Impact investment is a new asset class, according to a report titled Impact Investments: An Emerging Asset Class and released on 29 November. The report was by JP Morgan and the Rockefeller Foundation and includes the first large-scale data analysis of return expectations and, when available, realized returns for impact investments. It is compiled from data collected by the Global Impact Investing Network (GIIN) from more than 1,000 impact investments.
Impact investments are intended to create positive social or environmental impact beyond financial return and are typically made in private markets by providing debt or equity to mission-driven businesses. Impact investing has gained traction among a wide range of investors, including large-scale financial institutions, pension funds, family offices, private wealth managers, foundations, individuals, commercial banks, and development finance institutions.
The report also estimates the market opportunity for potential impact investment over the next 10 years. After analyzing selected segments of 5 sectors – affordable urban housing, rural access to clean water, maternal health, primary education, and microfinance – serving the population at the “base of the economic pyramid,” the authors estimate a potential investment opportunity between $400 billion and $1 trillion with potential profits between $183 billion and $667 billion for just these segments of the impact investing market.
The analysis shows that investors have broad expectations for financial returns on their impact investments, ranging from concessionary (lower financial returns but social impact) to market-beating financial returns. For those impact investments with realized returns, actual earnings were in line with expectations.
Nick O’Donohoe, Global Head of Research for J.P. Morgan and co-author of the report, said in a press release: “In 2007, J.P. Morgan launched its Social Finance business to provide capital, financial services, and research to the growing market for investments and businesses creating positive social impact. Since that time, we’ve seen the impact investment market gain significant momentum with the entry of greater numbers of mainstream investors.
“The development of uniquely skilled professionals and intermediaries, specialized industry associations and networks, and standardized metrics points to the emergence of impact investments as a burgeoning asset class in its own right.” J.P. Morgan (www.jpmorgan.com) is the investment banking arm of JPMorgan Chase & Co., a leading global financial services firm with assets of $2.1 trillion and operations in more than 60 countries.
Rockefeller Foundation (www.rockefellerfoundation.org) President Dr. Judith Rodin added: “Government funding, international aid and philanthropy alone are insufficient to solve the world’s most challenging problems. This is why the Rockefeller Foundation has committed $38.5 million to both standardize and harness the power of the impact investing industry – to help support the world’s poorest and most vulnerable citizens by enabling investors to direct their resources toward multiple bottom-line returns and social good. “This report highlights an important milestone in the growth of the industry as impact investing has evolved into an asset class, indicating an opportunity for the capital markets to create investment vehicles that enable both social and financial returns and create an avenue to direct more dollars toward helping those most in need.”
The GIIN (www.thegiin.org) is a not-for-profit organization dedicated to increasing the scale and effectiveness of impact investing, by building infrastructure and supporting activities, education, and research to help accelerate the development of a coherent impact investing industry. It is overseeing the development of IRIS, a common vocabulary and framework for measuring and reporting the social and environmental performance of impact investments, and is launching ImpactBase, a database of impact investment funds designed to reduce search and transaction costs across the impact investing industry.
Amit Bouri, Director of Strategy and Development at the GIIN says: “For quite some time, a diverse set of investors has targeted positive social and environmental impact with their investments. Recognizing impact investing as an asset class engages an even larger group of investors. We hope this analysis provides the necessary catalyst for investors who are interested in impact investing, but have been hesitant to act so far.”
The report can be downloaded here.