Impact Investing In India
Affordable urban housing and clean water for rural communities are considered to have most of the potential capital requirement, write Jyoti Kainth & Neelendra Nath
When Jyoti Yadav was recognised as one of the two national honourees at the ‘Pramerica Spirit of Community Awards 2012’, she had done so by contesting over 3,000 participants from schools all over India. Jyoti Yadav, is from Dadadwas village in Alwar, Rajasthan who lived on alms along with her mother after her father passed away in 2010. Two years hence, the same girl got recognition for her work in addressing the issue of life and respect for widows in society. Jyoti is a class VII student and first generation learner at ‘Satya Bharti Government Upper Primary School’. Satya Bharti Schools are a Bharti Foundation initiative being run in 6 states of India with 254 schools. The days of belief that the only responsibility of business is to earn profit are passé; private investment for public improvement is the way ahead. Of late, India has been seeing an increasing participation of private investments and efforts in changing social climate of the country. A lot of big businesses have adopted social responsibility as part of their DNA and this has now started reflecting. Until recently, not only a telecom company would have found idea of opening and running free schools for underserved children in desolated areas ridiculous, but also the village broods would have violently opposed the idea of sending their girl child out of the house to study. But things are changing now and this change apart from standing as a testimony to the effect of impact investment, also builds a strong case for more participation in the coming times.
Impact Investments & New Horizons
‘Impact Investment’, the term was coined in 2007, when Rockefeller Foundation convened a meeting with leaders from the fields of finance, philanthropy and development at its Bellagio Centre in Italy. The motive of the meeting was to deliberate upon the means and ways of creating a worldwide industry for investment to create social and environmental impact. It would be safe to say that some good ground has been covered since then. The definition of the term ‘Impact Investment’ still remains sketchy, though a consensus can be brought about ‘Investment to create a positive Impact beyond financial returns’, as proposed by J.P. Morgan, Global Impact Investment Network and Rockefeller Foundation. Globally asset managers have seen great potential in the impact investment sector with its emergence as a new asset class. The belief that social impact eats on financial returns is increasingly being put behind by new actors in the sector. Both, the demand side and the supply side actors in the diaspora see it as an important sub-segment of Global Asset Management Industry and profit potential finds an important space along with social impact in investment decisions. For an investment horizon of ten years, J.P. Morgan and Rockefeller report of 2010, peg the investment potential in the sector in the range of $400 billion -$1 trillion. The analysis yields a correspondent return potential in the range of $183 billion - $667 billion over the same time horizon. While it is expected that as market matures more publicly traded investment will come through, the current trend of capital tends more to be from private debt or equity investment. However, the ecosystem is maturing with participation from different kind of investors; ranging from High Networth Individuals to Development Finance Institutions. They are entering the sector with different portfolio sizes and varying expectations in terms of risk and return. The prime attention of the social investor in the impact sector can be put in two categories – basic needs and basic services. Basic needs sector essentially includes housing, water and agriculture. While basic services sector comprises education, health, energy and financial inclusion. Affordable urban housing and clean water for rural communities are considered to have most of the potential capital requirement. Microfinance is a rapidly growing sector in emerging economies with a high potential for capital requirement. While America remains the leading impact investment destination, new destinations are on the horizon with South Asian & Sub – Saharan regions catching eyes of investors.
India & Impact Investment
While we can date the rise of social responsibility and private investment in social sector back to the late 1990s in India, identification of Impact Investment Sector is quite new to the country. There were about eight impact investors in India in 2011, a list which grew over 35 by 2013. Indian Venture Capital and Private Equity Report of 2013 reports India’s social investing space as a huge opportunity. India houses the largest Bottom – of – Pyramid (BoP) population in the world, pegged at over 800 million. This huge population severely lacks basic needs and services. Water, Sanitation, Healthcare and Education remains few of the major challenges in front of the Indian government. Though, over the years, government budget has gone up substantially to address these challenges, inefficient public delivery system and non – execution of key projects have resulted in no significant improvement. In some cases good private alternatives are available, but they are concentrated majorly near the urban centres and are priced high, which poses a challenge for BoP (Bottom of Pyramid) population in terms of access and affordability. However, there is another side to the story. This underserved population has a disposable income over $358 million and private entities recognize them as a great potential market. Consequently, they are trying to align their business strategy to target this lucrative segment. This change in vision supports impact investment in India as many Indian business leaders/ entrepreneurs are responding to this opportunity with bottom – up innovation approach, for profit market solution and social business models, thus creating a dynamic and fast growing entrepreneurial ecosystem in the impact sector. Social investing, which essentially started in India in the early 2000s led by firms like Acumen, Aavishkar and Lok Capital has now reached an inflection point. In 2013, impact investing was 23 per cent of total private equity transaction. By an estimate, the cumulative impact investment in India since early 2000 has reached more than $1.6 billion, of which approximately 57% has come from mainstream investors and rest from various social funds, development finance institutions (DFIs) and foundations. These investments have successfully funded more than 220 firms in the social sector, with a major chunk of it going into Microfinance, financial inclusion and healthcare. In year 2013 alone, a total of 80 deals were made worth over $390 million. Recent times have seen specialized investors coming up which now number over 25. With collaborative efforts from companies and the set-up of specialized funds, the sector in poised to grow.
Investment With A Purpose
If not for Satya Bharti School, we would not only be uncertain about the future of Jyoti Yadav, but also of the lives of many widowed women, which now she works to improve. The need for impact investment in India has been well established now, corroborated based upon past results. Though India is witnessing rapid economic growth, the fruits of growth are not evenly distributed and seen in every strata of society. The parity among different factions of society rises because of unavailability of basic services to all of them. It is said that multiple India exist within India, each facing its unique set of opportunities and problems, ranging from infrastructure, water, healthcare to education and employment. In India, 220 million people lack access to safe drinking water and over 640 million people are without basic sanitation facility. While these may seem isolated issues, they are intertwined in most cases leading to a bigger misgiving i.e. slowing down the rate of nation’s growth. Lack of safe water and poor sanitation results in a vicious circle of dwindling average immune and health of Indian population, building pressure on public healthcare which as it is inadequate;. However at the same time, it highlights the massive opportunity, which if implemented effectively has a huge potential. Thus, the impact investment in India is with a purpose which extends far beyond the ambit of one social cause or welfare. It is the tool which would in true sense, help realize the dream of ‘Inclusive Growth’.
Driving Force & The Future
India in the past decade has seen emergence of a huge middle class population and also an upsurge in economy, which has resulted in rising aspirations. Even if lot of efforts are being made, a community itself is required to be ready to take the leap of social change. The rise of an aspirational class in India has brought it at the inflection point, where the zeal to break the social barriers is way more than it ever was. It seems to be the time to fulfil the soaring aspirations with the inclusive growth models. In the past decade, the impact investment sector has slowly grown and now we have an established marketplace with over $1.6 billion invested and more than 25 specialised social investor in India. Much more domestic capital is flowing in, as ‘cause marketing’ is catching up with the corporates. Infrastructural development, penetration of mobile and internet has provided the necessary access to develop beneficial plans for far flunked regions and underserved faction of population. There has also been a rising sense of consciousness and the role of social investing has been recognized among private and public leaders. In the light of the changing ecosystem for impact investment, the future seems to be even better as industry bodies like Indian Impact Investor Council (IIIC) are being set up and favourable regulatory regime is being brought in with the government mandating companies to spend 2 per cent of average profit after tax on corporate social responsibility. The success stories from the past have also boosted the confidence of new entrants, as social investors make successful exits. Rockefeller Foundation estimates Indian impact investment to grow at 30 per cent per annum.
We are here, standing at a juncture in time, which witnesses a turning point in both the social environment and the impact investment sector of India. The country is poised to see many more Jyoti Yadavs coming out from every small village of India holding a beacon of social change, lit not by donations but by investments.
Dr Jyoti Kainth is an Assistant Professor at IMT Ghaziabad. An alumnus of FMS and SRCC, she has to her credit, more than thirty national and international publications.Neelendra Nath, a business graduate from IMT Ghaziabad is an Entrepreneur & Petroleum Engineer. He has worked with Halliburton as an oilfield professional. He consults for startup and building an open source platform for energy industry at his start up, PetroFirs
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