J.P. Morgan Global Research and The Rockefeller Foundation argue in a new report that wealthy investors want exposure to this alternative asset class, which "will reveal itself to be one of the most powerful changes within the asset management industry in the years to come."
The "emerging asset class" is impact investments, which the report defines as investments intended to create positive impact beyond financial return. Impact investments generally aim to improve the lives of poor and vulnerable people or to provide environmental benefits at large, says the 96-page report "Impact Investments: An emerging asset class," released November 29.
"With increasing numbers of investors rejecting the notion that they face a binary choice between investing for maximum risk-adjusted returns or donating for social purpose, the impact investment market is now at a significant turning point as it enters the mainstream," says the report. Investors include high-net-worth individuals, as well as philanthropic foundations and commercial financial institutions.
It may be hard to believe that a competitive return is possible from businesses that focus on the poor or the environment, but the report maintains that they are. Its researchers conducted a survey of 24 leading impact investors that provided data on expected returns for more than 1,100 individual investments. "Reported return expectations vary dramatically: while some impact investors expect to outperform traditional investments, others expect to trade-off financial returns for social impact," the report says. "Increasingly, entrants to the impact investment market believe they need not sacrifice financial return in exchange for social impact. Indeed, many have a regulated, fiduciary duty to generate risk-adjusted returns that compete with traditional investments."
Transactions currently tend to be private debt or equity investments, but the authors expect more publicly traded investment opportunities will emerge as the market matures.
The report's authors, which include Nick O'Donohoe, J.P. Morgan's Global Head of Research, say risks for impact investments are similar to those for venture capital or high-yield debt, with heightened reputational and legal risks, particularly in emerging markets. Critics argue that such investing exploits poor people for the sake of profits, and the authors don't deny that's possible. But they 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."
The report focused on one segment of the impact investing market--the global population earning $3,000 a year--and looked at measuring the potential scale of invested capital and profit in that segment. The authors looked at five sectors involving that population--housing, rural water delivery, maternal health, primary education and financial services--and concluded the market over the next ten years could attract $400 billion to $1 trillion in invested capital and generate profits of $183 billion to $667 billion.
The report goes into a lot more detail on why impacting investing should be defined as an emerging asset class, just like hedge funds and private equity are. It's well done and worth reading, and you can do so by clicking here.