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Home > Blogs > All About Alpha > OK, people: stretch those muscles, and let’s invest in a way that has a positive impact!

OK, people: stretch those muscles, and let’s invest in a way that has a positive impact!

Impact investments | OK, people: stretch those muscles, and let’s invest in a way that has a positive impact! All About Alpha

A car accident, a plane crash, or Jane Fonda’s workout, perhaps, but ‘impact’ is not a word one might typically associate with investing. Especially in the context of alternatives, using ‘impact’ could be construed either meaning augmenting returns in a broader portfolio or potentially hitting the deck as the market is crashing.

Yet, a recent research report in great detail outlines impact investments as an emerging asset class.

Not to be confused with socially responsible or “green” investments (click here to read AllAboutAlpha.com’s recent coverage of EDHEC’s SRI report), which from the report’s perspective generally seek to minimize negative impact, impact investments are intended to create positive social or environmental impact beyond financial return. Indeed, they require the management of social and environmental performance in addition to financial risk and return.

“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,” notes the report (click here to download), which was produced by JPMorgan Global Asset Management in conjunction with the Rockefeller Foundation and the Global Impact Investing Network.

In other words, investors grappling with making money while ensuring their investments have a positive impact are increasingly gravitating to a new type of asset class. This neophyte class encompasses assets that promote the channeling of large-scale private capital for social benefit – helping offset a broader portfolio that likely has no distinction between good and bad, and likely helping offset a bad conscience to boot.

If there’s still confusion on how one differentiates impact investing from SRI and other “virtuous” causes, JPMorgan’s report makes a solid effort at explaining it: there are more than 96 pages of questions, definitions, analysis and even ratings. In particular, institutional investors will utilize all this content to measure whether the pay-it-forward approach is both proper and making a return. There is even a way to measure business services that impact investments offer! The two small tables below offers some areas where impact investing is applied.

Impact Investments

Impact Investments 2

Still, it’s a pretty vague concept to use to decide what constitutes an impact investment, how it is measured both in terms of existing and potential performance, how it fits in with other kinds of “non-impact” investments, etc.

So, really, what defines and differentiates impact investments?

According to the report, it’s not so much about the nature of the underlying assets but about how investment institutions organize themselves around it. Put differently, impact investors finance businesses that generate positive social impact alongside financial returns. Investments that simply avoid negative social consequences will not deliver what would be deemed as sufficient impact to meet investors’ expectations.

What’s more, it’s very much about the approach, that is how one decides that an investment is “impact,” how one allocates, monitors and pays for the investment itself, and how one fits that into their broader portfolio of non-impact investments. (See chart below outlining returns expectations for impact investments.)

Impact investments 3

To be sure, no matter how well-intentioned, every investment has it’s potential negative upshots. In impact investing’s case, the worry about profiting from the poor arises. Since many of the potential investments are geared toward housing development initiatives, power generation and renewable energy, clean-water projects and other types of efforts, the idea of making a profit is certainly a “reputational risk.”

And with any sort of high-impact investment, there will always be questions about fees, since ‘high impact’ probably also means “high-touch,” in that the amount of monitoring an maintenance involved is a bit more than the average.

Impact investments 4

And the cherry on the cake that Richard Simmons would not want you to eat? An entire ratings system called the Global Impact Investing Rating System (GIIRS) to evaluate, measure and monitor impact investments – a weight-watchers, BMI-like, monitoring system to make sure there aren’t any slip-ups along the way.

Incubated by an independent non-profit group called B Lab, GIIRS “will assess the social impact of companies and funds using a ratings approach analogous to S&P credit risk ratings, using IRIS reporting standards where applicable to provide an overall company rating based on sub-ratings across five stakeholder categories and multiple sub-categories.”

In short, impact investing is a new way to invest with a conscience. What remains to be seen is how many pensions, foundations and other institutions that want and need to stretch their muscles and embrace investing in a proactive, positive way.

This guest blog was first published on AllAboutAlpha.com.

Tags: asset management , impact investing , investments
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