Achieving Goals While Making an Impact

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Impact investing has grown considerably over the past several years. According to the Global Impact Investing Network, the total size of the impact investing market has grown by about 14% per year since 2015. It is clear that many investors are interested in allocating at least some of their wealth toward investments which bring about social good as well as a financial return on investment.

But when you have financial goals to achieve, how much return should you give up to pursue an impact investing mandate?

This was the subject of Franklin Parker’s recent paper published in the Journal of Impact and ESG Investing. Striking the right balance between achieving financial outcomes and achieving social outcomes is not as straightforward as one might expect, and investors of all types would do well to follow a basic framework for balancing these tradeoffs.

Understand Your Goals

The first step is to understand and articulate your objectives. Is achieving the financial or social goal more important? If social outcomes are the most important objective, it is likely that philanthropy is a better use for some or all of the funds. Parker shows that when you value the social outcome more than your financial goal, you are willing to accept a complete loss on your investment–effectively making you a philanthropist rather than an impact investor.

That is not to say that outright giving is bad! Rather, we need to understand how to direct your capital to best accomplish your objective–whether that be philanthropy, impact investing, or something else entirely.

How Important is the Impact Mandate to You?

When the financial goal is more important than the social outcome (but you’d still like to have both), the conversation should progress to an understanding of your willingness to give up one goal for the other. Put simply: how much probability of achieving your financial goal are you willing to give up to incorporate the impact mandate? Are you willing to move from a 90% chance of attaining your financial goal to an 85% chance? What about moving from a 90% chance to a 60% chance?

The answer to these questions will help your advisor understand how much you value the impact mandate relative to your financial goal, and it becomes a simple matter to calculate the maximum return drag you are willing to accept. In the end, this yields impact investment plans that you can stick with for the long haul.

Things Change, So Do People

Another interesting conclusion of this research is that your willingness to sacrifice return is not constant through time. There are times when you are more willing and less willing to sacrifice return for an impact mandate. You tend to be more willing to sacrifice returns for an impact mandate in the face of highly volatile markets, for example.

The importance of the financial goal matters too. You tend to be less willing to incorporate an impact mandate for more important financial goals. This could be a source of contention for wealth intended to support multiple generations. The older generation, for example, could feel that the family’s current wealth as more than enough to support their own needs, giving them more psychological freedom to sacrifice returns. The younger generation may not feel quite so confident.

Location, Location, Location

Account types matter, too! Whereas personal accounts are generally most appropriate for impact investing mandates, many trusts, charities, foundations, pensions, and retirement plans may wish to pursue such mandates, as well. Despite this desire, impact investing cannot be pursued with equal vigor across every account type! There are various legal nuances for assets, based on their location, and these govern how or whether you can pursue an impact investment mandate.

Knowledgeable Help

In the end, an advisor who understands your goals–both ethical and financial–is key to helping you implement an effective and efficient impact investment program. At Directional, we are eager to help you navigate these waters.

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