This article is a shorter version of the publication Impact Investing is Cool, which can be accessed here. However, there are a few additions to this report including specific India focused examples.
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, this is still less than 1% of global capital markets with asset managers dominating 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. India Impact 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.
Impact Investment Exchange (IIX) launched in 2013, in Singapore serves as a social stock for impact investors investing in Asia.
“Aavishkaar Venture Fund, a leading impact investment manager in India, has a $94M India focused 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 $300M assets under management”.
“Mera doctor offers affordable primary healthcare service through licensed doctors, including access through mobile-based application impacting lives of 278,685 people. Aavishkaar invested in Mera doctor in 2011.”
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. The emergence of a private sector capital, primarily through philanthropy around the world, is proving to be a panacea for addressing social issues long ignored or neglected by governments. Private capital helps in correcting market failure at the bottom of the pyramid by promoting equity in social entrepreneurship through an assortment of intermediaries, development finance institutions, foundations, and impact asset managers.
“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.”
“Success of impact investing in India rests a lot on the tremendous growth in microfinance in India, which posted a 38% growth last year. Unitus Ventures recently invested in Utter, an AI-based multilingual mobile education platform which uses chatbots and tutors to teach blue collar workers English and work-related skills. 78% of the workforce in India is blue collared and Utter addresses the problem of educating low income low skilled workforce in a cost-efficient manner.”
Blending the Impact
One of the most innovative ways of attracting private capital in impact investing is through Blended Finance. Blended Finance is not a panacea for the global development crisis but works as a creative way to pool in commercial capital to aid risk-adjusted return for development projects.
OECD defines blended Finance as the strategic use of development finance for the mobilization of additional funding for sustainable development in developing countries. The new definition is a defining change in the scope of blended Finance from its work as various financial structuring instruments to its strategic use as a form of finance to eradicate social inequality. The means to attract additional capital for development through governments, foundations, development finance institutions through concessional (soft loans with lower interest rates and longer repayment duration) or non-concessional resources or public or private relationship gives a defining new policy perspective to blended finance. Pic Source: OECD Library
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.”
“India stood third among middle- and high-income countries between 2012 and 2014 attracting $1.28 B of blended capital.” OECD
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 nonconcessional 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: Convergence Finance
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.
I end this article in my signature creative style with a fantastic song by Enya.