The framework has been developed on the basis of the J.P. Morgan Social Finance portfolio, as well as experiences of twenty leading impact investors. The key idea behind this framework is the inclusion of an impact dimension to be equally considered alongside the traditional risk-return profile of an investment. A portfolio’s impact is measured relative to a fund-specific impact thesis outlining the desired social/environmental effect of the investment. The parameter is quantified by aggregating scores across individual aspects constituting the determined impact.

The guide introduces the following steps in constructing an impact investment portfolio. First, the investing party needs to find a home for the portfolio by assigning an individual or team to source, commit to and manage this set of investments. Second, it must define an impact thesis, which should reflect the mission and environmental and/or social objectives of the portfolio, and usually includes references to target population, business models and impact. The impact thesis will determine specific investments that may be included in the impact portfolio. Third, the investor must define targets for parameters that will drive financial performance. 

The graphical framework assessing potential impact investments includes three dimensions: risk, return and impact (the investor is free to quantify the axes as he or she finds suitable). First, the investor is required to map the target profile, by assigning specific targets for each dimension. Then, he or she must compare the expected risk, return and impact of individual investments with the set portfolio targets. Finally, the investor will map the aggregate portfolio against the targets, by either overlaying the individual investments, or calculating a simple or weighted average. If there is a skew from the targets, the investor can rebalance the portfolio. 

 Although the impact portfolio will usually face the same risks as a traditional portfolio, the impact thesis will dictate the scope of investments and hence determine the related risks (by, for example, only investing in more volatile emerging markets). The highly focused investments from a narrow investment scope may also concentrate risk. In addition, there are cross-market risks primarily stemming from the impact investment market’s early life stage, narrow ecosystem, potential for mission drift and moral hazard. Nevertheless, these risks might be mitigated by structural features like investment instruments, diversification, compensation schemes and investing through local intermediaries. 

1. This is a framework that helps investors select investments that align best with their impact thesis. For that reason, this guide could be used to meet targets to achieve the Sustainable Development Goals. In particular, goals one, eight, nine and ten, depending on the social and/or environmental objectives of the impact thesis.
2. This guide provides a framework for investors that wish to dedicate a portfolio entirely to achieving a predetermined social and/or environmental objective, and offers an assessment of investment opportunities with regards to not only risk and return, but also impact. The guide also provides examples of how leading impact investors apply or have previously applied the framework.
3. Organisational structures set up to source and manage the set of impact investments may include a separate team, ‘hub-spoke’ partnership between a centralised team and the individual portfolio management teams ensuring oversight of overlay strategy, or a whole institution dedicated solely to impact investments.
4. The impact thesis incorporates portfolio mission and social and/or environmental objectives, effectively narrowing down the scope of investment opportunities to ones that align with the intent of the thesis (by, for example, having an impact on a predetermined population, investing in a particular sector and business, risk appetite, impact delivery, and quantifiable and/or general targets). For example, J.P. Morgan Social Finance impact thesis is to improve livelihoods of low-income and excluded populations worldwide by engaging those populations as consumers or suppliers.
5. When defining parameters that will drive financial performance, the investor should abandon the trade-off debate between impact and return. Instead, he or she is encouraged to assess each opportunity individually, and let the economics of the intervention determine the return.
6. The target profile for risk, return and impact for individual investment and/or aggregate portfolios may be measured and scaled according to each investor’s preference (specific quantities or simply low-medium-high). To quantify impact, investors commonly use scorecards that rank investment opportunities on various aspects related to the impact thesis. Return depends on investors’ goals; some wish to maximise returns, others are willing to accept lower returns to make investments with required impact.
7. The consolidation of individual investments into an overall assessment of the portfolio may be performed by overlaying all individual graphs on top of another in the same chart, or calculating a simple or weighted (by investment notional) averages. It is recommended that the investor looks at more than one method to obtain a complete understanding of expected portfolio performance.
8. The risks inherent in the impact portfolio are usually the same as in traditional investments, but are however closely related to the scope of investments determined by the impact thesis. Additional cross-market risks may be present due to the early stage of the impact investment market, narrow ecosystem, mission drift by the investee, grants funding returns rather than invested capital, and moral hazard in form of not recognising losses due to failure of delivering the impact mission. However, investors are advised to not extrapolate risk profile from a specific mandate to the whole market, and only assess the risk from their impact thesis.
9. Risks may be mitigated by choosing the right investment instrument, investing through fund intermediaries like local private equity funds with local expertise and presence, and linking compensation to return and/or impact targets to avoid mission drift.