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Date: 2024-11-13 Page is: DBtxt003.php txt00006114

Issues
Impact Investing

Does Impact Investments Generate Below Market Returns?

Burgess COMMENTARY

Peter Burgess

Does Impact Investments Generate Below Market Returns?

IMGE To Catch Fish

Impact Investing, as explained throughout the website, is a strategy by which the investor is actively seeking to achieve social impact, in addition to the financial return. Hence, the investor may be willing to accept a lower financial return in exchange for achievement of a social outcome. This have led many to assume that impact investments always generate below-market returns. This is not true!

Actually 35% of the funds actives in the impact investing scene target an internal rate of return above 20%! ( See here for Market Return definition and Internal Rate of Return explanation. Market Return is usually referred to as in the range of 7-8%)

Impact investment opportunities have huge room for growth

Impact investing opportunities are usually related to businesses aiming at serving the BoP (the Bottom of the Pyramid), the low income communities in poor countries. For instance, business models entail giving access to energy, financial products and other services to rural communities or poors living in the slums, in countries such as Kenya or India. These “markets” are very large and present a big potential for growth, and hence, (potentially) high financial returns, while serving people in need with cheap products and appropriate distribution channels.

Impact investment opportunities can offer better diversification

As an impact investor, part of your portfolio would go to social businesses in developing countries. Those businesses and “social models” , from affordable housing to microfinance, are rarely correlated to the global markets, and hence could be a good way to diversify, meaning having assets with different risks than your usual stock market account.

Many of the impact investors also “cap” their return, as it is usually perceived unethical to generate high revenues on the back of vulnerable segments of societies. Do you agree with this?

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