Impact Investing & Impact Bonds: Scalable Models for India

Introduction

The 2030 agenda for sustainable development, adopted by all United Nations in 2015, provides a shared blueprint for peace and prosperity for people and the planet, now and into the future. At its heart are the 17 Sustainable Development Goals (SDGs), which are an urgent call for action by all countries i.e developed and developing to come in a global partnership. They recognise that ending poverty and other deprivations must go hand-in-hand with strategies that improve health and education, reduce inequality, and spur economic growth, all while tackling climate change and working to preserve our oceans and forests. Public and private players have realised one of the challenges to achieving the Sustainable Development Goals (SDGs) in the next 10 years is funding. According to Brookings India, achieving the SDGs by 2030 will take an estimated $5 to $7 trillion per year, with a financing gap of $2.5 trillion in developing countries alone. Impact investing is one of the instruments that have been identified, globally as a financial model to bridge this gap.

Impact investing is powered by investors who are determined to generate social and environmental impact along with financial returns and are purpose-driven e.g creating a digital platform for people with disabilities in India, or creating customised interventions to affect entrepreneurship, hygiene, and sanitation, education, literacy, etc. The investment is used to finance projects, in developed and developing countries, to serve the bottom of the pyramid which offers efficient resource mobilisation and harnesses private capital. Impact investing or results-based financing is a process in which governments or donors pay service providers contingent on outputs or outcomes. Impact investing differs from corporate social responsibility, environmental, or socially-responsible investing as it goes a step further to include only those investments that have clearly defined intentionality for achieving "measurable" impact, alongside financial returns. Financial returns for impact investing range from simply preserving the principal amount to matching the principal amount to even exceding mainstream market returns.

Impact investing refers to projects that have tangible, measurable outcomes, and are linked to financial payouts. The implementation of impact investing involves three parties namely a private investor, an outcome payer, and a service provider or implementer. When the outcomes are achieved, the investor is paid back the capital, including interest, by the outcome payer, usually a philanthropic funder or organisation. The payouts are known as impact bonds and are only provided when the envisaged outcomes are achieved. Impact bonds in financial terms do not qualify as bonds since unlike bonds, impact bonds tie financial returns to the achievement of outcomes. If the payer is the government, it is known as a Social Impact Bond (SIB), and if it is an aid agency or funder, then a Development Impact Bond (DIB). Impact bonds or outcome linked payments have the potential to affect large-scale systemic shifts in how governments and service providers think about service provision because they build cultures of transparency, encourage investments in prevention, and incentivise collaboration.

 Impact Investing in India

 India is emerging as an attractive market for this impact investment wherein there is a high demand due to a growing population, underlying economic growth, stable financial markets with a strong rule of law, and large unmet social needs. The emergence of the public-private partnerships, in India, has been effective in creating a ground for impact investments which is cooperative and network-based. Moreover, the Impact Investors Council, an umbrella association of the impact investors in India, lists more than 30 active players in this field, like #Aavishkaar, #Asha Impact, #Acumen, #Ankur Capital, #Patamar Capital, #Omnivore Partners, #Michael & Susan Dell Foundation, among others. The major focus areas of impact investments in India are financial inclusion, health and hunger, clean energy, education, gender equality, and sanitation. Several of these sectors have seen companies flourish and attain large scale impact, with support from impact investors.

 In the year 2015, the first DIB was launched in India, by #Educate Girls as the service provider, #UBS Optimus Foundation as the investor and #Children's Investment Fund Foundation as the outcome payer. UBS invested USD 2,70,000, with the project covering 166 schools and 140 villages in Bhilwara, Rajasthan over 03 years. It led to an increase in enrolment of girls in Standards II to VIII and also increased learning outcomes in literacy and numeracy for children in Standards III to V. Taking from the achievements of this project in Rajasthan, #British Asia Trust (BAT) along with UBS Optimus Foundation launched $11 million to affect 300,000 children through improved literacy and numeracy skills. This is the largest education DIB in the world launched with a coalition of partners including Tata Trusts, Michael & Susan Dell Foundation, Comic Relief, the Mittal Foundation, the UK Government's Department for International Development (DFID) and BT (British Telecom).

Similarly, #Child Fund India and Grameen Impact Investments India launched the #Women Holistic Empowerment and Enhanced Livelihood (WHEEL) impact bond, the world's first domestically funded SGD bond under the Grameen Outcome Accelerated Lending (GOAL) impact bond series. The #WHEEL Impact Bond works towards helping 2,000 marginalised tribal women in Maharashtra and Madhya Pradesh to become self-reliant and empowered by training them to become poultry farmers (micro-entrepreneurs), with a specific outcome target of an average annual net income of INR 30,000 through this intervention.

 Way Forward

DIBs and SIBs are also known for their accountability and transparency as these projects are continuously monitored and data is collated.

According to a recent analysis by the Global Impact Investing Network (GIIN), over 1,300 organisations manage $502 billion in impact investing assets globally.

 To create a robust ecosystem of impact investing in India to achieve the SDGs the following is recommended:

1.    Standardisation on 'impact' or 'outcomes' to bring about accountability and transparency, and encourage risk-averse or resource-scarce funds to join.

 2.    To mobilise capital towards the sector, it is imperative to develop methodologies and indicators both on financial returns and social impact.

 3.    Ensure that social reporting requirements are not overly burdensome for social enterprise.

 4.    Formulate a regulatory framework that is conducive to foreign investments in India which should be constantly evaluated by the government.

 5.    Cultivate and develop new and innovative companies and business models, including ones adapted to the needs of the bottom-of-the-pyramid populations.

 6.    Promote international research, data collection, case studies and the development of indicators on social impact investment.

The future of social impact investing for development can according to Economic Times can range from $2.5-3 billion in 2020 to $6-8 billion in 2025. The rapid growth of the investment through this instrument can affect social change and the recommendations would prove prudent in increasing the implementation of projects that incur result-based outcomes. This will lead to the alleviation of a lot of social problems and help India solve its social challenges.