Investing in ‘bottom-of-the-pyramid’ could yield profits of hundreds of billions while focusing on social and environmental improvement.
Impact investing, which prioritises positive social and environmental impact over investment returns, could see new capital inflows ranging from $400bn to nearly $1 trillion in the next ten years as the ‘emerging asset class’ targets segments of the economy typically under-served by traditional business. A report by JP Morgan, the US bank, said impact investing merited the status of new asset class and estimated that it could generate potential profits ranging from $183bn to $667bn over the next ten years by investing in sub-sectors including agriculture, water, housing, education, health, energy and financial services (microfinance), notably in countries where people earn less than $3,000 annually. This is referred to as the ‘bottom-of-the-pyramid’ approach (BoP), a phrase popularised in a 2004 book by Indian business professor C.K. Prahalad. The report was prepared for the Rockefeller Foundation, which supports the development of impact investing. JP Morgan looked at expected and realized returns from more than 1,000 investments collected by the Global Impact Investing Network, a lobby group, as the basis for its estimates. Impact investing favours capital deployment intended to create positive impact beyond financial return. It is increasingly seen as a more dynamic, market-based alternative to philanthropy. Impact investments aim to return at least the capital principal to investors. Some pay
market rate or better returns, but all emphasise positive social and environment benefits as the crux of their business strategy. Investors active in the space include development finance institutions, foundations, private wealth managers, commercial banks, pension fund managers, boutique investment funds, companies and community development finance institutions.
Looking at potential returns, the report suggests that in emerging market venture capital allocations, impact investing could outperform the Cambridge Associates Emerging Market Venture Capital and Private Equity index. The JP Morgan report said investments currently take the form of traditional private debt or equity transactions. They also include more innovative structures such as the Social Impact Bond issued in the UK, where returns are linked to the reduction of prisoner reoffending rates. JP Morgan said it expected to see more publicly traded market products in the coming years. The report said academic research showed selling affordable products and services to BoP communities required new and innovative approaches to accommodate unreliable income streams, deliveries to remote rural areas and partner with governments. It said risks for impact investments were similar to those for venture capital or high yield debt investments, with heightened reputational and legal risks.
Link to JP Morgan report