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Commentary: How good is your portfolio?


Close monitoring of environmental, social and governance concerns has spawned trillions of dollars of so-called ESG investments, totaling approximately $45 trillion as of year-end 2022. The motivation behind each of these investment decisions was to improve social and environmental outcomes while still generating some return.

But the measurement of impact in finance is more complex than commonly understood.

Avoiding so-called sin stocks has stopped no one from smoking or drinking. Similarly, it’s yet to be determined if ESG strategies which exclude oil and gas shares have any discernible impact on climate change. Investing based upon one’s values promotes moral consistency, but seldom changes fundamental corporate behaviors.

In contrast, investments with true impact generate positive outcomes that would not have otherwise been achieved, an attribute called additionality.

For example, the proceeds of green bonds are used to reduce carbon emissions in a measurable way. Similarly, public and private equity investments in industries dedicated to the underserved — including health care, education, affordable housing and financial inclusion, among others — demonstrably improve the lives of those who are marginalized. Many strategies across each of these sectors have simultaneously generated at- or above-market returns.

Over the past five years, from 2017 to 2022, the Sorenson Impact Foundation in Salt Lake City has been engaged in a bold experiment. Following early successes in mission-related investments, SIF deliberately committed 100% of its investible assets to impact outcomes.

The results are now clear: SIF’s investments have generated very meaningful impact without sacrificing return. In fact, SIF has achieved quantifiable social and environmental impact while outperforming its standard market-rate benchmark (75% MSCI ACWI index and 25% Bloomberg U.S. Aggregate Bond index). Specifically, SIF has outperformed its market rate benchmark by 100 basis points annualized since inception on Jan. 1, 2018 and its private investments are marked at a 64% net internal rate of return since inception.

Our experience proves it is possible to do well and do good through disciplined, mindful investing. Qualitative outcomes have been achieved while simultaneously achieving our quantitative goals.

One might wonder what types of investments are delivering strong returns alongside measurable impact. We have invested in an activist hedge fund that, in addition to the traditional activist playbook, implements specific, value-adding impact and ESG initiatives across each of their portfolio companies. One of our venture capital funds invests in portfolio companies whose business models target marginalized communities. SIF’s private credit allocation comprises strategies that offer small-business loans to underserved borrowers globally. Our affordable housing strategies have dedicated impact teams that design customized social programs that enhance tenant resiliency. Each of these investments target returns equal to or above their respective asset class benchmarks. Their financial objectives are not concessionary, yet their social and environmental impact can be tangibly documented.

A growing number of institutional investors are setting fixed return targets for portions of their portfolio, like inflation plus 400 basis points or low to midteens, annualized for the specific life of an investment. The impact investment market may also be approached in this way, with risk-return targets serving as constraint or sorting mechanisms. As with all investments, future returns combined with impact objectives are never fully knowable in advance.

While we have yet to see a common industry standard emerge for measuring impact investing, many investors have begun to coalesce around the United Nation’s Sustainable Development Goals. Professional impact investment managers commonly trace their investments to some form of social inclusivity (SDGs 1-5, 7-8, 10 and 17), environmental sustainability (SDGs 6 and 11-15) and/ or broader economic opportunity (SDGs 1-11, 1 and 16). Utilizing the U.N. SDGs as a common language has improved impact reporting standards while facilitating communal purpose.

Thus far, companies in SIF’s mission-related investment portfolio have helped mobilize $5 billion in capital for underserved borrowers, catalyzed more than $300 million in global public health solutions, reached 490 million students, created and/or preserved 216,000 affordable housing units and removed or avoided 294 million tons of carbon emissions. Some of our mission-related investments have been genuinely pioneering: For example, one of our early-stage venture capital companies has already shipped more than 6 million ounces of breast milk for working moms.

At the same time, SIF’s approach to asset diversification and risk management has adhered to industry best practices. We take an all-weather approach to asset diversification while carefully monitoring our exposures by industry, geography and multiple asymmetric risk factors.

There is an active, healthy debate about what exactly constitutes an “impact” investment.

Like traditional investors, we constantly debate where we are willing to make trade-offs between higher returns and greater impact. The impact investment opportunity set spans multiple asset classes, including cash, loans, and bonds, public and private equity, venture capital and real assets like renewable energy and low-income housing.

We now see considerable, untapped opportunity ahead. Our recent study of the impact investment market in the global environmental and U.S. social categories alone has identified $4.5 trillion of viable impact investment opportunities per year for the decade ahead (see Table 1 below). The global funding gap for housing, education, health care, financial inclusion, economic mobility and gender equity clearly constitutes trillions of dollars. Many of these opportunities will achieve at or above market returns while providing portfolio diversification benefits.

As the global human family expands from its current, record level of 8 billion to 10 billion by the end of this century, business and finance must find more ways to promote integral, sustainable development for all. Our experience suggests it is possible to invest in multiple enterprises that advance the needs of the underserved while achieving specific financial goals. All that is needed is heightened mindfulness, intention and discipline.

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