This story originally appeared in our December 3, 2010 e-magazine. Click here to subscribe.
In the first issue of Beyond Profit, published in April 2009, we wrote about the emergence of the impact investing industry, which facilitates investments that create a positive social impact beyond financial return. Earlier this week, a report by J.P. Morgan and the Rockefeller Foundation declared impact investment a new asset class—a remarkable development in the lifecycle of this industry. What does it mean for social enterprise? Lindsay Clinton analyzes the current landscape.
On November 29, J.P. Morgan and the Rockefeller Foundation released a report that will likely serve as a turning point in the development of impact investing. The report, which assesses expected and realized returns of more than 1,000 impact investments, estimates that the industry presents an investment opportunity between US$400bn and US$1 trillion with profit potential between US$183bn and US$667bn. Importantly, the report declares impact investment an asset class which provides a strong indicator to investors who may have shied away from social investing in the past to reconsider this emerging investment category.
The declaration of impact investment as an asset class functions as an on-ramp for investors eager to find the “next microfinance.” A recent article in Forbes estimates that microfinance comprises 50% of the total impact investing market. Within the social enterprise sector, microfinance (not withstanding the current crisis in India) has demonstrated to many investors the role capital can play in a for-profit investment and what that investment can achieve in financial and social returns.
Signposts of Progress
Twenty years ago, companies and investors started to think more formally about responsibility, launching CSR departments, and engaging in “socially responsible investing” (SRI)—a “do no harm” approach. More recently, these philosophies are evolving to emphasize impact first.
This new way of thinking may have been triggered in part due to the economic crisis. Significant losses in mainstream financial markets over the last three years shook the conviction that many investors had about the inherent truth of old investing ideologies. Antony Bugg-Levine, Managing Director at the Rockefeller Foundation, explained, “The crisis opened up cracks in established investment practices, enabling impact investing practitioners to make a greater case for doing something in a different way.”
In the early part of this decade, lone rangers like Aavishkaar and Acumen Fund appeared, making small, strategic, patient investments into impactful businesses in emerging markets. During this period, investors also tested their luck in microfinance and green investing. These sectors served as a gateway to wider acceptance of the idea that financial return and social return can coexist. Now the impact investing sector includes big names like TIAA-CREF, Prudential, and Citibank. The industry includes a spectrum of investors encompassing institutional investors like pension funds, wealth management advisors and investment advisors, high-net worth individuals, and philanthropic investors.
Today, signs abound that impact investment has become an asset class. New business units have emerged at institutional investment houses, including TIAA-CREF’s Social and Community Investing, and J.P. Morgan’s Social Finance unit. In addition, entirely new businesses have emerged to provide impact investment advisory, including Bamboo Finance in Switzerland and Intellecap in India. (Intellecap publishes Beyond Profit.)
Industry associations like the Global Impact Investing Network (GIIN), Toniic (see our interview with CEO Morgan Simon in this issue), and the International Association of Microfinance Investors (IAMFI) bring like-minded investors together. Events like SoCap, Skoll Forum, and Sankalp (hosted by Intellecap in India) connect practitioners, investors, and entrepreneurs within the space.
Market Opportunity
India has become a fertile landscape for impact investing: in a survey of 31 social investment funds conducted by Gray Ghost Ventures earlier this year, about 30% of investment capital focused exclusively on India. But, until now, sector practitioners have not had reliable indicators of market potential for India or in other emerging markets. With the launch of this report, the market opportunity has size and scope.
This report approaches the challenge of sizing the diverse impact investing marketplace by analyzing five sectors across emerging markets: housing, rural water delivery, maternal health, primary education and financial services—for the portion of the global population earning less than US$3,000 a year. The projections focus specifically on companies that provide products or services to BoP customers, but not ones that BoP entrepreneurs run themselves. In each sector, the researchers have determined the amount of invested capital that would be required to fund such businesses, and the profit potential.
The numbers are sizeable and compelling, with profits across the five sectors over the next ten years projected between US$183bn and $667bn. The affordable housing sector makes up the majority of this profit, comprising US$177-$648bn, notably a rather wide range. The next most promising sector, education, indicates a profit potential of US$2.6-$11bn—tiny when compared to housing. Clean water delivery is on par with education, with a potential profit range of US$2.7-$7bn. Health comes in at US$.1bn-$1bn.
While housing makes up the majority of the market potential, it is important not to view these numbers in a vacuum. Compared side by side, clean water may play second fiddle to housing in terms of investment potential, but viewed alone, a multi-billion dollar projected return should be taken seriously. In addition, these sector projections comprise only a snapshot of market opportunity at the BoP. Several other BoP-focused sectors, like inclusive technology, affordable clean energy, or vocational training, could also be considered as evidence of market opportunity.
Overcoming Risks
Can the numbers projected in the report be realized? Right now, impact investment sizes are still small (many are less than US$250,000), identifying investments can be difficult, due diligence is costly, and exit opportunities are few and far between.
Amit Bouri, Director of GIIN, explains, “Impact investing does not suffer from a lack of interest on either the buy or sell side of the market. There is, however, a need for better intermediation—investment advisors, fund managers, product developers—because investors today have trouble identifying the investment opportunities that they are most interested in capitalizing.”
A new searchable directory called ImpactBase, launched by GIIN, will enable investors to find open impact investment funds using criteria such as “impact goals” and “minimum investment amount.” And third-party rating systems like GIIRS and measurement tools like IRIS (see By the Numbers in this issue for more information on these tools) will help investors who are putting capital to work in emerging markets ensure transparent processes and accurate measurement.
These tools and collaborations between like-minded investors will help overcome the barriers and risks currently facing the impact investing industry.
Implications for Social Enterprise
While these findings give shape to different sectors within social enterprise, the report may not have much effect on social enterprises and social entrepreneurs in developing countries in the near term. Enterprises are still mostly small, and entrepreneurs are looking for patient investors who are willing to work hand in hand to provide value to the business over time.
While projecting investment opportunity and profit potential is useful to investors, entrepreneurs face a tougher ground reality.
Vineet Rai, Chairman of Intellecap and Co-Founder and MD of Aavishkaar, explained, “Measurement of the impact investing landscape using an outcome-driven thought process is not sustainable, as we have witnessed in microfinance. These businesses have stakeholders that are very sensitive; an approach that positions them as big numbers is insensitive to the complexity of executing these ideas on business.”
Meeting in the Middle
A few years ago, impact investing practitioners were uncertain about when or if an industry would develop because of the fragmented nature of the players. Would it become just another marketing tool? However, the growth of sector infrastructure over the last several years has proven otherwise. As associations, businesses, tools, and exchanges (see next article) have formed to serve the sector, a diverse range of investors, from individual to institutional, with varying risk expectations, from market rate to mere return of principle, are taking a closer look at the industry.
What the impact investing sector needs now is more dialogue and exchange between investors and entrepreneurs. We may see dissonance between investors and enterprises in emerging markets if we focus only on the numbers, growth, and scale. The numbers are compelling, but mission and purpose should continue to drive the growth of the sector.
Photo by Beverly and Pack
