In my opinion, #impactinvesting seems to hold a tension between impact and financial returns, although some organizations argue otherwise.
For example, the Rockefeller's Foundation, in its famous impact investing handbook, argues that: “Impact is not simply a third dimension of the financial risk/return relationship that can somehow be optimized. #Impact may occur independently from or not be directly correlated to risk and return.”
Discussion for another day.
Moving on, I think one way to reduce the tension/tradeoff between impact and financial return is to incorporate impact into financial returns, as a single metric.
For example, what if welfare metrics such as DALYs or income gains are converted into monetary units and used to inform financial returns?
Here are possible pros:
1️⃣ Better informed decision-making
Since welfare-adjusted metrics provide additional insight into:
• long-term #sustainability of interventions
• real value created for end users
• hidden risks (e.g., negative externalities)
They can improve the quality of information provided to LP.
2️⃣ Identifying Hidden Risks
Ignoring welfare can create blind spots.
For example, welfare-adjusted analysis can help identify products that scale but don’t improve outcomes, interventions with unintended negative effects, and solutions that fail adoption over time.
Early recognition can protect financial performance, reputation, and long-term portfolio value.
3️⃣ Improving Capital Efficiency
In global health and development, welfare metrics are used to compare impact per dollar, and guide resource allocation.
#Impactinvestors could apply a similar lens by asking:
• Which investments generate the most welfare per unit of capital?
• Where are diminishing returns setting in?
• Are we funding the highest-impact opportunities?
If impact weighted IRRs are used at the portfolio level to benchmark impact efficiency, and guide thematic allocation, could they ease up trade-offs, while still improving overall impact performance?
Thoughts?
