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From My Generation to Yours: A letter to my father on why we need impact investing.


Today we celebrate our fathers.

In preparing for Fathers’ Day this year, I wrote a letter to my dad listing some of the many things I have learned from him about financial markets and investment theory. In writing to him, I explained that what I do as an impact investor is an extension of much of that learning. I am sharing some of that letter here, as I know there are many of us in the younger generation who share the same need to integrate our values, goals and mission into our investment approach.

My dad is an options trader, a quant and a market timer. I am an impact investor, building buy and hold portfolios of solutions-focused companies, all of which include women in leadership. While on the surface my father and I have quite different approaches to asset management, at the core we are both financial entrepreneurs and investors who care deeply about how we put money to work.

Thoughts on Modern Portfolio Theory -- and the need to go Post-Modern

Modern Portfolio Theory (MPT) has served as the bible for many investors for the last five decades. Instead of assessing the risk of individual companies, MPT instructed us look at the risk of the entire portfolio as a whole, seeking to optimize returns by constructing an efficient frontier. This theory encouraged investors to diversify portfolios across asset classes and in doing so, to reduce anticipated financial risk.

While there is much to be gleaned from this approach, like all academic thinking, once new information becomes available, we must update our theories. Given all that we collectively know now about our earth—both its gifts, resources and its limitations--I am moved to re-envision MPT, moving to its Post-Modern counterpart: Total Portfolio Theory.

Like you, our generation is also concerned about risk, and in fact we have an expanded notion of risk. We find that traditional ways of looking at and addressing financial risk are no longer sufficient. We see that climate change, resource scarcity, the growing population on our planet all have effects on our portfolios. We now know that our investment choices also have effects on our planet.

We see global systemic risks (such as extreme weather, infectious diseases, and growing inequality) as significant--both to our planet and to our investment portfolios. To the extent that we can account for these tangible risks within our investing strategies, and perhaps mitigate them through our investment choices, our generation aims to align these interests through a Total Portfolio Theory.

It feels important to note the different contexts and decades in which we have grown up. MPT was first developed in the 1950’s, a time when people commonly believed we lived on a planet with infinite resources. By extracting these resources (commodities such as timber, gold, and oil) the theory held that we could expect infinite financial growth from such endeavors. We now understand that our planet actually has a finite amount of resources, and we as investors can no longer take our environment for granted. Those businesses that are efficient in their use and protection of our planet’s limited commodities are those that we believe will be most profitable. The companies that are able to incorporate clean technologies and harness renewables (wind, solar, waves) have the attention of our generation.

This younger generation of conscious Investors takes into account that we are living on a planet with limited resources. We see that to expect infinite growth in our markets may not be either practical or wise. Instead, we ask ourselves, “What are reasonable and appropriate expectations for financial returns?” Many of us are in a place where we not only want to be a part of solving our earth’s systemic risks, we feel a responsibility to use the power of our investments to do so. When it comes to reducing inequality, or lowering our carbon footprint, we may actually ask ourselves, “What is the risk of not making this potentially game changing investment?”

Like you, we also want to maximize returns, and yet we also have an expanded notion of returns. When looking for returns, we are multidimensional and think along a spectrum including social, environmental and financial. We live at a time when we can no longer take the environment or its people for granted. We need to account for these inputs and outputs, and are building metrics to measure these additional variables.

And like you, our generation still believes in a well-diversified portfolio. This notion, too, we have expanded as we now understand the importance of diversity at all levels. We understand the need for biodiversity in our environment, and at decision making tables. In addition to selecting non-correlating asset classes, we look for diverse revenue streams and perhaps most importantly, we need to see diverse leadership in the companies where we invest.

By investing into the world in which we want to live (rather than making money by any means possible and then looking to give away anything extra), we are perhaps creating a new efficient frontier.

Please join with us as we move toward Total Portfolio Theory.

Additional thoughts on the generation gap that exists for impact investing appeared in the Wall Street Journal in March, 2018 and is available on Nia's press page.

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