Impact Investing is a fast-growing new approach to global economic development
This is part 1 of a 4-part series titled Impact Investing Reaches a Tipping Point in India which explains the history, the status and the relevance of impact investing to the economic development landscape in India.
Many stakeholders are getting involved these days, in impactful ways, trying to help out the world’s poor. Governments implementing social programs, multi-lateral aid agencies, NGOs provide direct services and advocating for policy changes, and individuals volunteering their time, talent and resources are among the established approaches to propagate social advancement. Trillions of dollars are spent globally on such programs. On the other hand, the private sector also plays an increasingly important role as corporations adopt sustainable practices into their business decisions and seek broader, double and triple bottom line objectives. For the first time anywhere in the world, large listed companies in India are now mandated by the 2013 Companies Act to apply 2% of average net profits to corporate social responsibility (CSR) schemes. Existing CSR programs like Microsoft’s Project Shiksha which helps government school teachers in India integrate information technology into their teaching modules have been very well received, helping millions over the past 7 years. There are too many other good examples to recite here.
Doing well while doing good
Clearly, ‘doing good’ is in the air these days. What about ‘doing good’ while also ‘doing well’ financially? This question leads us to another relatively new fast-growing actor in this social impact space — the impact investor. Impact investors can be found among wealthy individuals, foundations, microfinance institutions, philanthropists, and venture capital and private equity funds, and now even modest income individuals — each of whom provides capital to fuel ventures that address social needs. These are often called “social businesses”, but we like to focus on the business and the impact, so we call for-profit businesses that are solving social problems “impact businesses”.
The gaining popularity of for-profit social businesses that are beginning to augment and/or replace traditional non-for-profit setups has fueled the growth of the impact investing sector. A 2012 Rockefeller Foundation report states that:
- Close to 2,200 impact investments worth INR 26.4k crores ($4.26 billion US) were reported globally in 2011, as opposed to ~1,100 deals in 2010.
- Close to INR 12k crores ($1.94 billion US) of impact investment funds came from North America.
- Emerging markets contributed substantially, with Latin America, Africa and India accounting for approximately INR 4.02k crores ($650 million US), INR 1.8k crores ($290 million US) and INR 1.44k crores ($233 million US)3 respectively.
The focus of this first of a four-part series is on understanding the global context around investing capital in businesses that deliver both profits and sustained social impact.
Impact Investing is Not Philanthropy
It is imperative to call out at this stage the distinction between philanthropy and impact investing. While most philanthropic capital requires social and environmental returns and no financial returns, impact investments are expected to provide financial returns as well as social good. The two should be viewed as distinct avenues for social impact, and not be classified as subsets. Impact investing, for instance, is not a form of charity and should not be classified as such when one ear marks funds for different areas, be it family, work or donations. In reality, it is another form of a traditional investment and should be considered as part of a diversified portfolio of any investor, social or otherwise. As Mr. Samit Ghosh, Founder and CEO, Ujjivan Financial Services says, “Impact investments are like an infrastructure investment, for example. If one is willing to have a longer term outlook for financial returns, impact investments can be just as good as any other financial investment.”
As articulated by a recent Monitor Institute report, impact investors can be broadly classified into two groups – ‘impact first’ and ‘financial first’ investors. While the former approach investments with the primary aim of creating social or environmental good with a minimum financial threshold, the latter seek out sub-sectors that offer market-rate returns while achieving some social or environmental good. As is evident, financial returns can and should be a primary focus point for impact investments. Impact investing is also different from the traditional form of Socially Responsible Investments (SRI) in that it proactively aims to create positive social and environment impact while also managing financial return and risk. In contrast, SRI intends to minimize negative impact of traditional corporate activities, thereby, contributing to the social well-being of the community at large.
According to a 2010 JP Morgan report, Impact Investing is emerging as a new asset class and is proving to have the sustainable and scalable impact the world needs today. They calculate that impact investments aimed at low-income families (earning less than INR 1.8 lakhs ($3,000 USD) a year and across housing, rural water delivery, maternal health, primary education and financial services sectors provide an INR 2,400k-6,000k crore ($400B to 1 trillion USD) invested capital potential for the next 10 years; the total profits from these investments can range between INR 1,080k-3,900k crores ($183-667 billion USD) . Agriculture and energy are also popular targets for impact investors.
In recent times impact investing and philanthropy have started to work hand in hand. For example, charitable foundations have started investing in funds (e.g. IntelleGrow raised 10 crores ($1.8M US) from the Michael & Susan Dell Foundation) and major global foundations such as the Bill & Melinda Gates Foundation, MacArthur Foundation, and Rockefeller Foundation have been applying billions of dollars in program related investments to fuel for-profit endeavors that align with their philanthropic programs.
A Deeper Look at Types of Global Impact Investors
There are multiple types of impact investors, each with different expectations of risk and return, and vastly different strategies and portfolio sizes:
- Development Finance Institutions (DFIs; e.g. multi-laterals such as IFC and investment organizations such as CDC or OPIC)
- Global foundations (e.g. Sorenson Impact Foundation, Ford Foundation)
- Large-scale financial institutions (e.g. J.P. Morgan, Deutsche Bank, and Citibank)
- Seed-stage equity (e.g. Mumbai Angels, Village Capital, and Unitus Ventures (formerly Unitus Seed Fund))
- Early/growth stage equity (e.g. Elevar Equity, Omidyar Network, and Aavishkaar)
- Specialized debt funds (e.g. Responsability and Oikocredit) provide investors with lower-risk, fixed income products with built-in social impact.
- Multinationals such as Starbucks and Cisco are adopting impact investing methods to improve their supply chain and in-market partnerships.
Another concept beginning to gain prominence is crowd-funding for social impact. Given that crowd-funding is inherently social, it is a great way to market and attract investments. SeedAsia, the first equity crowd-funding site based in China, recently launched in 2013. Milaap.org sources domestic and global funds for deployment in India. Kiva.org raises funds globally and operates in close to 70 countries though field partners. In the US, the JOBS Act is now making it more feasible for individual investors to buy equity stake in start-ups through crowd funding.
To ensure an environment conducive to investing, standardized ratings have been offered through The Global Impact Investing Ratings System (“GIIRS”) and measuring metrics through The Impact Reporting and Investment Standards (“IRIS”). The GIIRS aims to enhance and make efficient the investment decision making process. In addition, in September 2009, J.P. Morgan, Rockefeller Foundation, and the United States Agency for International Development (“USAID”) launched the Global Impact Investing Network (“the GIIN”) whose aim is to increase the scale and effectiveness of impact investing.
As is evident from the growing amount of activity taking place in this space, impact investing is clearly here to stay, and is spreading around our increasingly flat world. Going forward, there is a strong possibility that impact investing will become a widely embraced mainstream investment asset class which funds a growing number of businesses committed to sustainable social impact.
In part 2 of this series, we will focus on the evolution of impact investing and current trends in India. Read Part 2: Impact Investing in India Today >