Consider the hard facts. Two billion people on this planet do not have access to safe water, heath care, or financial services. A billion people do not have access to electricity. Two hundred and fifty million children do not have access to education or childhood immunization. The problems are immense and need speedy solutions. With public funds being limited the need for private investment in public areas is acutely felt. Impact investing expands the role of private enterprise in addressing the world’s most pressing social problems.
Impact investing is defined by The Global Impact Investing Network (GIIN) as: “investments made into companies, organizations, and funds with the intention to generate measurable social and environmental impact alongside a financial return.” Impact investing also goes by several other names – socially responsible investing, social investing, mission driven investing, responsible investing etc.
Case Study: Vaatsalya Healthcare: The poor in tier two and three cities in India have limited access to healthcare services, as primary and secondary healthcare infrastructure is inadequate and tertiary healthcare infrastructure is largely concentrated in metropolitan areas or larger cities. Vaatsalya addresses this gap in primary and secondary healthcare infrastructure by offering high quality, no-frills, affordable primary and secondary healthcare services. Vaatsalya currently operates across 17 tier-two and -three cities in South India, such as Mysore, Shimoga, and Ongole. (www.vaatsalya.com)
Impact investing is set to soar. Industry research suggests that approximately 2,200 impact investments worth $4.4 billion were made in 2011.This is almost doubling of investments from 2010. In India, the impetus is likely to come from the new Companies Bill (2012) that mandates 2% investment in CSR activities subject to certain criteria. Growth in impact investing is likely to come from four sources:
- Massive pent-up demand at the bottom of the pyramid – a large number of consumers and producers in this segment will join the market
- Driving green growth – investment in renewables are forecast to grow at a steep rate
- Reconfiguration of the welfare state – fundamental shifts in the ways in which we approach public good output will create opportunities for the private sector
- Emerging lifestyles of health and sustainability segment at the top of the pyramid – this is already a fast and growing segment
The social investing ecology is best described in Figure below. Although, traditional investors have been foundations, development financial institutions and high net worth individuals have contributed, recent studies indicate that other investors are getting attracted to the potential of impact investment.
Impact investors also create new financial instruments such as social impact bonds – a contract with the public sector in which a commitment is made to pay for improved social outcomes that results in public sector savings.
The growth and visibility of the impact investment industry has been remarkable. However, significant challenges remain. It has generally been pointed out that the lack of track record of successful investments is a main concern and that too few established players are active in impact investing.
One of the key challenges is the measurement ‘problem.’ As an example, if the impact of an investment is creation of three jobs then the outcome is increased wages to the workers, higher taxes to the state and reduced government subsidies. On the other hand, if one of the workers would have found a job without the investment then the benefit would have been a net of two persons. Hence it is not easy to track impact over time. Measurement issues are being addressed by three distinct but complementary tools: IRIS, PULSE, and GIIRS.
Another area of challenge is the much stricter fiduciary obligations of institutional investors. Lack of a successful track record and shortage of scalable and attractive investment opportunities create barriers to impact investing. Layering of financial instruments (e.g. grants and PRIs) also makes it harder to precisely define the impact of investing.
Governance is an area of significant concern. Profiting from the poor is a grey area and significant attention needs to be paid towards creating frameworks that build an independent third party monitoring mechanism.
Other roadblocks include investor skepticism about achieving both financial returns and creating social impact together; imperfect information regarding investment opportunity set; limited exit strategies due to insufficiently developed and illiquid markets.
Despite several roadblocks impact investing is expected to grow and become part of the mainstream finance.