A new study by analysts at J.P. Morgan concludes that “impact investing” – which is intended to generate social good as well as financial return – could represent a highly-profitable trillion dollar market over the next decade.
Women at water pump in Mozambique
“The market opportunity for investment is vast,” the study (PDF) says, “As this movement gathers steam, we recognize the potential for impact investments to attract a larger portion of mainstream private capital and anticipate that more investors will seek to generate positive social and/or environmental impact when making investment decisions. In fact, we believe that impact investing will reveal itself to be one of the most powerful changes within the asset management industry in the years to come.”
Impact investing, according to the study, can target and benefit different populations: the so-called “base of the pyramid” (BoP), which has been defined by the World Resources Institute as people in emerging markets earning less than $3,000 a year; a broader “base of the pyramid” which includes low-income populations in developed markets; and the broadest group, “which can include those impacted by income-independent factors such as climate change.”
Applying its methodology only to the first of those groups - the BoP population in emerging markets – the study identifies five business sectors - housing, rural water delivery, maternal health, primary education and financial services – with potential over the next 10 years for total invested capital of $400 billion to $1 trillion and profit of $183 billion to $667 billion.
The BoP market opportunity exists, the study says, because ““markets at the base of the economic pyramid are typically under-served by traditional business, which may exclude this population from being considered part of its potential customer base.”
Impact investing is attracting a wide variety of investors “including development finance institutions, foundations, private wealth managers, commercial banks, pension fund managers, boutique investment funds, companies and community development finance institutions,” according to the study.
While these investors have varied expectations regarding financial returns, the study says, increasingly “entrants to the impact investment market believe they need not sacrifice financial return in exchange for social impact. Indeed, many have a regulated, fiduciary duty to generate risk adjusted returns that compete with traditional investments.”
The report notes that J.P. Morgan is a co-founder – along with the Rockefeller Foundation and the U.S. Agency for International Development – of the Global Impact Investing Network, which aims “to accelerate the development of an effective impact investing industry.”
Among other signs of growth, the study says, “large-scale financial institutions such as J.P. Morgan, Citigroup, Prudential and Africa’s Standard Bank are positioning themselves to grow impact investing businesses beyond their minimal regulatory obligations.”