Achieving Goals While Making an Impact: Balancing Financial Goals with Impact Investing

Abstract

For investors who wish to engage in impact investing and who have specific goals to achieve, there exists the potential for a trade-off. When impact investments yield lower returns than nonimpact portfolios, how much return should an investor be willing to give up to incorporate it? Using recent advances in goals-based utility theory, this article explores an answer to that question and offers practical and concrete advice for advisors to individual investors and fiduciaries of trusts. Using the goals-based framework, the author shows how an investor’s willingness to sacrifice return for an impact investing mandate changes in response to market and portfolio conditions. <b>TOPICS:</b>ESG investing, portfolio theory, performance measurement <b>Key Findings</b> ▪ For investors who wish to incorporate an impact mandate in goals-based portfolios, a trade-off may exist between the two. Using advances in goals-based utility, this discussion provides a framework for evaluating that trade-off. ▪ The author finds that investor willingness to sacrifice return is not constant through time, but subject to various market and personal conditions. Expected volatility, return, and risk tolerance requirements all affect how willing an investor is to sacrifice return for an impact mandate. This has direct bearing on not just individual investors but also on portfolio managers of private trusts whose legal ability to pursue impact strategies is highly constrained. ▪ This analysis also reveals a philanthropy limit—the point at which someone ceases to become an investor and is instead a philanthropist. Advisors and individuals would do well to be cognizant of that limit and structure impact portfolios accordingly.