Constructing a Portfolio on the Efficient Impact-Financial Frontier

A collaboration with Root Capital

By IMP
Constructing a Portfolio on the Efficient Impact-Financial Frontier

Root Capital has been working with the Impact Management Project to provide guidance for individual funds within a single asset class, who are looking to build a portfolio on the efficient frontier of both financial and impact performance.

Both fiduciary and non-fiduciary investors are often faced with the question: how can we maximise our impact, within the constraints of our financial goals? In this paper, Root Capital illustrates their approach to defining the efficient impact-financial frontier for their given impact goals and financial goals, while indicating how this analysis has enabled a more flexible approach to portfolio construction.

In finance, a portfolio that lies on the efficient frontier offers the greatest possible financial return for a given level of risk and for a given set of investment opportunities. A portfolio of investments that lies on the “efficient impact-financial frontier” offers the highest level of overall impact, relative to the cumulative risk-adjusted financial return of those investments.

This work builds on the previous paper in this Investor’s Perspective series, which shared the model portfolios built with UBS to illustrate different combinations of financial and impact goals.