Opening the Market for Impact Investments: The Need for Adapted Portfolio Tools

Abstract Social and environmental impact investing as an activity as well as a concept has grown in recognition on a truly global scale. Yet, apart from anecdotal success stories of some specialized forms such as social-impact bonds, little is known about the field and the complex interplay between agents, instruments and regulations. Neither the rationales of the various participants in the field, nor the evaluation criteria for some of its instruments have been scrutinized in-depth so far. Especially the important constructs of risk and returns from a financial as well as a social impact perspective have so far been used in differing fashions, thus rendering the applied logic constructs incompatible to each other. Compatibility, however, is a pre-requisite for the inclusion of impact investments into the portfolios of traditional institutional investors. Much can be gained from this, not only would a huge inflow of capital improve the social and environmental sector, but early evidence shows that the overall performance of mixed portfolios might profit because the experienced low correlation of impact investments to traditional markets reduces portfolio risk and increases sustainability. In addition, more and more investors demand ESG (environmental, social and governance) criteria to be considered when it comes to building portfolios because of the great opportunities provided.