Social Impact Investing

Impact Investments:
An emerging asset class
Global Research
29 November 2010
right 100 . In practice, many poor people are still unable to freely access these “human
rights” and acquire these services from private markets (often incurring the “bottom
of the pyramid penalty” with higher prices than their middle-class compatriots).
Despite this reality, skeptics will maintain that private sector solutions for these kinds
of services are exploiting their consumers by charging for what should be free of
cost. Impact investors will need to recognize that when their business seeks to
provide basic services they are operating in a complex social and political context. In
some cases they will also be competing directly with government agencies tasked
with providing the same service to the same population but failing to do so in a way
that satisfies demand from poor customers. This creates an especially complicated
operating context that can easily flare up as evidenced in the 2010 controversy over
microfinance in the Indian state of Andhra Pradesh that resulted in strong
government action to curtail for-profit microfinance institutions.
Mission drift and exploitation are risks that are amplified when BoP are affected
We believe that mission drift (or even false claims of an impact mission) and
exploitation are legitimate concerns and impact investors should ensure the right
metrics are in place to monitor their portfolio companies. These are concerns that one
should apply when making any investment, where due diligence processes assess
management values and growth targets. In the case of impact investments, however,
the consequences of a business exploiting its customers can be particularly
devastating, given how little they have.. It is crucial, for these reasons, that impact
investors demand transparency and measure for themselves whether their
investments uphold their initial claims of producing positive social impact.
The philosophy: Economic engagement of BoP+ can build a path out of poverty
The question of whether it is right to make money from the poor is philosophical. In
our experience, impact investors have resolved this question in several ways:
1. Impact investments can reduce the BoP Penalty
Poor people already pay for goods and services, often with unreliable quality and
at higher prices than their middle class compatriots (the BoP penalty).
Introducing more efficient and lower cost means of supplying products and
services can improve quality and reduce the cost to the end user, while still
generating enough profit to make the service provider financially sustainable.
This results in a better situation for the clients, freeing them from relying on other
providers that would charge more or from the reliance on philanthropic or
government aid money, which can be redirected to other purposes in the future.
2. Philanthropic or government money will be limited
Across sectors, for-profit business channels can deliver services to more people
sooner than would be reached by government and donors alone and can leave a
smaller burden for government and philanthropy to address. For example, the UN
states that almost 900 million people worldwide do not have access to clean
water 101 , despite annual global expenditures estimated at $485bn 102 in 2005.
While philanthropic initiatives and government subsidy will always be needed to
100 General Assembly declares access to clean water and sanitation is a human right, UN
News Centre, 28 July 2010.
101 General Assembly declares access to clean water and sanitation is a human right, UN
News Centre, July 28, 2010.
102 Charting our Water Future, The Water Resources Group (available on the website of
McKinsey & Company), citing Global Water Markets 2008, Global Water Intelligence.
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