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JP Morgan’s Definition of Impact Investment

SOCAP Global December 4, 2010

This summary below was pulled from the pdf of the JP Morgan, Rockefeller collaborative research piece on impact investing. I had not read this when I made my own definitions. Their rationale for why Impact Investing meets the test of being an asset class is a strong one. For my part, I don’t want Impact Investing to be totally defined within a market context. That caveat aside, I  think their work is a real contribution, the kind of research this new and emerging market needs to approach clarity.
My caveat comes from a belief in the reality of the market in the middle. Impact Investing is a creature of two worlds; it’s home is at the intersection of money and meaning; it is not just the child of the market. That’s a philosophic distinction, which does nothing to detract from the ways in which Impact Investing behaves like a child of the market; the ways in which it conforms to accepted definitions of what constitutes an asset class. But Impact Investing is also a child of meaning; of using the market to make a difference, not just to use the poor to create yet another extension or differentiated niche of the market economy that just focuses on return, sometimes, as Jonathan Lewis says happens with microfinance, even coming close to exploiting them.”Is social entrepreneurship about creating a viable asset class to make money while doing good or about building a social movement for economic justice? Are we advocates for the poor or advisers to the well-off?”Lewis asks. in his recent Huffpo piece.
Here is 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 skillset
• 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.
Link to Pdf of the entire report.

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