Social Impact Investing

Impact Investments:
An emerging asset class
Global Research
29 November 2010
Measuring social performance: IRIS
Impact investments are not well served by portfolio management tools that lack
social performance metrics. Some investment pioneers, such as Investing for Good 31 ,
have developed bespoke systems for measuring the social impact of the investments
in their portfolios, but there often remains a lack of comparability across these
systems. In response, investors in 2008 sponsored the development of the Impact
Reporting and Investment Standards (“IRIS”). IRIS seeks to create a single,
consistent reporting standard for measuring and reporting the social and
environmental impact of investments. Just as the standardized terms within the
GAAP standards (e.g., net income, gross margin) provide investors with comparable
metrics to assess the financial prospects of a business, IRIS metrics aim to allow
investors to compare social and environmental activities, outputs and outcomes
across investments (e.g., student to classroom ratio, number of full-time female
employees ).
Benchmarking and indices: IRIS data repository
Working in partnership with Hitachi, the IRIS team has built a data repository that
will facilitate benchmarking and provide impact investors with data on the relative
performance of impact investments in delivering positive social and environmental
objectives. Researchers, both academic and applied, are working to build the databased
analysis that will underpin the asset class.
Ratings: GIIRS
Beyond benchmarking data, efforts are also under way to launch third-party rating
agencies that can vet and monitor impact investments for their social and
environmental outputs, not just financial risk. Built off the definitions and data of
IRIS, the Global Impact Investing Reporting Standards (GIIRS) is field-testing its
ratings methodology with 25 “pioneer funds” in anticipation of a full launch in 2011.
By providing simple and comparable ratings of the social impact of an investment,
GIIRS – and the competitors that will likely arise in the future – has the potential to
unlock substantial new sources of capital from investors who are interested in impact
investments but lack the appetite and expertise to develop their own social impact
assessment methodology.
A new alternative
Based on the above criteria, we conclude that impact investments are an emerging
asset class. We anticipate that the organizational structures will most readily form
within the alternative investments bucket that commonly houses such asset classes as
hedge funds and commodities, as alternative investment professionals tend to include
in their offerings a new asset class gaining prominence. Further, within buy-side
organizations, the unique risk/return/social value characteristics of these investments
will require an alternative investment strategy. While we recognize an alternative
view that impact investments should be assigned to traditional asset classes, such as
equity and debt, we believe this would lead to a fragmentation of impact investing
skills and that positioning impact investments as an asset class within alternative
investments is most likely to catalyze a significant inflow of capital.
31 http://www.investingforgood.co.uk/rating-impact
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