An Emerging Asset Class

The text below summarizes the Rockefeller, JP Morgan introduction to their research:

Impact investments: An emerging asset class

In a world where government resources and charitable donations are insufficient to address the world’s social problems, impact investing offers a new alternative for channeling large-scale private capital for social benefit. 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. In this work, we argue that impact investments are emerging as an alternative asset class. As such, we analyze the questions one would ask when adding impact investments to an investment portfolio. Specifically, we consider the following:

What defines and differentiates impact investments?

Impact investments are investments intended to create positive impact beyond financial return. As such, they require the management of social and environmental performance (for which early industry standards are gaining traction among pioneering impact investors) in addition to financial risk and return. We distinguish impact investments from the more mature field of socially responsible investments (“SRI”), which generally seek to minimize negative impact rather than proactively create positive social or environmental benefit.

Who is involved in the market and how do they allocate capital?

Charting the landscape of the impact investment market, investors range from philanthropic foundations to commercial financial institutions to high net worth individuals, investing across the capital structure, across regions and business sectors, and with a range of impact objectives.

What makes impact investments an emerging asset class?

While certain types of impact investments can be categorized within traditional investment classes (such as debt, equity, venture capital), some features dramatically differentiate impact investments. We argue that an asset class is no longer defined simply by the nature of its underlying assets, but rather by how investment institutions organize themselves around it. Specifically we propose that an emerging asset class has the following characteristics:

• Requires a unique set of investment/risk management skills
• Demands organizational structures to accommodate this skill set
• Serviced by industry organizations, associations and education
• Encourages the development and adoption of standardized metrics, benchmarks, and/or ratings

These characteristics are present for such asset classes as hedge funds or emerging markets, which channel significant capital flows as a result. With each of these indicators having materialized, we argue that impact investments should be defined as a separate asset class.

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