By Shamika Ravi, Emily Gustafsson-Wright, Prerna Sharma and Izzy Bogglid-Jones
Achieving the ambitious sustainable development goals (SDGs) by 2030 will take an estimated $5 to $7 trillion per year, with a financing gap of $2.5 trillion in developing countries. In India alone, the outsize challenge has been translated into a financing gap of $565 billion.
While the country has seen huge progress across the social sectors, enormous challenges remain. For example, only slightly over half of all children enrolled in standard 5 can read at least a standard 2 level text, while just 21% of mothers receive full antenatal care.
Closing this gap requires action on several fronts; efficient and effective domestic resource mobilisation, outcome-focused donor efforts to ensure that money is spent well and harnessing private capital for good. In recent years, interest has grown globally amongst governments and markets to develop new investment approaches, such as impact investing or purpose-driven finance.
Impact investment refers to the provision of finance to organisations with explicit expectations of financial returns as well as measurable social outcomes.
According to a recent analysis by the Global Impact Investing Network (GIIN), over 1,300 organisations manage $502 billion in impact investing assets globally. The impact investing sector in India attracted over $5.2 billion between 2010 and 2016, with over $1.1 billion invested in 2016 alone.
With the emergence of impact investing as a new asset class in India, investors are not only providing capital and support to social enterprises but also growing to understand the potential of this new form of investing.
India has a thriving social enterprise ecosystem; many organisations, however, struggle to access the capital they need. In a survey of Indian social enterprises, 57% identified access to debt or equity as a barrier to growth and sustainability. And despite the developing ecosystem and potential of the impact investment space, the literature on impact investing in India is limited.
The number of impact investors in India, the sectors and areas they choose to invest in and the future of instruments remain unclear.
Within the broader spectrum of social investment models, approaches range from purely profit-driven investing without expectations of social impact to pure philanthropic grant-making by donors and foundations.
Corporate social responsibility (CSR), socially responsible investing (SRI) and a focus on environment, social and corporate governance (ESG) have also gained traction in the last decade in India and abroad. Globally, some of these trends have been driven by government-led advances in bringing analysis and rigour into public spending and social outcomes.
Impact investing differs from corporate social responsibility, environmental, social and governance or socially-responsible investing as it goes a step further to include only those investments that have clearly defined intentionality for achieving “measurable” impact, alongside financial returns.
Financial returns for impact investing range from simply preserving the principal amount to matching the principal amount to even exceeding mainstream market returns. Impact investors also focus on investing in social enterprises that do not just mitigate negative impacts but also generate net positive impacts.
Despite the promise, cumulative assets under impact investing remain marginal compared to the billions of dollars invested under CSR, ESG or SRI. The field is new and evolving fast in India, with approximately 30 firms in the market, a subset of which is registered with the Impact Investors Council (IIC) in India.
The impact investing market in India has mimicked the trends and challenges of the global impact investment industry. However, there are several peculiar aspects of the Indian market which make it interesting and critical to examine from a policy perspective.
Impact bonds refer to a specific form of outcome-based or payment-for-success contracting that often employs upfront impact investment capital. The impact bond model aims at improving development outcomes for specific groups or beneficiaries.
Impact bonds in financial terms do not qualify as bonds, since unlike bonds, impact bonds tie financial returns to the achievement of outcomes. Impact bonds have several potential advantages: when investment is tied to outcomes, rather than activities, service providers gain greater flexibility to adapt and improve their programs; governments have the potential to transfer the financial risk of a program to the private sector by only paying for a program when pre-agreed outcomes are achieved.
Such instruments may help promote a culture of data generation and use and performance management. Impact bonds in India remain at a nascent stage, with two contracted in education and one in healthcare.
We recommend impact investors move beyond “easy-finds” and push for innovations beyond tech-based solutions. And the acceptance of global best practices and the promotion of greater transparency in measurements, through coordination and facilitation by industry organisations, such as the Impact Investors Council and Quality Council of India (QCI). We recommend investments of time and energy on search processes and truly filling gaps in provision, by bringing innovations in products and solutions.
We also recommend the investigation of outcomes contracting at scale through the creation of an Outcomes Fund at a government or quasi-government level. Ultimately, a robust Indian impact investment market will depend on accurately identifying and improving hindering factors and constructing a strong ecosystem that fits its needs.
Source Brookings