Impact Trade-off

Impact Trade-off measures the extent to which investors prioritise doing good over financial returns. It can also be thought of in terms of ‘how green’ investors want their portfolio to be or how far they want to travel down the ‘impact spectrum’. 

Outputs:

The assessment places investors into three categories. 

Low	You have a low willingness to give up financial outcomes (e.g. take more risk, get lower returns, or reduce liquidity) to do more good with your investments. You may prefer to include sustainable or social investments only where they also contribute to your financial aims.
Medium	You may be willing to give up some limited financial outcomes (e.g. take more risk, get lower returns, or reduce liquidity) to do more good with your investments. You may be happy to consider sustainable investments to achieve improved sustainable and social outcomes even if they require you to make some financial trade-offs.
High	You have a high willingness to give up financial outcomes (e.g. take more risk, get lower returns, or reduce liquidity) to do more good with your investments. You would be happy to consider sustainable investments even where they require you to make significant financial trade-offs if you can achieve improved sustainable or social outcomes as a result.

 

How to use it

If Impact Desire and Impact Apprehension tell us how much to align investible assets to ESG, then Impact Trade-off helps to identify what type of Sustainable solution is most appropriate.

There are many different approaches to sustainable investing from more traditional investments that simply exclude the nasty stuff, through to solutions that actively seek to make a positive impact on the planet and society. Often the deeper you go the more investors have to make trade-offs like paying higher costs and investing in a smaller ‘investment universe’ which can lead to both over and under performance relative to more traditional approaches. 

Investors with High Impact Trade-off are more likely to be happy considering sustainable investments that require them to make significant financial trade-offs. 

Investors with Low Impact Trade-off have a low willingness to give up financial outcomes and may prefer to include sustainable investments only where they do not harm their financial prospects. ‘Lighter green’ funds which employ negative screening techniques or standard solutions with simple exclusionary approaches might be more suitable.