8/5/15

The risk-narrative for impact investments

Last year, I shared a risk-based segmentation that I frequently use for differentiating impact investments; outlining four primary segments (Catalytic, Partner, Venture, Luxury). The motivation for this was to frame impact investments from a point-of-view that was more intuitive to investors.

Under a risk-centric view of the world, the impact investment discussion would not be fixated solely on financial returns vs social returns (e.g. "impact"), but rather, by the types of risks-profiles that funders would be getting exposure to. Introducing risk more deliberately into a segmentation, opens the door for talking with investors about risk-appetite, risk-adjusted return expectations, and diversification benefit—all things that fit more squarely with existing portfolio management and finance theory.

I've since been refining this risk-based segmentation, and more broadly turning it into a "risk-narrative for impact investing". This has helped me in many of my discussions with impact-sector practioners and investors.

The following figures summarize the key pieces of the impact investing risk-narrative, and serve as a complement to my original article on segmentation.

1.  Impact Investing Relative-Risk Profiles—Impact investing segments and their relative risk profiles (illustratively weighted between "financial" and "non-financial" risk).


Impact Investment Relative Risk Profile

2. Impact Investment Risk-Return-Capital Matrix—Impact investment segments overlaid with supply-side (capital) considerations incl. risk-adjusted returns and capital mix/source.


Impact Investing Risk-Return-Capital Matrix