The Emergence of Impact Investing as an Asset Class

Our own anecdotal experience and interviews with fund of fund and alternative investment managers suggest that mainstream PE/VC managers in both the developed and emerging markets target net returns in the range of 15–20%, and gross returns of 20–25%. Reporting standards need to grow from the right definitions To date, most impact investors have created their own systems for tracking and measuring impact, which is inefficient for the market as a whole and limits comparability across investments. Indeed, among our survey respondents only 2% currently employ a third-party impact measurement system. As the market has grown, participants have identified that standardized, well-defined social performance metrics will ensure that impact investments can be assessed against a set of rigorous social impact criteria and compared more broadly.

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This year’s study, the twelfth in the series, discusses how these factors are influencing asset allocations, and examines the impact on long-term trends, including rising allocations to private credit, emerging markets, and funding the energy transition. We also examine the global election year and how central banks are navigating this uncertainty. The Fortune at the Bottom of the Pyramid, C.K. Prahalad The original thesis that profitable business models can serve to improve the lives of poor people. The latest edition (2010 at time of publishing) includes case studies of some of the most prominent examples of impact investments. Segments we haven’t measured As stated earlier the above framework has been applied only to some sub-segments of the impact investment market and leaves significant scope for further research and refinement. We expect a full and complete sizing effort would produce invested capital and profit numbers many multiples of those we’ve presented above.

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Finally, we scale the number of urban people in each bracket by the economic activity rate from Table 29 to get the total number of people (earners and non-earners), and then divide by the average number of people per household. Social impact performance data allows for comparisons across investments In addition to having different reasons for measuring impact, participants in the impact investing industry will use the measured data in different ways. Companies want to understand, track and report their social performance, and compare their performance with that of their peers. Fund managers also need a system for managing the variety of social performance information they receive from their portfolio companies. Limited partner investors often invest across different geographies, sectors and asset classes, with investments directly into companies as well as funds. They require an overarching framework to facilitate comparisons across these varied investments.

How do impact investments perform financially?

Although they delivered similar education results to the urban program, they were shut down due to resource constraints81. UNESCO also cites that urban for-profit education provision cannot be extrapolated to rural areas with more dispersed and often much poorer populations82. Transferability assumption described above – the impact investments an emerging asset class target market is then 45 million births. Our haircut is less dramatic in this sector since we’ve already limited our target population to those who will not be expected to employ government services. In practice, the private sector hospitals may attract some customers that could otherwise have used government services.

While they may not have been identified historically as “impact investors”, their intent was consistent with the definition. Selected data show realized returns on debt broadly reflect the range of expectations Most of the realized data we received pertain to debt investments. The data show that EM debt provides higher yields than DM debt, as one would expect. The realized returns for EM debt are in line with expected returns while the DM debt realizations appear to outperform average expectations.

In each table, we show both the number of deals and the notional amount represented by each category. We find that most of the investments reported were made via private equity or debt instruments. Among the sectors, microfinance is the most frequently referenced, which is unsurprising as it is one of the most mature of the impact investment sectors and presents lower barriers to entry35 to new investors. In terms of geographic distribution of investments, the US dominated our data set. Credible, and comparable; investors can access ratings agencies, syndicators, clearinghouses, auditors and other necessary market intermediaries; and co-investors are easily identified.

Financial institutions in particular tend to hold government debt, so the financial services sectors – microfinance and SME finance – of the impact investment universe could be especially at risk should the sovereign restructure its debt. Even if the particular impact investment does not own government debt, it will likely be affected indirectly by the increase in bond yields of the sector in which they operate. If the government debt is not held by the local companies, then there may be less of a direct impact on their financial health. However, the indirect impact of higher funding costs is likely to remain in place as many of these companies will be borrowing from financial institutions that may be holders of the government debt. With losses on the books, lending standards would be likely to tighten and borrowing costs could increase to compensate for those losses as well.

The values attached to social impact are by nature subjective and often driven by emotion (just as people tend to donate to charities with which they feel some connection). As a result, it is difficult to be objective when constructing an impact measurement system and when comparing investments on the basis of their impact. Investors often implicitly assign value to certain types of impact over others when deciding where and on what terms to allocate their capital. By instituting standard approaches to impact measurement, the industry can become more objective and transparent around the drivers of investment decisions. Hedging currency risk depends on whether there is liquidity available in the currency.

• They can invest into community development venture and loan funds or direct capital into a CDFI bank.
• Rather than competing with these local entrepreneurs, they sought to encourage their success, applied their experience in the microfinance sector and entered the education sector with a financial services model.
• Environmental, social, and governance practices refer to business decisions that could affect the returns of that company.
• This is a highly promising statistic for the CDFI industry, given that the Obama administration has increased the CDFI financial assistance appropriations to a record $245m in FY 2010 and $250m in FY2011, up substantially from the $54m in appropriations in 2007 and $107m in FY 2009.
• Despite these best efforts, impact investors will need to manage carefully the political and social risks inherent in selling life-sustaining services to poor and vulnerable communities.
• But note that companies currently use various methodologies for calculating ESG scores, so there’s no one authority on ESGS scores.

Investments in infrastructure According to the World Bank, emerging countries need 7 to 9 percent of their GDP per annum, or approximately US$400bn, to address their core needs in building infrastructure. Including these sectors would bring the annual investment need to more than US$900bn or close to 20 percent of the GDP of emerging countries. In total then, the investment need could be as high as US$3 trillion per annum globally (or close to 5 percent of current global GDP), of which approximately US$1 trillion per annum needs to be spent in emerging countries.98. Energy We did not attempt to size the market for clean energy products, given the wide array of product and business types, and often the significant regulatory hurdles for scalable business solutions. Clean energy services and products include solar home systems, solar lanterns, energy efficient cook stoves, and hydro- or waste-biomass generated electricity. The potential for clean energy solutions for the BoP market is huge – a recent study96 conducted by IFMR Research-Centre for Development Finance and the World Resource Institute estimated that the consumer market in India alone is $2.1bn per year.

We presented the opportunity for investment into water service for the BoP above, but broader opportunities exist within infrastructure. Ports, roads, on-grid power generation, and large-scale water delivery are all examples of products or services that could greatly improve the lives of BoP+ populations. Poor roads for example contribute to post-harvest food losses that can range from 15% to as high as 50% of what is produced.

Nor will an investment necessarily fall into only one category within the business sectors or impact objectives. The impact objectives of an investment in Selco Solar in India, which sells solar home systems to provide energy access for people without access to electrical grids, would incorporate climate change mitigation with improving basic welfare for people in need, for example. Involved have resulted in mainstream institutions defining both as separate asset classes within the category of alternative investments. We note that this definition was a key catalyst in driving the institutional growth of these assets over the last 20 years. It involves providing financial services to low-income individuals who lack access to traditional banking services. Impact investors are focused on measuring the social and environmental outcomes of their investments.

Complementing government service provision As with water, education is a service often provided by the government. Several studies cite that the success of the affordable private schools relies on the quality of service (that they are deemed to be higher quality than government schools). One study has actually identified several relationships to give evidence to this otherwise anecdotal conclusion. In Private Schools for the Poor89, R Baird finds an inverse relationship between government education spending and private school enrollment, such that higher government spending corresponds to lower private school enrollment. Further findings include that high teacher absence in government schools also has a major statistical link with private school enrollment. The business model on which Monitor focused its analysis is the community water system, where a centralized filtration unit provides water for the community and is operated by trained staff.

However, SRI may focus more on avoidance of harm, while impact investing also suggests a positive impact via its investments. We believe the asset management industry is at an inflection point, where active ETFs are becoming an increasingly important part of investor toolkits, alongside mutual funds, closed-end funds, separately managed accounts, and index ETFs. It is not intended as a recommendation to buy or sell any particular asset class, security or strategy. Regulatory requirements that require impartiality of investment/investment strategy recommendations are therefore not applicable nor are any prohibitions to trade before publication. As the demand for environmentally and socially beneficial investments has soared, a number of global standards have emerged to support investors in measuring impact.

px” alt=”impact investments an emerging asset class”/>https://www.1investing.in/ base identified. The small average deal size for impact investment presents a challenge to investors whose due diligence costs remain more or less fixed relative to traditional investments. For investors capable of making larger investments, the cost of spending time and resources on a small impact investment deal is higher than for traditional investments.

For example, SRI investors may avoid investing in companies that are involved in producing or selling alcohol, tobacco, or firearms. Typically, when interest rates rise, there is a corresponding decline in the value of debt securities. Credit risk refers to the possibility that the debt issuer will not be able to make principal and interest payments. In 2024 sovereign investors navigate a shifting investment landscape, adapting their strategies to seize opportunities and mitigate risks.