I have the pleasure and privilege of close trusting relationships with several enterprises in the socio-ecological sectors of renewable energy, education, waste management, water, and sustainable housing. These are established entities whose founders have both the expertise and the passion to scale their initiatives. During formal and informal interactions, a common lament is that ‘access to finance’ is the #1 impediment to enabling big change.
Additionally, one of my work areas is financial advisory for rooftop solar systems. Typically, an on-the-ground engineering contractor that has an interested industrial unit or a residential society will connect for financing assistance. My initial questions are on the type of financing needed (viz. equity, debt, project financing), the credit-worthiness of the client, etc. In every second case, the person at the other end has no clue and responds as if I am speaking an alien language. This got me thinking.
The investment world waxes eloquent on the trillions of investment dollars that are allocated to achieving the UN Sustainable Development Goals (SDGs). Despite that, huge numbers of our population continue to remain unserved or underserved, climate change is upon us, and environmental stresses are multiplying.
If even the mature renewable energy sector demonstrates a lack of familiarity with the investment world - is a fundamental issue the disconnect between the on-the-ground-doers and the investors in the business districts?
Hello, Impact Investment!
For those of us dreaming of changes to the status quo, and working on sustainable development, there is hope. Consider some data first.
Globally, over $500 billion is deployed by 1,300+ organizations in the social enterprise sector, according to the Global Impact Investing Network. In India, the corresponding number is over $5 billion, and as of 2016 that reaches 60-80 million people annually. These are not small numbers.
Crucially, these are not traditional government, philanthropy, or corporate social responsibility (CSR) funds. They are coming from private sector investors in the capital markets. Surprised? You are not alone - welcome to the exciting world of Impact Investment!
Antony Bugg-Levine, ex-MD of Rockefeller Foundation, was one of the first to articulate that the money needed to solve global problems goes much beyond what governments and philanthropy can provide. At the same time, it is clear that there is no dearth of capital – financial markets are flush with it – and like water, capital will find a way to flow. The key difference – there is a need to add the dimension of purpose along with profit – to the required returns on this investment capital.
Thus was born, in 2007 at the Rockefeller retreat in Bellagio, Italy, the concept of Impact Investment - investments made with the intention of generating both financial return and social and/or environmental impact.
Per Sir Ronald Cohen, an authority in this space, “in the 19th century, investors focused on returns; in the 20th, they shifted to measuring risk and return; in the 21st century we must adopt a new paradigm of risk-return-impact.” An impact economy dispels the belief that we can either help others (do good) or make money (do well). Creating impact does not detract from making profit. In fact, it enables it – businesses that embed impact in their decisions will be more sustainable. Today, a company worth $1 billion is called a ‘unicorn’. In the near future, a company that is worth $1 billion and that also improves the lives of 1 billion people will be called an ‘impact unicorn.’
How can it help me?
Let’s look at an example. The NGO, Educate Girls, established in 2007, works on improving enrollment and learning outcomes for girls. In 2015, instead of a traditional grant, an innovative pay-for-success model called a Development Impact Bond (DIB) was created. UBS Optimus Foundation - the investor - provided upfront capital of approximately $270,000 to Educate Girls.
At the start, outcome metrics were agreed and targets established to increase enrolment of girls, and improve learning outcomes for both boys and girls. At the close in 2018, not only were the outcomes achieved, but they were also exceeded (evaluated independently by a third party).
In turn, UBS received a 15% internal rate of return on its investment from an outcomes payer – the Children’s Investment Fund Foundation (CIFF). Figure 1 shows these relationships.
Of course, traditional investments (equity – investor is a shareholder and participates in profit distribution; and debt – investor provides a loan and receives principal and interest) form the bulk of the impact investment portfolio. Innovations like the one described bring the best of both worlds - doing good and generating financial returns - to the socio-ecological sector, as:
- service provider is in-charge
- focus is on outcomes, not activities
- investor provides long-term growth capital
- investor ensures a relentless focus on scale
It is my belief that collaboration and co-creation amongst the social enterprises and the investment organizations will lead to solutions responsive to the triple bottom line of people, planet, and profit; it is how India will become a $5 trillion economy. Interestingly, impact investments are shifting from financial access, microfinance, and energy, towards traditionally philanthropic sectors such as health, education and agriculture – and also affordable housing, employability and skilling. The common trait? The potential for scale - scale attracts capital. It is truly an exciting time to be a change-maker.
Ashish Mehta is a founder of Second Nature Sustainable Solutions-a clean-tech and climate finance advisory; has an active role with Mumbai Sustainability Centre-a sustainability not-for-profit (team behind Safai Bank: safaibank.org) runs solar finance training; works with the Forum for Responsible Building, and the India Circular Economy group. For more information please contact Ashish at mehtaashish2015(at)gmail.com
For more information on the project, contact Program Manager Anurag Shanker anurag.shanker(at)fes-india.org