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