Portfolio risk management accepts the right amount of risk with the anticipation of an equal or higher reward, while project and program risk management focuses on identifying, analyzing and controlling risks and potential threats that can impact a project. There’s simply no room for project failures in a project- driven organizations.

But portfolio-based organizations actively embrace appropriate risks, knowing that strategic portfolio risk management will yield high rewards. For instance, an organization may invest in new technology that has yet to be tested, in anticipation of high pro table sales. The potential risk, under the circumstances, is the possibility that the technology may not work. If it does, however, then portfolio risk management would prove beneficial.

At its most basic, project concerns and risks are often specific to a program or project, but portfolios focus on their entirety, taking into account the financial value of a portfolio, alignment of the portfolio to the organizational objectives and strategy, and the balance of the projects and programs within the portfolio.

Between portfolio risk management and project and program risk management, the former is more difficult because of the projects’ inherent inconsistencies. There is no one magic formula that will work for an entire portfolio. In fact, what will work for one component, may not necessarily work for another.

One thing is certain, however, portfolio risk management will find ways to decrease potential threats that will impact the value, balance and strategic fitness of a portfolio, and increase positive events for a positive impact.

Measuring Impact is Art and Science

Investors and managers alike increasingly want to assess businesses’ impact on society. But measuring a firm’s wider societal impacts is not easy. Accounting standards for measuring impact do not exist, and the measures in use are still evolving. Impacts sought are diverse, so measures are as well.

For example:

• Forest bonds would likely include measures of carbon sequestration and biodiversity protection
• A social bond targeting homelessness would evaluate the number of homeless people receiving shelter
• A real estate development might look at measures of neighborhood health, energy use, and access to employment.

Greater clarity on measurement is slowly emerging. Academic researchers are studying impact assessment, and organizations such as the Global Impact Investing Network, GIIRs and Principles for Responsible Investment seek to develop standards for the industry.

For now, impact assessment remains a craft that requires a bit of faith, some skill and a lot of innovation.

Vehicles for impact investment include bonds – and more
Impact investing is often associated with green or social impact bonds, which raise money from investors for specific types of projects. Bonds are driven by institutional investors, and can be issued by governments, corporations or public-private partnerships.

Here are some examples:

• Investing in companies that demonstrate a positive impact on communities. Vox Capital, a venture capital firm, has launched multiple investment vehicles to support businesses that develop scalable solutions for problems facing low-income Brazilians.
• “Place-based financing,” where local investors provide money to fund local activities. In London, Canada, Verge Capital launched a fund supported by local investors. The Breakthrough Fund makes loans to social enterprises and affordable housing developers in Southwest Ontario.

Innovation is everywhere – securitization offers endless possibilities. Impact investing has become a sort of Research & Development for finance.

Impact investing is not more or less financially risky than other investment strategies.

Some argue that as soon as one limits an investment decision, e.g. by adding a social or environmental requirement, the financial product will perform worse. This belief comes from “portfolio theory,” which argues that diversification decreases risk.

But in reality, this argument is often proved wrong. Diversifying risks among a pool of companies that are all bad investments is unlikely to make more money. With any investment approach, investors must do due diligence and carefully study the deal.

Impact investing is new, so it lacks a historical record. But that gap forces investors really to think about how capital is raised and spent, to connect with the organizations they invest in, and to ask — as any investor should — where does my investment’s value come from?

By focusing on the origins of value, impact investing is tackling one of the main issues of our contemporary financial system: the growing disconnect between financial markets and the “real economy.”

Many gains in today’s markets come from investors repeatedly exploiting tiny pricing differences between two markets. These pricing differences tend to be artificially created by a few financial actors eager to appropriate value that did not even exist before they decided to believe in it; high frequency trading represents this approach.

As a result, today’s financial markets are not doing their basic job: connecting those who have capital to those who need capital, in order to help the economy and society thrive. Impact investing speaks to BlackRock CEO Larry Fink’s recent challenge to CEOs. In a letter entitled “A Sense of Purpose,” he wrote that “society increasingly is turning to the private sector and asking that companies respond to broader societal challenges… To prosper over time, every company must not only deliver financial performance, but also show how it makes a positive contribution to society.”

Many investors are not greedy. They actually want to do what they are paid for: put their financial power at the service of organizations that participate in building sustainable and long-term growth.

The best way to fish for a long time is to make the fishes flourish. Impact investing creates a healthy ecosystem for those fishes — the organizations and stakeholders that compose our society. Without them, the “fishermen” in financial markets will ultimately fail.

Diane-Laure Arjaliès is an assistant professor at the Ivey Business School (Western University, Canada). She teaches Sustainable Finance and Impact Assessment and researches the mechanisms through which finance can be put at the service of society. Her latest book, co-authored with a renowned team of social scientists of finance, is Chains of Finance: How Investment Management is Shaped.