- Author: Mr. Rana Kapoor, MD & CEO – YES BANK, Chairman – YES Global Institute
In this era of creating social and environmental impact, the traditional model of philanthropy is undergoing a paradigm shift. It does not end with just giving money and goods; rather, it is an endeavour to make an impact on the lives of families and communities.
So, what is impact investing? The genesis of impact investing is the realisation that given the scale and complexity of societal problems, the traditional method of providing grants and aid may not yield the desired impact. There is a need to achieve greater scale with the same resource base.
With a focus on unlocking the entrepreneurial dynamism targeted at specific social needs, impact investing can help generate specific societal or environmental impact in addition to financial returns. It should be seen as a tool to direct large-scale private capital to accelerate social and environmental impact. For this, impact investment needs to be seen as an alternate asset class in itself.
According to a recent study, globally the sector is estimated to see investments within the range of $400 billion and $1 trillion (about ₹24,00,000crore to ₹60,00,000 crore) over the next decade. The profit potential estimated for the same period is about $183 billion to $667 billion. Comparing this with socially responsible investing (SRI), a similar concept, will help understand these numbers better. According to the Forum for Sustainable and Responsible Investment, the total US-domiciled assets under management using SRI strategies expanded from $3.74 trillion at the start of 2012 to $6.57 trillion at the start of 2014, an increase of 76 per cent, suggesting that avenues for social good along with financial return as an investment strategy is a large market waiting to be unleashed.
In India, impact investing has been gaining steady momentum with participation from various notable investors like VinodKhosla, RomeshWadhwani and Bill Gates. There have been investments of over $1.6 billion in over 220 enterprises, with more than half in the financial inclusion sector.
Investors can be classified in two categories: Financial First and Impact First. The strategies of Financial First investors revolve around risk-adjusted return comparable to market returns by selecting investments with a positive impact. Impact First investors focus on social good and accept a lower financial return, or higher risk, for a higher impact return. They would act as complementary forces for coalescing capital, talent and societal benefit.
An old system
The traditional either/or hypothesis of choosing between maximising risk-adjusted return or undertaking philanthropy can be rejected in favour of impact investing, which ideally provides the optimal balance. The approach leads to a double bottom line, wherein the organisation achieves impact along with financial returns.
Impact funds encourage traditional non-profit organisations to reconfigure their grant-driven models to fit into the impact investment ambit. In fact, the recent BNP Paribas Individual Philanthropy Index 2015 revealed that 52 per cent of global philanthropists identified impact investment as the top way to contribute to society.
In India, the ecosystem for impact investing existed even during more Gandhian times, enshrined in the principles of economic self-sufficiency, and later with success stories like Amul and LijjatPapad, examples of PPP leading to financial security and livelihood provision to millions. Amul is now one of the largest FMCG companies in India with over 700,000 retailers, 5,000 wholesales dealers and a turnover of $3.2 billion in 2013. This ecosystem in India along with a spirit of entrepreneurship and huge demonstrable demand can act as a catalytic factor in garnering funds in this asset class.
The challenges are similar to the once struggling venture capital sector. It may, therefore, be prudent that some form of initial infusion from the state be used to create a platform to rope in further private capital in the impact investment space.