This article is written by Diksha Mahla, of Raffles University, Neemrana, Alwar, Rajasthan. The article talks about Impact Investing and top organizations working in the area of Impact Investing in India.
In the words of Elizabeth Burgess, ‘Businesses that fail have no social impact because if they can’t sustain themselves financially, there is no product or service to deliver’.
‘Impact Investing’ is the combination of two terms ‘impact’ and ‘investing’ and to understand impact investing we need to understand investment first. Basically, investment is the purchase of an asset or item which may not be used today but saved for future income. When this investment is made in companies and organizations with the intention and commitment of creating social and environmental impact along with financial return then this investment is known as Impact Investing. It has emerged as an alternative investment practice to deal with the world’s biggest social and environmental challenges. It came up with an idea to indulge investors in the activities which can create financial, social and environmental development. To decide the area of Impact Investing, one should first identify the audience which means a group of people who are going to be affected and then the impacts of that investment must be analyzed.
Man is a social animal who cannot survive without the society. But it is a bitter truth that no one is concerned about the condition of society. There should be a balance between profit-making activities and society benefitting activities. It is a moral duty of everyone to protect society. The International Organization for Standardization (ISO) strongly emphasizes that society and environment need to be taken into consideration along with financial return. It is the responsibility of the companies to protect the society and it is known as Corporate Social Responsibility (CSR).
The need of Impact Investing
Three important things everyone should know about impact investing
- Impact Investing is not Philanthropy or charity but, it is derived from the failure of philanthropy to address various social and environmental problems. Philanthropists have failed to provide healthier, better, safer, and less polluted life to the poor because there is less connectivity between rich donor and problems of poor. Impact Investing emerged with an idea to allow the ZASa flow of money in the hands of local entrepreneurs who better understand the problems of society such as poor healthcare, poor food supply, water supply, education and many more.
- Impact Investing aims to create additional impact as the core business of the targeted company. Every socially inclined investment is not impacting investment. For example- buying stock in public solar energy plant may not lead to the production of green energy. Additional money needs to flow in the business to create a social impact. Impact investment helps to create a social and environmental impact which will contribute towards fulfilling the dream of a better society.
- Impact Investing is, after all, an investment only so, expecting financial return is obvious. Required financial return is an important element to promote Impact Investing. Impact investors are looking forward to a profitable business which will give them money in return because they are not investing in charity. This not only creates social impact but also helps to get a high amount of financial return.
Bodies Making Impact Investing
Both individual and institutional investors are attracted towards Impact Investing but the bulk of Impact Investing is made by institutional investors. Some of the impact investors are:
- Insurance companies
- Pension funds
- Individual Investors
- Fund Managers
- Family Offices
- Private Foundations
- Religious Institutions
- Development finance institutions
Characteristics of Impact Investing
The Global Impact Investing Network has given four characteristics of Impact Investing:
- The intention of an investor: Investor activities can be carried out both in developed and developing markets. The intention is an essential element of Impact Investing because, without the intention of improving social and environmental conditions, the impact cannot be created. Every investor has an intention in his mind to deal with a particular social and environmental challenge for example- one is interested in investing in the field of education, healthcare, housing, sanitation, etc., which is not accessible to poor and rural population and other might be interested in impacts of climate change and environmental degradation and so on.
- An expectation of the returns: Financial returns from Impact Investing are the major attraction of investors. While investing in any area, there lies an expectation of financial returns on capital and, at a minimum, a return of capital.
- The range of asset classes and return expectations: The target of impact investors is from below market (or concessionary) to the risk-adjusted market rate. The instruments in which investment is made clearly shows their intention which is driven by economies of investment. This depends entirely on the interest of the investor because some are inclined towards investment in early-stage social enterprises whereas others are more inclined towards investing in the expansion of already proven business models.
- Impact measurement: Measurement and report of progress and performance of social and environmental impact from an investment is the hallmark of Impact Investing. An approach towards impact measurement will show investors’ intention, goals, and capacities. Components included are:
- Setting performance metrics/targets related to these objectives using standardized metrics wherever possible,
- Monitoring and managing the performance of investees against these targets,
- Reporting on social and environmental performance to relevant stakeholders, and
- Establishing and stating social and environmental objectives to relevant stakeholders
The Future of Impact Investing
Since the emergence of Impact Investing, it is growing day by day because investors have adopted it in a positive way. The need for Impact Investing is realized by the investors who help those small business entrepreneurs to work in the field of societal development. As we all know the gap between rich and poor is increasing day by day. Impact Investing is a link which joins the investment to the problem of society. One of the major problems of the society is that natural resources are exploited by the people but Impact Investing is promoting sustainable use of the natural resources which is a very important need of the society. In short, we can say that Impact Investing has a very bright future.
GIIN (Global Impact Investing Network)
It is a non-profit organization which is working to increase the effectiveness of Impact Investing. It helps in the acceleration of the impact investing industry. It provides a data report of 209 impact investors around the world through conducting Annual Impact Investor Survey.
- There was a progress in key indicators of industrial growth in a survey conducted in 2016.
- In aggregate, around 205 investors invested USD 22.1 billion in 2016 and they planned to increase capital investment by 17% to USD 25.9 billion in 2017.
- Currently, 208 impact investors manage USD 114 billion on Impact Investing.
- Impact investors measure their performance using qualitative information.
- Investors observed return more than their expectations both financial and impact.
Progress and challenges-source: GIIN
Professionals with relevant skill sets
|An indicator of industry progress/challenge||% noting some or significant progress||% noting more significant progress|
|2.||setucts and performance||89%||40%|
|3.||High-quality investment opportunities||86%||42%|
|4.||The sophistication of impact measurement practice||86%||38%|
|5.||Innovative deal/fund structures to accommodate investors||84%||33%|
|6.||The common understanding of definition and segmentation of impact investing market||82%||47%|
|7.||Appropriate capital across the risk/return spectrum||73%||52%|
|8.||Government support for the market||60%||36%|
|9.||Suitable exit options||60%||47%|
Number of investments and amount of capital invested in 2016 and planned for 2017- source: GIIN
|Capital invested (USD millions)||No. of investments|
|2016 reported||2017 planned||2016 reported||2017 planned|
|% growth (projected)||17%||20%|
Types of Impact Investing
The focus of Impact Investing varies from investor to investor because they will have their own conception of social good they are aiming for. There might be some investors who are more interested in developing an educational system, healthcare access, climate change and many more. There can also be ideas to care for developed and developing economies or some may be interested in developing a particular class or community of a nation.
- Place: Investments which are made in the companies or projects located at a particular place to help out the people of that locality. For example- investing in the set-up of a small scale industry which will create job opportunities for nearby population. Investments which are made in the companies or projects located at a particular place to help out the people of that locality. For example- investing in the set-up of a small scale industry which will create job opportunities for nearby population.
- Process: Investments which are made to promote better processing technique in a particular manufacturing process is said to be an investment on the basis of process. For example- investment to provide better cultivation techniques to the farmers.
- Planet: Environmental degradation is the major issue of the present world. So, an investment which is made to preserve climate and natural habitat or more efficient techniques promoted to reduce the effluents of carbon dioxide in the air are said to be an investment made for the benefit of the environment.
- Product: An investment which is made to have better social impacts, for example- investing in free and compulsory primary education for the children because children are the future and they must get a proper education which will have a strong social impact.
- Paradigms: Investment aiming towards a change in the whole system is the investment on the basis of paradigms, for example- an investment made to alter the system of childhood nutrition.
Advantages of Impact Investing
- Impact Investing is in practice for decades till now but initially, it was limited to small and middle market private funds and below-market-rate (or concessionary) returns but now it is has widened to include the issues at a larger scale.
- Easy and efficient funding for non-profit organizations.
- To promote Impact Investing and also to employ the same rigor underwritings same as applicable for any non-Impact Investing.
- Social and environmental challenges are dealt with ease through investing to carry out a positive social impact.
- Identify new job opportunities for the people.
- It can have an edge in negotiating PE (private equities) deals in which non-impact counterpart lacks.
- It can offer to lock in a company’s long-term mission and also to amplify its spread.
- Microfinance loans are helping small business owners to expand their business and more often women are beneficiaries of such loans.
“In the words of John Rogers, When I sit across the table from a founder and tell them that I am going to be held accountable for the social impact of the investment, a light goes on. That’s a real competitive advantage.”
Myths about Impact Investing
- Impact investing means lower returns: it is a misconception in the mind of the people that they need to sacrifice profit for Impact Investing. There might be many situations when one makes concessions when it comes to returns. The GIIN and Cambridge Associates released a report in 2015 “The Impact Investing Benchmark” which reveals that the impact investors were getting returns more than their expectations. In 2016, GIIN, JP Morgan, and the Impact Investing Programme released report annual impact investor survey in which it was revealed that 99% of the impact investors got results better than their expectations. Impact investing companies are becoming the iconic brand with the time because of their financial performance and social impact.
- Only rich have access to Impact Investing: it is true that many high net worth investors have taken the step in the area of Impact Investing but now Impact Investing has a wide scope which is creating on-ramps for various range of income levels. Example- Calvert Foundation which is offering different investment options starting from $20 so that more investment could be made by individuals.
- Impact Investing market is limited to only “do-gooders”: there is a broadening in the tent of Impact Investing market which means that in last few years world-class investors such as Bill Gates, Vinod Khosla, BlackRock have jumped in this game.
- Social enterprises are backed by small investments: this is not true that there is an only small investment in impact market. There is a gradual increase in the investment level as the time passes. The GIIN releases report every year which shows an increase in the investment level.
Top Impact Investing organizations working in India
India is one of the most attractive places for impact investors because in India there are many social problems which are still prevalent and need to be taken into consideration. Impact Investing is showing rising altitudes every year. In 2015 there was a turning point in Impact Investing when investment touched $1-billion mark and in 2016 the investment totalled $1.1 billion in India. Some of the top impact investors are:
- Aavishkaar: It was founded in 2001 with the fund of 5,000 USD and now it has a fund of 500 million USD. It focuses on catalyzing India’s underserved regions through entrepreneurs by providing them with capital which helps in building sustainable enterprises. It covers almost every sector like healthcare, education, agriculture, dairy, water and sanitation, technological assistance, micro-finance and financial inclusions. Aavishkaar has the aim to back 300 startups across many emerging economies with a low-income population. It includes portfolio companies like Milk Mantra, Ulinks Organics, Zameen, Mera Doctor, Raya Dairy, Vaatsalya Healthcare, Mela Artisans and Waterlife.
- Omidyar Network: It was started by Pierre Omidyar, Founder of eBay. It invests in both for-profit and not-for-profit organizations. It focuses on key areas of education, citizen’s engagement and property rights, consumer internet and mobile. Its portfolio companies include Bangalore-based enterprise Vistaar, Mumbai-based foundation Dasra, and Akshara Foundation.
- Unitus Impact: It is a venture capital firm investing in businesses that improve the livelihood of the poor in Asia’s growing economies. It focuses on addressing market inefficiencies by improving the supply chains to carry out better opportunities for poor and to provide essential goods and services to the consumers. Its portfolio companies are Ruma, Mya, Kinara, Micro-benefits, and Mobivi.
- Acumen Fund: It was incorporated in 2001 with an idea to raise charitable donations that allow it to make long-term debt or equity investments in companies which are in their early-stage and providing easy access to agricultural requirements and markets, healthcare services, housing, safe drinking water, quality education, clean energy to low-income consumers. Its portfolio enterprises are Labournet, Asian Health Alliance, Avani Bio Energy and EduBridge.
- Khosla Impact Fund: It was founded by Vinod Khosla, Founder of Sun Microsystems. This funding body helps those investors who are passionate about solving socio-economic challenges by introducing new ideas and trying to apply science and technology to the problem-solving process. It primarily focused on helping for-profit organizations which are working for the welfare of the bottom half of the world’s economic pyramid such as farmers, small businesses as well as low-income labourers.
Impact Investing aims to provide easy and required amount of investment to the entrepreneurs and the businesses whose aim is to deal with emerging social and environmental challenges. Impact Investing is connecting investors with their wealth and their wealth to the present social and environmental issues. Sustainable development is an essential requirement in the present day world because by observing the conditions of the environment and depleting natural resources, it is clear that the coming generation will be falling short of natural resources. Impact Investing is a good idea to promote sustainable techniques. It is also creating new opportunities for the people. A large population of India is facing the problem of poor sanitation, healthcare issues, access to education and so on. Impact Investing helps companies and organizations in solving socio-economic issues by providing financial assistance to the entrepreneurs who are passionate and enthusiastic about dealing with social and environmental challenges. All possible ways must be adopted to create awareness among the people about the idea of Impact Investing.