INVESTING IN THE ECOSYSTEM
Taamara de Silva emphasises that some ventures have a sustainable social impact
Impact investments have seen a boost in popularity during the COVID-19 pandemic due to increased awareness of climate change, as well as social challenges such as unequal access to healthcare, and racial and gender inequality.
Today, assets totalling an estimated US$ 10 trillion are being actively managed and related strategies could be directed towards achieving social impacts that go beyond traditional financial benefits.
This concept focusses on financing businesses and projects that are designed to have intentional, positive, measurable and sustainable impacts on society while simultaneously delivering financial returns.
The social sector has been transforming apace; and today, there’s a visible rise of trading charities, and social enterprises and businesses, as well as social service providers that are engaging with governments in varying capacities.
This has created an opportunity for impact investing to serve as an additional tool for financing organisations that have a social contribution to make.
An impact investment market provides capital to address the world’s most pressing challenges in sectors such as sustainable agriculture, renewable energy, conservation, microfinance, and affordable and accessible basic services – including housing, healthcare and education.
There is also a strong alignment of the trend with achieving the UN’s Sustainable Development Goals (SDGs), which are critical to envisioning and enabling an equitable world for everyone.
In 2020, a report by the IFC identified the fact that more assets were invested for impact than ever before and a total of nearly 2.3 trillion dollars had been dedicated to intent for impact.
Approximately 30 percent of these investments were managed by private funds and institutions, and the remainder by development finance institutions (DFIs) and banks, which equates to about two percent of global assets under management (AUM).
Accordingly, impact investing remains a small market niche; but it is attracting growing interest.
There are two approaches to impact investing.
A ‘finance-first impact fund’ seeks to deliver market rate returns for investors and includes investing in businesses sectors that are looking to achieve social or environmental outcomes.
An ‘impact-first fund’ offers loans to social service providers or community groups at below market rates because they’re unable to access financing elsewhere.
The concept of impact investments involves three core characteristics.
INTENTIONALITY This refers to an investor’s intention to have a positive social or environmental impact through his or her investments.
MONETARY RETURN The investment is expected to generate a financial return on capital (or at minimum, a return of capital).
IMPACT MEASURE A commitment by the organisation receiving the funds to measure and report on the progress of the investment, and social and environmental performance as a result of it, while ensuring transparency and accountability.
The social return on in-vestment (SROI) requires the incorporation of an outcome-based measurement framework, which understands and quantifies the social, environmental and economic value created.
Impact reporting and investment standards (IRIS) refers to the implementation of a method of collecting, analysing and reporting information to internal and external stakeholders while continuously tracking the impact of an investment.
Having said that, India’s impact investment ecosystem for example, is riddled with challenges and hurdles. Foremost is the absence of a standardised legal structure governing social enterprises and investors. This has triggered higher outlays for registration, compliance and the cost of doing business.
In turn, these problems discourage potential investors from investing in impact sectors. Another roadblock is the lack of a considerate taxation system.