We need a fresh approach to Sustainable Portfolio Management
Given that there are many published Portfolio Management techniques, why do we need a new approach?
Portfolio management is the act of building and maintaining an appropriate investment mix for a defined risk tolerance. The key factors for any portfolio management strategy involve asset allocation, diversification, and rebalancing rules, and the idea of passive vs active portfolio management, as summarised succinctly by Investopedia.
Sadly, virtually all these approaches look at mature publicly listed companies where the main focus of interest is on financial risk based on conventional indices with sustainability considerations treated as ‘externalities’ based on environmental, social and governance (ESG) risks.
The limitations of handling ‘externalities’ in this way are now well-recognised.
This problem is not restricted to ESG assets: it also arises in the pricing of ‘mature’ publicly listed assets in conventional portfolio management, so we know there are serious issues in looking at dynamic growth portfolios. Conventional portfolio management approaches focused on ‘mature’ companies in ‘public’ markets can provide very few insights into the growth phase of companies. Even in ‘conventional’ portfolios, asset mispricing can be the ignored externality.
We urgently need a fresh approach to managing highly dynamic growth portfolios, where these so-called ‘externalities’ are often the most important components of any assessment. In particular, we need to explicitly tackle three key issues:
We need to explicitly define the Ideological Stance or Orientation at a level of granularity where we can explore the balance between social, environmental and financial considerations. This means that we need to go much deeper than the simplified approach associated with impact investing - the explicit goal here is to articulate the real priorities (and avoid any suggestions of ‘green-washing’)
We need to include the full set of meso-economic Vectors (or drivers) associated with understanding growth, not the reduced set of variables deployed in the simplistic qualitative grids typically deployed by business schools and management consultancies.
We need to apply the approach consistently across a portfolio which may contain propositions with different maturities on the commercialisation curve, so that we can use the approach to assess, select, monitor, generate insights and enable robust decision-making about the shape and size of the ‘mixed’ portfolio.
The new Triple Chasm approach to Portfolio Management consists of the following elements:
Proposition Maturity, relative to the 3 Chasms along the commercialisation journey
Definition of the 60 Attributes associated with each of the 12 meso-economic Vectors
Explicit definition of the ideological Stance chosen for each attribute by the Portfolio owner (this effectively defines the relative importance of the attribute as seen by the Portfolio manager)
Detailed treatment of Potential based on the Assessment of each of the Attributes (the assessment for each attribute is based on a unified scalar treatment which deals with the different measurement units used for the different vectors)
Calculation of the Weighted Potential for each attribute based on combining the Stance and the ‘raw’ assessment score
Explicit definition of the weighted Sustainability Potential based on the Sustainability Stance defined by the portfolio owner
The power of any portfolio management approach depends strongly on how the data and analysis enables the generation of new insights, which in turn can enable more intelligent interventions, both at the broad policy level but also at the level of company-specific interventions.
We can use this new approach to calculate the following:
The Market Potential for any proposition based on aggregating the potential associated with all four external vectors (market spaces, proposition framing & competition, customer focus, and go-to-market criteria)
The Execution Potential based on aggregating the potential associated with five Internal Vectors (contingent technology deployment, IP management, product & service design, manufacturing & deployment, and human capital)
The Financial Potential based on aggregating the two composite vectors (commercialisation strategy and business model definition) and the internal finance vector (funding & investment)
The Overall Commercialisation Potential based on aggregating the Market, Execution and Financial Potentials
Critically, from a sustainability perspective, this approach enables explicit comparisons between ‘traditional investment’ and sustainability stances applied at the level of the portfolio as a whole: given the ability to adjust these weightings explicitly, this approach allows ‘tuning’ of the portfolio based on the ideological stance adopted.
This Portfolio Mapping Approach can be applied at two different levels of aggregation:
To explore the structure of a multi-product portfolio for a single company, typically of interest to the leadership team in the company
To explore the structure of a multi-company portfolio, which is of great interest to investors, intervention agencies and government policymakers.
The delivery of this functionality depends on three key products provided by the Triple Chasm Company:
The Multi-Company Portfolio Mapper provides a structured approach to understanding the shape and balance of the Overall Portfolio based on the Triple Chasm Approach which explicitly looks at the growth management challenge. The multi-company portfolio mapper is primarily of interest for Investors, Intervention Agencies and Corporate M&A teams
The Product Portfolio Mapper provides a way for companies to understand the relative contribution of different products to the overall performance of the Company. The product portfolio mapper is mainly of importance for SMEs with multiple products who need to understand the impact of supporting multiple products.
The Workbench provides a tool for the detailed analysis of a single product produced by a single team or company. The Workbench supports analysis at the Individual Product Level covering the following: Maturity Definition, Diagnosis, Target-setting, Gap Analysis and Execution Planning. The Workbench forms the fundamental building block for the analysis of growth and is mainly of interest for SME Leadership Teams.