2012 a-portfolio-approach-to-impact-investment

www.morganmarkets.com
Global Social Finance Research
01 October 2012
A Portfolio Approach to
Impact Investment
A Practical Guide to Building, Analyzing and Managing
a Portfolio of Impact Investments
Social Finance
Yasemin Saltuk
(44-20) 7742-6426
yasemin.x.saltuk@jpmorgan.com
J.P. Morgan Securities plc
 This research presents a portfolio management tool to analyze impact
investments across the three dimensions that determine the performance
of these assets: impact, return and risk.
 Using our own portfolio and the experiences of over twenty leading
impact investors, we have created a graphical framework to set targets,
map investments and aggregate the profile of the portfolio as a whole.
 The work responds to an increasing demand for portfolio management
strategies from both new and experienced impact asset managers, as
market opportunities and portfolios grow.
See page 47 for important disclosures

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A Portfolio Approach to Impact Investment
01 October 2012
Yasemin Saltuk
(44-20) 7742-6426
Table of Contents
Executive Summary .................................................................4
1. A Portfolio Theory for Impact Investment ..........................8
Starting with traditional portfolio theory .....................................................................8
Adding the impact dimension ......................................................................................8
2. Building an Impact Investment Portfolio............................9
Find a home for the portfolio.......................................................................................9
Define an impact thesis..............................................................................................11
Define parameters that will drive financial performance...........................................14
Use focus and diversification, together......................................................................16
Sourcing deals............................................................................................................17
Today, impact portfolio construction is an iterative process......................................18
3. A Framework for Impact, Return & Risk...........................19
Characterizing investments in three dimensions........................................................19
Map the target profile.................................................................................................19
Map the individual investments.................................................................................22
Map the aggregate portfolio & compare to target......................................................24
Expand the dimensions of the graph..........................................................................26
4. Financial & Impact Risk Management ..............................27
The nature of risk in the impact portfolio ..................................................................27
Manage risk through structural features.....................................................................29
Manage friction between impact and return...............................................................31
Portfolio diversification .............................................................................................32
5. Looking Forward ................................................................34
Benchmarking success will depend on the investor...................................................34
Some challenges should ease in a maturing market...................................................34

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Appendices
Appendix I: Defining Impact Investments ............................35
Appendix II: Company versus Fund Investments................37
Appendix III: Differentiating Impact Investments ................39
Appendix IV: The Impact Spectrum ......................................42
Appendix V: Interview Participants.......................................43
Appendix VI: Social Finance Library ....................................44
Acknowledgements
We would like to acknowledge the contribution of several partners to this research,
who provided access to their experiences and insight. In particular, we thank the 26
organizations that participated in interviews and focus groups, all of whom are listed
in Appendix V. We also thank our colleagues at J.P. Morgan for providing essential
input and feedback throughout the development of this work. While many
individuals contributed to this work, all errors remain our own.
J.P. Morgan Social Finance Group
Serving the growing market for impact investments
J.P. Morgan Social Finance is dedicated to serving and growing the nascent market
for impact investments – those intended to deliver positive impact alongside financial
return. To this effect, the Social Finance Group was created in 2007 as a business
unit to invest proprietary capital in the market and provide client advisory services
and analytical market research.
Click here to visit the J.P. Morgan Social Finance website at
www.jpmorganchase.com/socialfinance
J.P. Morgan Social Finance Research
Building a library of market analysis for impact investments
In 2010, in partnership with the Rockefeller Foundation and the Global Impact
Investing Network (GIIN), we published Impact Investments: An Emerging Asset
Class (Nov 2010), which provided a market landscape for investors beginning to
explore the impact investment market. In 2011, we conducted an institutional
investor survey (again in partnership with the GIIN), which produced data on over
2,200 private transactions that spanned debt and equity, developed and emerging
markets, and across sectors. The resulting publication, Insight into the Impact
Investment Market (Dec 2011), revealed investors’ expectations for returns, the risks
they perceive, their approaches to impact measurement, and their perceptions of the
market. Having analyzed that sample of individual investments, we now present a
portfolio management framework that incorporates the third dimension of impact.
Click here for the full J.P. Morgan Social Finance Research Library, also referenced in
Appendix VI.

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Executive Summary
This report is written as a practical guide to building, analyzing and managing
portfolios of impact investments for professional investors. In traditional financial
analysis, investment management tools allow investors to evaluate the return and risk
of individual investments and portfolios. This research presents a tool to analyze
impact investments across the three dimensions that determine the performance of
these assets: impact, return and risk. Throughout, we reference the experiences of
impact investors with case studies of how they approach each step of the portfolio
construction and management process. The content for this research was informed by
our own investment experience as well as that of 23 institutional investors that we
interviewed. Figure 1 provides an overview of the report structure, and we
summarize the key findings below.
Figure 1: A Portfolio Approach to Impact Investment
Source: J.P. Morgan.
Building an Impact Investment Portfolio
Find a home for the portfolio
To successfully build a portfolio of impact investments, investors need to assign an
individual or a team to source, commit to and manage this set of investments, and
institutions are setting up their organizations in different ways to address this need.
Some investors establish a separate portfolio with its own management team while
others employ a “hub-spoke” strategy where a centralized impact team partners with
various portfolio managers across instrument types (such as fixed income and equity)
to manage the portfolio's multiple dimensions. Still others bring the total institution
in line with the impact mission.
Define an impact thesis
Once the organizational structure is in place, the portfolio management team will
need to articulate the impact mission of the portfolio. For many impact investors, the
impact thesis is usually driven by the value set of an individual or organization and
can reference a theory of change, often with reference to specific impact objectives
such as access to clean water or affordable housing. An impact thesis can reference a
target population, business model or set of outcomes through which the investor
intends to deliver the impact, some examples of which are shown in Table 1.
Define an impact thesisFind a home for the portfolio Define financial parameters
Building an Impact Investment Portfolio
Mapthe individual investmentsMapthe target profile
Mapthe aggregate portfolio
& compare to target
A Framework for Impact, Return and Risk
Manage risk through
structuralfeatures
Identify the risks
in the impact portfolio
Manage friction between
impact and return
Financial & Impact Risk Management
Throughout, we use the term
"social” to include both social
and environmental concerns.
Also, we use the term
“institutional investor” to
reference non-individual
investors, including foundations,
financial institutions and funds.

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Table 1: Illustrative components of an impact thesis
Target population Target business model Target impact
Income level Product/service provider to target population Number of target population reached
Degree of inclusion Utilizing target population retail distribution Percent of business reaching target population
Region of inhabitance Utilizing target population suppliers Scale of outputs
Implementing energy and natural resource efficiency Quality of outputs
Source: J.P. Morgan
Define financial parameters
Alongside the impact thesis, the investment team will determine the investment
scope with respect to the parameters that can drive financial performance. These
parameters include: the instruments that will be eligible for investments; the
geographies and sectors of focus; the growth stage and scalability of the businesses
that will be targeted; and the risk appetite of the investor.
Abandon the trade-off debate for economic analysis
In setting the investment scope and return expectations, we encourage investors to
abandon broad debates about whether they need to trade-off financial return in
exchange for impact. We rather propose that investors rely on economic analysis on a
deal-by-deal basis of the revenue potential and cost profile of the intervention they
are looking to fund, and set risk-adjusted return expectations accordingly.
A Framework for Impact, Return & Risk
Once the target characteristics of the portfolio are defined, investors can map the
following across the three dimensions of impact, return and risk: a target profile for
the portfolio, the expected profile of the individual opportunities and the profile of
the aggregate portfolio, which can then be assessed against the target.
Map the target profile
To illustrate how different investors might map their portfolio targets, we present the
graph of our own J.P. Morgan Social Finance target portfolio – the shaded grey area
in Figure 2 – alongside the profile that might be targeted by an investor with a higher
risk appetite and a lower return threshold, and the graph that might represent the
target for an investor pursuing only non-negative impact with a low risk appetite.1
Figure 2: J.P. Morgan Social Finance
target portfolio graph
Figure 3: High risk investor’s
Figure 4: “Non-negative impact” investor’s
1
We use the term non-negative to indicate, for example, a socially responsible investor that
might employ some negative screening to exclude negative impact from their portfolio but
does not actively pursue positive impact. Readers should note that we imply no particular
correlation or relationship between impact, return and risk.
Risk
Return
Impact Risk
Return
Impact Risk
Return
Impact

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Map the individual investments
Next, we map out expectations for an individual investments based on assessments of
the impact, return and risk. Once that investment is mapped, we can then compare it
to the portfolio target as shown in Figure 5. Although we show an example in which
the individual investment profile does fit within the portfolio targets, in general
investors may not require that each investment necessarily fits within the target
range, so long as the aggregate does.
Map the aggregate portfolio & compare to target
Once the portfolio begins to grow, we can consolidate the individual investment
graphs into one graph representing the characterization of the portfolio as a whole,
aggregating the individual graphs by either overlaying them or averaging them
(simply, or on a notional-weighted basis). Then, this aggregate can be compared to
the target profile for the portfolio to ensure alignment.
Expand the dimensions of the graph, if desired
Investors should consider the three-dimensional graph as a template. For some, the
simplicity of this approach might be appropriate for aggregating across large
portfolios at a high level. Others might prefer to use a more nuanced framework that
better reflects the different contributing factors of the parameters represented on each
axis – impact, return and risk.2
As an example, we could consider an investment
graph across six dimensions, splitting each of the three into two components, as
shown using a hypothetical investment in Figure 6.
Figure 6: Illustrative graph in six dimensions
The bold blue hexagon illustrates the profile of a hypothetical debt investment.
Once the targets have been set and the portfolio begins to grow, investors are then
faced with managing the investments to ensure that the portfolio delivers both impact
and financial returns in line with the targets.
2
To ensure the investment profile is not oversimplified, we advocate the use of this framework
– whether in three dimensions or more – in conjunction with a more detailed understanding of
the investments, and never on a stand-alone basis.
Appreciation
Income
Ecosystem
Investment
Products
Process
Return
Risk
Impact
Figure 5: One investment in the
context of portfolio targets
The grey shaded area represents our
portfolio targets; the bold blue triangle
represents an individual investment.
Risk
Return
Impact

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Financial & Impact Risk Management
Identify the risks in the impact portfolio
On an individual investment basis, the risks that arise for impact investments are
often the same risks that would arise for a traditional investment in the same sector,
region or instrument. Just as we abandon the trade-off debate on return across the
asset class and encourage deal-by-deal analysis, we encourage investors to assess the
risk profile that results from their particular impact thesis and motivation.
There are also some cross-market risks to consider, including: the early stage of the
market and its supporting ecosystem; mission drift; the responsible combination of
different types of capital (including grants); and the moral hazard of recognizing
impact failure or financial loss. The development of the market over time should
erode some of the risks associated with its early stage and ecosystem. While some of
these risks will remain in place, investors will likely develop better processes for
recognizing and dealing with them.
Manage risk through structural features
Once the risk profile of the investment is determined, investors manage it using
structural features such as seniority in the capital structure, fund intermediaries, and
compensation-related or covenant-based incentives. With respect to the currency risk
that arises for investors allocating capital internationally, some investors referenced
diversification across countries as the preferred means of management.
Manage friction between impact and return
Many investors cite that they pursue opportunities where the impact mission is
synergetic with the financial return pursuit. Several organizations also acknowledged
that at times friction can arise between these two pursuits. Some of the challenges
referenced include: the investee’s growth coinciding with a reduction in jobs; the
investee maintaining mission; or ensuring impact measurement. Some investors
manage these challenges by building covenants referencing the mission into the deal.
Portfolio diversification
Rather than setting hard targets for diversification as can more easily be done for
public equity portfolios, impact investors tend to take a more opportunistic approach
to portfolio diversification, monitoring the broader concentrations in any sector,
geography, instrument, or impact pursuit. Many of them referenced being mostly
responsive to the opportunity set before arriving at an inflection point at which they
could become more strategic about diversification as the portfolio grows.
Looking Forward
Challenges should ease over time
In order to be successful today, investors need to be realistic about the stage of the
market, employing patient capital, bringing a dynamic approach and taking an active
management role to the investment. Whether investing directly or indirectly,
investors need to navigate a broad ecosystem to ensure success. Investors today share
a collaborative spirit in meeting these challenges with the broader goal of catalyzing
capital towards impact investments. This research has been a first step towards
sharing the experiences of these field builders to help investors establish a strategic
approach to portfolio management for impact investments.

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1. A Portfolio Theory for Impact Investment
In traditional financial analysis, investment management tools allow investors to
evaluate the return and risk of individual investments and portfolios. This research
presents a tool to analyze impact investments across the three dimensions that
determine the performance of these assets: impact, return and risk. In order to put this
work into context, we explain the purpose and process of this framework.
Starting with traditional portfolio theory
In traditional finance, modern portfolio theory (MPT) evolved as an important
portfolio management tool because it allowed investment managers to distill a multi-
dimensional set of information into a graphical representation using just two
parameters: risk and return (and the correlation between them). With the additional
dimension of impact and growing portfolios, investors in the impact investment
market are increasingly in need of a framework that can clearly represent the nature
of both the individual investments and the aggregate portfolios in three dimensions.
Adding the impact dimension
The framework we have developed is presented in the next three sections. In Section
2, we present the considerations that investors face at the stage of building the
portfolio, including choosing an organizational structure to manage the portfolio and
defining the impact and financial targets with which the portfolio will be built. In
Section 3, we translate those targets into a graphical representation along the three
dimensions of impact, return and risk. We then use this graphical structure to
represent the profiles of individual investment opportunities. Finally, we aggregate
these individual graphs to represent the profile of the whole portfolio. Figure 7 shows
what the outcome of this assessment can look like – with the shaded area
representing the target profile of the portfolio across three dimensions and the bold
red triangle showing the actual aggregate portfolio profile. Once this assessment has
been made, it can be used to determine whether the portfolio is skewed away from
the targets in any one direction, and further asset allocation decisions can then be
made accordingly. In Section 4, we present the financial and impact risks that arise
for investors, and some of the ways in which they manage these risks.
Conversations with a range of institutional investors inform this research
In order to inform these conclusions beyond our own investment activity, we have
interviewed 23 institutional investors who operate across geographies and sectors,
and who range in organization type from foundations to financial institutions and
from pension funds to fund managers. We asked these investors about their approach
to portfolio construction and management, from the perspective of attaining the
pursued impact while delivering target returns and mitigating perceived risks.
Scope of the research
In this research we present the ways in which investors manage their impact
portfolios and the framework that we have developed as a result of what we learned.
We do not address the larger question of how to manage these portfolios in the
broader context of the traditional investment portfolios or grant portfolios that some
impact investors manage. This remains a question for future research.
Throughout this paper, we refer
to the analysis of individual
impact investments or portfolios
rather than the asset class as a
whole. As such, we refrain from
characterizing the asset class by
a singular defining set of return
and risk traits or by a single
impact character.
Figure 7: Aggregate portfolio
representation
The grey shaded area represents our
portfolio targets; the bold red triangle
represents an aggregated portfolio.
NB: Readers should note that we imply no
particular correlation or relationship between
these three parameters.
Risk
Return
Impact

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2. Building an Impact Investment Portfolio
Many of the interviews we conducted for this research referenced articulating a
mission as one of the most important steps to building an impact investment
portfolio. In this section, we explain how investors define their impact thesis and set
financial parameters for the target profile of the portfolio. In order to determine those
targets, there will need to be a team responsible for managing the portfolio itself. We
present some of the organizational structures with which investors manage their
impact portfolios and then explain the process behind defining the impact thesis and
setting targets for the financial parameters.
Find a home for the portfolio
To successfully build a portfolio of impact investments, investors will need to assign
an individual or a team to source, commit to and manage this set of investments. As
we will see in the examples below, institutional investors utilize different
organizational structures to establish these teams.
Organizationally, investors manage impact portfolios in different ways
Some impact investors establish a separate portfolio with its own management team
while others employ a “hub-spoke” strategy where a centralized impact team partners
with various portfolio managers across instrument types (such as fixed income and
equity) to manage the portfolio's multiple dimensions. Below we provide some more
detail on some of the organizational structures institutions have established to
manage their impact portfolios.
 Separate team: Some impact investment portfolios are managed by a separate
team that will operate alongside program officers responsible for grant-making,
as is the case at foundations like the Rockefeller Foundation with program-related
investment (PRI) teams,3
or alongside the teams making investments into
traditional assets as is the case at J.P. Morgan Social Finance.
 “Hub-spoke” partnership: Other organizations apply the impact thesis as an
overlay strategy to the portfolios they manage. This structure is managed as a
partnership between a centralized team and the individual portfolio management
teams to bring consistent oversight to the cross-portfolio set of impact
investments. This is the case for example at PGGM and TIAA-CREF.
 Whole institution: Still others, mainly asset managers, have their entire
institution dedicated to impact investments and split out the portfolios by
instrument, sector or asset type. This is the case, for example, at Bridges
Ventures, a UK-based fund manager with real estate portfolios and equity
portfolios, and at MicroVest, a US-based fund manager with portfolios separated
by instrument type (debt and equity). The F.B. Heron Foundation has also
committed to bringing their entire portfolio into impact investments, across a
diversified set of assets.
3
A program-related investment is an investment made by a US-based foundation that qualifies
as a charitable expense under the tax code, allowing the foundation to include the investment
as part of the 5% of assets it must distribute philanthropically each year.
In the main body of this report,
we present a high-level
approach that applies to direct
investments into companies and
indirect investments through
fund intermediaries. More
analysis of the considerations
that arise for fund and company
investments can be found in
Appendix II.

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Table 2 shows some examples of investors including foundations, pension funds,
financial institutions and fund managers and the organizational structures they use.
Regardless of structure, these teams require a skill set that allows them to articulate
both an impact thesis for the portfolio and a financial profile for the investments they
will target. We present the ways in which investors are setting these targets below.
Table 2: Organizational structures across institutional investors
Investor type Example Portfolio management
Foundation The Rockefeller Foundation Separate team
The F. B. Heron Foundation Whole institution
Pension fund TIAA-CREF “Hub-spoke” partnership
PGGM “Hub-spoke” partnership
Financial Institution Storebrand Separate team
J.P. Morgan Social Finance Separate team
Fund manager MicroVest Whole institution
Sarona Asset Management Whole institution
Source: J.P. Morgan
Case study: PGGM, combining financial and social return objectives through a hub-spoke organizational structure
The Dutch investment firm PGGM is one of the largest pension fund managers in Europe, investing assets worth over EUR
120bn on behalf of institutional clients. Responsible investment is integrated into PGGM’s general investment policy
through six pillars: ESG (Environmental, social and governance) integration, Targeted ESG investments, Engagement,
Voting at shareholders meetings, Legal proceedings and Exclusions. The Targeted ESG Investments – those that not only
contribute financially to the performance for clients but are also intended to create social value – align with our definition of
impact investments, so we consider this sub-portfolio here.4
By making targeted ESG investments, PGGM and its clients seek to consciously address important social themes, such as
climate change and poverty. Targeted ESG investments can be made in all investment categories. The various investment
teams are responsible for selecting them, with the support of the Responsible Investment department. Total commitments
were increased to EUR 4.7bn in 2011 (4.1% of total assets under management). These are demarcated mandates. By
contrast, investments in solar panel manufacturers and hospitals that may have an impact, but were not chosen with the
intention of creating social added value, are not held in separate mandates and are not earmarked as Targeted ESG
Investments. PGGM has developed a tool with the Erasmus Centre for Strategic Philanthropy (ECSP) at Erasmus University
Rotterdam to measure the social impact of its Targeted ESG Investments.
Case study: The F. B. Heron Foundation, removing the traditional separation of investment from grant-making
Like other American foundations, The F. B. Heron Foundation has focused for years on helping families at the bottom of
the economic and social scale – inheritors of persistent poverty, racial and ethnic discrimination, social and geographic
isolation, and various failures in markets, social policies, and safety nets. In the wake of the financial crisis, The F.B. Heron
Foundation re-evaluated the effectiveness of its pursuit of asset ownership as its core mission strategy and decided that the
economic environment called for a strategy focused on employment and job-creation as its first order effect. Long-time
mission investors, Heron believed that its strategy would require resources beyond its grant-making – and they moved the
asset allocation strategy of the entire foundation towards facilitating the new mission. They now plan to invest 100 percent
of the endowment and leverage their broader resources for mission. They reorganized their operations so that all capital
investment is managed through a single capital deployment department, removing the traditional separation of investment
from grant-making found at most U.S. foundations. Heron has combined grant-making and investing into a single, focused
activity: to deploy capital for mission.
4
See Appendix I for our definition of Impact Investments

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Define an impact thesis
For any impact investor, it is critical to articulate a set of well-defined impact goals
for the portfolio. This is often easier said than done, particularly at this stage in the
market, as impact goals are best articulated when their measurement is well-defined.
Nonetheless, we attempt to distill some of the most common characteristics of an
impact thesis based on our own experience and our interviews.
Articulate the mission of the portfolio5
For many impact investors, the impact thesis is usually driven by the value set of an
individual or organization and can reference a theory of change with respect to
poverty alleviation or environmental sustainability for example. The impact thesis
may be integrated into the mission statement of the business, or it may be a separate,
complementary statement in the organizational charter. The statements below give
hypothetical and actual examples of mission statements that include an impact thesis.
Sample mission statements from IRIS
 To empower overlooked individuals at the Base of the
Pyramid, by selling innovative products that enable
access to basic services.
 To provide financial services to the urban and rural poor,
building financial literacy and pride among women.
 To address the world's growing energy needs through
sustainable scalable solar energy solutions.
Mission statements from investors
 Accion is a private, nonprofit organization with the
mission of giving people the financial tools they need to
improve their lives. – Accion International
 Acumen Fund is a non-profit global venture fund that
uses entrepreneurial approaches to solve the problems of
global poverty. – Acumen Fund
 Our mission is to grow rural prosperity by investing in
small and growing agricultural businesses that build
sustainable livelihoods in Africa and Latin America.
– Root Capital
Define social and/or environmental impact objectives
Many mission statements reference a set of defined impact objectives. As a set of
examples, we have categorized the IRIS objectives by what might be considered
three different missions that would each reference a sub-set of those objectives. The
full set of objectives is included in Table 3 below.
Table 3: Impact objectives
Increase incomes and assets for
low-income or excluded people
Improve basic welfare for people in need Mitigate climate change
Access to energy Access to clean water Biodiversity conservation
Access to financial services Affordable housing Energy and fuel efficiency
Access to education Conflict resolution Natural resources conservation
Access to information Disease-specific prevention and mitigation Pollution prevention and waste management
Agricultural productivity Equality and empowerment Sustainable energy
Capacity-building Food security Sustainable land use
Community development Generate funds for charitable giving Water resources management
Employment generation Health improvement
Income/productivity growth Human rights protection or expansion
Source: IRIS. As defined at iris.thegiin.org.
5
Further guidance on articulating an impact mission can be found in Guidelines for How to
Measure and Report Social Impact, A Hornby, Investing for Good, 2012.
The Impact Reporting and
Investment Standards (IRIS)
initiative of the Global Impact
Investing Network (GIIN) oversees
the development of a set of
standardized metrics for describing
an organization’s social,
environmental, and financial
performance. Founded in 2008,
IRIS has since been adopted by
hundreds of impact investment
funds and thousands of companies
globally as part of their social
performance measurement and
reporting. For more, see
http://iris.thegiin.org/.

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Some impact mission statements may be as broad as “increase incomes and assets for
low-income and excluded people”, while others may be as specific as “access to
energy”. Regardless of the breadth of the target impact, many statements include
reference to one or more of the following:
 A target population, which could be defined by income level, degree of
inclusion or access, or other characteristics
 A target model of impact delivery, which focuses the investment opportunity set
on certain business models
 Target impact, which can be measured to determine the success of the
intervention6
These parameters are not exhaustive but can give some guidance towards the
characteristics common to impact missions across our experience and that of the
institutions we interviewed. Taking these one by one, we give some examples of
each in the tables below and then provide a few case studies for more detail.
Referencing a target population
An impact thesis may reference a target population with defining characteristics such
as income level or degree of inclusion, as shown in Table 4. The income level can
reference the base of the economic pyramid (BoP): the global population earning less
than USD 3,000 per year, as defined by the World Resources Institute.7
Investors
might also include the base of the economic pyramid in developed countries who
may earn a higher income than the global BoP but who still need improved access to
services and opportunities – this larger group is what we call the BoP+.8
Some other
investors reference a degree of inclusion or a region of inhabitance. Examples of all
three types of criteria are listed in Table 4.
Table 4: Target population
Defining criteria Examples of descriptors Examples of specific population targets
Income level BoP or BoP+ Acumen Fund invests patient capital in institutions that can be effective in reaching the BoP
Degree of inclusion Excluded, Underserved, Rural, Off-grid AllLife provides insurance to people living with HIV in South Africa, a population that is often
excluded from access to such products
Region of inhabitance Frontier markets, underserved areas, rural Bridges Ventures invests in ambitious businesses in the 25% most deprived wards in the UK
Source: J.P. Morgan
Case Study: AllLife, bringing insurance products to excluded populations
AllLife was established in 2004 to bring an innovative approach to life insurance in South Africa. AllLife is a profitable
business which designs, distributes and administers life insurance products to individuals living with HIV or Type 1 or Type
2 diabetes mellitus who commit to follow an appropriate health monitoring and treatment program. Since 2005, the
company has provided affordable life insurance coverage for thousands of people living with HIV, as well as significantly
improving the health experience of the individuals insured through the company’s adherence management program. In
2008, AllLife extended cover to people living with diabetes mellitus, once again based on their commitment to ongoing
health monitoring.
6
Some will reference outputs, others will reference outcomes, and others might reference
impact. See Appendix IV for more details.
7
See The Next 4 Billion: Market Size and Business Strategy at the Base of the Pyramid,
International Finance Corporation (IFC) and World Resources Institute (WRI), 2007.
8
For more discussion, see Impact Investments: An Emerging Asset Class, J.P. Morgan and the
Rockefeller Foundation, Nov 2010.

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Referencing a target business model for impact delivery
The impact thesis may also specify a target business model for impact delivery, such
as delivering products or services like healthcare or housing to customers in the
target population. Other business models utilize processes that intentionally include
suppliers or distributors from the target population in the value chain, such as
utilizing informal retail franchises for distribution or aggregating the produce of
smallholder farmers. Other models will work towards environmental conservation
and sustainability goals, such as improving the efficiency of natural resource
utilization. Table 5 lists some examples of these business models.
Table 5: Target business model
Defining criteria Examples of descriptors Examples of specific business model targets
Product/service provider to
target population
Low-cost healthcare Aravind Eye Care System provides affordable, world-class eye care to the poor in India
Utilizing target population
distribution networks
Utilizing and improving informal
retail networks for distributors
The Bayer Green World programme targets smallholder farmers in Kenya and identifies top
performing agrodealers, and trains them to become “local consultancy centers” for farmers
Utilizing target population
suppliers
Smallholder farmer aggregators Afro-Kai engages more than 9,000 farmers across Uganda through the trade, aggregation,
processing, and transport of sorghum, barley, cassava, groundnuts, and maize
Implementing energy and
natural resource efficiency
Drip irrigation Global Easy Water Products focuses on developing and delivering low-cost irrigation solutions
to small farmers in India
Source: Monitor, J.P. Morgan.
Case study: Afro-Kai, aggregating smallholder farmer produce
Incorporated in 1984, Afro-Kai engages more than 9,000 farmers across Uganda through the trade, aggregation, processing,
and transport of sorghum, barley, cassava, groundnuts, and maize. The core business is commodity processing and trading,
but Afro-Kai has also been contracted by Nile Breweries as its barley and sorghum handler, processor, and third-party
extension service provider. This relationship, which guarantees a forward price and purchase of all outputs, enables Afro-
Kai to contract with small farmers to increase productivity and volume of output by providing seeds at a subsidized rate,
offering timely cash payment, and providing access to a guaranteed market. Afro-Kai has a significant impact on
participating farmers, increasing their profit by an estimated 32 per cent.9
Case study: Global Easy Water Products (GEWP), improving water efficiency
GEWP is a for-profit social enterprise in India that focuses on developing and delivering low-cost irrigation solutions to
small farmers who are often overlooked by technology advancements. GEWP’s mission is to distribute products that help
smallholder farmers to increase their available income, improve their nutrition and earn their way out of poverty. The
company’s portfolio contains over 50 different products primarily in drip tape, micro sprinklers, fertilizer tanks and flexible
water storage tanks.10
Referencing target impact11
There may also be reference in the impact thesis to specific impact targets. This
could be quantifiable – for example, a specific number of people reached within the
target population – or more general – for example, targeting delivery of certain
services at scale. The impact that we have referenced as “pioneer” is reflective of
some investors’ mission to fund interventions that address challenges to which there
are few alternative responses. Table 6 summarizes some of the common impact
targets referenced in the marketplace, and provides a few examples of how these
might be interpreted to assess portfolio performance relative to mission.
9
See Promise and Progress: Market-based Solutions to Poverty in Africa, M Kubzansky, A
Cooper and V Barbary, Monitor Group, May 2011.
10
See From Blueprint to Scale: The Case for Philanthropy in Impact Investing, H Koh, A
Karamchandani and R Katz, Monitor Group, Apr 2012.
11
Some will reference outputs, others will reference outcomes, and others might reference
impact. See Appendix IV for more details.

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Table 6: Target impact
Defining criteria Examples of descriptors Examples of specific impact targets
Number of target population reached Number of customers LeapFrog Investments aims to reach 25mm low-income and underserved
people worldwide
Percent of business reaching target
population
Minimum percentage of customers in
target population
The Africa Health Fund managed by Aureos has set development targets
according to the percentage of BoP clients served by portfolio companies
Scale of outputs Cost-effective expansion of
product/service delivery
Shell Foundation aims to act as a catalyst in the very early stage by proving
business models that can be replicated at a large scale
Quality of outputs Improved quality of products/services
available
D.Light provides energy and lighting solutions to households
without access to reliable electricity
Pioneer Addressing a gap in market for which
there are few alternatives
Root Capital provides capital to "the missing middle” (enterprises underserved
by either microfinance and commercial banks)
Case study: Shell Foundation, investing to build scalable solutions
Shell Foundation is an independent charity that catalyses scalable and sustainable solutions to global development
challenges. Established by the Shell Group in 2000, the Foundation applies business thinking to a range of social and
environmental issues linked to the energy industry – harnessing links to its corporate founder where appropriate to deliver
greater development impact. The Foundation deploys an ‘enterprise-based’ approach: it identifies the market failures that
prevent products and services with the potential to support sustainable development from reaching the poor, then co-creates
new business models with long-term ‘social enterprise’ partners to service these markets. The Foundation staff provides the
vital business development support to help these partners develop the skills, capacity and incentives to operate at scale and
progress towards financial independence. By applying this approach to major global challenges such as job creation through
small and medium enterprises, urban mobility, indoor air pollution, access to modern energy, and sustainable supply chains
– and by learning from both success and failure over the last 12 years – Shell Foundation has created several strategic
partners that now deliver large-scale impact in multiple countries across Africa, Asia and Latin America.
Case study: Root Capital, lending to address a funding gap
Root Capital is a nonprofit social investment fund that grows rural prosperity in poor, environmentally vulnerable places in
Africa and Latin America by lending capital, delivering financial training, and strengthening market connections for small
and growing agricultural businesses. Root Capital’s lending is directed towards “the missing middle” of developing-world
finance, targeting businesses that are too big for microfinance and generally unable to secure credit from conventional
commercial banks. Loans provided to small and growing businesses range from USD 50,000 to USD 2mm. Since 1999,
Root Capital has disbursed more than USD 368mm in loans to 367 businesses. These loans have helped Root Capital clients
improve livelihoods for more than 500,000 rural households in Africa and Latin America.
Many impact investors today rely upon a well-articulated impact thesis with defined
parameters to set the scope of their investable universe. Once they have articulated
their impact thesis, they will be able to find investment opportunities that align with
the intent of that thesis and hopefully set out some metrics by which they will judge
the success of their investments from an impact perspective. The next consideration,
alongside the impact mission, will be to set a focus for the parameters that determine
financial performance.
Define parameters that will drive financial performance
Setting the parameters of the investment scope
Alongside defining the impact mission, investors will set the scope of the investment
universe that they will consider, as determined by the drivers of target returns and the
drivers of risk to those returns. These drivers will include some of the components
listed below, each of which is listed with an example of how one institution has
incorporated that parameter in its investment strategy. We explore these factors in
more detail in Appendix II and we also present some of the features that differentiate
impact investments from traditional investments in Appendix III.

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 Geography
LeapFrog Investments, a cross-regional financial services fund, used impact
parameters like population size, income level and development rankings to target
countries in need of investment, as well as the degree of investment by other
impact funds. Then, they cross-referenced the short-list of countries against
practical considerations like whether the team had experience in those countries,
and whether the operating language in the country was accessible to the team.
Finally, they considered the political and economic stability to ensure a level of
comfort in finding a future path to exit for the investment.
 Sector
Pearl Capital Partners is a specialist agriculture investment firm that has been
investing in small and medium-sized East African agribusinesses since 2006.
They invest between USD 250,000 and USD 2.5mm in growing agricultural
small and/or medium-sized businesses in East Africa, typically using a
combination of equity, quasi-equity, equity-related and debt investments.12
 Instrument type
Calvert Foundation issues and distributes Community Investment Notes, retail
debt instruments that provide a means by which retail investors can invest
directly in their communities. Given the desire for liquidity by retail investors,
Calvert Foundation focused on short- and medium-term debt instruments as the
preferred funding structure. Consequently, to match their assets with their
liabilities, Calvert Foundation makes fixed income investments into their investee
businesses. The full value of the principal that Calvert Foundation borrows is lent
out to help underserved communities. As loans are repaid, the capital is lent out
again, multiplying the social impact that the investment has created. At maturity,
the capital is returned to investors with interest.
 Growth stage of business & scalability
Shell Foundation characterizes itself as an enterprise philanthropist, supporting
social enterprise partners with more than money (including funding, business
skills and access to market linkages) from the incubation stage through the pilot
of the business. The goal is to create a pipeline of businesses ready to scale up
their operations that would be appropriate for impact investors pursuing
opportunities with higher return potential and catalyzing a financially sustainable
model for the delivery of sustainable transport, enterprise development, access to
energy and sustainable value chains.
 Risk appetite
Root Capital, which provides loans ranging from USD 50,000 to USD 2mm to
rural, small and growing agribusinesses in Latin America and Africa, manages
two lending portfolios: the Sustainable Trade Fund (STF) that includes loans for
businesses that export natural products such as coffee, cocoa, nuts, and fresh
fruits and vegetables and represent the core lending activity; and the Frontier
Portfolios that have a higher risk profile and include loans for activities such as
the production of goods for domestic consumption rather than for export.
12
We define quasi-equity and equity-related as instruments between debt and equity, typically
a debt instrument with potential profit participation. E.g. Convertible debt, warrant, debt with
equity kicker. These made up 2% of the investments reported in our 2011 investment survey,
Insight into the Impact Investment Market, Dec 2011.

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Abandon the tradeoff debate for economic analysis
In analyzing the financial expectations of an opportunity, one of the most common
debates in the impact investment marketplace is whether or not there needs to be a
“trade-off” on financial returns in order to add the pursuit of impact to the
investment. We believe that the variety of profiles that exist in the impact investment
market – across impact, return and risk, across geographies, sectors, and instruments
– makes this question intractable. We should not aim to describe this diverse set of
assets with one overall statement about the relationship between return and impact,
because it serves little purpose to characterize with an average such a broad universe
of opportunities. Rather, we encourage investors to assess each opportunity
individually, and let the economics of the intervention determine the return profile.
Set risk-adjusted return expectations: Consider revenues, costs and risks
Changing our language from a sector-wide trade-off debate to an economics-driven
approach will bring more financial rigor to the analysis of impact investments. Some
investments may reasonably be expected to achieve competitive returns while return
expectations may be lower for other investments. In Section 3, Appendix II and
Appendix III, we present in more detail some of the considerations that arise when
assessing the financial return potential and risk profile of impact investments.
Use focus and diversification, together
Once the impact mission and financial targets are determined, investors have
identified an area of focus. For example, an investor might target an impact objective
such as financial inclusion or a business sector such as agriculture. Indeed, investors
that have more than one portfolio, often separate those portfolios by area of focus.
Recognizing that focus, while necessary, can also concentrate risk, some investors
cite a strategic area of diversification for their portfolio, like geography or sector, to
balance this concentration. Some investors, like IGNIA, report setting specific
diversification limits to their portfolio such as a company exposure limit of 15% and
a sector exposure limit of 40%. Others, such as Acumen Fund, referenced that the
diversification is applied more softly to maintain an opportunistic responsiveness to
the pipeline of opportunities they evaluate, without specific portfolio targets that
would constrain them too tightly.
Incorporating a diversification strategy
There are several permutations of focus and diversification across sector, growth
stage, geography and impact theme. For example, Bridges Ventures invests in the
United Kingdom only, and the diversification comes through in the sector
distribution of their various portfolios. The Bridges Sustainable Growth Funds focus
on backing businesses in four key impact themes where they believe growth and
financial returns go hand-in-hand with wider societal impacts: under-served areas,
health & wellbeing, education & skills and environment. By contrast, LeapFrog
Financial Inclusion Fund has chosen to focus on one sector – micro-insurance (and
related financial services) – and diversifies with respect to geography.
Abandon the idea of a trade-off
Set return expectations driven by
the economics of each intervention

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Case study: LeapFrog, using sector focus with geographical and growth stage diversification
LeapFrog is the world’s largest dedicated investor in insurance and related financial services to low-income and excluded
people. In building their investment strategy, LeapFrog has focused mostly on one sector – the insurance sector – that is
directly aligned with their impact thesis: that insurance can provide safety nets and springboards for under-served people,
with the scale necessary to make a dent on global poverty. Given the sector focus, the portfolio is diversified with respect to
geography to mitigate some of the country and currency risk and with respect to stage of the business. For example,
LeapFrog’s portfolio today includes two earlier-stage companies that focus mostly on low-income or excluded populations
– AllLife in South Africa and Express Life in Ghana– and three later-stage traditional insurance companies that are moving
into the micro-insurance segment – Apollo in Kenya and Shriram and Mahindra in India.
In using focus and diversification together, impact investors are not very different
from traditional investors in their portfolio construction: the main distinction is the
pursuit of an impact objective. This objective, together with the private nature of
much of the market today, can make it challenging to find the best opportunities that
are aligned with the investment mandate.
Sourcing deals
While infrastructure for deal sourcing is growing, the market today remains fairly
dependent on networks and contacts to source investment opportunities. A few key
considerations have been repeated by several investors as being helpful in the pursuit
of the best deals (and potentially in finding exit opportunities as well):
 Network of like-minded investors: Given the early-stage of the market, a
network of like-minded investors can help to source quality opportunities and can
also help to (formally or informally) collaborate in the due diligence process.
 Local presence: Given many impact investors allocate capital outside of their
home market, there is an important role for a member of the team or a partner to
bring local market knowledge into the process, both for sourcing deals and for
ongoing risk management.
 Advisors, banks and conferences: Increasingly, advisory firms and banks are
working with their clients to help them source impact investment opportunities.
Some investors might also find introductions to opportunities at the impact
investment conferences that are appearing on the global agenda.

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Today, impact portfolio construction is an iterative process
Through our conversations, it has emerged that several investors were not in a
position to be as strategic as it might appear above when they started out. Rather,
they started out with a broader focus that allowed opportunistic allocations. As the
portfolio and their knowledge of the market’s opportunity set grew, they began to
better define the focus and refine the strategy to accommodate both their
organizational interests and the deal flow aligned with their focus.
Case study: Storebrand, expanding beyond the microfinance debt investments
Storebrand, a financial institution in Norway offering pension, insurance, asset management and banking services, invests in
microfinance and social investments to contribute to economic development in emerging economies, and at the same time
generate a positive financial return. As of Dec 31, 2011, Storebrand has committed ca. USD 50mm to microfinance and
social investments and intends to increase the investments in this sector. The nature of the Storebrand portfolio was
historically a function of the market at the time: in 2005, when the first investments were made, most impact investment
funds were debt funds focused on the microfinance sector. Their equity allocation evolved organically as the set of market
opportunities grew, and today the allocation is roughly split between debt and equity. The sector exposure has also
expanded beyond microfinance into healthcare, for example, as investment opportunities in other sectors matured.
Case study: Accion and Frontier Investments, building out a portfolio in adjacent sectors
Begun as a grassroots community development initiative in 22 shantytowns in Venezuela, Accion today is one of the
premier microfinance organizations in the world, with a network of lending partners that spans Latin America, Africa, Asia
and the United States. Accion’s Frontier Investments Group is an early and growth stage impact investing fund focused on
catalyzing a new approach to financial inclusion. Having identified an opportunity to invest in business models that have the
potential to further the impact of microfinance, Frontier’s mandate is to invest in disruptive business models and
technologies that will radically enhance the efficiency, reach and scope of products and services for the unbanked. To
accomplish this vision, Frontier leverages Accion’s five decades of experience in emerging markets – including feet-on-the-
ground and institutional relationships in four continents and a deep bench of operational and product specialists working in
emerging market enterprises that serve the poor.
In the next section, we translate the portfolio targets onto a graphical map. We then
show how to use this map to graph individual investments and compare the aggregate
portfolio to the target profile determined at the outset.

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3. A Framework for Impact, Return & Risk
Once the target characteristics of the portfolio are defined, investors may start to
analyze the set of investments that fall within the scope of those portfolio targets. In
this section, we present a way of mapping impact, return and risk for investments to
graphically represent the nature of a portfolio across these three vectors. Using this
map, an investor can graph a target profile for the portfolio, the expected profile of
the individual opportunities, and the actual profile of the aggregate portfolio. The
actual portfolio profile can then be assessed against the portfolio targets to determine
whether the two are aligned.
Characterizing investments in three dimensions
For each company, the target output of our portfolio analysis will be a map on three
axes, like the examples shown in Figure 8 and Figure 9.13
These maps are shown
without numerical axes to reflect that each investor can adapt this map to the level of
accuracy they wish to employ. For example, some investors rank the risk of their
investments using a high/medium/low indicator. These investors might use a scale of
one to three on their risk axis. Others might rank the risks more granularly, from one
to ten. Still others might prefer to just show relative shapes rather than numbering the
axes. Whatever the scale used, the general shape of the map should suit any
approach.
Figure 8: Example investment graph:
High return, high risk, high impact
Figure 9: Example investment graph:
Low return, low risk, low impact
Map the target profile
In this section, we turn to our own portfolio to provide an example of how one could
use this framework to set targets, analyze investments and manage the portfolio
relative to the targets. We start by presenting the targets themselves, and then walk
through how those targets translate into an investment graph that we can then use to
manage the actual portfolio.
13
Readers should note that we imply no particular correlation or relationship between these
three parameters. The choice of high, high, high and low, low, low is purely illustrative.
Risk
Return
Impact Risk
Return
Impact
Though we acknowledge that
there is a return on social
impact, our use of the word
“return” throughout this section
refers to “financial return," for
the sake of clarity.

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J.P. Morgan Social Finance (JPM SF) Portfolio Targets
For our own portfolio, we have outlined the investment thesis for the portfolio,
highlighting the impact thesis in particular:
 JPM SF investment thesis: To invest in impact funds that deliver a
reasonable rate of return while simultaneously improving livelihoods of
low-income and excluded populations worldwide.
 JPM SF impact thesis: To improve livelihoods of low-income and
excluded populations worldwide by engaging those populations as
consumers or suppliers.
With these targets, JPM SF invests in funds rather than directly into companies.
However, the analysis below applies for both types of investments (see Appendix II
for the considerations specific to fund or company investments).
Assign impact, return, and risk targets
For investors that choose to quantify their impact, return, and risk targets, they will
need to determine the scale that should be used for each axis on the graph. We refrain
from showing our rankings on the graph of our target portfolio in Figure 10. Instead,
we present the map of our target portfolio area – the shaded grey area – alongside the
graph that might be targeted by an investor with a higher risk appetite and a lower
return threshold (Figure 11) and a graph that represents the targets for a hypothetical
investor pursuing non-negative impact with a low risk appetite (Figure 12)14
. Below
we walk through our assessment for each component of the graph, and then we
compare our target to what these two hypothetical investors might pursue.
Figure 10: J.P. Morgan Social Finance
Figure 11: High risk investor’s
Figure 12: “Non-negative impact” investor’s
Impact
Our impact assessment consists of a due diligence exercise to come to a view on the
intent and the impact of the proposed investment opportunity. For each opportunity,
we assign a ranking from one to five on questions addressing the fund manager’s
intent and questions regarding the people, products or processes through which the
impact will be delivered.15
The result of each scorecard is a weighted average across
these questions, giving an overall ranking between one and five for the investment.
In general, we target a minimum score of three, and in fact all of our funds to date
have scored four or above.
14
We use the term “non-negative” to indicate the responsible investor that might employ some
negative screening to exclude negative impact from their portfolio but does not actively pursue
positive impact.
15
For more on impact delivery, see Impact Investments: An Emerging Asset Class, J.P.
Morgan and the Rockefeller Foundation, Nov 2010.
Risk
Return
Impact Risk
Return
Impact Risk
Return
Impact
Scorecards are common ways of
quantifying impact relative to the
mission of the investor.

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Return
We assess the performance of the portfolio on a blended basis – the aggregate
financial return and social impact of our invested capital are considered in
determining success. In practice this means we will consider returns below the
threshold used internally for other businesses of the firm, if the impact objectives of
the opportunity are compelling and consistent with our stated thesis. The intent of
our portfolio, however, is to demonstrate that there are investable opportunities in the
market with commercial or near-commercial returns that would be appropriate for
institutional investors, and we assess opportunities for their potential to deliver those
returns.
Risk
Our target risk profile – not too high and not too low – acknowledges that investing
in a new market requires some risk appetite. As a result, we aim to mitigate some of
those risks by avoiding frontier markets where our firm doesn’t have a presence and
avoiding opportunities exclusively focused on very early stage start-ups. While we
do maintain flexibility with respect to all of the parameters that determine risk, we
also try to find a balance across risk factors to reduce the net risk profile of any
investment. For our portfolio, an opportunity in a riskier macroeconomic region may
be more attractive, for example, if it is at a later stage of growth. Similarly, if the
company risk is high because the business model is unproven, we will look for
country-level risk mitigants.
Contrasting our targets to those of a “high risk” investor
The graph in Figure 10 pulls together the considerations above into an illustration of
the profile of the portfolio we target. To provide contrast, Figure 11 represents a
hypothetical graph for a higher risk investor. Several of the investors that we
interviewed indicated an explicit desire to invest in frontier markets that might be too
risky for other investors, and this is reflected in the chart by their higher risk appetite
and lower return target16
. By contrast, J.P. Morgan Social Finance is less focused on
frontier markets and so our target portfolio profile reflects a higher return target and
lower risk appetite accordingly.
Contrasting our targets to those of a “non-negative impact" investor
In order to show the different targets that investors might have for the impact
component, we also compare our targets with those of a hypothetical “non-negative
impact” investor. We use the term non-negative to indicate for example a responsible
investor that might employ some negative screening to exclude negative impact from
their portfolio, but does not actively pursue positive impact. These investors will
likely target impact above a minimum threshold by abstaining from funding tobacco,
say, but will not insist on intentional positive impact as part of the business mission.
The minimum threshold and the lower overall target are reflected in Figure 12.
16
Some investors may have a higher risk appetite because they have a return target.
Different investors determine
their target return profiles based
on different goals. Some with
fiduciary responsibility will
maximize returns, while others
may accept lower returns in
order to make the investments
with the impact they seek.
Several investors referenced
that they too aim to balance
risks for each investment, for
example, mitigating high country
risk by focusing on later stage,
proven businesses for example
or investing in earlier stage
businesses in less volatile
geographies.

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Map the individual investments
In the above figures, we have presented the graphs of target portfolio profiles; the
next step will be to assess individual investment opportunities relative to those
targets. In order to make this exercise as tangible as possible, we present some of the
considerations that arose for our investment team in analyzing the impact, return and
risk profile of the African Agricultural Capital Fund (AACF).
Case study: African Agricultural Capital Fund
The African Agricultural Capital Fund transaction brought four investors together
with the fund manager to structure the fund, requiring willingness from all parties to
compromise and be open to constructive problem-solving throughout negotiations.
Background on the transaction
The African Agricultural Capital Fund, managed by Pearl Capital Partners, primarily
invests in small- and medium-sized agricultural enterprises to improve the
livelihoods of smallholder farmers in East Africa. In September 2011, J.P. Morgan
Social Finance, The Bill & Melinda Gates Foundation, the Gatsby Charitable
Foundation, and the Rockefeller Foundation closed a USD 25mm impact investment
into the fund. The JPM SF investment was in the form of debt for which The United
States Agency for International Development (USAID) provided a 50 percent
guarantee. USAID also grant-funded a technical assistance facility for the fund’s
investees. The transaction entailed a detailed negotiation process, in which the
investors and the fund manager jointly developed a capital structure and social
impact governance mechanisms to satisfy each participant’s social and financial
goals.
Table 7: Fund information
Term Description
Fund manager Pearl Capital Partners
Inception year 2011
Geographic focus At least 85% in East Africa (Tanzania, Kenya, and Uganda); up to 15% in neighboring countries
Fund term 10 years, with an option to extend two years
Fund impact thesis Improve the livelihoods of smallholder farmers by investing in agricultural enterprises that provide improved access to
goods, services, and markets
Impact measurement and assessment IRIS metrics to track and report smallholder farmer outreach; will obtain a GIIRS rating17
Investee technical assistance Provided to AACF’s investees as needed through a USD 1.5mm USAID grant-funded facility
Fund assets under management USD 25mm
Investment instruments Debt, quasi-equity, and equity
Investment period Maximum of 5 years
Investment size USD 200,000–2,500,000
Target gross portfolio return At least 15%
Target number of investees Approximately 20 agricultural enterprises
Fund management fees 2.5% fee, 20% carry
Source: Diverse Perspectives, Shared Objective: Collaborating to Form the African Agricultural Capital Fund, The GIIN, Jun 2012.
Impact assessment
The Fund was established with a specific social impact target: to improve the lives of
at least 250,000 smallholder farmer households, such that within five years of
investment each affected household should realize an increase of at least USD 80 in
annual income. The investors and fund manager agreed that an impact committee
would screen potential investments during the investment review process before
financial due diligence begins to mitigate pipeline risk from an impact perspective.
17
The Global Impact Investing Rating System (GIIRS) is a system for rating the social and
environmental impact of companies and funds.
For a full case study on this
investment, see Diverse
Perspectives, Shared Objective:
Collaborating to Form the
African Agricultural Capital
Fund, The GIIN, Jun 2012.

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Return and risk assessment: Fund level
Pearl Capital attracted these investors because it was one of the few fund managers
with experience investing in East African agricultural small and medium-sized
enterprises (SMEs). The fund was established with a target return of at least 15%, but
investors were aware that the fund’s track record was not substantial – a common
issue across the market raised by many investors – and that the sector as a whole
lacked a long history of impact investment.18
To address these concerns, the investors
conducted extensive due diligence on the fund manager and encouraged the fund to
hire two additional employees to increase capacity.
Return and risk assessment: Underlying company level
Due to the emerging nature of the formalized East African agricultural sector,
AACF’s target investees are likely to be under-resourced and may not have the skills
or systems necessary to adapt to business or market challenges. The grant-funded
technical assistance (TA) facility was designed to help mitigate risk for investors by
allocating resources to sustain investees’ operations and commercial viability.
We map out our expectations for the JPM SF debt investment into AACF in Figure
13, based on the impact, return and risk assessments presented above. We then verify
whether it aligns with our portfolio targets, as shown in Figure 14. Although we
show an example in which the individual investment does fit within the portfolio
targets, investors may not require that each investment necessarily fits within the
target range, so long as the aggregate does.
Figure 13: J.P. Morgan Social Finance's AACF investment
Figure 14: AACF in the context of our portfolio target
In order to illustrate some more general cases, we also draw illustrative graphs for
three hypothetical investments, shown in Figure 15, Figure 16 and Figure 17. In
order to make these examples more tangible, we provide some characterization of the
investments that might be represented by the graphs below.
 Figure 15 (Investment 1) illustrates a USD 2mm equity investment with a
medium impact, high return, and medium risk profile.
 Figure 16 (Investment 2) illustrates a USD 25mm short tenor, senior secured debt
investment with a high impact, low return and low risk profile.
18
See Insight into the Impact Investment Market, J.P. Morgan and The GIIN, Dec 2011.
Risk
Return
Impact Risk
Return
Impact

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 Figure 17 (Investment 3) illustrates a USD 8mm long tenor, unsecured debt
investment with a high impact, high return and high risk profile.
Figure 15: Investment 1
Notional = USD 2mm
Notional = USD 25mm
Notional = USD 8mm
Map the aggregate portfolio & compare to target
Once commitments have been made to the first opportunities, we can begin to
consolidate the individual investment graphs into one graph representing the
portfolio as a whole. There are several ways in which the aggregate graph can be
drawn, which we illustrate below.
Three methods of aggregation: Overlay, simple average, weighted average
Once we have mapped the individual investments, we can then construct a graph to
represent the aggregated portfolio in three ways:
1. Simply overlay the three graphs on top of one another in the same chart, as shown
in Figure 18.
2. Calculate a simple average across each of the three parameters of the three
investments, as shown in Figure 19.
3. Calculate an average across each parameter that weights each investment by its
notional size, as shown in Figure 20.
Figure 18: Overlay graph
Figure 19: Simple average graph
Figure 20: Weighted average graph
Compare aggregate to target
Once the aggregate graphs are drawn, an investor can then compare these to the
target set for the portfolio. If there is any skew in the portfolio such that the
aggregate graph falls outside the target area, then the investor has a guide as to the
profile of investments that they should pursue in order to re-balance the portfolio
towards the target profile. In Figure 21, Figure 22, and Figure 23 we plot the various
aggregate graphs against a hypothetical target profile, for illustration.
Risk
Return
Impact Risk
Return
Impact Risk
Return
Impact
Risk
Return
Impact Risk
Return
Impact Risk
Return
Impact

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Figure 21: Overlay graph
Figure 22: Un-weighted average aggregate
Figure 23: Weighted average aggregate
Figure 24: JPM SF weighted average
aggregate & target profile
Case Study: Mapping the aggregate JPM SF portfolio against our targets
The risks posed by the geography and political environment, by the agriculture
sector’s seasonality and dependence on climate factors, led the J.P. Morgan
Social Finance investment team to determine that a debt instrument was the most
appropriate tool for the investment – forsaking upside in exchange for downside
protection. At the time of considering this opportunity, the portfolio contained
four equity funds. In the context of that portfolio, (the full portfolio is shown in
Table 8), the inclusion of AACF resulted in the overall profile shown in Figure
24. This chart also shows that the inclusion of this investment kept the profile of
the aggregate portfolio within our targets across all three dimensions.
Table 8: The J.P. Morgan Social Finance Principal Investment Portfolio
MicroVest II-A, LP LeapFrog Financial
Inclusion Fund
IGNIA Fund I Bridges Social
Entrepreneurs Fund
African Agricultural
Capital Fund
Fund
summary
MicroVest II seeks
sustainable solutions to
poverty by facilitating the
flow of capital to pro-poor
finance institutions serving
low-income individuals in
emerging markets such as
Latin America, Asia and
Eastern Europe
LeapFrog is the world’s first
micro-insurance fund,
investing in businesses
providing insurance and
related services to low-
income and financially
excluded people
IGNIA is a venture capital
fund based in Mexico
supporting the founding and
expansion of high growth
social enterprises serving
low-income populations in
Mexico
Bridges Social
Entrepreneurs Fund
provides growth capital to
support high-impact,
scalable and financially
sustainable enterprises in
the UK
African Agricultural Capital
Fund (AACF) is a private
equity fund that invests in
agri-business to support the
development of smallholder
farmers and rural
economies
Impact
mission
To provide capital to low-
income finance institutions
and to help build capital
markets serving individuals
at the base of the economic
pyramid
LeapFrog aims to reach
25mm low-income and
vulnerable people, 15mm of
them women and children,
by providing them with a
springboard to escape
poverty
To identify entrepreneurs
with scalable businesses
that deliver high value
propositions to the base of
the economic pyramid
To support scalable, high-
impact social enterprises
with a focus on serving the
most deprived 25% of the
population in the United
Kingdom
To invest in small and
medium-sized agriculture-
related businesses in East
Africa
Sector Microfinance Microinsurance Multi-sector Multi-sector Agriculture
Geography Emerging markets Emerging markets Mexico United Kingdom East Africa
Instrument Equity Equity Equity Equity Debt
Investment
Size
USD 10mm USD 10mm USD 5mm GBP 2.75mm USD 8mm
Fund size USD 60mm USD 137mm USD 102mm GBP 11.75mm USD 25mm
Tenor 7 years 10 years 12 years 10 years 10 years
There will be benefits and biases to each aggregation method. Overlaying all the
graphs may be helpful with a portfolio of five investments but is likely to become
less valuable when 50 investments are involved. Weighting by investment notional
will skew the outcome towards the largest investments, while a simple un-weighted
average will give more representation to the smallest deals. In analyzing the
portfolio, looking at the outcome of more than one aggregation method can help to
ensure a more complete understanding of the true nature of the portfolio.
Additionally, splitting out a portfolio into sub-categories by sector, region, impact
pursuit or instrument can also provide better visibility on larger portfolios.
Risk
Return
Impact Risk
Return
Impact Risk
Return
Impact
Risk
Return
Impact

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Expand the dimensions of the graph
Breaking out the return, risk and impact components into more granularity
Investors should consider the three-dimensional graph as a template. For some, the
simplicity of this approach might be appropriate for aggregating across large
portfolios at a high level. Others might prefer to use a more nuanced framework that
better reflects the different contributing factors of the parameters represented on each
axis – impact, return and risk.19
As an example, we could consider an investment
graph across six dimensions, splitting each of the three into two components, as
shown using hypothetical investments in Figure 25 and Figure 26.
Illustrative portfolio targets
In order to understand why the two illustrative examples score the way they do, we
first need to understand the target profile of the investor. For the sake of this
illustration, we are considering an investor that targets the following:
 Impact: The investor targets businesses that deliver products and services to
underserved communities while meeting a high-standard of employment and
resource efficiency practices
 Return: The investor seeks to balance asset income and asset appreciation
 Risk: The investor seeks a balance between ecosystem risk and investment risk
Figure 25: Illustrative investment #1
The bold blue hexagon illustrates the profile of a
hypothetical investment.
In Figure 25, we illustrate the profile for a hypothetical debt investment
with the following assessment:
 Impact: The company is delivering low-cost education, so ranks highly
on the product metric, and utilizes fairly impactful employment and
operating practices
 Return: The debt structure shifts the return profile towards income
rather than appreciation.
 Risk: The country in which the company operates has developed a
supportive regulatory policy for impact businesses, reducing the
ecosystem risk. However, the company is at an early stage in its
development, so the investment risk remains high.
Figure 26:Illustrative investment #2
The bold blue hexagon illustrates the profile of a
hypothetical investment.
In Figure 26, we illustrate the profile for a hypothetical equity investment
with the following assessment:
 Impact: The fund is focused on improving working conditions and
energy efficiency in its portfolio companies, ranking very highly on
process. It does not target businesses delivering products or services to
an underserved population, though some may be included in the
portfolio for other reasons.
 Return: The equity structure provides more asset appreciation than
income.
 Risk: The country in which the fund operates has a challenging
infrastructure for developing the value chains needed to scale the
business (high ecosystem risk), although the company is maturing to
growth stage.
19
To ensure the investment profile is not oversimplified, we advocate the use of this
framework – whether in three dimensions or more – in conjunction with a more detailed
understanding of the investments and never on a stand-alone basis.
Appreciation
Income
Ecosystem
Investment
Products
Process
Return
Risk
Impact
Appreciation
Income
Ecosystem
Investment
Products
Process
Return
Risk
Impact

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4. Financial & Impact Risk Management
Once the portfolio is constructed, ongoing portfolio management will remain multi-
dimensional. In this section, we present the nature of risk in the portfolio, and then
explain how some investors manage risk through structural features and manage the
friction that can sometimes arise between the financial and impact pursuits.
The nature of risk in the impact portfolio
Impact thesis and financial targets determine investment scope and risk profile
On an individual investment basis, the types of risk that arise for impact investments
are often the same risks that would arise for a traditional investment in the same
sector, region or instrument. While we do not believe the inclusion of an impact
pursuit necessarily contributes to risk, we do believe that the impact thesis will
determine the scope of the investments for the portfolio, and hence the risk profile.
For example, J.P. Morgan Social Finance’s impact thesis leads us to invest mostly in
emerging markets where products and services are less readily available and
affordable for low-income and/or excluded populations, so country and currency risk
are likely to be prominent in our impact investment portfolio. With the view that
SMEs are the engine for job and wealth creation and are critical to sustained poverty
alleviation in developing countries, the Lundin Foundation is making calculated
investments into early stage companies and SME-focused funds in Africa to address
a funding gap that has historically persisted for these enterprises. Acumen Fund cites
that they prefer to invest through equity instruments in order to be able to exercise
influence over their investees and insure against mission drift. The risk profiles of
these investors’ portfolios will be directly related to their respective impact missions.
Avoid extrapolating risk profile from a specific mandate to the whole market
These respective pursuits determine particular risk profiles for each investor’s
portfolio, but we should be cautious of extrapolating those characteristics to the
market as a whole. Just as we abandon the trade-off debate on return and encourage
investment-by-investment analysis, we encourage investors to assess the risk profile
that results from their particular impact thesis and motivation.
Yet cross-market risks do exist
Early stage of the market today
While we encourage individual investment risk assessment, the market does have
some characteristics that apply more broadly. For one, it remains small relative to
traditional markets, and the market remains young resulting in a short track record of
performance to date. As a result, portfolios and deal sizes tend to be smaller than
many institutional investors would normally consider, and fund managers tend to be
less experienced at delivering on the dual-return objective than their counterparts in
traditional funds are at delivering financial returns.

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Case study: Christian Super, managing risk for impact investments
One superannuation fund in Australia, Christian Super, highlights that the early stage of the market means that their impact
allocation adds certain risks but emphasize that it also reduces other risks. They acknowledge that this is a market that
includes unproven assets without established track records. They also recognize that the effect of combining impact assets is
an unknown in itself, given for example the fact that many of the impact assets tend to attract a particular set of investors
that might expose them to behavioral finance risks or that an impact pursuit such as climate change might go out of favor.
However, they point out that they expect these assets to reduce market risk in their portfolio, since they should be less likely
to fall in value when broader markets decline given they are held by fewer and less mainstream investors.20
Ecosystem risk
The impact investment market is largely dependent on the development of a broader
ecosystem to support its growth, with such components as policy support and impact
measurement infrastructure under development. The significant support from the
investment community at large should mitigate such risks for the impact investment
market, but it is widely acknowledged that a lot of progress remains to be made
before this risk wanes.
Mission drift
There is also the risk that investees drift away from their intended mission without
the approval of investors. This is a risk among traditional fund managers more
generally since managers can be tempted to invest in sectors outside of their
mandates when attractive opportunities arise or yields in their designated assets
become less competitive. The impact mission simply adds another dimension to the
style-drift risk familiar to traditional fund investors.
While changing the investment approach without investor approval is certainly an
unsatisfactory manager practice, it is important to maintain the flexibility to respond
to changing market conditions. Several microfinance investors, for example, now
consider other adjacent sectors as the market in those sectors begins to grow and
since the microfinance sector experienced a challenging period with the crisis in
India.21
Other managers have had to adapt their strategies in order to weather the
financial crisis of recent years or to respond to successes or failures.
Combination of grant and investment capital
While some impact investments are innovating structures that bring together grant
capital with investment capital, there can be risks associated with this. The
Rockefeller Foundation notes that they do not tend to invest in organizations
receiving grants, partly for fear that the grant capital might fund the investment
return rather than the actual business performance. While there are innovative ways
to effectively combine these different types of capital as mentioned above, investors
do need to check that the capital is combined in a construction that respects the
expectations and intentions of the respective funders.22
We discuss the role of
different types of capital in more detail in Appendix III.
20
Note that we prefer this characterization to what some might reference as low correlation,
since a claim to low correlation requires a quantifiable justification using historical
performance data. Given a significant time series of return data is not currently available
currently, it is difficult to calculate actual correlations for the impact investment market (and
correlations can change dramatically over time in any case). Rather, we prefer this behavioural
finance approach.
21
For more details, please see Discovering Limits: Global Microfinance Valuation Survey
2011, J.P. Morgan and CGAP, Jul 2011
22
The Root Capital grant-funded “equity” tranche referenced in Appendix III, for example,
may not pay the returns for the senior debt investors, but it does absorb risk and could

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Moral hazard
Recognizing loss is an emotional challenge for any investor, as it means crystallizing
failure. This is the case in traditional finance as well as impact finance, but there is a
risk that the moral hazard of delaying or failing to recognize losses is heightened in
this market because of the additional (and arguably more potent) failure: that of
delivering on the impact mission. Exactly because the investor is explicitly focused
on helping the recipient of the funding, it will be even more difficult to enforce loan
covenants or submit a claim on assets than would be the case for a traditional lender.
Maintaining rigor with respect to loss recognition and structuring transactions in
alignment with the impact mission is especially important in this sector, and some
investors are choosing their investment instruments with this consideration in mind.
Case study: The Prudential Insurance Company of America, structuring investments against moral hazard
The Prudential Insurance Company of America has invested over USD 1bn through its Social Investment Program to
support and improve communities since 1976. The portfolio consists of various investment instruments through which this
capital has been allocated, including private equity and debt. In evaluating investments in this space, Prudential is careful to
structure investments to match the unique character of investees and to avoid jeopardizing their mission goals. One example
of this balance is to use dedicated collateral rather than unsecured general recourse obligations to secure loans.23
Some of these systemic risks will change over time
The development of the market over time should erode some of the risks associated
with the early stage of the market and its ecosystem. While some of these risks will
remain in place, investors will likely develop better processes for recognizing and
dealing with such drift through experience. The microfinance market is a good
example of how systemic risk evolves as a new market grows.
Case study: Evolution of risk in the microfinance industry
The microfinance industry has been growing significantly over the past decade. With microfinance gaining scale, there has
been a gradual shift in risk perceptions in the industry. While there is still a strong focus on credit risk, other risks such as
liquidity and funding risks have decreased in importance as the industry has matured and attracted more capital. A number
of other concerns have sustained despite (or arisen on the back of) this growth. Key risks for an investor today also include:
(1) corporate governance risk, linked to the strength of management teams at microfinance institutions, potential conflicts of
interest and lack of independence; (2) political and regulatory risk, including the risk of political interference; (3)
competition risk, which puts pressure on margins and can fuel irresponsible lending; and (4) impact risk, such as the risk of
employing poor or exploitative lending practices.24
Manage risk through structural features
Once the risk profile of the investment is determined, it can then be managed –
should the investor wish – using structural features such as seniority in the capital
structure, fund intermediaries, or compensation-related incentives.
potentially be viewed as using grant capital to subsidize returns for investors. As such, the
grant funders must be providing capital with this intent and understanding.
23
This may be the case for most traditional investors as well, but the inclusion of a social
motivation in preferring such a structure is noteworthy.
24
For more details on the microfinance market, please see Volume Growth and Valuation
Contraction, J.P. Morgan and CGAP, May 2012 and Microfinance Banana Skins 2012, Centre
for the Study of Financial Innovation, Jul 2012.

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Choosing the right investment instrument
The choice of investment instrument will usually be motivated by the risk and return
appetite of the investor, which can be formalized in investment guideline constraints.
For instance, although the J.P. Morgan Social Finance portfolio typically considers
equity investment opportunities, the risks posed by the AACF transaction – including
geography and political environment, the agriculture sector’s seasonality and
dependence on climate factors – led the investment team to determine that a debt
instrument was the most appropriate investment tool.25
Others access higher potential returns while building in protection against financial
risk and exit challenges by investing through equity-like debt investments. For
example, Bridges Ventures and Big Society Capital, which both invest in the UK,
may structure their investments as "quasi-equity", since some of the investees are
legally structured as organizations that cannot take on traditional equity capital.
Currency risk: Long tenors can make diversification preferable to hedging
Currency volatility is one risk that has been raised by investors considering impact
investments into markets abroad. While there are financial instruments available in
the market for hedging currency volatility, several fund managers and investors have
cited the long tenor of their impact investments as reducing the effectiveness that
those hedges might have (particularly relative to the cost) and instead choose country
diversification as their means of mitigating currency risk in their portfolio. Another
approach, employed by some private equity managers in Brazil for example, offers
investors returns with a hurdle rate that references inflation.26
Investing through fund intermediaries
For investors allocating capital in markets outside those in which they operate, it may
make sense to utilize fund intermediaries to manage the investments on-the-ground.
Fund intermediaries can also relieve some of the burden of managing the investments
post-commitment, which can often require a high level of engagement due to the
early nature of many impact businesses. Some investors may even prefer to utilize a
double-layer of intermediation, through a fund-of-funds structure, to either bring a
more diversified exposure across sectors and regions or to allow for a limited partner
role that would allow a more passive approach.
Case study: Sarona Asset Management, shifting from direct investing to fund investing
Sarona Asset Management, and its predecessors, have been investing in frontier and emerging markets for 60 years under
the banner “Business Solutions to Poverty”. Until very recently, the only way to channel growth capital to entrepreneurs in
Emerging Markets was by providing direct loans and equity capital on a “fly in – fly out” basis. It is a relatively risky
strategy: investors based thousands of miles away from investee companies can do little more than provide financing and
hope that it will be used wisely. Over the last ten years or so, Sarona monitored the growth of a locally-based private equity
industry backed by development finance institutions. By 2009, Sarona felt that the time had come for a strategic shift away
from direct investing and towards supporting local small and medium-size enterprises through the selection of top quality,
locally-based private equity teams. In private equity there are two main tools helpful in managing risk: 1) careful selection
based on long experience and 2) diversification. By shifting to a fund-of-fund model, Sarona can continue to apply its
experience in selecting the best managers and can construct diversified portfolios accessing 12-18 different funds across
Africa, Asia, and Latin America, investing in over 150 companies across a variety of sectors. In this way, Sarona believes it
can do a better job at serving the interests of investors and investees alike.
25
Diverse Perspectives, Shared Objective: Collaborating to Form the African Agricultural
Capital Fund, The GIIN, Jun 2012.
26
A hurdle rate is the minimum return to investors to be achieved before a carry is permitted.

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Linking compensation to financial and/or impact targets to avoid mission drift
Impact measurement is often difficult to contractualize
As the impact investment market often parallels the venture capital or private debt
fund market, many investors and fund managers have followed those models for
building compensation structures into their investments. Impact investors may link
compensation to financial returns, but the early stage of the market demands
flexibility on linking compensation to impact objectives. The objectives for the
portfolio may be set in the impact thesis, but investors recognize that identifying the
right metrics for an investment will be an iterative process, refined over time. As
such, it can be challenging to incorporate a contractual link between a successful
impact determination and the compensation of the managers delivering that impact.
Some are starting to experiment with impact-based incentive structures
However, investors are increasingly working to develop impact-based incentive
structures, as many recognize that this can help to ensure the managers’ commitment
to the stated impact mission. Below, we provide two case studies: one where the
objectives are in place for a company and the other where the incentives are
structured at the fund level. We also direct readers towards a recently published set
of case studies on this topic.27
Case study: LeapFrog, incorporating impact objectives to investment terms
At the company level, LeapFrog has incorporated impact objectives in the compensation structure for the managers of one
of its portfolio companies, Apollo. Apollo is a traditional insurer moving into the micro-insurance market with the help of
LeapFrog. With their investment, LeapFrog negotiated that Apollo should allocate its bonus pool with 20% of total
entitlement linked to the performance on micro-insurance impact objectives.
Case study: AACF, implementing mechanisms to ensure social impact
At the fund level, J.P. Morgan Social Finance’s investment into AACF presented a challenge in finding the right structure to
ensure that smallholder farmer livelihood improvement would be a priority in all of AACF’s investments. The original
offering memorandum called for the fund manager’s compensation to be tied to the fund’s measurable impact on
smallholder farmers. The five stakeholders ultimately decided not to pursue an impact-based compensation model because
they determined it could not create focused incentives for the fund manager. In lieu of an impact-based compensation
model, the stakeholders established fund governance mechanisms to help prioritize investments with high potential for
social impact.28
Manage friction between impact and return
Many investors cite that they pursue opportunities where the impact mission is
synergetic with the financial return pursuit and that in the long term bringing impact
into the financial decisions can make businesses more sustainable. At the same time,
many of the organizations that we interviewed acknowledge that friction can arise
between these two pursuits. Here, we highlight a few cases of friction, and the action
that the investor took in response.
27
See Impact-Based Incentive Structures: Aligning Fund Manager Compensation with Social
and Environmental Performance, GIIN, Aug 2012.
28
For more on this transaction, see Diverse Perspectives, Shared Objective: Collaborating to
Form the African Agricultural Capital Fund, GIIN, Jun 2012.

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When growth eliminates jobs
Job creation is often referenced by impact investors as one of the components of the
impact they pro-actively pursue. For example, the Lundin Foundation referenced that
they have faced short-term trade-offs between creating (or keeping) jobs and
bringing the company to the next stage of growth through investment in technology,
for example. While job creation is part of the Lundin Foundation’s impact mission,
the foundation prioritizes the viability and competitiveness of the business to ensure
that those jobs sustain for the long term.
Maintaining focus on an impact business within a traditional business
Several investors referenced that friction can arise when a traditional business is
encouraged by impact investors to move into a lower-income segment of customers.
LeapFrog, for example, has invested in larger insurance companies looking to
implement a BoP strategy. In the case of one company, the fund manager was able to
align their mission with the management of the company based on both the impact
achievable and the financial opportunities in that less competitive market.
Maintaining mission more generally
Increasingly, investors state that they are incorporating terms in investment
documents that allow them to ensure that the investee remains aligned to the impact
mission. Frontier Investments, for example, have insured themselves against mission
drift in their investee companies by including a clause in the term sheet requiring the
company to find them an exit in case it drifts away from the financial inclusion
mission that qualified the business for the investment in the first place. Similarly,
Acumen Fund uses covenants in their investment documents to ensure that the BoP
strategy that attracted their investment remains intact. Importantly, they note that an
investee management decision to move away from that strategy would likely lead
them to exit the investment, rather than block the move. AACF provides another
example, as the agreements with investees incorporate an “intent vs. use” clause,
which allows the fund to withdraw investments if enterprises use them in ways that
undermine their engagement with smallholder farmers. Further, in order to mobilize
U.S. foundations to invest rather than donate, fund managers must be able to ensure
no drift from the impact mission and to provide for exits in the event that any
covenants are broken.
Ensuring impact measurement
Several investors have also incorporated impact measurement and regular reporting
requirements to their investment terms. Some, like the Rockefeller Foundation make
investments conditional on the funds submitting to an impact rating by GIIRS. Big
Society Capital has also strategically decided to incorporate impact measurement in
their investment terms to ensure both the intermediaries and the underlying
businesses in which they invest maintain alignment with the mission.
Portfolio diversification
As mentioned above, investors often find a softer approach to diversification to be
more suitable to the private nature of this market. Rather than setting exposure limits
as can be done for public equity portfolios, impact investors tend to take a more
opportunistic approach while monitoring the broader concentrations in any sector,
geography, instrument, or impact pursuit. Many of them arrive at an inflection point
at which they become more strategic about diversification as the portfolio grows.

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Case study: J.P. Morgan Social Finance, adding strategic targets to an opportunistic approach
As already indicated, the J.P. Morgan Social Finance portfolio currently consists of close to USD 40mm of committed
capital across five different funds. While the portfolio began opportunistically, we have now reached a stage where we can
be more strategic about growth and diversification with respect to geography and sector. For example, our first investments
were in the financial services sector, which we felt were the most natural entry points for the impact investment market at
the time. As the market has developed, we have been focused on broadening our sector exposure by investing in two cross-
sector funds and one single sector fund. Our portfolio now has an investment footprint across 30 countries, on 5 continents.
Case study: MicroVest, balancing risks across different parameters
MicroVest manages a family of funds that make debt and equity investments in microfinance and other low-income
financial institutions across broad geographic areas. The manager generally pursues diversification across geographies and
institutions, scanning individual company limits, country limits and high-risk country exposures. At times, participating in
high-risk countries might lead the manager to choose a shorter tenor for the investment, or to target more mature businesses
in which to invest (rather than investing at an earlier stage of growth). Within countries, MicroVest also assesses the balance
between rural and urban presence to avoid concentration in either.
Case study: TIAA-CREF, building diversification across instruments and geographies
TIAA-CREF, a Fortune 100 financial services organization, is the leading retirement system for Americans who work in the
academic, research, medical, and cultural fields. TIAA-CREF pursues impact investing through its Global Social and
Community Investing Department within the company’s Asset Management division. Its efforts support global
microfinance, community bank deposits, corporate social real estate, and green building technology. This strategy is funded
by the TIAA General Account, which is not available for direct investment but supports the claims-paying ability of our
guaranteed annuities. It has committed capital of over USD 120mm in microfinance through its Global Microfinance
Investment Program (GMIP). The program seeks to promote economic development from the bottom up, and includes
investments in leading microfinance companies and private equity funds. GMIP is a globally diversified program which
captures a wide range of microfinance models and products, including small deposits, micro-insurance, and small and
medium enterprise lending.

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5. Looking Forward
For investors building and managing impact portfolios today, the strategies presented
above should provide a broadly applicable guide, which can then be refined
according to their particular ambitions. One way in which the process will differ by
institution is the determination of success, as institutions will value the impact and
financial performance aspects differently, as we describe below.
Benchmarking success will depend on the investor
Benchmarking investment performance is always a challenge, no matter whether the
investment is made for purely financial return or for impact as well. In the case of
impact investments, the additional impact dimension feeds through to the
benchmarking process as well, and different investors may focus their determination
of success on different components of the performance.
Each investor will determine their metrics for success
While impact investors are by nature placing value on the dual mission of impact and
financial return, some investors will naturally find themselves more focused on one
of these goals relative to the other. Some foundations, for example, may benchmark
the success of their investment by comparing the delivered impact against the impact
that might have been expected from a grant-funded intervention. Some institutional
investors, on the other hand, may prioritize the benchmarking of the financial success
against the performance of other investment opportunities in which they might
otherwise have invested. In either case, there is likely to be a minimum threshold for
performance on both financial returns and impact – we simply reference that there
can be stronger focus towards one relative to the other.29
Some challenges should ease in a maturing market
We also anticipate that some of the challenges that arise in portfolio construction and
management today will ease over time as the market continues to establish itself. In
order to be successful today, investors need to be realistic about the stage of the
market, employing patient capital, bringing a dynamic set of expectations and taking
an active management role to the investment. Whether investing directly or
indirectly, investors will need to navigate a broad ecosystem in order to ensure the
investment’s success, utilizing technical assistance and managing any friction that
can arise between the financial and impact pursuits.
The nature of the market today, while early in its development, is characterized by a
collaborative spirit across many investors that share a broader goal of catalyzing the
continued allocation of capital towards impact investments. The immediate response
we received from our interview participants at the request to share their experiences
is testament to this camaraderie. This research has been a first step towards sharing
the experiences of these field builders to help investors new to the market establish a
strategic approach to portfolio management for impact investments.
29
This alludes to the “finance first” or “impact first” designations that have been used by the
Monitor Group in describing investors’ approach to this market (see Investing for Social and
Environmental Impact, Monitor Institute, Jan 2009).

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Appendix I: Defining Impact Investments
The definition for impact investments that we published in 2010 is outlined in Figure
27 below. In short, impact investments are investments intended to create positive
impact beyond financial return. Underlying this definition are four key components:
An impact investment provides capital to a business with intent to generate positive
social and/or environmental impact alongside financial returns.
Figure 27: Defining Impact Investments
Reference impact assets rather than investing behavior
One source of confusion in the market is driven by interchanging reference to assets
versus behavior: Some will refer to impact investing rather than impact investments.
For the purposes of analysis, it is easier to set our scope as those assets (companies or
funds) characterized by their intent to deliver impact, than to analyze a set of
investments made with a given intent. An asset class can be defined only by the
characteristics of the assets themselves, not by the behavior of investors buying those
assets. This is why in our definition the intent for impact rests with the business
receiving the funds, whether at the fund level in the case of investment funds, or at
the company level in the case of direct investments. In our view, it is easier to
document intent for impact in the founding documents of a fund or company, such as
the mission statement or articles of affiliation, than in the behavior of an investor.
This is not to discount the intent of the investor, which is critical to channeling
capital, but rather to be rigorous in the definition of a set of assets.
For more on the definition of impact
investments, and background on the
broader market, see:
Impact Investments: An Emerging
Asset Class
J.P. Morgan, the Rockefeller
Foundation and the GIIN, Nov 2010
Click here for full PDF
For more on the GIIN, see
www.thegiin.org

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We notice some muddy water in the market when references are made to asset
classes, and we feel it appropriate to clarify the difference between investment
instruments and asset classes. Investment instruments will include debt, equity, and
alternatives, while asset classes, by contrast, are not necessarily mutually exclusive
and often overlay the different instruments. Sometimes asset classes reference single
instruments like “private equity” and sometimes they reference multiple instruments
like “hedge funds”. Impact investments constitute a cross-instrument asset class like
hedge funds. Figure 28 illustrates asset classes and the instruments they utilize, with
the size of the bubble illustrating the relative market capitalization.30
Figure 28: Asset classes across instruments
Global asset market capitalizations, USD trillions
For the sake of comparison, assess issuer rather than investor
Another challenge with associating the intent to the investor is that of comparing
investment performance. In evaluating traditional equity or debt investments, there is
no reference to ownership – only to the performance of the company or fund itself.
For the sake of tractability, this needs to be the model with which this sector
approaches investment evaluation as well – on both the financial and impact
components. This also avoids the unattractive predicament of a social enterprise
having to declare that some of its capital is impact investment capital, while other
capital is not. Further, it avoids the situation of investments changing nature as a
result of changing ownership. If this is to become an analyzable set of investments, it
needs to be the investments themselves that we consider, not who makes them.
A set of cross-instrument assets channeling capital: An emerging asset class
Our recognition of impact investments as an asset class responds to the fact that these
assets have the potential to channel significant capital and are beginning to do so.
This is where the investor behavior comes into play – when both the buy side and
sell side organizations are assigning investment management roles with specific
impact components, we must acknowledge that this is a trend that will result in
increasing capital flows towards this sector.
30
NB: We do not have a measure of the current market capitalization of the impact investment
market.
DM Equities
33.8
Securitised Assets
6.8
Govt Bonds
31.9
EM Equities
8.1
Commercial Real
Estate
5.2
HG Corp Bonds
6.4
Private Equity
1.9
Hedge Funds
2.1
EM Debt
2.8
Commodities
0.4
HY Corp
Bonds/Loans
2.1
Equity
Debt
Alternative
Instrument Asset class

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Appendix II: Company versus Fund
Investments
The assessments above have been presented to apply generally to impact
investments, whether made directly into companies or indirectly through a fund
intermediary. In this section, we present some of the specific considerations that arise
in analyzing company and fund investments.
Company-level and fund-level considerations
In general, the drivers of profitability and risk for impact investments are similar to
those for a traditional investment, and the company and fund-level considerations
translate as well. The profit-tree in Figure 29 provides a starting point for the analysis
of the return and risk for a company investment and at the fund level as well. As the
figure shows, the profitability for a company investment will be driven more by
operating concerns including the volume and price at which the product or service
will be sold and the costs associated with the development and distribution. At the
fund level, profitability will also be driven by the financial structure of the investor’s
participation in the fund, the fund manager's operational expenses, and the cost of
due diligence on the pipeline of opportunities that the manager is considering. The
risk considerations will include country risk, investment risk, and company risk.
Figure 29: Illustrative profit-tree for analyzing potential return and risk of an impact investment
These are only some of the considerations that will arise, for the purposes of providing an example
Company
Profitability
Revenue Cost
Volume Price
 Scalability
 Competition
 Market size &
penetration
Variable Costs Fixed Costs
 Product differentiation
 Customer income profile
 Price elasticity of demand
 Competition
 COGS
 Logistics
 Market
preparation
 Assets
 Market creation
 Business model &
product development
 Training
(fixed and ongoing)
Fund
Profitability
Yield Cost
 Seniority
 Investment instrument
 Exit potential/value at exit
 GP/LP investment terms
 Fees
 Due diligence
 Technical assistance
 Operational expenses
Profitability framework at fund and company level Key risks
 Company risks
 Financing
 Management
 Business Model Execution
– Newness
– Technology & products
– Stage of business
 Ecosystem
– Market creation &
development
– Competition
 Impact
– Mission drift
– Achievement of stated
objectives
– Lack of measurement &
reporting
 Country risks
 Political
 Regulatory
 Fraud/corruption
 Macroeconomic & currency
 Investment risks
 Liquidity & exit
 Perception & reputational

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Some of the factors driving profitability and risk that are more specific to impact
investments include market creation and ecosystem development, for example. We
discuss these differentiating features in more detail in the next appendix. Below, we
provide some insight into the company-level analysis from Monitor Group, which
has performed significant analysis of impact businesses in both Africa and India.
In-depth company-level analysis:
Monitor Group’s study of market-based solutions to poverty in Africa
In 2011, Monitor Group published the findings from a year-long study of more than
270 market-based initiatives to solve poverty in Africa, initiatives that use the market
economy to engage low-income people as customers or business associates
(suppliers, distributors or agents). The research identified three common themes
across the more successful market-based solutions (MBSs) that can help us think
about the drivers of profitability for companies pursuing similar business models in
similar regions.
1. Firstly, Monitor finds that many enterprises achieved viability by adopting an
expanded view of low-income consumers or business associates, engaging those
at the bottom of the pyramid but also those in adjacent income groups to buffer
the volatility and risk that arises when dealing with the very poor.
2. A second finding identifies that MBSs can operate sustainably selling “push”
products only if they engage in large-scale demand stimulation to educate target
customers about the benefits of the offerings. While this may be expensive,
companies in sectors as diverse as mobile-enabled services and agriculture inputs
successfully incorporate this cost into an economically viable business model,
although it often requires higher gross margins to afford the “push”.
3. Thirdly, they find that “market joiners” – businesses joining a market already in
existence – are able to achieve scale more quickly than “market creators” – those
that pioneer new products or services for low-income customers, which typically
take a decade or more to reach scale in India, for example.
The findings of Monitor Group's research can help investors to think about the costs
and benefits of operating in such markets and the types of businesses that are likely
to deliver solutions at scale when serving low-income customers. They have
published the findings of similar research study in India as well, and we recommend
both sources for examples of economic analysis at the company level in this market.
For more on the profitability of
impact businesses serving low-
income customers or engaging
low-income suppliers, agents or
distributors, see:
Promise and Progress:
Market-based solutions to poverty
in Africa,
M Kubzansky, A Cooper and V
Barbary, Monitor Group, May 2011.
and
Emerging Markets, Emerging
Models, A Karamchandani, M
Kubzansky, P Frandano, Monitor
Group, Mar 2009.

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Appendix III: Differentiating Impact
Investments
Many of the drivers of profitability and risk for impact investments are the same as
for traditional investments. Below, we highlight some of the factors that are more
specific to the imapct investment market.
At the market level
The presence of the impact thesis
While some view the inclusion of an impact thesis as a constraint that would restrict
the profitability of the investment, we believe that it should be viewed simply as
contributing to defining the focus of the investments, which does not have a general
affect on profits necessarily. For example, if the impact mission of one investor is to
more efficiently deliver consumer goods to low-income populations in frontier
markets, some will assume that low prices and high operating costs should determine
low return expectations.31
But perhaps the lack of competition might result in high
demand, and hence high sales volumes, to the business. Again, as we have been
advocating, investors should assess each opportunity individually to determine which
factors – costs or margins, volumes or competition – might drive financial
performance the most, given the impact thesis.
Pioneering structures and partnerships
Many investors cite a specific desire to employ innovative financial structures to
ensure the investment best meets the needs of entrepreneurs and also to demonstrate
a role for other investors that might then follow suit. Part of our motivation for
participating in the AACF referenced above, for example, was related to showcasing
the viability of a transaction that brings together different types of investors –
foundations and a financial institution – with different risk/return profiles coming
together to create a new investment solution. The Rockefeller Foundation also cited
this goal as making it critical for their investment to leverage commercial capital,
though it was not needed to close the deal. In fact, to demonstrate ways in which
different forms of capital could come together they were willing to take on more risk
than if they were only interested in capitalizing the fund itself.
Case Study: Big Society Capital, offering more flexible finance to match the impact mission
Big Society Capital is an independent financial institution established to develop and shape a sustainable social investment
market in the UK by investing in social investment finance intermediaries. The goal of developing the market is likely to
lead BSC to structure loans with longer tenors than might be offered by commercial lenders and largely on an unsecured
basis to allow the recipient organizations more flexibility in their growth.
The newness of the market
Stepping back to consider the market more broadly, its early stage nature can also
present some challenges that should hopefully begin to dissolve over time as the
market matures. Today, for example, investors may also need to support the
31
We do not claim that low margins are necessary in order to serve low-income markets, but
rather referencing a common assumption about the market. As Erik Simanis argues in Reality
Check at the Bottom of the Pyramid (Harvard Business Review, Jun 2012), higher margins
may be both necessary and possible for base of the pyramid business success.

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development of a broader ecosystem to support the business, investing in such things
as market creation (stimulating demand for a product that does not yet have natural
demand) and business model validation for disruptive business models.32
The costs
associated with addressing these issues can dampen return expectations today, and
some investors cope with this cost by setting up a parallel funding facility.
Case Study: LeapFrog Labs, subsidizing the cost of innovation
Having recognized that innovative business models require research & development, LeapFrog established LeapFrog Labs,
a grant-funded parallel facility to the fund. LeapFrog Labs provides technical assistance to the portfolio companies of the
fund and also enables innovation by subsidizing the cost of testing new models and approaches for the investee companies.
The combination of different types of capital: grant, PRI and investment
Funding with the right type of capital
Another feature of this market that is unique to others is that some opportunities at
the early stage can be more appropriate for grant capital than for investment capital.
Prudential cites that they consider which investments should be made from their
foundation as PRIs – often those deals with a more direct connection to the
foundation’s thesis and sometimes those with higher risk or lower return. The Esmée
Fairbairn Foundation also has a grant portfolio alongside their mission-related
investment portfolio, and they find the opportunities to be fairly self-selecting in
terms of the appropriate type of capital.
Grant capital alongside (or below) investment capital
In addition, individual investments are sometimes made alongside grant capital.
Often, the grant is provided to fund technical assistance to the investee, to help with
market creation or to fund more in-depth impact measurement. Sometimes, though,
the grants take the place of equity as a loss-absorption facility to attract more
commercial investors.
To link these various types of capital back to our framework for impact, return and
risk, we show in Figure 30 the graphs you might expect to see for investors with
different pools of capital. Naturally, a grant is not an investment so is outside the
scope of our analysis, but we include it in this graph to illustrate the relative targets
of the three types of funding that can capitalize impact funds or businesses.
Case Study: Root Capital, building the capital structure appropriate for the risk appetite
Root Capital is one fund that has successfully utilized a mixed pool of capital for their work. The mission of the firm is to
grow rural prosperity by investing in small and growing agricultural businesses that build sustainable livelihoods in Africa
and Latin America. The firm is strategically committed to funding businesses that struggle to source capital from traditional
commercial lenders, addressing the “missing middle” with loans typically between USD 50,000 and USD 2mm. Given the
risk profile and cost of delivering such loans, the firm raises philanthropic capital from grantors to provide an equity first-
loss tranche for their funds. With this capital in place, debt investors are then able to provide senior funding, with different
debt-net asset ratios across the various funds depending on the risk of the fund's underlying portfolio.
32
See From Blueprint to Scale: The Case for Philanthropy in Impact Investing, H Koh, A
Karamchandani and R Katz, Monitor Group, Apr 2012.
Figure 30: The types of funding that
capitalize in impact investments
Illustrative profiles
Grant
PRI
Investment
Risk
Return
Impact

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At the investment level
Market creation and development
The disruptive nature of some impact business models can mean that significant
investment needs to be made in developing the demand and the supporting value
chain for a new market. The company (and its investors) may need to invest
considerable resources to essentially build market demand for a new product or
service through marketing and education, and there is a risk that the demand fails to
materialize sufficiently to turn the business into a profitable venture.
Competition
The pursuit of an impact mission can lead to innovative business models for which
there is little competition at the outset. Once created, however, the demand for a new
product is not something over which the company that invested in creating it can
maintain control. Thus, a company can spend resources to help their own business,
while also lowering the barrier to entry for competitors, which can in turn put
pressure on prices and volumes.
Technical assistance
For investors supporting new entrepreneurs, there can often be a benefit to providing
a technical assistance facility alongside the investment. Often, this is grant-funded to
mitigate the cost to investors.
Ecosystem development
The impact investment market is characterized by its disruptive nature, and often the
success of the investments can depend on the regulatory or policy support from the
governments of both the investor and the investee.
Impact mission drift
Impact mission drift can arise in both successful and failing ventures, where
pressures on the financials – from investors or would-be investors – can lead the
management to prioritize profits at the cost of mission.
Case Study: IGNIA, identifying business risk and ecosystem risk
IGNIA is an impact investing venture capital fund that supports high growth enterprises serving the base of the socio-
economic pyramid in Mexico. When assessing the risk of an investment, IGNIA organizes the risk analysis into two
components: the risk inherent in the business model itself – the business risk – and the risk related to the broader ecosystem
in which that business will need to operate in order to be successful – the industry ecosystem risk.

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Appendix IV: The Impact Spectrum
Defining our terminology: Outputs, outcomes and impact
Throughout this paper, we reference the measurement of ‘impact’ because that is the
term used by most market participants. However, in social science, ‘impact’ has a
specific definition: it describes outcome(s) that can be attributed to a particular
intervention, as depicted in Figure 31. An academic impact evaluation of a bednet
manufacturer, for example, might entail a multi-year study on the incidence of
malaria among target customers, with a control group to understand what would have
happened to those customers if they had not purchased bednets. This type of
evaluation would provide the greatest possible certainty that the bednet company had
delivered the social impact intended by its management.
Figure 31: Impact Value Chain
Source: The Rockefeller Foundation, J.P. Morgan.
Rigorous impact evaluation, including Randomized Control Trial (“RCT”), is
powerful, but onerous and expensive in practice. Many impact investors therefore
settle for measuring ‘activities’ or ‘outputs’ (such as number of bednets sold) rather
than running control groups to measure the ‘impact’.33
Investors balance the need for
rigorous impact evaluation against the need for simple, cost effective ways of
measuring this impact. We believe the tools being developed to balance these needs
should build on knowledge generated by the existing body of academic literature,
while acknowledging the need for systems that add value and are pragmatic for
investment activity.
33
There could also be ethical questions about running control groups if it meant denying the
product or service to a part of the population that should have equal access.
INPUTS ACTIVITIES OUTPUTS OUTCOMES
WHAT WOULD
HAVE HAPPENED
ANYWAY
GOAL ALIGNMENT
LEADING INDICATORS = IMPACT
What is put into
the venture
Venture’s
primary
actions
Results that can
be measured
Changes to social
systems
Activity and goal
adjustment
INPUTS ACTIVITIES OUTPUTS OUTCOMES
WHAT WOULD
HAVE HAPPENED
ANYWAY
GOAL ALIGNMENT
LEADING INDICATORS = IMPACT
What is put into
the venture
Venture’s
primary
actions
Results that can
be measured
Changes to social
systems
Activity and goal
adjustment

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Appendix V: Interview Participants
Table 9: Interview participants
Investor type Interview participants
Foundation The Bill and Melinda Gates Foundation
Calvert Foundation
The Esmée Fairbairn Foundation
The F. B. Heron Foundation
The Lundin Foundation
The Rockefeller Foundation
Shell Foundation
Pension fund Christian Super
PGGM
TIAA-CREF
Financial institution J.P. Morgan
The Prudential Insurance Company of America
Storebrand
Fund manager Acumen Fund
Big Society Capital
Bridges Ventures
Accion and Frontier Investments
IGNIA
LeapFrog Investments
MicroVest
Pearl Capital Partners
Root Capital
Sarona Asset Management
Company AllLife
Other IRIS
Monitor Group

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Appendix VI: Social Finance Library
Cross-sector research
Insight into the Impact Investment Market:
An in-depth analysis of investor
perspectives and over 2,200 transactions
J.P. Morgan and the GIIN, Dec 2011
Counter(Imp)acting Austerity:
The Global Trend of Government Support
for Impact Investment
J.P. Morgan, Nov 2011
Impact Investments:
An Emerging Asset Class
J.P. Morgan, The Rockefeller Foundation and
the GIIN, Nov 2010
Microfinance research
Volume Growth and Valuation Contraction:
Global Microfinance Valuation Survey
J.P. Morgan and CGAP, May 2012
Discovering Limits:
J.P. Morgan and CGAP, Jul 2011
All Eyes on Microfinance Asset Quality:
J.P. Morgan and CGAP, Mar 2010
Shedding Light on Microfinance Equity
Valuation:
J.P. Morgan and CGAP, Feb 2009

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Copyright 2012 JPMorgan Chase & Co. J&098$#*P

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