Profit with a purpose

by India Global Business Staff

Impact investing can play a pivotal role in helping India meet SDG 3,4 5 and 6 ie healthcare, education, gender equality and clean water and sanitation.

The widespread impact of Covid-19 has been a wake-up call for the world in many aspects of business and life. The pandemic has provided a moment of crystal clarity across the board, exposing social and economic disparity, as footage of thousands of migrant workers walking hundreds of miles to their villages played across television screens and splashed across newspapers and portals in India. The need to diversify supply chains and move towards sustainable practices are slowly dawning upon corporates in India and across the world. With much of the government’s financial aid and private philanthropy now focussed on relief efforts during the global pandemic, there is a huge funding gap left to address other pressing matters such as education, upliftment of poverty, healthcare to the rural areas – all of which will play a decisive role in post-pandemic recovery. And this is where impact investing comes in.

 

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What is impact investing?

According to the Global Impact Investing Network (GIIN), impact investment is funding made to generate positive, measurable social and environmental impact alongside a financial return.

A paper by Brookings institute highlights impact investing as different from corporate social responsibility, as it includes only those investments that have clearly defined intentionality for achieving “measurable” impact, alongside financial returns.

In India, the inception of impact investing can be traced to the establishment of Aavishkar, India’s first for-profit impact fund, in 2001. In 2013, the Companies Act of 2013 made it compulsory for corporates above a certain profit threshold to spend 2 per cent of their net profits on corporate social responsibility (CSR).

In many ways impact investing takes into account the “fortune at the bottom of the pyramid’ approach, first introduced by C.K. Prahalad in 2004 in his book by the same name. In it, Prahalad set forth several case studies to illustrate how corporates can cultivate new markets and consumers through an innovative and inclusive approach to capitalism. According to Prahalad, “the poor represent a “latent market” for goods and services. Active engagement of private enterprises at the BOP is a critical element in creating inclusive capitalism, as private-sector competition for this market will foster attention to the poor as consumers.”

Impact investing can play a pivotal role in helping Indian meet SDG 3,4 5 and 6 ie healthcare, education, gender equality and clean water and sanitation.

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Investing for impact

The current Indian government has taken several steps to initiate social financing and building up rural communities through welfare policies and schemes. Also, India is perhaps the only country to mandate corporates above a certain profit threshold to spend 2 per cent of their net profits on corporate social responsibility (CSR). According to research conducted by Impact Investors’ Council, impact investments in India have grown at a 26 per cent CAGR over the last decade (CY 2010-2019), from $323 million in 2010 to $2.7 billion in 2019, bringing in $10.8 billion cumulatively into 550+ enterprises. This has been driven by a tripling of average deal size, from $5 million in 2010 to $17 million in 2019, a jump from the last two years (2018 and 2019) with the entry of commercial capital and larger, follow on rounds raised by companies initially funded by impact investors.

Another study by the Global Impact Investing Network shows that the impact investing sector in India attracted over $5.2 billion between 2010 and 2016, with over $1.1 billion invested in 2016 alone.

Yet it’s not enough. India currently ranks 115th on the Global SDG Index and needs $ 0.6 trillion to meet its SDG goals.

Courtesy: Impact Investors’ Council

How impact investment can help

The ongoing pandemic has already put a huge strain on the global economy and way of life. In India, in order to activate funding towards ongoing relief efforts, the government decided to take the spends toward Covid relief efforts under the purview of CSR. This means funding for other and perhaps equally important ongoing social enterprise projects has dried up.

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In a recent survey by the British Council of Indian social enterprises, 57 per cent identified access to debt or equity as a barrier to growth and sustainability. Impact investment can open up many these blockages and provided much needed funding for ongoing projects.

Social impact bonds or development impact bonds (DIB)are another great example of impact investment. DIBs offer results-based contracts in which one or more private investors offer capital for social programs. The investors only see a return on their investment if the programme is successful. In 2018, the British Asian Trust, a charity founded by HRH the Prince of Wales, launched the world’s largest education development impact bond – Quality Education India Development Impact Bond (DIB) in India. A four-year programme, the DIB focuses on improving the quality of education in India through the delivery of specific measured outcomes of improved literacy and numeracy among children.

It is by no means an easy road even with the rising appeal for impact investment. As more and more organisations and investors look into this sector, the need for a transparent and effective framework to measure the actual impact on the ground also becomes important. According to the IIC report: the absence of a standardised framework for measuring impact means that many fund managers continue to use a combination of tools and their own proprietary standards, resulting in a lack of comparability and ability to aggregate impact across enterprises and investors. But these are teething problems that can easily be solved with government support. Ultimately, it comes down to how India and the world choose to respond to the pandemic.

About the Author: India Global Business Staff