Impact Investment Landscape: An Introduction
Impact Investing has of late captured the attention of the world. The Global Steering Group (GSG) for Impact Investments estimates that the global market for impact investments will be $ 300 bn by 2020.
With an increasingly globalized and hyper-connected world, the problems facing humanity in every place of the world are known to all, and people with the ability and concern, have the means to put their resources to use to solve these problems. The millennial generation is also more concerned about creating impact than any other previous generation, which some academics relate to the topmost rung of the Maslow’s hierarchy of needs: self-actualization. The millennials, more than any previous generation, focus on this rung, and this too has brought the need to create a positive impact on the mainstream line of thought for both younger and older populations. The Sustainable Development Goals (SDGs) set by the United Nations General Assembly act as the guiding beacons for several organizations and individuals in their official as well as personal activities today. Impact investors also look to fulfilling these goals by leveraging the force of the market economy and for-profit investors.
However, many doubts persist about what impact investments really mean? How do they differ from philanthropy? Is it only for investors who are content with lower returns in place of the impact created? Lastly, how will this space develop and where does it fit into the larger worlds of both social impact and financial investors?
While there are several definitions of impact investments that differ slightly on technical details, we can think of them as investments that chase the double bottom line, instead of simply monetary profit. Thus, they are investments that seek both profit and impact. An easy way to visualize this may be an investment into a for-profit organization that has a social impact as part of its official goals. This differs from pure philanthropy, which seeks to create an impact without expecting any monetary return. Thus, impact investments may be thought of as supplements to government and philanthropy, in dealing with humanity’s challenges.
An interesting finding is that impact investments do not necessarily mean lower financial returns. McKinsey published that between 2010 and 2015, the average IRR (internal rate of return) of impact investment exits has been 10%, higher than the expected market rate of 7% during the period. In fact, the top third of deals generated an average IRR of 34%!
Several large global private equity funds are now starting their own impact investment arms or buying impact investment platforms. There is a large population of standalone impact investment funds. At the same time, the increasing interest of governments and social enterprises for this topic shows that impact investments are a bridge between the world of social development and high finance.
In India, the impact investments space is a rapidly growing field. In fact, India is playing a pioneering role in this space, with early pilots and adoption of the impact investments model. More than $ 5 bn of impact investments have taken place in the country from 2010 to 2016, as per McKinsey. The Impact Investors Council, an umbrella association of the impact investors in India, lists more than 30 active players in the field, which stellar names like Aavishkaar, Asha Impact, Acumen, Ankur Capital, Patamar Capital, Omnivore Partners, Michael & Susan Dell Foundation, among others.
The major focus areas of impact investments in India are financial inclusion, health and hunger, clean energy, education, gender equality, and sanitation. Several of these sectors have seen companies flourish and attain large scale impact, with support from impact investors.
The field, as it moves ahead, will surely develop more. Several questions are being discussed about the further development of the field. One of them is impact measurement. Several organizations and experts are trying to come up with credible measures for the impact generated and are trying to develop composite indices to measure both the financial returns and social impact. Proprietary indices have been developed by some experts, and further interest from stakeholders including the limited partners in the funds would probably drive adoption of such indices. Another topic is increasing the pool of investments by bringing in more traditional investors and sources of capital into the impact investment universe.
The rapid pace of growth in this field will bring more attention from the government, financial investors, and both for-profit and non-profit enterprises, which will, in turn, boost the emergence of what Amit Bhatia, CEO of GSG, calls the Capitalism 2.0: “a more human and conscientious global impact economy”.