Students in Wharton Social Impact Initiative’s Total Impact Portfolio Challenge (TIPC) are on a quest to design a positive impact investment portfolio. But where should they begin?
This February, Sandi Hunt, managing director of Wharton Social Impact Initiative (WSII), interviewed Matt Christensen, WG’97, global head of sustainable and impact investing at Allianz Global Investors, during a TIPC webinar.
Christensen offered students his advice on topics ranging from impact metrics to intentionality, highlighting the important questions impact investors should ask themselves during portfolio management. Here are highlights from their conversation.
This transcript has been edited for brevity and clarity.
Identify Your Mission Prior to Portfolio Construction
“The trickiest part is identifying the mission that you’re trying to solve and the constraints. How do you define impact? How do you meet the performance objectives? There are also the classic investment management constraints in terms of volatility. How much downside risk are you willing to take?
Then you start to add on the impact piece, like what does impact mean in public equity? And how do you design for that? What does it mean if you are going to have things that move from more public liquid markets into alternatives?
Then you get into what’s the data that you’re going to use? And how do you harmonize across different frontiers of information gathering? The biggest problem I run into is that clients want reporting that is quite specific.”
Use Existing Frameworks for Social Impact Metrics
“While it is not perfect and not designed particularly for investors, we have this architecture now that is used all over the world: the Sustainable Development Goals. I would advise students to use that as your best proxy, as a top layer of how to create something that unites across disparate asset classes.
If you think about how to create an approach to impact investing, one of the frameworks you could use is the Impact Management Project (IMP). We have referred to that impact framework as part of our due diligence efforts in impact investing. As part of your due diligence in a potential investment, it forces you to think about the what, the who, the contribution, and how much risk.”
Avoid Impact Washing
“When you are preparing your portfolio, ask yourself how to avoid being looked at as an impact washing fund management professional. Even if you don’t have the perfect answer, if you’ve shown authenticity and sincerity in the way that you’re designing the portfolio and the metrics, that’s a starting point.
You also need to remember that there is no perfect company. What you need to be able to do regarding the impact washing question is to get enough of the right things that companies are doing in order to offset the negative. We call that ‘net impact.’”
Assess Equity Issues
“You can certainly look at gender equity, and at the board level that is very doable. You can set a requirement that the companies you invest in have a certain number of female board members or executive committee members. You should also seek the ethnic composition as part of this effort. That’s a metric you can track. You could do that at the portfolio level and company level.
Additionally, you can look at the pay gap. You can look at the median base salary of a company compared to the CEO level of pay. When we design our portfolios, we may say to some of those companies that if they don’t change the way they’re addressing the pay gap, it will influence our overall view of the company.”
“What is your social or environmental purpose? What is the impact outcome you are trying to achieve that is integrated into your business model? How is it a part of the operational design? What are the incentives you have in place to reward it? The word intentionality comes up all the time in impact investing, and there’s a reason. Even if intentionality in public equity is harder to show, you still want to start with this idea of purpose.”
Want to learn more about constructing an impact portfolio? Check out the Total Impact Portfolio Challenge (TIPC) program.
Please note: Matt Christensen acted in his personal capacity for this webinar.
— Victoria Sansone
Posted: March 25, 2021