De-jargoned: impact investing—the business of doing good

If a private-equity fund or a venture capitalist was to invest in a chain of schools in backward regions of the country, that would be impact investing

Hemant Mishra/Mint
Hemant Mishra/Mint

When an investor puts money into a company, it is with the expectation of getting a good return. Impact investing is not charity and investors expect a return here too. The difference is that here they also want to make a positive impact. Besides looking at returns, they look to invest in companies whose activities can influence the environment and society.

If a private-equity fund or a venture capitalist was to invest in a chain of schools in backward regions of the country, that would be impact investing. Investors who put money in solar power plants, would similarly be called impact investors.

In such cases, apart from other financial controls, the investment would come attached with methods of assessing the social impact.

Often, such investments are made in the initial stages of the business and the investors do the due diligence to know the objectives of the company they are investing in.

The investment can be structured as equity investment, wherein the returns are earned from the profits as dividend, or it can be structured as a fixed-return investment.

In either case, given that many such businesses could be in nascent stages, the risks of financial and social goals being met are borne by the investor. Some impact funds are structured as venture capital and private equity funds, which collect money from investors and utilise it towards impact investments.

Apart from them, pension funds, insurance funds, development finance institutions (DFI), asset managers and individual investors also make such investments.

According to a recent report by McKinsey&Company, Achieving Impact For Impact Investing, despite encouraging trends, impact investing is a niche market in developed countries with limited evidence of financial performance. Some of the reasons cited for this are: lack of investment-ready entrepreneurs, few specialised investors and infrastructure constraints.

Scope in India

According to a report by Global Impact Investing Network (GIIN) on the industry dynamics in South Asia, the bigger share of impact investing in India is taken up by development finance institutions. In India, an industry body called Impact Investors Council was set up around 2 years ago. According to the GIIN report, till date impact investors have deployed around $5 billion in India. Another $437 million has been deployed by other investors like family offices, high net-worth individuals and funds.

While bulk of the DFI capital is structured as a debt investment, non-DFI capital is mostly deployed as equity investment.

The GIIN report also states, bulk of the impact investing in India happens in the financial services sector—more specifically in micro-finance.

This is followed by investments in the manufacturing and renewable energy sectors. The GIIN report added that there is some debate about the social impact of lending to micro-finance companies. Others contend that financial inclusion is key to economic development in an emerging economy and investment in these companies qualifies as impact investing.

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