Nishant Malhotra Founder of Middle Road OPC Pvt Ltd & The middle Road platform on the evolving Sustainable Finance sector

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What is Impact Investing: The Rise of Patient Capital

Patience is not the most iconic song of Gun N Roses, yet it completes the rock band in its entirety and range of rock music. Patience is one of the sublime virtues among humans, combined with capital takes the form of Patient Capital. Patient Capital termed coined by Jacqueline Novogratzfounder and CEO of marquee impact investment firm, Acumen, refers to impact investing or financing for social and/or environmental good. These investments are long term investments and take time to recover the capital. Impact Investing is a key enabler for social change and impact and in the next decade will become a potent tool in the development sector.  

What is Impact Investing? 

The Global Impact Investing Network, the foremost body, championing impact investment globally defines impact investment as those made to generate positive, measurable social and environmental impact alongside a financial return. The key aspect of impact investment viz a viz other investments is its prime intention to create a positive social or environmental impact. Impact Investing investment philosophy ranges from market driven risk adjusted return to concessional finance in terms of recuperating capital. Although majority of the returns both globally and in India are above average, going forward the industry will average out fewer spectacular returns.

Graph GIIN survey, Sample n=266, 66% respondents sought risk adjusted, market rate returns, 19% below market rate, closer to market rate  and 15% capital preservation

Impact Investing rise is not only to correct market failures in addressing the most pressing social, environmental and governance problems but to incorporate an evidence-based mechanism for measuring accountability into giving. Over the years, as philanthropy evolved from charitable giving from foundations and philanthropist to development financial corporations, multilateral banks and impact focused asset managers, an impact evaluation criteria started to emerge. A rise in corporate social responsibility and awareness to social issues especially with emergence of technology and millennial’s brought in an increased level of responsibility among civic societies. This rise in awareness backed by a rise in socially responsible investing led to incorporation of impact investment thesis within the corporate framework.

SRI which became mainstream in the 1980s has been an exponential growth of assets under management from $1T in 1995 to $6.5T in 2014. 

 

Pic Source: Goodreads.com

Rise of a New Era: Battle of Seattle, Alter-Globalization, Naomi Klein and No Logo

Globalization works in mysterious ways. Immigration esp. in the US from the early 1980s brought in more tolerance and awakening among diverse sect of actors within civic societies. The 1990’s MTV inspired a generation of teens through music. Music brought in more commonality than envisioned by communities. Music became an invisible spread in uniting diverse people for shared purposes. One of the major transformations within the society resulted in a rise in empathy towards social causes affected by businesses. The collective fusion culminated in most significant alter-globalization protests against WTO Ministerial Conference in Seattle in 1999. Alter globalization did not oppose positive benefits of globalization but rather the exploitation of societies through bad business practices. Naomi Klein’s book No Logo, an international bestseller highlighted the plight of workers in sweatshops leading to a rise in activism for the suffering of employees, especially in less developed economies. Seattle event marked a turning point in tolerance towards unethical practices epitomizing adverse side effects of free wheeling capitalism. As Americans rose in protests forcing major corporation to relook at their corporate strategies, an invisible market driven hand moved in socially responsible investing giving rise to impact investing which over the next decade became mainstream.

Globalization brought in increased global linkages affecting supply chains across multinationals. From cheap labour to commodities, multinationals especially working in Africa, Latin America and Asia soon became susceptible to price fluctuations in commodities. Commodities especially in Africa became ingredients of final products increasing necessity of hedging against extreme climate changes resulting in weather insurance products in Africa. By 2000, the first wave of millennial’s set out globally backed by internet and technology bringing down curtains across many countries. Armed with information, affluence and empathy, millennial’s built and sustained the momentum kick-started by a few visionary Generation X social change agents. Global imbalances, globalization and its discontents followed by a wave of accounting scandals example Enron brought (ESG) environmental, social and governance issues within the gamut of corporate social responsibility and investment decision making. To add up, the private sector further geared up to the potential viable business at the bottom of the pyramid bolstered by Prof C K Prahalad ground-breaking theory. Impact Investing took myriad pathways of looking at investment returns and funding depending of type of actors and their mandates within the Impact Investment Ecosystem.

Actors within the Impact Sector

Social enterprises, multilateral development banks including development financial institutions, bilateral aid agencies, impact investors, foundations & charitable institutions, nonprofits, philanthropists, angel investors, religious institutions, policy think tanks, civic societies, activists, public and government, are actors within the development ecosystem. For an in-depth summary read here.

MDBs further form the most vital component of fostering public private partnerships, a key partnership to attract $5-7T worth of capital in meeting SDGs target by 2030. MDBs work along with other major institutional impact actors including foundations, DFIs, impact investors for furthering development work both in private & public sector. DFIs are government backed institutions formed either as MDBs like IFC or bilateral aid agencies like USAID and DFID.

These institutions focus around the SDGs in low and developing economies. Impact investors example Accion and Acumen are asset managers solely focused towards investing in social enterprises. Foundations example Bill and Melinda Gates and Rockefeller form a key role especially in tying up concessional funding for boosting private capital. Other players are banks, religious institutions and high net worth individuals.

As sustainable finance became more diverse and mainstream, an increase of private sector resulted in a rise in sophistication of instruments within the development ecosystem. Sustainable Bonds example, Green, Sustainability and Social Bond are increasingly becoming ubiquitous financial instruments to fund projects in the development sector or social enterprises addressing sustainable themes. Blended finance, an improvisation from the private sector in the social industry and pay for success are other forms of capital raising mechanisms increasingly being deployed.

Impact Evaluation

Finally, to measure the social and environmental impact, impact investing set standards for measuring social impact. Impact reporting and Investment Standards (IRIS), managed by GIIN set out performance standard guidelines to measure and record outcomes for impact investing. Impact Evaluation carried out through Social Return on Investment, a matrix involving multiple stakeholders to define the scope of analysis, identify key performance indicators, calculate monetary values and SROI ratio (impacts/inputs) and manage values through making systems which have the ability to capture the value created or destroyed.1  

Impact Evaluation can range from merely computing the percentage of students passing each year for measuring success of intervention in schools to conducting complex random control trials which take years to provide conclusive evidence of causality of interventions. Another tool to calculate social good or adverse social effects is valuing positive or negative externalities related to the service/product. Impact Investing valued at $500B in 2018 by GIIN is still less than 1 per cent of Global Debt Markets which stands at $100T. However, seen in entirely, especially through leveraging as part of blended finance, it is fast rising as a vital financial tool in marching towards nearly improbable but divinely achievable 2030 Development Agenda.

  1. What is relationship between SROI and IRIS
  2. GIIN

References

Glossary of Key concepts and terms: World Bnak Group Unlocking Investment and Finance in EMDEs