Impact investing: Mixing business and social good

Impact investing is definitely the next venture capital destination as it can narrow the gap between the underserved and the privileged. Government must, however, remove roadblocks and provide stimulus to it

Making money need not be a dirty and insensitive game anymore. Gone are the days when profitability and well-being of the society could not go hand-in-hand. Impact investing, a new way of investing, has challenged the long-held view that social returns should be funded by philanthropy, financial returns funded by mainstream investors and has exemplified that profits can be made while contributing positively towards the society and environment. Initially confined to a small sector as an alternative, the notion of impact investing has grown in leaps and bounds and is expected to grow to $300 billion or more by 2020, according to the Global Steering Group on Impact Investing.

Although a fraction of the total private equity assets are under management, which were estimated at about $2.5 trillion in 2016, an increasing number of investors, businesses, bankers, entrepreneurs, philanthropists, not-for-profits, and Governments are seeking for a double and triple bottom line in their returns and at the same time improving environment and lives of millions.

Traditionally, social enterprises survived only through the largesse of Government subsidies, charitable foundations, and a handful of high-net-worth individuals, who made donations and accepted lower financial returns on their investments in social projects. Although some social enterprises can earn profit by providing goods and services to customers willing to pay a premium for a socially beneficial product like green energy or organic food, their access to modern sources of funding, like financial markets, is limited as the scale of their profits are not big enough to help them access capital markets.

They do not have the wherewithal to engage in fund raising activities and this creates a financial-social return gap where the social value of providing poor people with affordable health care, basic foodstuffs, or safe cleaning products is enormous, but the cost of private funding often outweighs monetary return and here comes the role and importance of impact investing.

Impact investing is a unique combination of capitalism and socialism; financial engineering and social innovation where mainstream capital is chasing worthy, socially responsible ventures the world over in areas like health, water management, resource efficiency, safety, clean energy and education. The Global Impact Investing Network (GIIN) defines impact investing as investments made into companies, organisations, and funds with the intention of generating social and environmental impact alongside a financial return.

Fairly a new concept, impact investing emerged in 2007 out of global discussions on how to mobilise more capital to tackle societal problems. There are several reasons for the tremendous growth of impact investing worldwide. First, the scale of social and environmental problems facing the world today is beyond the scope of any Government budget and more capital needs to be directed toward tackling social and environmental problems. Second, there is a sea change in the attitude of investors and they are increasingly interested in not encouraging socially and environmentally detrimental businesses and industries.

A coupe of years back, Standford University made headlines with its decision to divest its huge endowment fund worth $18.7 billion away from 100 publicly listed coal companies. Another example is Australian-based fund, Future Super, that divested fossil fuels and redirected its investments into renewables sources instead. Similar steps are being taken around the world to contribute to changing public opinion and encouraging investments in firms and organisations that are ‘doing good’. Third, new corporate forms and business models have suitably demonstrated that it is increasingly possible and also highly profitable to aim for social and/or environmental gains with sustainable benefits along with financial return.

Globally, impact investing is growing at a high rate of over 29 per cent per annum. On the demand side, with a natural ability to provide investment opportunities, to put capital to work for social impact and financial returns, emerging markets have become hotbeds for impact investing in areas like food and agriculture, education, energy and healthcare. In fact, 45 per cent of the global impact investing activities are directed to emerging markets with CAGR of 14 per cent in impact capital deployment, an internal rate of return of 11 per cent with more than 80 million beneficiaries. In East Africa’s Rwanda, 65 per cent of non-Development Finance Institution (DFI) capital has been put into agriculture and the Rwandan Government plans to spend five billion dollars to increase electrification from the present 20 per cent  to 70 per cent by the end of this year.

In neighbouring Kenya, nearly 40 per cent of impact investments are made in the agriculture and financial services sectors. In Nigeria, private investors are collaborating with DFIs to invest in agriculture. In Southeast Asia, the Government of Philippines, with the help of venture funding, has developed an initiative to respond to natural disasters.

Back home, India has emerged as one of the biggest markets for impact investing. Between 2010 and 2016, India attracted over 50 active impact investors, who, along with mainstream investors, poured in more than $5.2 billion out of which, about $1.1 billion was invested in 2016 alone. The immense interest in India is natural, as although, it is one of the fast growing economies in the world with its gross domestic product expanding to $2.1 trillion and the official poverty ratio declining considerably from 45 per cent of the population in 2012 to 12.4 per cent in 2015, according to a World Bank report, it still accounts for the largest population in the world below international poverty line.

India is at a very interesting crossroads as a large part of the population remains underserved but at the same time, its appetite for connectivity through mobile technology is voracious. According to a McKinsey report, 500 million people in India lack secondary education or skills training, 300 million people lack electricity, and 120 million rural households are still unbanked. However, at the time, 70 per cent of the population now has access to mobile connection and smartphone adoption is expected increase 400 per cent over the next five years. This juxtaposition provides a huge opportunity for impact investors in India.

India can boast of several examples of mainstream capital being invested in companies which were not considered conducive by regular investors. Rise fund, co-founded by U2 lead singer and activist Bono, invested $50 million in Hyderabad-based Dodla Dairy, which now processes 40,000 litres of milk and milk products daily, sourcing from more than 10,000 farmers directly, introducing an organised way of doing business to them and in the process improving their lives tremendously, in addition to being profitable. There are several other examples in the areas of information technology, education and healthcare.

Impact investing is a financial innovation that has unlocked funding for social entrepreneurs. It has clearly shown that business risk and return can be optimized by measuring social and environmental outcomes and how private capital can help Governments around the world by bringing scale and speed in addressing important social challenges in fields of education, health, poverty and environment, that philanthropy alone cannot match. To provide a stimulus to this trend, the Government needs to take steps to provide a conducive ecosystem that can help the free flow of

private capital with a possibility to earn competitive market returns while contributing to improvements in the lives of millions of people as well as the planet. 

(The writer is Assistant Professor, Amity University)