Investments that aim to create a positive social or environmental impact are emerging as a new asset class, says a new report from J.P. Morgan and the Rockefeller Foundation.

The report examines so-called “impact investments”, estimating that the investment opportunity is between US$400 billion and US$1 trillion, with profit potential between US$183 billion and US$667 billion over the next 10 years in five sectors — affordable urban housing, rural access to clean water, maternal health, primary education, and microfinance.

The report indicates that these sorts of investments are typically made in private markets by providing debt or equity to mission-driven businesses; and that this has gained traction among a wide range of investors, including large financial institutions, pension funds, family offices, private wealth managers, foundations, individuals, commercial banks, and development finance institutions.

“The development of uniquely skilled professionals and intermediaries, specialized industry associations and networks, and standardized metrics points to the emergence of impact investments as a burgeoning asset class in its own right,” said Nick O’Donohoe, global head of research for J.P. Morgan and co-author of the report.

Return expectations for impact investments vary dramatically, it notes, from those who expect them to outperform traditional investments in the same category, to others that expect to trade-off financial return for social impact. Whether there is a trade-off depends on instrument type, investor perceptions, and chosen benchmarks, it says.

Developed markets debt investors appear to expect some return sacrifice, whereas emerging markets debt targets returns that are competitive with long-term index returns, it says. For equity, the results are mixed, it says, with targets that appear competitive for emerging markets, but concessionary for developed markets.

IE