Understanding Portfolio Theory in Impact Investing: Key Concepts and Resources

Modern Portfolio Theory (MPT), developed by Harry Markowitz in 1952, is a fundamental framework used to optimize investment portfolios for maximum returns given a specified level of risk. This approach has significantly impacted how investors construct and manage their assets. However, MPT traditionally focuses on financial returns and not necessarily on the social or environmental impact of investments. In recent years, there has been a growing interest in integrating impact principles with portfolio theory, leading to the development of impact investing.

Diving into the specific literature and resources available for impact investing can be challenging due to the relative novelty of this field. While there are some books and publications addressing this area, they may not always be widely recognized or easily accessible.

Resources for Impact Investing

Modern Portfolio Theory (MPT) and Impact Investing

MPT encourages diversification to reduce risk by building a portfolio of investments that are uncorrelated, with the aim of optimizing returns for a given level of risk. For traditional investment approaches, this is a well-established principle. However, to adapt this theory for impact investing, many investors and experts are experimenting with new portfolio construction methods.

In a conventional portfolio, investments are selected based on expected financial returns and risk. In contrast, impact investing portfolios can include assets that are not only financially attractive but also have a positive social or environmental impact. This raises new questions about diversification, such as how related impact ventures can be combined in a portfolio to ensure both financial and social returns.

Key Players in Impact Investing

A few organizations and publications have emerged as key sources for understanding and implementing portfolio theory in the context of impact investing:

JP Morgan Chase: In October 2012, JP Morgan Chase published a paper on their portfolio approach to impact investment, setting a new standard for how large institutions can integrate impact into their investment strategies. Athena Capital: In April 2017, Athena Capital released a whitepaper on building impact portfolios, offering valuable insights for those looking to construct portfolios with both financial and social goals.

Challenges and Innovations

One of the significant challenges in applying MPT to impact investing is the evaluation of non-financial returns. While financial metrics are well-defined, measuring the impact of investments often requires qualitative assessments and more complex methodologies.

Several innovators in the field have explored ways to integrate related impact ventures into portfolios. For example, an impact investor I met several years ago was experimenting with constructing a portfolio where impact ventures were related and mutually supportive. Rather than only sharing services and resources, these ventures helped each other by contributing to the same overall value or supply chain.

Additional Reading and Recommendations

If you're interested in learning more about impact investing and MPT, here are a few additional resources:

Real Impact by Morgan Simons: This book provides a fresh perspective on impact investing, moving away from the 'naive profit angle' to focus on real and measurable impact. Stanford Social Innovation Review: Subscribe to this publication for ongoing information and clear solutions in the field of social impact investing.

Additionally, for a more academic approach, you might want to explore recent papers and whitepapers published by leading institutions in the field.

Closing Thoughts

While the current landscape of literature on portfolio theory and impact investing is still evolving, the field is dynamic and filled with innovative approaches. It’s a challenging but exciting time to be involved in this area. By understanding the core principles of MPT and adapting them to impact investing, investors can build portfolios that not only generate financial returns but also contribute positively to society and the environment.