Efficient Impact Frontier Simulation Exercise

Constructing a portfolio to optimise both impact and financial return

This participatory portfolio construction simulation, created by Root Capital and now housed within the IMP, provides students and practitioners with an opportunity to put the idea of the efficient impact frontier into practice.

It is based on the concept of the efficient frontier of financial risk and return, well known in finance. Simply put, 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. By extension, a portfolio of investments that lies on the “efficient impact frontier” offers the highest level of overall impact, relative to the cumulative risk-adjusted financial return of those investments. The methodology is elaborated in more detail in this case study co-authored with Root Capital, and in the SSIR article “Toward the Efficient Impact Frontier.”

The simulation has been used dozens of times at foundations, funds, schools, and conferences, and we are now making the exercise available for wider use. Goals of the exercise include:

  • To demonstrate the increasingly data-driven practice of impact management in impact investing;
  • To bring to life the multidimensionality of impact in a real-world context, and to provide a model for addressing that multidimensionality in a practical way; and
  • To practice using integrated data about the impact and the financial risk and return of investments to select individual investments and construct a portfolio.

Participants build their own impact investing portfolio by choosing from a set of 200 actual Root Capital loans. We provide detailed data about the expected financial risks, returns, and impacts of each loan; instructions for how to choose from that set of loans to build a portfolio; and an Excel tool that auto-calculates the expected risk, return, and impact of that portfolio. At the end of the exercise, participants have an opportunity to find out whether their chosen portfolio falls on the ‘efficient impact frontier.’

There are two versions of the simulation: a Harvard Business School case study for use in the classroom, and a professional version for use within industry organisations and at conferences. Both take 90 – 120 minutes. People and organisations that would like to organise a simulation session on their own are welcome to use these materials to do so.

Classroom version: Students complete the simulation exercise independently as homework and discuss their results during class. For this version, a Harvard Business School case study is available, as well as a teaching note for instructors.

Standalone version: Participants complete the simulation exercise in small groups on laptops during a self-contained event that includes an introduction, the simulation exercise, discussion, and conclusion.

  • Resources for participants: This zip file includes the Excel file participants will use, as well as instructions and a glossary of terms
  • Resources for facilitators: These include facilitator instructions, slides, and narrative to draw on. For access, please email simulation@impactmanagementproject.com with your name, organisational affiliation, and email address, and we will email you the facilitator materials.

Online videos of past ‘efficient impact frontier’ presentations:

  • Efficient Impact Frontier presentation: “Challenging Perspectives on Impact Investing” (minute 7:25 to 27:20), Stanford Center on Philanthropy and Civil Society, December 1, 2016.
  • Efficient Impact Frontier Webinar (minute 0:00 – 20:00), Aspen Network of Development Entrepreneurs Sector Update, February 2017