Impact Investment: A Practical Guide to Investment Process and Social Impact Analysis

CHAPTER 8

Investment Alternatives, Challenges, and Outlook

At the end of 2010, J.P. Morgan issued a report titled “Impact Investments: An Emerging Asset Class,” which suggested impact investing was evolving in such a way that it should be defined as a new asset class. The report proposed that the way for impact investing to grow was to define itself as an asset class; otherwise, if impact investors sought “…to assign their investments to traditional asset classes such as equity, debt and cash … this would lead to a fragmentation of impact investing skills and constrain the industry's potential growth.”¹ Such a proposition seems tenuous, given the diversity of expertise required to professionally invest funds using different mediums. The development of impact investing over the years has supported a non–asset class approach, with a variety of products available ranging from equity to debt to even receivables financing.

Although the methods of investing for social impact is developing on the right track, there are still critical issues to address. Disparate costs of equity from nontraditional funding sources have led to unsustainable businesses being perceived as commercially viable. The excitement over investing into such enterprises and anticipating traditional returns sets up the possibility of falling significantly short of expectations. Additionally, the dearth of high impact, commercially viable investments will lead impact investment funds to alter criteria from their marketed ...