From impact investing to total portfolio impact

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Total Portfolio Impact

What are impact investors looking at beyond the UN Sustainable Development Goals?

By Jonathan Bailey, Head of ESG and Impact Investing, Neuberger Berman

Every investment has an impact – whether positive or negative, intentional or accidental, material to the financial return for the investor or not. For too long many investors have either ignored these impacts, or used blunt tools, like sector exclusions, to focus on minimising negative impacts. This is beginning to change, helped by three big shifts: rising expectations from beneficiaries, the United Nations Sustainable Development Goal as a rallying force, and increasingly sophisticated approaches to managing impact. Investors now have the opportunity to build portfolios that optimise for positive total portfolio impact.


From impact investing to total portfolio impact

It was a little over a decade ago that the term ‘impact investing’ was coined. The common language helped coalesce an existing group of investors who sought to generate both a financial return and a social and/or environmental return. Since then innovative asset managers have demonstrated that it is possible to generate positive outcomes for people or the planet while also delivering market level financial returns across a range of asset classes.

Yet the potential for pension funds and other asset owners to have positive impact in the world is much greater than is possible through labelled impact funds alone. This is because, whether conscious or not, every investment an asset owner makes generates a mix of positive and negative outcomes for people and planet. Just as asset owners seek to optimise across risk and return when making an investment, they also ought to be adding a third consideration of impact. With long-term obligations comes a responsibility not only to generate long-term financial returns, but also to ensure that beneficiaries can ultimately enjoy those returns in a sustainable world.


Outcomes from across the portfolio

To start assessing total portfolio impact asset owners need to understand the way that each investment strategy considers the impact it has on people and the planet (if at all). This bottom-up approach helps get at the intentionality of each strategy and identify opportunities to swap in strategies that generate more significant positive outcomes with similar risk and return characteristics.

We believe there are four main ways that an investor can integrate material environmental, social and governance (ESG) factors into an investment process, each of which has different associated outcomes – Avoid, Assess, Amplify or Aim for Impact (link).

Avoid involves screening our sectors like tobacco, and thereby seek to reduce negative outcomes for people or the planet. Exclusions work well for activities which are clearly negative but are less effective where engagement might drive transformative improvements in business activities.

Assess involves trying to price the risk and opportunity from ESG factors at the security level, for example demanding a significant discount for the bonds of a sovereign with concerns around corruption or lack of voice and accountability. In so doing the investor will be associated with both positive and negative outcomes, but they are at least consciously seeking to be compensated for the potential financial implications of those negative outcomes. If capital markets work effectively, over the long term the cost of capital will fall for issuers associated with positive outcomes, while rising for those associated with negative outcomes.

The last two approaches to integration are taken by investors who are actively seeking positive outcomes – either Amplifying the best-in-class issuers by overweighting them within a sector or Aiming for Impact by only investing in issuers whose products and services have inherently positive outcomes for people or the planet. The difference between these two approaches is important – a plastic manufacturer’s products may not be inherently positive for people or the planet, but as a best-in-class company they may have committed to reducing their greenhouse gas emissions based on science-based targets. In contrast, a company which produces essential pharmaceuticals for life-threatening diseases and prices their products to ensure broad access, will see its revenues grow in lock-step with positive outcomes from its products.

Once an asset owner has mapped each investment strategy to one of these integration approaches, they can start to adjust the portfolio composition to optimize for risk and impact-adjusted returns – expecting a greater contribution to positive outcomes from asset classes like private equity or infrastructure where the manager has control of the underlying assets, net positive outcomes from listed equities and credit portfolios, and more neutral outcomes from asset classes like commodities.


SDGs – going beyond categorizing products and services

Measuring impact within investment strategies that are Aiming for Impact is not straightforward. The United Nations Sustainable Development Goals (SDGs) have helped rally governments, non-governmental organisations, companies and investors around a ‘common plan for humanity’. Yet it is not sufficient to simply map revenues from products and services to the SDGs and claim ‘impact’.

Asset owners may find that the Impact Management Project ( provides a useful framework for deeper analysis of impact. It stresses considering how much impact is being generated in terms of duration and scale. For example, a pharmaceutical intervention that has a transformative impact for many years on the quality of life of a small number of people has a different duration and scale of impact than a technology service connecting large numbers of lightly skilled workers with short term employment opportunities.

Other considerations include the level of need of who is being reached, and the contribution that this specific business is making compared to alternatives that are available. Asset owners are also increasingly asking what contribution investors themselves are playing in generating the outcomes – for example by driving change through systematic multi-year engagement with a company. When combined with an assessment of the risk of the impact not being delivered, we believe this is a more comprehensive approach to understanding impact.

The future – salience and materiality

Even the most comprehensive impact management framework is only helpful if there is consensus on which impacts need to be understood and measured. This is where impact is likely to get increasingly complicated for asset owners in the years to come. To date asset owners have predominantly focused on environmental, social and governance factors which can reasonably be foreseen to have a material impact on financial performance. Fortunately, this has led them to also address salient issues – a term sometimes used to describe issues which are significant to people or the planet regardless of financial impact. A good example would be efforts to reduce greenhouse gas emissions which addresses the salient issue of climate change (SDG 13) and is usually financially material for companies.

The challenge comes when an issue is clearly salient but is not clearly financially material. Recent academic research has highlighted SDG 14: ‘Conserve and sustainably use the oceans’ as an example of a salient issue with limited overlap with a commonly used set of sector-specific material financial topics (LINK). Good long-term investors will be aware of how quickly a salient issue can become financially material, as we have seen in recent months as some fast food and coffee chains have taken action to manage the reputational risks of plastic straws ending up in the world’s oceans. Yet tackling the ‘tragedy of the commons’ in our oceans clearly requires far more action than this.

In the years to come, asset owners are likely to increasingly find themselves being asked by their beneficiaries and other stakeholder what they are doing to generate positive outcomes on salient but less financially material issues. Asset owners will need to have an answer, including how they determine when governments and NGOs are best positioned to take the lead.


Jonathan Bailey is head of ESG and Impact Investing at Neuberger Berman.


First published in Superfunds Magazine August 2018