Social Impact Investing

Appendix: Market Benchmarking
Impact Investors, whether they are Financial
First or Impact First in their motivations, have
a keen interest in measuring and reporting
the financial and social returns on their investments.
It is critical to benchmark these returns
against commonly accepted standards as this
facilitates meaningful comparisons between
investments and, moreover, allows for judgement
of the extent of impact or relative success
of an investment.
On the financial returns side, investment
returns are typically measured against benchmark
indices corresponding to specific asset
classes. The indices are typically composites of
representative investment instruments in that
asset class; for example, the MSCI World Index
is a market capitalisation weighted index of
public equities in 23 developed countries. The
year on year change of the representative index
provides a measure of ‘market rate’ returns on
average for that asset class; the growth in the
MSCI World Index provides a measure of the
average return of investing in a public equity
strategy in a developed market.
It is important to note that for most asset
classes, the market return benchmark can vary
significantly with geography and the actual sector
in which the investment is made. The return
rate for a real estate investment can be quite
different depending on whether the investment
was made in a developed or developing
country and an agricultural commodity can
yield significantly different returns as compared
to a precious metal. There can also be cases
where no meaningful benchmark exists. When
Omidyar Network was considering investing
in Ignia, a Mexican Venture Capital firm that
makes investments in businesses that cater
to the low income segment of the population,
Omidyar found that there were insufficient
precedents of Latin American Venture Capital
firms investing in social enterprises. Says Matt
Bannick, Managing Partner at Omidyar, “We
found that there were no historical datasets
corresponding to our investment space and as
a result there was no benchmark to draw from.
We built our own financial model and by testing
the sensitivity of our assumptions, narrowed
down to a target range for financial return.”
On the social and environmental impact front,
the metrics used to measure return vary quite
widely. Common metrics include jobs created
and extra income and carbon offsets generated.
But the lack of standardisation of these
metrics renders the process of benchmarking
social and environmental returns difficult.
However efforts such as those by the B Lab,
Veris, Rockefeller Foundation, Global Impact Investing
Network and Acumen are underway to
create standardised metrics and this will help
make benchmarking social impact feasible.
The following table provides the average upper
and lower bounds of 5-year compounded annual
growth rates of benchmark indices 4 in each
asset class by decade. It must be reiterated
that the market return benchmarks presented
here may not be applicable across all geographies
and sectors.
4
Benchmark Returns/Indices used:
Cash: 3 month discount rate on US Treasury bills
Quasi Equity, Buyout, VC: Cum. Vintage Year Return, US Private
Equity Performance Index, Thomson Financial
Public Equity: MSCI World Index
Real Estate: Dow Jones Wilshire US REIT Index
Commodities: Dow Jones AIG Commodity Index
40
Investing for Impact: Case Studies Across Asset Classes