Pricing impact- By david wilton

        The growing global interest in incorporating impact criteria into the management of investment portfolios has created the opportunity to price both positive and negative externalities.

        Pricing externalities will lower the cost of capital to more impactful investments, increasing the commercial viability and sustainability of companies and projects which benefit people and planet.

        Impact investing is the vehicle through which this pricing of externalities can be achieved.

Before impact investing can play this role it needs some restructuring to align the process of impact investing with the established process of portfolio management. Designing an approach to impact investing which enables externalities to be priced into the cost of capital does not require radical change to current approaches to either portfolio management or to the concepts used to think about impact.

It simply requires that:

1. The focus of impact investing be on the quantity of impact created by an investment, such as the amount of carbon off-set and the additional number of people with access to education;
2. When assessing the potential impact of an investment, estimating the potential quantity of impact created is treated as a separate exercise from the application of value-judgements specific to the mandates of individual investors and;
3. A general theory of impact is developed that can be used to assess the potential impact of asset classes. 

        The ability to assess the impact of asset classes is necessary as it enables institutional investors to incorporate impact top-down across the total portfolio.

This is game-changing because just three types of institutional investor – pension funds, insurance companies and sovereign wealth funds – manage around $81 trillion in assets, dwarfing the resources of DFIs and philanthropies.

        Enabling institutional investors to fully incorporate impact criteria into portfolio management provides the best chance of mobilizing the volume of capital required to achieve the UN Sustainable Development Goals

        Enabling institutional investors to fully incorporate impact criteria into portfolio management will also lead the capital markets of the future to work on the basis of risk-adjusted, impact-optimized returns, increasing the commercial viability and sustainability of companies and projects which benefit people and planet.

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