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Impact Investing: Global and Indian Perspective


You can also read the article here. Impact Investing is fast becoming a rising phenomenon of delivering social good globally and in India. The term “Impact Investing” was coined in 2007 by the Rockefeller Foundation to distinguish investments for generating both social/environmental impact and financial return. In the recent years, with the rise of Generation X in leadership positions and millennial entrepreneurs primarily in private and public companies along with a sustained thrust by UN through its ambitious collection of 17 SDGs has boosted awareness on social and environmental causes. The set of SDGs forms the central thesis of social equality and economic betterment today and includes removing extreme poverty, driving economic growth, quality education, healthcare, and sanitation for all along with increased use of alternative energy by 2030.  This is republished from Publication page.

IFC estimates a transfer of $30T in wealth to Gen X and Millennials over the next three decades in North America alone. Gen X, “the kick-ass generation” which grew up on MTV; rock, grunge and metal music and millennials over the years have shown an increasing penchant for driving positive social/environmental change through social innovation and social entrepreneurship at the bottom of the pyramid.

To catalyze sustainable social businesses and address the increasing funding gap in the social ecosystem, major multilateral, and development financial institutions shared financial innovation and best business practices in the public sector. Further, civic societies, broad-based activism through social groups, shareholders, and corporates backed by collective political goodwill drove asset managers, foundations, and philanthropists to promote evidence supported solutions in social impact. New ways emerged in tapping capital markets through Corporate Responsibility, Social Bonds, and Blended Finance for funding development projects in the social and environmental sector. Pay for success bonds refreshed partnerships between public and private sector through financial incentives for achieving measurable interventions and social goals.

The Global Steering Group for Impact Investment (GSG) formed in 2015, set a platform for bringing global leaders from the world of finance, philanthropy, and business to drive impact investing and social entrepreneurship. Twenty-three countries and EU are members of GSG highlights the convergence of blending measurable social impact with financial return. The development of Social Impact Investment Framework by OECD and the recent establishment of Operating Principles of Impact Management by IFC and other institution is a positive step in the right direction for promoting development in impact space. However, still, it’s a long way forward. Majority of the investors still expect market-driven returns (evidence suggests gains in line with market returns), the precursor of increase in blended finance deals in the development sector. This mindset needs to change for social impact to become a mainstream theme in investing. It is pertinent to note that impact investing is less than 1% of global capital and far from a panacea in the development sector. India leads in impact investing in South Asia and is a major force globally.

 Global Landscape of Impact Investment

The Global Impact Investing Network (GIIN) defines impact investing as investments made into companies, organizations, and funds to generate social and environmental impact alongside a financial return. Impact Capital has a dual goal between social (priority) and financial gain. Impact investing or impact capital’s mission is to create a positive social impact related to social or environmental cause along with a financial return. The Global Impact Investing Network (GIIN) estimates impact investing assets under management to be $502B with 1340 organizations managing capital.

However, about $269T of financial assets are held by institutions and households across the globe, suggesting the untapped opportunity in impact investing.1 The private market demand for its investment is estimated to be $5T, which is predominantly alternate investments incl. private debt and equity, real assets, infrastructure, and natural assets and approx. $21T in public markets. Public markets here refer to capital markets incl. social bonds.1 The mentioned figures don’t include funding by Development Financial Institutions (DFI).

Asset managers dominate impact investing with a market share of 51% viz a viz development finance institutions (27%). Nevertheless, Impact Investing is fast becoming an essential and potent tool for bridging the yearly $2.5tr gap to meet the UN Sustainable Development Goals target by 2030.

The recent GIIN Annual Impact Investor Survey included 266 respondents with $239B under investible surplus; a two-thirds of respondents are asset managers. Interestingly majority of the impact investors (more than 60%) have aligned their investments to UN Sustainable Development Goals with decent work and economic growth (73%), no poverty (61%), reduced inequalities (59%), and good health and well-being (58%) SDGs as the top four. Further, although a majority still target market-based return, about 34% of the respondents aim closer to market rate and capital preservation. Energy (15%), microfinance (13%), and other financial services (11%) were the dominant themes. Impact investors are planning an increase of 13% in investments to $37B over $33B in 2019 with a mean deal size of $146M.

The primary focus of the impact investors is a combination of social and environmental causes followed by social causes, with only 7% of the survey citing the environment as their core focus.  Primarily the rise of Gen X, Millennials, as the younger generation of leaders backed by a global thrust to implement SDGs, boosted capital in social impact. The impact has been measurable in South Asia, particularly in India and also globally. 

Impact Investing in India

Impact Investing in IndiaImpact investing in India is the largest in South Asia and second in the world according to a report published in May 2016, titled A decade of impact investing in India. The ecosystem in India and Asia is fast developing in the impact capital space. According to a report by McKinsey, between 2010 to 2015, India attracted $5.2B in impact investing. The rise in impact investing is to address market failures by sustained entrepreneurship at the bottom of the pyramid. The rapid economic and industrial growth in India has drastically reduced poverty, but still, a large chunk remains in extreme poverty.

Impact Investments not only generated a median gross IRR of 10% but also touched the lives of 60 to 80 M people in India. McKinsey estimates the top quartile of impact investors generated a return of 34% withholding period of exits at an average of 5 years, far less than the average holding periods in venture deals.

Pic Source: IIC Members survey, VCCEdge, McKinsey analysis

The data highlights the rise of maturity within the social entrepreneurship in India, especially in energy and microfinance sector. The average deal size increased to $17.6M in 2016 from that of $7.6M in 2010 with a rise in deals in education, healthcare, and agriculture sector.

“Impact Investment Exchange (IIX) launched in 2013, in Singapore serves as a social stock exchange for impact investors investing in Asia.”

Share of investment value by type of investorThe enablers in catalyzing social entrepreneurship in India are not limited to impact investors. Private equity and venture capitalists play a defining role in India. The increased participation by PE/VC signifies the ease of scalability among the companies where price works as the most significant differentiator keeping other factors constant.

<“Aavishkaar Venture Fund, a leading impact investment manager in India, has a $94mn India focussed fund to provide capital to entrepreneurs serving rural India. The fund has private investors like CISCO and development funders IFC, KWF, CDC among others to invigorate health, energy and education sectors among the low-income consumer base in India. Aavishkaar has made 61 investments in four countries and eight sectors with $300 mn assets under management”.

The McKinsey report highlights the growing holistic vision of General Partners (GP) in aligning sustainable development goals in their mission as compared to Limited Partners. This is one of the most refreshing and positive indicators of future growth in funding social enterprises in India.

Key Insights in Impact Investing in India

Holding Periods Vs. Returns: no clear relationship; McKinsey Report

The McKinsey report regressed return (IRR) on the holding period of impact investors with exciting analysis. The regression analysis of regressing IRR (return as the dependent variable) with holding period as the independent variable does not show any clear relation. The R2=0.0439 signifies that the holding period only explains 4.39% of the return. The analysis further implies that the regression has high Omitted Variable Bias, i.e., many regressors (independent variables), which better describe the performance of companies are not included in the regression analysis.

The two conditions of omitted variable bias are as follows


  • The independent variable must be a determinant of the dependent variable.
  • The independent variable correlated with other independent variables (correlation cannot be zero and not be equal to one).

Alternative Investments like Angel Investing/Venture/PE have a higher risk and nonnormal returns viz equities and hence IRR as a measure of performance. Investing in unlisted companies based on the business model is far riskier than companies which have evolved to a measurable size with predictable cash flows. Social Enterprises are considered riskier investment compared to other enterprises considering they predominantly cater to less privileged people in the society. Length of holding period is critical to recuperate investment, yet it plays no role as a significant factor of return on investment is a welcome insight about evolving social sector in India.

A few observations. First, the scalability of ventures within the social ecosystem is much higher than expected due to the sheer size of the population. Second, Indian entrepreneurs have been effectively leveraged technology to cut costs, improve efficiency without impacting the quality of either service or product. Finally, it would be interesting to check factors like the role of technology, importance, and stage of seed funding, guidance in capacity building and scaling businesses, etc. as independent factors for regressing returns.

Impact Investment, and Social Entrepreneurship

Both Impact Investing and Social Entrepreneurship play a crucial role within the social impact ecosystem. One of the most enterprising ways to invest capital is to promote social entrepreneurship and sustainable businesses which focus on alleviating poverty. Social Entrepreneurship has been one of the most impactful measures of deploying impact capital for social good as well as for measuring accountability. This form of impact capital helps in funding projects/start-ups, providing strategic and logistic support as well as management competency for a successful transition towards a sustainable business. This not only helps to address social issues but also to generate jobs and act as ancillary support for multinational corporations.

Social, Environmental and Economic NeedsPrivate capital helps in correcting market failure at the bottom of the pyramid by promoting equity in social entrepreneurship through an assortment of intermediaries, development framework as it forms an integral part of the evolving development sector.

OECD’s Social Impact Investment Market Framework defines the various actors within the social ecosystem addressing a social or environmental need. The framework highlights the growing importance of impact investors like family offices, HNWI, asset managers including institutional investors to form an integral part of funding the social entrepreneurship ecosystem along with government, foundations and financial institutions.

Role of Technology: Impacting Social Enterprises

Utter addresses the problem of educating low income low skilled workforce in a cost-efficient manner i.e. unorganised and blue collared segment. Both these segments account for 78% of the workforce in India. Utter leveraged technology using chatbots to educate its target market segment economically.

As of 2017 number of smartphone users in India stood at 468M growing at CAGR of 12. 9%. According to Statistica in 2018, about 36% of all mobile phone users in India used smartphones, less than the global average of 50% but growing steadily. With an average speed of 6.5mpbs, even low-income people can access applications like a chatbot. Utter uses an AI-based multilingual mobile education platform chatbot and tutors to provide skill development in 109 local languages at plans as low as less than a dollar. The company got seed funding from Unitus Seed Fund and some angel investors and has 500,000 institutional and about 100,000 retail users. Utter case is a shining example of leveraging social innovation through emerging disrupting technologies and promoting positive structural change for low income/less privileged people of the society.

Arvind Eyecare is one of the most visible success stories in India. Acumen Fund, a global impact investment fund, supported Arvind Eyecare to build a telemedicine network for five hospitals to serve low-income patients in rural areas at a subsidized or no cost. Today Arvind Eyecare has conducted more than 4M eye operations a year with more than 50% at low or no cost.”

Forward-looking policies to enable start-up ecosystem through accelerators & incubators and the emergence of impact accelerators and venture philanthropic funds have played a key role in invigorating the social landscape in India.

Dasra, a leading venture philanthropic fund in India, specializes in scaling businesses of nonprofits in India, among other services. It advises corporate, and foundation on giving while consults nonprofits and social enterprises on scaling their businesses. It has kick-started a culture of giving in India through its flagship Philanthropic week building collaboration among corporates, foundations, and philanthropists in India. Social Alpha, a Tata Trust enterprise and a joint venture with Government of India, is spurning social entrepreneurship through its periodic competitions in selected development sectors for incubating promising start-ups. “

Green and Social Bonds, Social Impact Bonds and Blended Finance

Green and Social Bonds, Social Impact Bonds and Blended FinanceTo attract capital, impact investors have tapped capital markets through social bonds (green/ blue bonds etc.), promoted public-private partnerships through pay for success bonds/development impact bonds and introduced private sector finance innovation through Blended Finance. Pic Source: Danske Bank

Green and Social Bonds are debt instruments issued for social and environmental purposes. The largest DFI by assets the European Investment Bank and the World Bank issued the first green bond.

Label diversificationThe total outstanding issuance of these bonds is $456B, less than 1% of the global debt market, which stands at $100T. Globally governments are the largest issuers of these bonds. India is the second largest emerging market green bond market with a total $7.2B issuance till date according to climate bonds initiative. BSE, India premier exchange trading platform along with Nifty, recently launched an exclusive trading platform for green bonds, GSM Green. The launch included a listing of $500M green bonds from three subsidiaries of Adani Green Energy Limited. In recent years, the issuance of green bonds in India has been phenomenal keeping in step with low carbon usage policies under the smart cities project.3                                                                                             Source: Climate Bonds Initiative Total Global Bond Issuance

India’s bond market is still in the nascent stage as compared to developed countries. Pune Municipal Corporation, recently raised $29M towards better water management. But such cases are far, and few considering limited liquidity in municipal bond markets in India.

Development Impact BondsSocial Impact Bonds “Pay for Success Model” pioneered by Social Finance UK still are not a mainstream mode of financing social projects. The pay for success model works on a collaborative Public-Private Partnership to direct government funds towards social projects with measurable outcomes. In social impact bonds, outcome payer is the government and are like development impact bonds (deployed in emerging markets). To measure intervention, a third-party impact evaluation specialist is used. India implemented the world’s first operational and successful development impact bond through Educate Girls project where UBS Optimus Foundation provided the capital and Children’s Investment Fund Foundation (CIFF) is the outcome payer. The project has achieved more than 100% of its stated objectives in driving inclusive and learning targets. Social Impact Bond suffers from market efficiencies concerning high legal costs for setting up the collaborative model. (Service provider, outcome payer, evaluator, investor etc.) Pic Source:

Blended Finance

Blended Finance works in offering private investors a first loss guarantee, mezzanine or senior debt to cushion against potential losses with actors from development space, i.e., donors, multilateral development banks and development finance institutions taking equity first loss. The capital is primarily deployed for infrastructure and climate change, with Africa attracting 30% of total contributions followed by Asia (15%). Various kinds of instruments are used to mobilize capital like Shares in CIVs, Guarantees, Syndicate Loans, Credit Lines, and direct investment in companies.

                            “India uses blended finance in promoting projects in renewable space. Further, India has ambitious plans to generate 40% of electricity from renewables by 2030. To meet its demand, India will need $189B as additional investment by 2022 and $292B by 2030. US India Catalytic Solar Finance Facility uses the catalytic first loss of capital for capital infusion, currency hedging, and payment security mechanism.”

India Innovation Lab provides long term debt with concessional financing to rooftop solar PV developers. Sustainable Energy Bonds, Solar Investment Trusts are some of the impact investment blended mechanisms used to fund green infrastructure projects in India.”2

“India stood third among middle- and high-income countries between 2012 and 2014, attracting $1.28B of blended capital.” 

Blended Finance

One of the critical strategic use of blended capital is to enhance funds in the development sector, especially in low and middle-income countries. To attract capital from the private sector, especially institutional investors, the idea of catalytic first loss capital evolved.

Although mixed capital can include both concessional and non-concessional Finance, IFC deployed about $560M of concessional development funds between 2010 and 2016 to support more than 100 projects in 50 countries. The data signifies the skew towards concessional finance as part of blending. Pic source: All blended finance transactions till date in Asia; Convergence Finance

Types of Blending Instruments

Development Finance Providers take the first loss of capital through guarantees, grants, insurance working as different ways of blending capital for credit enhancement. Guarantees work in covering the first set of losses while Grants might include first loss guarantee or deployment of capital without any repayment over a fixed time. Grants also include money for technical assistance for completion of the project correctly to develop capacity and scale up the business model. While guarantees are the most widely used in blending capital especially in infrastructure projects, more instruments including pay for success (social and development bonds among others), securitization, hedging, and junior equity/ subordinate debt and collective investment vehicles are incorporated today.

OECD estimates, $81B blended finance invested in development space in four years, a puny amount compared to $200T in global capital markets. Rise of impact investments globally will help in structuring new sources of finance and boost blended finance as a form of capital source for addressing sustainable development goals. A lot will depend on how the rules and regulations support the emergence of innovation in development space backed by political goodwill.

The Road Ahead

Impact Investing is slowly but steadily transforming social ecosystem. IFC along with other major DFI and institutions are developing essential regularity guidelines defining impact investing. Below are few thoughtful recommendations which would catalyze impact sector going forward.

Escrow Account: In India, businesses must donate 2% of their profits to projects related to corporate social responsibility. This rule is based on specific parameters. This policy must be replicated globally. To drive accountability in execution and deployment of capital, its best to open an escrow account. A committee must independently manage this account. The committee must include leading practitioners from DFI and multilateral organizations, asset managers, foundations, philanthropists, businesses, academia, and the government. The funds must be utilized only for projects in the development sector with a well-developed regulatory framework detailing the projects funded. Updating funded projects real time through a website to inform the public fortifies transparency and accountability. A government-backed think tank must take the lead in coordinating and implementing the rule. In India, e.g., it would be Niti Aayog. Further, each country should contribute to an international fund for enforcing development projects mainly in low-income countries. The fund would implement critical projects aligned with key SDGs.  The contribution of the states could be proportionate to GDP, GDP per capita, etc.

Awareness: To promote awareness of SDGs; UN, DFI, government institutions, and global compact arms of the United Nations must closely coordinate with businesses and academia. Periodic seminars and dedicated national conventions should be conducted to highlight innovation and pioneering work in social impact and facilitate nonprofits, social entrepreneurs, individuals exemplary work in the social sector.  Further, all television channels globally should dedicate free advertising time esp. in prime time to commercials focusing on the social industry. The ads must promote how accountability is driving social impact to boost philanthropically among institutions and individuals.

Tax Incentives: Key tax incentives to impact asset managers and asset holders to balance subpar market returns in projects dedicated to addressing key SDG esp. removing extreme poverty, quality education, gender equality, etc.

Academia: Academia must play a pivotal role in building the structural impact investing and evaluation courses. Although globally, many universities and institutes esp. in the US have started teaching focussed thematic courses in the given space, yet there is a considerable room for improvisation. Oxford Impact Investing program is an excellent example of academia taking a decisive lead.

Debt Capital Markets: This a key sector from where capital can be raised, especially in developed economies. The global bond market is about $100T, and total issuance of social and green bonds have been less than 1% of the global bond market is a tell-tale sign of refreshing mobilization of capital. Structured blended funds utilizing mezzanine funding and with equity kickers (prolonged gestation period) can be used to fund development projects.

India and China have used technology remarkably for enabling sustainable goals. Some of the work can be used in a few other emerging economies. A key element in allowing social entrepreneurship is scalability. To promote scalability thrust must be given to impact enablers who consult, advise, and build competencies at hugely subsidized rates.

In a nutshell, it’s cool to invest in asset managers targeting social impact as their primary objective. Association of coolness signifies empathy is going to be the killer attribute for making impact investment mainstream, especially with millennials. So, are you cool?

Sources Referred:
Making Blended Finance Work for the Sustainable Development Goals, Better Finance Better World,
Blended Finance— A Stepping Stone to Creating Markets

Blended Finance Giving Voice to the private sector

River of Dreams: Sprucing up the Front Porch of Downtown Memphis


Blended Finance Vol 1: Primer for Development Finance and Philanthropic Funders

Fig 1:

*Social Impact Investment: The Impact Imperative for Sustainable Development

Aavishkaar impact report 2018

1.Creating Impact: The Promise of Impact Investing

2.Blended finance in clean energy: experiences and opportunities


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