Social Impact Investing

Impact Investments:
An emerging asset class
Global Research
29 November 2010
Foundations’ social duty demands high social impact
By contrast, many foundations, including the Esmée Fairbairn Foundation, the
Rockefeller Foundation and the Bill & Melinda Gates Foundation, making programrelated
investments (PRIs) primarily to advance a social goal. As a result of
prioritizing the social impact over the financial return, these investments can
acceptably deliver less competitive rates of financial return. Many private
foundations in the US qualify their impact investments under the Program Related
Investments section of the US tax code, which requires an investment to prioritize
social impact rather than financial return.
Social impact expectations
Investors’ expectations are largely anecdotal
By definition, impact investors finance businesses that generate positive social
impact alongside financial returns; therefore, investments that simply avoid negative
social consequences will not deliver sufficient impact to meet investors’
expectations. Generally speaking, however, expectations of social impact are largely
anecdotal. Without standards and benchmarks for non-financial performance,
investors must rely on their own judgement and proprietary systems to assess
whether an impact investment is making progress toward social goals. Indeed, only
2% of surveyed impact investors reported using a third party impact measurement
system – the rest use either their own proprietary system or the one used by the
company in which they invest 14 . Similarly, without average performance
benchmarks, investors are limited in their ability to understand how the social
performance of their investments compares to those made by other investors.
Comparable data will be available only once standard impact metrics are employed
Because most impact investors use proprietary impact measurement systems, there is
little consistent quantitative data about the social impact actually achieved by impact
investments made to date. Many investors have recognized the limitations of so
many bespoke approaches and are actively working to build and contribute data to
standardized frameworks. Rigorously assessing progress toward social impact
expectations will only be possible once standard social metrics are adopted.
Risk appetite
Given the variety of financial return and social impact expectations, it is unsurprising
that risk appetite can also vary. Most impact investing is done in private markets,
typically through private equity or debt instruments, and guarantees. The businesses
themselves are often small-scale and may operate in emerging countries where
political and country risks add to the risks of the company's standalone success.
While investors must approach these investments with a commensurate risk appetite,
there are opportunities to make impact investments with lower risk profiles as well.
Since its inception in 2002, the UK’s Charity Bank has earned steady returns of
about 6% from lending to charities and social enterprises with realized losses of only
0.3% of their loan portfolio 15 . Notwithstanding recent turmoil in India’s microfinance
market, empirical evidence suggests that microfinance institutions in some regions
have been more resilient than other financial institutions in recessionary
environments 16 . Clearly, the risk of an impact investment will be particular to the
14 See Section 3. Financial return expectations for more details.
15 Charity Bank 2009 Annual Report and interviews.
16 Microfinance: Shedding Light on Microfinance Equity Valuation Past and Present, J.P.
Morgan and CGAP, February 3, 2009.
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