Increasingly, impact investors in India are thinking beyond the trade-off between doing good and doing well. Experienced investors acknowledge the potential of private capital to address social issues and achieve financial return (doing well) while creating a positive impact (doing good).
To some extent, impact investors have started considering impact as a key non-financial criterion in their investment decisions. However, there is no universally accepted definition of impact and impact measurement metrics in India. This leaves significant subjectivity in defining and interpreting impact as well as clearly identifying impact-first investors. Most investors associate investments in sectors like financial inclusion, food and agriculture, education, and water and sanitation with impact investing. They define impact based on their own values, goals and preferences.
At times, investors having portfolios with a few impactful investees and not a fully dedicated impact fund identify themselves as impact investors. Of course, there are some compelling reasons for such impact labelling and branding.It helps investors to enhance visibility, differentiate from competitors, and raise funds from impact-focused capital owners.
Brookings estimates that India faces an annual financing gap of $565 billion to achieve its SDG targets
But impact-first investors in India follow different approaches. They assess impact across the value chain of investment. For instance, they use screening criteria to evaluate opportunities and estimate potential impact before investments. Post-investments, they use proprietary impact metrics linked to the United Nation’s Sustainable Development Goals and GIIN’s IRIS+ indicators to improve and monitor impact. At times, they co-create such metrics with their investees at the time of term sheet negotiations. The metrics usually measure both the breadth and depth of impact. High-level indicators, like the number of jobs created or the number of customers served, cover the breadth of impact. To measure the depth of impact, some impact-first investors go the extra mile to link outputs to outcomes and estimate the social return on impact.
In the last 5-6 years, impact investing in India has generated significant traction. One key milestone is the incorporation of the Impact Investors Council – a leading industry body to accelerate impact investing in India – in 2014. Additionally, India is home to the world’s first Development Impact Bonds (DIBs) in education and healthcare. Such progress, in addition to continuous interest among global investors, will make impact investing an integral part of mainstream investing in India.
In fact, India is in need of such a transition, as impact investors have only scratched the surface of the problems in the country. Brookings estimates that India faces an annual financing gap of $565 billion to achieve its SDG targets. The government, of course, cannot bridge this gap on its own. This creates a huge opportunity for value-driven mainstream investors to deploy their capital and analyse investment opportunities through an impact lens as well.
As impact investing becomes mainstream in India, standardised, sector-specific metrics will become the common language for measuring impact. The metrics will help investors to better understand sectors, evaluate portfolio companies, and compare sector trends. Such a shared language will be useful in avoiding confusion and improving transparency over terminology in the industry. The SDGs or the GIIN’s IRIS+ metrics can be a good starting point to create those metrics and establish rigour in impact measurement and prevent impact washing.
Mohit Saini is a Master of International Affairs candidate at The Fletcher School at Tufts University focusing on impact investing and innovative finance.
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The philanthropic world is facing mounting challenges from the impacts of climate change to inequality, global pandemics and authoritarian populism increase. At the heart of sector debates is the question of how foundations use their resources: not just the small amount for grantmaking and other charitable spending but the totality – most of which is invested in global capital markets in sectors such as aviation and pharma, through vehicles such as hedge funds and private equity and managed by discrete investment houses, many of whom are unknown to philanthropy practitioners let alone the wider public.