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June 07, 2011
Report Studies Impact Investing in Emerging Markets
    by Robert Kropp

Responsible Research finds that while challenges to effective measurement of social and financial benefits persist, the opportunities for impact investors in emerging markets are likely to grow.

Asserting that capitalism, with its concentration of wealth into the hands of "a relative few…cannot guarantee an equitable and sustainable future for mankind," a new report from Responsible Research, a Singapore-based provider of environmental, social, and corporate governance (ESG) research for sustainable investors in Asia, surveys the current state of impact investing in emerging markets.

The report adopts the definition of impact investing formulated by the Global Impact Investing Network (GIIN), "which states that impact investment strategies range from the simple return of investment capital to offering market rate or even competitive market financial terms to investors." Acknowledging that "philanthropic activities cannot alone provide solutions to the challenges our world faces," the report focuses on those strategies that seek at least a market return on investment.

Earlier this year, J.P. Morgan Global Research reported that in five emerging market 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." Furthermore, as Responsible Research found in its report, "an emerging market focus is supported by the more stable economic growth prospects currently offered by many developing countries."

The rationale for impact investing is also supported by the expectation of investors that the companies in their portfolios will be more resource-efficient and have stronger licenses to operate in developing countries. Also, "the enhanced due diligence involved compared to mainstream investment should prima facie remove a potential source of investment risk," according to the report.

However, the report continues, challenges to successful impact investing in emerging markets remain. A majority of the world's population living on less than $2.50 a day—the "bottom of the pyramid," or BoP—resides in developing countries, making the social mission of impact investors all the more critical. Yet, actually assessing the impact of such investments "still represents a subjective and daunting task for most investors and their portfolio companies," the report found.

Efforts to measure the social impact of investments are underway. GIIN developed Impact Reporting & Investment Standards (IRIS), which the organization describes as "a common language for describing the social and environmental performance of an organization." The goal of IRIS is to increase the value of non-financial data by standardizing the reporting of social and environmental performance by organizations.

Also, B Lab, a nonprofit that certifies corporations as B corps following impact assessments of their effect on stakeholders and their social and environmental performance, recently completed a beta process of its Global Impact Investing Rating System (GIIRS). An effort to create a rating system for a company's social and environmental performance, GIIRS seeks to provide institutional and high net worth investors with a tool for evaluating the social and environmental performance of companies throughout the investment lifecycle.

"Several factors make it difficult to get an accurate picture of the financial track record of the impact investment industry" as well, the report found. Much of the growth in impact investing has occurred within the last five years, and given the long-term horizon of most impact investments the overall performance of the industry is as yet difficult to assess.

"Most impact investments are made into growing private companies," the report continued, and "the only way to achieve transparency on performance is through disclosure from either the company or the investor—which often isn't forthcoming."

Yet, as with efforts to benchmark the social performance of impact investments, efforts to provide meaningful data on financial performance are underway as well. Last year, the Cordes Family Foundation, along with the Calvert Foundation and Giving Assets, launched the ImpactAssets Global 50 index. An index of the top 50 impact investment fund managers, the Global 50 has as its objective the addition of $2 billion to impact investing by 2016.

The index, according to the report, will provide "would-be investors into impact funds with a valuable benchmarking tool."

The report provides case studies of business models in six sectors—education, healthcare, nutrition, environment, infrastructure, and microfinance—focusing on companies doing business in Asia, the Middle East, and Africa. The report describes microfinance as the most developed of the sectors, but growth has come with a price. In the Indian state of Andhra Pradesh, for example, allegations of unsustainable interest rates and overly aggressive collections practices have led to steep declines in the repayment of loans.

Furthermore, the report points out, "Not all microfinance models are coupled with the right advisory services to equip small entrepreneurs with the business skills necessary to make the most of the funds received." Yet the market for microfinance is far greater than the current level of investment, the report continues, and such investments "can yield higher financial and social returns."

"The need for a sustainable economic environment has become clearer in the aftermath of the recent global financial crisis and social unrest throughout the Middle East," the report concluded. Unsustainable business models "are proving ineffective as channels for future economic progress." Impact investments, on the other hand, represent "an urgently needed alternative for sustainable investment."


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