Social Impact Investing

Impact Investments:
An emerging asset class
Global Research
29 November 2010
Introduction
Throughout, we use the term
“social” to include social and
environmental.
Impact investments: An emerging asset class
In a world where government resources and charitable donations are insufficient to
address the world’s social problems, impact investing offers a new alternative for
channeling large-scale private capital for social benefit. With increasing numbers of
investors rejecting the notion that they face a binary choice between investing for
maximum risk-adjusted returns or donating for social purpose, the impact investment
market is now at a significant turning point as it enters the mainstream. In this work,
we argue that impact investments are emerging as an alternative asset class. As such,
we analyze the questions one would ask when adding impact investments to an
investment portfolio. Specifically, we consider the following:
• What defines and differentiates impact investments?
Impact investments are investments intended to create positive impact beyond
financial return. As such, they require the management of social and
environmental performance (for which early industry standards are gaining
traction among pioneering impact investors) in addition to financial risk and
return. We distinguish impact investments from the more mature field of sociallyresponsible
investments (“SRI”), which generally seek to minimize negative
impact rather than proactively create positive social or environmental benefit.
• Who is involved in the market and how do they allocate capital?
Charting the landscape of the impact investment market, investors range from
philanthropic foundations to commercial financial institutions to high net worth
individuals, investing across the capital structure, across regions and business
sectors, and with a range of impact objectives.
• What makes impact investments an emerging asset class?
While certain types of impact investments can be categorized within traditional
investment classes (such as debt, equity, venture capital), some features
dramatically differentiate impact investments. We argue that an asset class is no
longer defined simply by the nature of its underlying assets, but rather by how
investment institutions organize themselves around it. Specifically we propose
that an emerging asset class has the following characteristics:
• Requires a unique set of investment/risk management skills
• Demands organizational structures to accommodate this skillset
• Serviced by industry organizations, associations and education
• Encourages the development and adoption of standardized metrics,
benchmarks, and/or ratings
These characteristics are present for such asset classes as hedge funds or
emerging markets, which channel significant capital flows as a result. With each
of these indicators having materialized, we argue that impact investments should
be defined as a separate asset class.
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