Social Impact Investing

Impact Investments:
An emerging asset class
Global Research
29 November 2010
Sizing methodology, in summary
The methodology we employ to
produce the headline numbers in
Table 1 combines the analysis of a
successful impact investment
business model in each sector with
an analysis of the potential
customer base for such a business
were it to be scaled up and
transferred across regions. We use
the economics of our case study in
each sector to ensure that the
products sold are affordable to our
target population (the BoP) and to
ensure that the business is
operationally profitable.
Table 1: Potential invested capital to fund selected BoP businesses over the next 10 years
$ bn
Sector
Potential invested capital
required, USD bn
Potential profit
opportunity, USD bn
Housing: Affordable urban housing $214–$786 $177–$648
Water: Clean water for rural communities $5.4–$13 $2.9–$7
Health: Maternal health $0.4–$2 $0.1–$1
Education: Primary education $4.8–$10 $2.6–$11
Financial Services: Microfinance $176 Not measured
Source: J.P. Morgan.
Why the BoP opportunity exists
Markets at the base of the economic pyramid are typically under-served by
traditional business, which may exclude this population from being considered part
of its potential customer base. BoP populations are also often unable to access
services provided by the government. Academic research has shown that the BoP
population will often manage its finances to buy affordable products or services
improving their productivity and reliability of income 4 . It is a market introducing
operational challenges to otherwise proven business models requiring innovative
approaches to accommodate what can be unreliable income streams or to deliver
services to remote rural areas. While government or philanthropic solutions will
sometimes provide these products or services (such as healthcare or education),
impact investment can complement government and philanthropic capital to reach
more people.
Managing impact investments
The risks for impact investments are similar to those for venture capital or high yield
debt investments, with heightened reputational and legal risks, particularly in
emerging markets where regulatory infrastructure can be onerous and the rule of law
is less well defined. Further, critics may argue that impact investments exploit poor
people for the sake of profits. Indeed, exploitation and mission drift are risks that are
amplified when poor populations are concerned, but we believe the potential of
impact investing to create a pathway out of poverty, combined with the emergence of
systems to track and manage social performance, outweigh these risks. Investors
need to be vigilant to ensure that the social impact and outcomes are delivered by
monitoring social performance.
In practice, measuring social performance is complicated, expensive and can be
subjective, so impact investors have supported the development of standard reporting
and social measurement frameworks. The Impact Reporting and Investment
Standards (“IRIS”) provides a taxonomy to standardize social impact reporting and
facilitate the creation of industry benchmarks. The Global Impact Investing Rating
System (“GIIRS”) will utilize IRIS definitions and additional data to assign relative
value to investments’ social performance, helping to inform investment decisions and
potentially lower diligence costs by collating standardized information on
investments.
4 Portfolios of the Poor, D Collins et al, Princeton University Press, 2009.
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