3 Impact Investing: Zeitgeist of the Modern World

Impact Investing: Zeitgeist of the Modern World

By: Muskan Bajpai (National Institute of Bank Management, Pune)

Background:

As we are moving ahead in the field of technology, finance, and science, the consciousness of the people seems to have been germinating faster. Investing based on the ESG (Environmental, Social and Governance) metrics, in the field of finance is a branch of the bigger tree called Impact Investing. The Impact fund adds to the social benefit fund as well as the financial goals of a company. The intention behind making these investments is to generate positive, measurable, environmental and social impact along with the financial returns.

Current Scenario:

The post pandemic world is actively demanding solutions to problems that were rising eventually and have now come at our feet. Social innovators who can bring in disruptive innovations and who believe in the long-term vision of impact funding are direly needed. Due to the pandemic, our health and economic machinery were questioned and the pandemic also impacted the disadvantaged population even more severely. But the world became aware. The care towards the question of ‘What is my money going to do?’ increased. The answer was sitting right here all the time - Impact Investing. It would be naïve and irrational to believe that only the government & the philanthropic community will bring the change. It is a collective effort and even the private investors and venture capitalists, family groups etc. shall take a pledge to address the ESG problems around us and invest in what brings a change and increases the sustainable standard of living.

India: Still in Nascency

Currently, many insurance companies, venture capitalists, pension funds, traditional banks, foundations, and family offices are stepping in this impact investing pond. Globally, a gradual increase can be observed in the number of family offices and High Net Worth (HNI) individuals in the investor segment. The reason why family offices and individuals are growing so rapidly in this field is due to the less stringent regulations bounding them. But when it comes to India, an emerging hub for startups, there is a lot of potential for the HNIs to jump in on the wagon early and encourage long term intergenerational impact. Very few domestic investors are aware of this amalgamation of social benefit with financial return which is why we see almost 80-85% of impact investing in India from overseas. India is on a path to getting over 6 lakh HNIs by 2025, but till now only a few notable HNIs like Kris Gopalakrishnan, Ravi Venkatesan, Anil Rai Gupta, Ronnie Screwvala, Vikram Gandhi etc., are actively investing domestically. Impact investing in India is being spearheaded by firms such as Omidyar Network, Elevar Equity, Unitus Ventures Aavishkaar Group, Acumen and etc. Despite the culture of impact investing being new, the movement is gradually gaining momentum. The aggregate assets in impact investments between 2010 and 2016 in India were US$5.2 billion, of which US$1.1 billion was invested in 2016 alone.

Even though, the overall impact investments in 2020 fell by 25 percent as opposed to 2019, the sector saw a 16 percent increase in seed stage investment funding [2]. Investors were inclined to back early-stage tech enterprises in the livelihoods, agriculture and healthcare sectors. The year-on-year decrement was actually led by the fall in late-stage investments in healthcare and financial access enterprises.

Investments in agriculture almost remained the same during the year,while education saw a record level of growth in investments. Healthcare sector could manage to obtain only in seed-stage investments and technology for development displayed huge promise in the SME space.

Returns vs Goodwill:

“Is the returns vs goodwill tradeoff effective? Is it really the case?” As the societal demand for ethical governance and climate responsible behavior by the corporates is rapidly on the rise, impact investing seems to have abundant opportunities, both in the developed and the developing world. The cynical notion of 'goodwill comes at the price of returns' is being busted by many new-age impact investing firms.

As per Abhilash Mudaliar, GIIN Research Director, impact investments can achieve the market rates, by making proper allocation and choosing the right fund manager and he also believes that

increased transparency of the data can enhance the performance both ways. As per the GIIN report on the ‘Evidence on the financial performance of Impact Investments’ which reviewed a dozen studies, evaluated investments in three asset classes – private equity, private debt and real estate assets. They all showed that if the goal is to achieve the market rate of return then it is very much possible depending on the selection of the fund manager and the type of asset class as some classes can be riskier than other. Most of the times the median performance is also at par with the market performance.

There can be situations where the investment is not made to seek market rates but targets an impact specifically. Impact investing has been profitable when the intention was to generate profits while doing something for the society. One such example is ‘Setu’ which is a three-year-old startup wanting to bring about a change in the financial landscape. The Indian Government has been responsible for significant developments in the domestic digital payments structure, and this is what Setu is targeting. Last year, it raised $15 Million through various international and national impact investors for bringing in ‘Sachet sized’ financial products to India. It has brought in India’s first Whatsapp bill collecting service and also provided easy linkages to FastTag, BillPayments and FD Booking etc. for the customers who found the preexisting technologies complicated.

Turns out that a right balance between the impact objective, impact measurement & management practice and financial returns is what needs to be established to get the best out of the Return vs Goodwill question.

The Gen-Z Revolution:

Gen-Z, also known as the generation Z i.e. humans born between the early 1990s and early 2010s have been at the forefront of a global political revolution. The emergence of famous child activists such as Greta Thunberg has been a testimony to the 'Zoomer' generations resolve to hold the previous generations accountable for their misdeeds.

Climate change resulting due to globally unrestricted carbon emissions, promotion, and encouragement for the use of fossil fuels coupled with crony capitalism to save the 'planet harming industries' are some of the issues taken by this generation fiercely. Movements like the Extinction Rebellion which is an international non-partisan movement for championing the motto of climate accountability are gradually shaping up the priorities of the future.

On the social and governmental fronts, Gen-Z is asking for more accountability, especially after the Global Financial Crisis. The distrust in the traditional systems has given birth to the revolutionary idea of decentralized finance and the subsequent narrative against the notorious shareholder worshipping principle of modern-day corporates.

The Way Forward:

Impact Investing brings in a completely radical but rational approach to investing. As humanity moves ahead in the 21st Century, it can be fairly predicted that ecological and social issues will be the most critical ones. In order to solve these issues, the new age firms as well as the legacy firms will have to adopt to practices that are innovative and sustainable. This shift in the way business is done, will eventually lead to creation of a sustainable investment mindset; And hopefully, the upcoming generations will carry on this mindset in the time to come!

References:

1. Impact investments in India - Observer Research Foundation https://www.orfonline.org/expert-speak/impact-investments-in-india-66617/

2. India impact investments trends in 2020 - https://idronline.org/what-were-the-impactinvestment-trends-in-india-in-2020/

3. GIIN report https://thegiin.org/assets/2017_GIIN_FinancialPerformanceImpactInvestments_Web.pdf

4. Setu raises $15Million - https://techcrunch.com/2020/04/15/setu-raises-15m-to-helpdevelopers-connect-with-banks-to-offer-indians-sachet-sized-financial-products/

5. IIIC Publications - https://iiic.in/research-publications/