‘The chance to do good by doing well’ is a laudable goal for any asset manager, especially those seeking to attract socially conscious investors. Impact investing is a new field that is gaining attention for its potential to generate sizeable risk-adjusted returns for investors while combating society’s largest problems, including poverty and environmental degradation. Investments are in sectors such as clean technology, global health, and sustainable agriculture, access to water, affordable housing, education and fast moving consumer goods for the poor. Impact investing, however, does not sacrifice financial returns in order to create positive impact. In fact, J.P. Morgan’s November 2010 impact investing report demonstrates that venture capital impact investments in emerging markets generated 12 percent to 15 percent returns per year compared to 10 percent annual returns for its representative benchmark¹. This same report identified U.S. $214 to $786 billion in impact investment opportunities in only five sectors.

Profit and impact

The 2008 financial collapse catalyzed the impact investment industry, shifting momentum “from a periphery of activist investors to the core of mainstream financial institutions”². Impact investment raises the bar from socially responsible investment, which simply aims to avoid harm; in fact “social finance”, is based on the belief that financial innovation can be used directly to help society’s neediest people while actively seeking to create significant community and environmental benefits while earning market rate returns. Impact investment asset managers also strive for improved transparency, accountability and overall impact through quantifiable and tangible community and environmental outcome measurements, in addition to demonstrated financial returns.

Performance and risk

The International Financial Corporation (IFC) and the European Bank for Reconstruction and Development (EBRD) are long-time private equity impact investors with a mandate to focus on impact investment managers that seek ethical, environmental and community excellence in their diversified investments. The strong historical performances of their impact investing portfolios are shown in the graph below. They have consistently outperformed public market indices and top-quartile private equity managers in both emerging and developed markets. By focusing on businesses that improve the well-being of a community, impact investment asset managers attempt to reduce stakeholder risk as well as select superior managers that can holistically consider multiple perspectives when making managerial decisions.

Moving forward

The Global Impact Investment Network (GIIN) was established in 2009 at the 5th annual Clinton Global Initiative, as a platform for impact investment managers to build their industry, much like that of the private equity industry in the 1980s. Members include: J.P. Morgan, the Bill and Melinda Gates Foundation, Citi Foundation, Deutsche Bank, Prudential, TIAA-CREF and Canada’s Sarona Asset Management. As GIIN members build the industry’s infrastructure, impact investment is expected to increase its role and prominence. Through impact investments, investors can diversify their portfolios, supporting positive social and environmental change alongside commercial returns. In 2009, the Monitor Institute reported that if groups like the Global Impact Investing Network (GIIN) succeed, within five to ten years impact investing could grow to $500 billion, around 1 percent of the world’s total assets under management in 2008³. This is a market opportunity too big to ignore. Canadian CFA charterholders have the opportunity to lead the way by creating investment vehicles and supporting and investing in existing impact investment products in this growing asset class.

References:

1. Impact Investments: An Emerging Asset Class, J.P. Morgan, 29 November 2010, page 10
2. Investing for Social and Environmental Impact, Monitor Institute, 2009, page 4
3. A place in society, The Economist, Sept 25, 2009