Global THINK IMPACT Optimizing for impact with private equity and real assets 16 Aug 2021 Download Plotting the most efficient path to achieving impact Traditional portfolio construction techniques can be adapted to create portfolios with impact objectives. Measuring impact To do this, investors must be clear on the impact they are aiming to achieve and be able to measure it. Perhaps their impact goals align with the United Nations’ Sustainable Development Goals (SDG), as they do at Nuveen. Leveraging the UN’s framework, we have developed our own metric – a net impact score for specific investments and portfolios – that can be used in standard mean variance optimization modelling. Other metrics for different impact goals can also be used. Carbon emissions data, for example, can be used for investors with environmental objectives such as net zero carbon targets. Solving for impact Using the appropriate metric, we can solve using mean variance optimization. The solution (illustrated in the figure) is a set of efficient frontiers representing portfolios that maximize expected returns across the relevant range of risk budgets and for every possible level of net impact in our example. Each efficient frontier reflects a unique constraint on the portfolio-level net impact score and gives the set of best possible portfolios for the specified level of impact. Frontiers on the right have the highest portfolio net impact score, and those to the left have lower scores. Moving from right to left improves risk-adjusted return, but at a certain point (beyond a portfolio average net impact score of 7), allowing for more net impact does not provide any additional return or risk benefit. Pursuing additional net impact up to a score of 7 does not sacrifice return or incur more risk – two objections often levelled at impact investing. This tells us that portfolios with certain levels of positive net impact outperform, on a risk-return return basis, less impactful portfolios. Over this range of net impact, investors can make greater contributions to the UN SDGs while also improving risk-adjusted returns. Achieving impact goals and financial returns By quantifying risk-return-impact trade-offs, we are able to do two things. The first is to identify the range of portfolio impact that is achievable without affecting risk-return efficiency. The second is to support the design of portfolios that minimize the reduction in risk-return efficiency required to achieve a targeted level of impact. The important takeaway is that impact needs to be evaluated and considered in the investment process with the same rigor and prudence as financial performance. By applying an increasingly robust set of impact metrics to a standard optimization modeling framework, investors can evaluate trade-offs across risk-return and impact, allowing them to construct portfolios that optimize for total performance. Download the report Download Related articles ASSET ALLOCATION Using a factors-first lens to find opportunities in today’s alternatives market PRIVATE REAL ASSETS Resiliency and diversification from uncorrelated market exposure Gwen Busby, Skye Macpherson, Abigail Dean 04 Jun 2021 MACRO OUTLOOK Managing climate change risk as an investment risk Nicholas Liolis 25 Jun 2021 All countries Australia Austria China Denmark France Germany Hong Kong Italy Japan Luxembourg Netherlands Singapore Spain Sweden United Kingdom United States of America Contact us OUR OFFICES London Email +44 20 3727 8000 201 Bishopsgate, London, United Kingdom Responsible investing incorporates Environmental Social Governance (ESG) factors that may affect exposure to issuers, sectors, industries, limiting the type and number of investment opportunities available, which could result in excluding investments that perform well. DISCOVER Insights Investment capabilities About us Subscribe OUR COMPANY About Nuveen Contact us Careers News Cookie Policy, Terms of use Privacy Accessibility Corporate governance Business continuity plan Cookie preference center The information contained on this website is provided for educational purposes only and is not intended to be relied upon as a forecast, research or investment advice, is not intended to be a recommendation or investment advice, does not constitute a solicitation to buy or sell securities. The information provided does not take into account the specific objectives or circumstances of any particular investor, or suggest any specific course of action. YOUR CAPITAL IS AT RISK. All financial investments involve an element of risk. Therefore, the value of the investment and the income from it will vary and the initial investment amount cannot be guaranteed. Products, services, or strategies shown may not be available in certain jurisdictions and/or to certain investors. Recipients should inform themselves about and observe any applicable legal requirements. The information provided should not be considered a solicitation or an offer by Nuveen or its affiliates to provide any financial products or services in any jurisdiction where it is not otherwise authorized to do so. Any funds described herein are not for sale in the US or to US persons and are available under the conditions of the relevant offering document(s). If you are a US citizen or resident, please visit our website for US Financial Professionals or US Institutional Investors. Nuveen provides a range of products including investment advisory services, strategies, and expertise through its independent investment affiliates. Securities are offered through Nuveen Securities, LLC. © 2021 Nuveen, LLC. All rights reserved. GWB-1755188PR-E0821W