As we conclude an eventful decade of profound social, economic and political transformation, and enter a new one full of more uncertainties, how do we assess the state of the Indian impact investing sector at this juncture? The period assumes significance because it has been 10 years since the microfinance crisis. How do we then assess the potential of impact investing to help the country achieve our 2030 Sustainable Development Goals (SDGs) targets over the next decade?
Today, there are three major trends shaping the development finance space which will together determine the future of using private capital for public good. And each of them has implications for the design of the proposed National Social Stock Exchange:
1. Blurring of lines between impact investing and commercial venture capital
2. Consensus on what constitutes impact (filter), how to measure it (rating) and how it can be priced (credit) among investors and philanthropists
3. Development of financial instruments for non-profits and non-market-return (or muted return) social enterprises
The overlap between impact and mainstream venture capitalist (VC) investment is here to stay. It has been increasing for some time, as pointed out in the 2018 McKinsey study, which makes sense, because social enterprises that are initially funded by impact capital and are successful in demonstrating traction and defensibility, are able to attract the commercial capital they need to further scale. With more exits from such enterprises, and availability of significant VC capital in India, even large private equity titans have launched impact funds, and more will do so in the future.
What does this mean? One, that high quality entrepreneurs will have more options to choose from, and impact and commercial fund managers will find synergies in working together. Two, that social enterprises which are not able to deliver a market return because of the inherent structural challenges in the sectors where they operate, will find it harder to raise venture capital funding, impact or otherwise. And three, impact funds will need to work harder to differentiate themselves from the broader VC ecosystem, most importantly by better measuring what they call impact.
Impact management should be seen at three levels. First, having a basic impact “filter” to define what is an impact investment or not. Once this filter is met, all deals that make it through are evaluated purely on a financial basis. Most impact funds go beyond this and try to measure and report their impact at an enterprise level in terms of outreach (number of low-income customers or suppliers) and depth (e.g. average income increase for a farmer or artisan in their supply chain), with additional metrics relating to climate or gender equality.
The problem is not just the lack of consistency in measurement or the need for an external social audit mechanism but of a missing consensus on an impact “rating” that measure the relative degree of impact within and across diverse social sectors such as education, healthcare or waste management. What is needed is industry level and tri-sector collaboration to define common standards.
The good news is there has been much progress globally on this front with initiatives like the Impact Management Project, a five-point framework that articulates what constitutes impact, and metrics such as the Impact Investment Reporting Standards (IRIS). In India, the Impact Investors Council is driving the adoption of best practices on common reporting standards and aggregating the impact metrics of Indian funds. Ideally, impact frameworks need to be agnostic of the delivery-model, using a common impact criteria across for- and not-for- profits to compare relative social performance. The third step would be if the measurement was credible enough to enable trading of an impact “credit”, a currency that monetises the value of social impact.
Effective impact measurement is also a driver of the third major trend: The innovative use of blended finance instruments to fund social enterprises that can’t deliver market returns but have delivery models to achieve scalable social outcomes.
Several pilots over the last few years have shown that a creative combination of philanthropic and commercial investments can help social enterprises raise capital through structures such as social success notes, development impact bonds and various guarantee arrangements. There is now a vibrant ecosystem of intermediaries (bond arrangers, measurement agencies) and funders (both high-net-worth individuals and family offices as well as global foundations and donors) eager to use these instruments.
It is in light of these three major trends that we can consider the potentially catalytic role of the Social Stock Exchange
(SSE), which can allow us to tap into the growing pool of impact money globally and channel it to the highest impact enterprises in the country. The SSE, in addition to listing equity shares of for-profit social enterprises, could also list blended finance instruments of NGOs. The SSE needs a consistent impact filter to determine who gets to list and is incentivised, to ensure a credible pipeline of enterprises. And the SSE needs not just philanthropists but commercially-focused investors, with and without the impact tag, to enable liquidity.
Over the last decade, the impact investment industry has already demonstrated success in financial inclusion and green investing, transforming financial intermediation for the poor and driving a carbon-conscious agenda across diverse sectors spanning electrification, clean cooking, waste, sanitation, water, agriculture, mobility, air pollution and more. Creating a common “impact credit” may be much harder ask, but it is certainly something that we must aspire to if we are to effectively work together to address our development targets for 2030.
The author leads Asha Impact, an impact investment and policy advocacy firm