It has been only 7 years since the term ‘Impact Investing’ was formally coined, but for a relatively young sector, the numbers aren’t too disappointing. Indian funds have invested in enterprises across a wide range of socially oriented sectors including financial inclusion, housing, health, agriculture, education, water and sanitation, among others.
While the flow of capital into impact funds continues to surge, a standard framework to communicate the impact side of the investing story remains a work in progress. Globally, there have been multiple initiatives to design frameworks that assess and communicate the impact created by enterprises. The IRIS taxonomy managed by the Global Impact Investing Network (GIIN) and the GIIRS rating tool managed by B Corp are two prominent initiatives that come to mind. Many Limited Partners have also developed their own proprietary frameworks for impact assessment.
Existing frameworks have focused on outcomes achieved by companies in terms of the numbers of people reached jobs. However, they are not designed to look into the real and local challenges of impact investing as they largely capture broad metrics linked mainly to investee company information. As a result, in many cases, it may appear that mainstream investing funds create higher impact because they invest in companies that operate in mature market segments, have access to better infrastructure, and have access to better talent.
In countries like India where impact investing has scaled up significantly, there has been a shift towards understanding impact more deeply in terms of the kind of risk taken by funds, the geographies in which investments are made, the types of entrepreneurs, and the stage of enterprises (early, growth, late stage). Impact funds play an important role through the pioneering nature of their investment in a region or sector, the disproportionate risks they take by investing at a very early stage, and through their willingness to often back first generation entrepreneurs in remote geographies which are lacking both in infrastructure and talent. Specific geography and sector focused impact fund performance measurement tools attempt to include these levers for impact in providing a contextual picture of impact created. One of the tools that attempts to include contextuality through specifics of impact investments is PRISM.
PRISM – stands for Portfolio Risk, Impact and Sustainability Measurement – developed by Intellecap with support from GIZ and IFC, is an effort to take a fund’s perspective and, for the first time, clearly articulates the role the impact fund itself beyond the impact created by investee firms. This framework captures the key impact metrics of a fund, and also explains all the numbers in the relevant context – be it in terms of the fund’s region of investments, stage of enterprises, or financial instruments (equity/debt/grant). PRISM’s partners include four (4) leading impact investors in India (Omnivore Partners, Unitus Seed Fund, Aavishkaar and Intellegrow. An interesting balance achieved by PRISM is the compliance with international reporting standards such as IRIS while retaining the alignment with the regional context of a country like India.
A reliable, rule-based standard framework that measures the impact created by funds will help Limited Partners and the wider community of stakeholders to form a better understanding of the impact created by this form of investing. Through their activities, impact funds have an incredible potential to foster a culture of entrepreneurship, promote high governance standards, and support the evolution of sustainable market based solutions to many intractable problems in social and economic development of lower income countries. There is much at stake and tremendous benefits to the idea of supporting this emerging class of investing. Building greater transparency and communicating the synergies with the wider national development agenda would allow all stakeholders to develop a better understanding and form greater assurance on the trajectory of this fast evolving sector going forward.
*You can learn more about PRISM by following it on twitter (PRISM_IMPINV) or on Facebook (PRISM), or contact email@example.com to find out more
Nisha Dutt, is director of consulting services at Intellecap where she works on strategy, business model design, business planning, risk management and research-related projects in high-impact sectors like agriculture, health care, financial services, etc.
Prashant Chandrasekaran, is a Manager with the consulting practice at Intellecap where he works on inclusive business models, impact investing and landscape studies across development sectors.