All the feedback I received from philanthropists, charitable foundations, and other impact-minded investors said: “We couldn’t agree more! But how do we do this?”

There’s clearly a demand for understanding, implementing, and measuring the real impact that investments in a portfolio have, while not having the process end up as a way to simple get charged additional fees in ESG compliant investment products. 

I thought of chronicling the path to creating and monitoring such a portfolio by seeking the assistance of one of the global leaders in impact investing, Jed Emerson, to create a long-term legacy.

The portfolio target is traditionally understood as “seeking its highest and best use” (by which we mean maximizing financial return for lowest risk and liquidity lock up), but changing this mindset to optimising for total blended value—creating the greatest level of total performance, generating sustained financial returns with the creation of greatest levels of social and environmental impact.

Recent debates regarding ESG and “greenwashing” have been a diversion. ESG was initially offered as a framework to understand how ESG factors effected corporate performance and how they are material to the operations and financial viability of a company—they were not intended to assess the greater question of a company’s impact upon the world, but rather the world’s (like climate change’s) impact upon the company or what is referred to as “materiality.”

While an important consideration, the effect of climate crisis upon a company is a fundamentally different question from that of the company’s impact upon climate and the planet. Confusion regarding this point has caused many investors and commentators to cry foul, arguing ESG is flawed and requires greater metrics and standards of practice. Yet ESG is doing just what was intended. 

As is true of traditional financial metrics, extra-financial metrics (metrics that have financial implications but are not considered within traditional financial analysis) such as environmental, social and governance factors, have also evolved over time. In the context of the United States, it was not until Richard Nixon—with bi-partisan support—created the Environmental Protection Agency that companies were consistently required to report on various environmental aspects of performance like pollution. And while government has a long history of tracking the social impact of publicly funded programs, it was in the 1980s that the cost benefit of social programs received widespread use. It is no wonder, then, that today we’re witnessing the evolution of ESG and Impact Investing practices and the metrics to assess them as drivers of financial returns and total performance. 

In future columns, I’ll explore this question of metrics and measurement further, but today I would simply point out that a focus on “metrics,” definitions and terms as the key challenges before us begs the larger question of meaning and purpose; namely, how do we understand the fundamental purpose of our capital? Our understanding of the purpose of capital is a social construct—a definition we arrive at based on our social frameworks and assumptions, and which each of us must then reflect upon and embrace depending upon our own personal understanding of history, economics and—believe it or not—philosophy. It is no wonder Adam Smith wrote “Moral Sentiments” before writing “Wealth of Nations” for if one is unclear on the purpose of capital than any investment strategy—even those that destroy the ultimate value we seek to create through our lives and with our wealth—will get us there. Or, to paraphrase the Rev. Dr. Martin Luther King, Jr., we will be at risk of having guided financial missiles and mis-guided fiduciaries! 

With a sharpened understanding of the purpose of our capital, we are then positioned to invest and manage our wealth on terms that help ensure we have a higher likelihood of attaining not only our short-term financial goals, but our long-term financial and life goals as well. This interplay between purpose and practice—between why we invest and how we invest—is a unique journey for each of us. We may each invest in a single impact fund, but our motivation and intent differ. Therefore, how we each explore the creation of this next iteration of capital—purpose driven capital—is on the one hand highly subjective yet, on the other, a common and shared experience. 

In future articles I will elaborate on my personal journey, with Jed’s help, to creating a sustainable high impact portfolio that, in addition to absolute return targets, has goals to create significant positive impact in a measurable way.

This column was written in collaboration with Jed Emerson, Global Lead Impact Investing, Tiedemann Advisors.