Before we talk about impact investing, we need to talk about the difference between social return and investment return.

 

“Social return” refers to the positive effects or benefits that an investment has on society in general in addition to the direct financial return to the investors. Social return is a way to measure the broader, non-financial benefits of an investment, like how it affects health, education, or the environment.

 

For example, an investment in renewable energy sources may give the investor a direct financial return. It may also reduce carbon emissions and improve air quality, which is good for the environment and public health. This positive effect can be thought of as part of the investment’s social return.

 

As people pay more attention to how investments affect people and the environment, the idea of social return is becoming more important. It is used to figure out how well social investments, like those made by governments or foundations, work and how businesses affect society and the environment.

 

On the other hand, investment return, also called return on investment (ROI), is a measure of how well an investment works or how profitable it is. It can also be used to compare the performance of different investments. ROI tries to directly measure how much revenue an investment generates in relation to how much it costs.

 

Then, what is impact investing?

 

Impact investing is a new-age investment strategy with the goal of improving society and the environment while making a profit. It entails putting money into businesses, non-profits, and funds that are trying to address issues including poverty, climate change, and poor healthcare and education. The objective is to help people and the planet while providing a financial return to investors.

 

Forget philanthropy. Embrace impact investing to generate both an ROI and a social return from a single investment.

 

How does impact investing work?

 

Impact investing works by investing money and entrepreneurial talent into groups, projects, and initiatives that are trying to make a positive impact in society or the environment. This can be done in different ways, such as by investing in companies that offer affordable housing, clean energy, or sustainable agriculture, or in funds that give money to microfinance institutions that help people with low incomes.

 

The first step is to find opportunities for impact investments. There are many ways to do this, such as through impact investment firms, online platforms, or direct contact with companies and organizations. Then, investors look at the opportunities from both a financial and an impact perspective and decide whether or not to invest.

 

Once the money is invested, the impact investor keeps a close eye on it to make sure that both the financial and social goals are being met. The investor may also give the investee organisation extra help, like technical assistance or mentorship, to help it reach its impact goals.

 

Impact investing has a deep impact on several sectors. Some of them are listed below.

 

• Financial Inclusion: Impact investing enables easier access to affordable credit for the masses.

 

• Affordable Housing: Impact investing creates more residential assets, addressing the housing shortage.

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• Education: Impact investing can give less fortunate people access to low-cost education and training to improve their skills.

 

• Agriculture: It can increase the quality of farming and agricultural productivity while ensuring enhanced traceability and better livelihoods for farmers.

 

• Clean Energy: Impact investing promotes lower dependency on fossil fuels and democratises access to electricity. It can also help reduce greenhouse gas emissions.

 

• Healthcare: It can offer lower incidences of incurable diseases and access to low-cost healthcare.

 

India and Impact Investment

 

India has turned into a global hub for impact investing. In the last ten years, the ecosystem for impact investing has grown quickly in the country. As per the latest information from the Impact Investors Council (IIC), over 600 impact investing ventures in India now have a positive impact on more than 500 million lives and have pooled more than $9 billion. Most capital for impact investing, though, comes from international investors and donors, such as global foundations, institutional investors, finance institutions, and high-net-worth individuals (HNIs). This influx of capital for impact investing has helped develop a solid impact investing ecosystem, but it also serves as a reminder that most private capital in the country is still getting invested through traditional investment approaches.

 

The Securities and Exchange Board of India (SEBI) made social impact investments (SII) under the Alternative Investment Funds (AIF) Regulations of 2012. This was done to encourage impact investing in India. The regulator must grant SIIs more benefits if they want to attract SIIs. SIIs are still considered Category-I AIFs and get the same benefits as other venture capital funds, small and medium enterprises (SME) funds, infrastructure funds, special situation funds, and other funds. SIIs don’t get any extra incentives, tax breaks, or relaxations.

 

In India, you can find a number of impact investing startups like Saarthi.ai, Milaap, and WeNaturalists.

 

In the table below, you can see a list of the key players in impact investing in India.

 

 

As investors, social entrepreneurs, and citizens, we have a moral obligation to solve the problems that our planet and its inhabitants are facing. Through impact investing, we can be the agents of social change in the world.

 

Happy investing!

 

Neeru Seal

 

Alpha Research