How To Create An Impact Investing Portfolio

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Impact investments have a verifiable good social and environmental impact as well as a financial return. They can help alleviate poverty, eliminate hunger, achieve sustainable development, improve access to excellent healthcare and education, achieve gender equality, assure justice, and promote peace. 

You can begin your own Long Term Investment Portfolios, with pre-made quantitative strategies available on the Aikido Finance website along with rebalancing services.

If you want to know how to get started but don’t know-how, you’re in the right place. But first, Here is why impact investing matters.

1. Secures investment portfolio

An impact investor might reinvest the same money in a series of socially beneficial projects or organizations in general. Even a simple return of principal generates philanthropic weight that standard grantmaking cannot match.

2. Return on investment (ROI) 

Investments in social, health, and environmental issues are a more efficient approach to accomplish your personal or company’s social responsibility goals, with a considerably more significant return on investment than contributions or grants, which simply give money away. 

3. Creates global citizens

Make an effort to live like a global citizen. As investors, it’s all too easy to get caught up in the numbers and the sectors that make up our portfolios. 

Investing in social or environmental initiatives expands your horizons and allows you to make a meaningful difference.

Steps to create an impact investing portfolio

Step #1. Define your goals and objectives 

The process of developing an impact portfolio requires a review of your expectations and objectives in terms of generating social and environmental effects. However, the right answer regarding a portfolio’s intended impact differs from one investor to another. 

For example, an investor passionate about climate change mitigation may find it hard to invest in fossil fuel production. In contrast, another investor passionate about sanitation and hygiene will be comfortable investing in the achievement of the Sustainable Development Goal 6 on water and sanitation

You can better understand your values by discussing your investment strategy with your peers and experts. The goal is to develop a plan that best advances toward your goal. Don’t wait for others to bring up the idea of impact investing; you need to initiate the conversation yourself. 

Make sure you understand the most important criteria for creating a portfolio that aligns with your investment value. Find out what impact options might work best with your risk tolerance. Having a basic understanding of the terminology used to describe such investments will help you decide your goal?

Contact peers and experts and ask the fundamental questions, such as, 

  • Who is willing to invest for impact?
  • What issues are impact investments attempting to address?
  • What benefits do impact investors in public equities offer?

Step #2. Design your investment policy statement

The Investment Policy Statement serves as your compass to give your portfolio a direction. It is crucial if you want to purposefully incorporate effect across your whole portfolio. Ad hoc impact investing or divestment is not a long-term impact strategy.

 The IPS provides a framework for assessing current assets and potential new investments. It’s also important to remember that the IPS is a living document that should be evaluated at least once a year, with its assumptions re-affirmed or adjusted based on various circumstances. 

Shifting market settings or changing investor purposes are examples of such circumstances. While any changes to the IPS should not be made lightly, the IPS provides “speed bumps” to advise and mitigate risk.

Step #3. Allocate your assets 

There are sophisticated asset allocation algorithms that can be developed to include the consideration of effect across asset classes to maximize the classic risk-reward trade-off on which traditional portfolio design is built.

Regarding the final objective, an adviser who strategically incorporates impact will determine when influence is redundant, complementary, or catalytic. The investment team will assess the investment scope in relation to the elements that can drive business results. The instruments available for investment, the locations and sectors of focus, the growth stage and scalability of the enterprises that will be targeted, and the investor’s risk appetite are all factors to consider.

Step #4. Find a suitable location for the portfolio

An impact investment portfolio requires an individual or a team to source, commit, and manage. To address the demand for these investments, organizations are forming their own organizations in various ways. You may opt to create a separate portfolio with its own management team or apply the hub and spoke strategy. Some institutions align the entire institution with the impact mission.

Step #5. Create a framework for impact, return, and risk

Once the intended qualities of the portfolio have been defined, you will then map the result, return, and risk across the three dimensions of a target profile for the portfolio;

  • Target profile for the portfolio
  • The expected profile of individual opportunities
  • The profile of the aggregate portfolio.

Step #6. Monitoring and evaluation 

Continuous monitoring and review is a best practice for any portfolio, especially for intentionally designed to have a good impact. Financial and impact performance benchmarks should be set per the investment strategy. Reviewing portfolio performance against these benchmarks regularly will reveal any needed adjustments to the investment strategy.

You should examine the risk profile they face and forsake the trade-off argument on the return across asset classes in favor of the deal-by-deal assessment.

Final Thoughts 

Impact investing is an excellent way to drive systemic change in the way global financial markets operate – It serves the real needs in society and the real economy.

Aikido has several impact investing portfolio add-ons to help you meet your social responsibility goals. Our offerings include an Eco add-on that filters the most highly polluting industries out of your portfolio. Partnering with us grants you access to several investment features that will help you attain financial success in a responsible, socially conscious way.

More To Explore

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