The concept of impact investment is capturing the attention of investors. As per the recent report by the Global Impact Investing Network (GIIN), over 1,300 organisations manage $502 billion in impact investing assets globally. Let us make an attempt to understand the same and see how it can add value to your existing portfolio.
What is impact investing?
Impact investing directs capital to those firms that generate social or environmental benefits apart from profits. As an investor, you make investments with an intention to generate positive, measurable social and environmental impact alongside a financial return. For instance, investing in sectors such as sustainable agriculture, renewable energy, conservation, microfinance, and affordable and accessible basic services including housing, healthcare, and education would be clubbed under impact investing.
How it is different?
Impact investing differs from socially responsible investment, which is a well-defined framework for choosing investments based on environmental, social and governance criteria. In fact, impact investing has evolved out of socially responsible investment, to the broader investment community. The difference today is that impact investors are far more proactive in their intention for positive impact as opposed to merely avoiding the negative impacts. Similarly, it cannot be compared to other similar ideas such as conscious capitalism, sustainable investment, and ethical investment.
Social venture funds
According to a recent Brookings report, the impact investing sector in India attracted over $5.2 billion between 2010 and 2016, with over $1.1 billion invested in 2016 alone. In recent past, private capital has flowed into sectors such as microfinance, health services, education and other allied sectors. Major players such as Incube, Charioteer, Unitus Seed Fund Lok Capital, Aavishkaar Venture Management, Menterra Venture Advisors, Ankur Capital, Acumen Fund and Omidyar Network have been at the forefront in this.
Typically, social venture funds tend to be impact funds which predominantly invest in sustainable and innovative business models. The investment manager of such a fund is expected to recognise that there is a need to forecast social value, track and evaluate performance over time and assess investments made by such funds.
Social venture funds also tend to be aligned towards environmental, infrastructure and socially relevant sectors which would have an immediate impact in the geographies where they operate. They focus on investing in business models that work with the lower income group across financial inclusion, priority sector lending, healthcare, education, livelihood, etc. They also invest in early and growth stage investments in priority sector. With timely financial support, most of the investees manage to grow substantially and yield positive social and economic returns.
Based on the market scenario, an impact fund would typically focus to develop a diversified portfolio across the segments. Let us take the example of SME financing. India has a huge entrepreneurial class of people who run their business with no formal source of financing. There exists a great demand-supply gap which needs to be addressed. The opportunity in the SME financing segment with products such as asset financing, working
capital financing, venture debt, loan against mortgage, etc., is huge.
To conclude, 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 are also understanding the potential of this new form of investing.