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January 11, 2011
Report Describes Impact Investing as an Alternative Asset Class
    by Robert Kropp

SocialFunds.com talks with Antony Bugg-Levine of the Rockefeller Foundation about the growing interest in impact investing, as well as the challenges that remain to its large-scale adoption.


A new report entitled Impact investments: An emerging asset class defines impact investing as "a new alternative for channeling large-scale private capital for social benefit," and argues "that impact investments are emerging as an alternative asset class."

Authored by J.P. Morgan Global Research in collaboration with the
Rockefeller Foundation and the Global Impact Investment Network, the report focuses on "investments that target the base of the pyramid defined by the World Resources Institute as people earning less than $3000 a year." The report forecasts that in five sectors—housing, rural water delivery, maternal health, primary education, and financial services—the market for impact investing "offers the potential over the next 10 years for invested capital of $400bn–$1 trillion and profit of $183– $667bn."

While acknowledging that some critics have criticized impact investments like microfinance as potentially exploiting the poor that they profess to help, the report argues that impact investing has the potential to "create a pathway out of poverty."

An example of the potential for exploitation was revealed late last year in India, where unsustainable interest rates and overly aggressive collections practices led the state of Andhra Pradesh to issue an ordinance that would regulate microfinance institutions at a regional level.

Antony Bugg-Levine, Managing Director at the Rockefeller Foundation, told SocialFunds.com, "Impact investing stems from the recognition that in the 21st Century, we're not going to solve our increasingly complex and increasingly expensive global problems with philanthropy and government capital alone. In order to create the world that we want to see in the 21st Century, it is imperative that we figure out how to mobilize some of the $80 trillion that is available in for-profit capital markets toward social issues."

"Impact investing as a practice is not new," Bugg-Levine continued. In fact, the movement is closely tied to the sustainable investment industry. The report differentiates between the two by stating that traditional socially responsible investing (SRI) "generally seeks to minimize negative impact rather than proactively create positive social or environmental benefit."

In fact, socially responsible or sustainable investors have largely moved away from the application of negative screens for more than a decade. Instead, most sustainable investment firms now focus on positive screens, in which leading companies in reporting on environmental, social, and corporate governance (ESG) are the primary focus of investment. Furthermore, community investing has been a central mission of sustainable investors for decades.

As Bugg-Levine pointed out, "Both want to actively place capital in investments that provide social solutions. Impact investing is closer to SRI in the way that SRI has been moving, toward engagement for instance."

"The mandate of the Rockefeller Foundation is building the components the industry needs in order to be more effective," Bugg-Levine continued. "Not only to insure that far more capital flows into impact investments, but also to insure that the capital that does flow is able to solve social problems in credible and efficient ways."

The data compiled by the Global Impact Investment Network for the report reveals varied expectations for financial returns by impact investors. Some expect to outperform the market, according to the report, while others are willing to sacrifice financial returns for effective social impact. "Increasingly," the report observes, "Entrants to the impact investment market believe they need not sacrifice financial return in exchange for social impact."

The report also notes "a unique set of complexities arising from social performance measurement and reputational exposure. Measuring and monitoring social performance are essential to track progress toward the intended impact and to manage the reputational exposure, but are challenging and potentially expensive in practice."

As a result, the report states, "Impact investors have supported the development of standard reporting and social measurement frameworks." Two such frameworks mentioned in the report are the
Impact Reporting and Investment Standards (IRIS) and the Global Impact Investing Rating System (GIIRS).

A
report published in 2009 by the Monitor Institute, with funding and support from the Rockefeller Foundation, described impact investing as "poised to exit its initial phase of uncoordinated innovation and build the marketplace required for broad impact." Challenges that remained, according to the Institute, include lacks of efficient intermediation, enabling infrastructure, and sufficient absorptive capacity for capital.

Bugg-Levine told SocialFunds.com, "There's been an explosion in interest in recent years from high net worth individuals, family offices, and private banks. But to go beyond the family offices and private foundations, we have to resolve the issue of fragmentation. One thing that is keeping large institutional investors out of impact investing is the lack of investable product that is aggregated that meets their requirements for economic efficiency. "

"Ultimately, we will not be able to unlock institutional investors until an infrastructure is in place that includes such things as standard measures for reporting and accounting for impact investments, and benchmarking data that allows investors to compare performance," he continued. "We also need a supportive regulatory environment. In most countries, regulations exist to support investing and philanthropy. But if you set out to achieve social goals through for-profit investments, in most cases you run into a regulatory system that has no idea how to deal with you."

"What does fiduciary duty mean when you're not only trying to achieve financial returns but social returns as well?" he asked.

In part due to regulatory uncertainties that vary from country to country, impact investments "involve several different types of risk typical in traditional investments, including: company risk, country risk, and currency risk," according to the report. "Further, and particular to impact investments, are certain legal and reputational risks that arise especially when operating in emerging markets and with vulnerable populations."

Notwithstanding the ongoing challenges to large-scale implementation of impact investing, Bugg-Levine noted several recent advances in the field, and described what remains to be done.

"Two things happened in 2010," he said. "One was an explosion in interest from high net worth individuals, family offices, and private banks, and the other was the beginning of an infrastructure."

"What's going to be required is that that infrastructure grows and consolidates, and that the explosion of interest be converted into deals," he added. "Not only that funds are raised, or even that funds are deployed, but that deals actually affect people's lives."

 

 
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