Allocating Impact Investments in New and Existing Portfolios

Abstract

Management Summary Major income inequality in the world is causing overconsumption, pollution and depletion of the earth’s natural resources on one hand, and hunger, exploitation and poverty on the other hand. To preserve the human and earth’s capital, major social as well as environmental issues need to be solved. To solve these issues, financial resources are needed. Impact investing can contribute to solving these issues by attracting large amounts of capital towards social or environmental projects. Because of the limited knowledge and opportunities for private investors to invest with impact it is most interesting to investigate the possibilities to implement impact investments in investment portfolios. The aim of this research is to study the current impact market and to explore the possibilities to implement impact investments in existing (traditional) portfolios or to compose a portfolio totally out of impact investments. The project has to lead to more insight in the possibilities to offer impact investments to private investors of the Rabobank and in general to more capital towards environmental and social issues. The current impact market was studied by performing a literature study and by studying the largest database for impact investments (ImpactBase). Another literature study was performed to investigate the possibilities to implement impact investments in existing portfolios and to investigate the possibilities to compose a total impact portfolio. Secondly, an empirical study with five Rabobank impact funds was carried out to explore the possibilities for the Rabobank to offer total or partial impact portfolios to private investors. In order to construct optimal portfolios with or without impact investments, the modern portfolio theory (MPT) of Markowitz (1952) was used. This theory uses the expected return and the covariance between the investments in the portfolio to calculate the optimal portfolio for the different levels of risk-aversiveness. Compared to the mainstream market, the number of impact investing opportunities is quite limited. Most impact products are for example only available in private equity. This inhibits the possibility to compose total impact portfolios. However, the literature study shows that it is possible to implement impact investments in traditional portfolios without compromising on the return. Our empirical research shows that it is possible to implement Rabo impact funds in a traditional portfolio without compromising on the return, depending on the risk-aversion of the investor. Composing a total impact portfolio with the five Rabo funds, without lowering the risk-return ratio is also possible for certain levels of risk-aversion. Based on the literature studies and the empirical study, two conclusions can be drawn. First, by carefully selecting the impact opportunities, impact investments can be implemented in existing portfolios of investors with different risk profiles and different social impact appetites. When the right impact opportunities are selected impact investments can be a valuable addition to existing portfolios of mainstream investors. Also Rabo funds can be a valuable addition to a traditional portfolio. When Rabo funds are added to a conservative or neutral portfolio the risk-return ratio increases compared to the traditional portfolio. Second, a total impact portfolio is currently not possible with the available impact products in the ImpactBase. This is partly due to the lack of variety in asset classes by the available impact products. A total impact portfolio solely consisting of Rabo impact funds and attractive for mainstream investors is possible in theory. However, in practice it will be hindered by the limited number of available funds.