April 23, 2024

In the past few years, the concept of investing in assets that generate financial returns and have a measurable social and environmental impact has evolved. In India, impact investing is now often conflated as an asset class. India is moving closer to its goal of becoming a USD5 trillion economy by 2025-26. We have seen many successful growth initiatives that have significantly impacted lives and livelihoods. We still face systemic issues that can only be resolved through innovative capital and solutions across all sectors.

Every year, opportunities for impact and social sector investments increase. Investors in all key markets now realize they can make financial returns and give back to society by making calculated and robust impact investments. This asset class is a high-risk proposition due to the need for standards for assessing the risks in the underlying assets, the reporting procedures, the information asymmetry, and the lack of a common taxonomy. However, investors are willing to take on this higher risk because of the potential rewards. Sustainable investing is being prioritized due to the declining pandemic.

The Global Impact Investing Network’s (GIIN) Annual Impact Investor Survey, 2022, found that 88% of global investors said their investments had met or exceeded expectations. This is a testament to its potential for the future. According to a detailed report by the GIIN, 3,349 organizations manage $1.1 trillion of impact-investing assets worldwide. Impact equity investments account for a large portion of these assets.

India is a great place to invest in impact.

India is uniquely positioned as a leader in the transition to impact-focused investment. India’s massive population, with many people at the bottom of a pyramid, allows investors to focus on various social impacts, such as agriculture, gender, and abundant natural resources. India’s social and environmental challenges also make it an ideal place for climate-themed investments that can facilitate innovations in the climate sector. Clean energy, waste management, and clean transportation are all sectors that contribute to reducing India’s carbon footprint. We also expect a greater focus on diversity, equity, and inclusion as impact investors realize the importance of investing in companies and organizations that promote these values.

Impact of regulatory measures on different sectors

The policy mandates and initiatives are crucial in determining a sector’s maturity, which is why specific sectors enjoy greater access to capital at different stages of growth. For example, multiple policy initiatives have been implemented simultaneously in renewable energy, infrastructure, and EV/mobility, increasing capital flows into these sectors. These sectors have more significant potential for applying traditional financial modeling methods to understanding impacts, risks, and returns as well as projections compared to niches or emerging sectors like climate action and social infrastructure. We need to create more innovative structures to allow for the flow of risk capital during incubation to make it more scalable and, therefore, more investible later. This is especially true in sectors such as climate change.

Legal Enablers

Recent Government of India policies and interventions have encouraged impact investing and capital consistency, such as SEBI’s allowances for social venture funds. This has created an enabling climate for impact investors. For example, the newly amended AIF Regulations on Social Impact Funds removed the restrictions or muted returns to allow returns that are more in line with commercial funds.

Challenges

Social impact funds face several challenges, including the need for more debt capital options and exit strategies, particularly for smaller companies. It is difficult for SMEs to meet the dual financial return and impact goals. There is also a need for a common taxonomy, fewer professionals with the skills to do impact investing and complexities in India’s legal and regulatory framework.

Impact investing is an excellent opportunity to create value in India. Capital is flowing into investments and sectors that have the potential to make a significant impact, and we see a sustainable impact investing ecosystem. Longer-term money that is patient and willing to take on greater risk due to the infancy of these sectors will drive positive change.

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