Prashant Mara, Devina Deshpande, Nandita Gopalan
Companies the world over are increasingly being judged on their sustainability or ‘ESG’ (environmental, social and governance) practices. Regulators and stakeholders are relying on sustainability metrics as key criteria for engagement with business. This has progressively changed the way capital is put to work. The conventional investment landscape has, in the recent past, pivoted towards sustainability or ‘impact’ investment, balancing financial returns with positive, measurable ESG impact. In this respect, India has emerging as an attractive destination for impact investment on account of stable financial markets, robust market forces, rule of law, growing population and high social needs.
In India, traditional sources of sustainability finance have included the government (in the form of ‘priority sector lending’ and sovereign bonds targeted at sectors like agriculture, education, low income housing etc.), development agencies and philanthropic investing – in each case, with social impact driving the mandate. However, impact investing has challenged the long-held view that social returns should be funded by philanthropy and financial returns should be funded by commercial investors.
Since the early 2000s, the Indian impact investment market has seen the emergence of new sources of funding, structured financial instruments and retail funding platforms. The ecosystem has seen an infusion of finance from both domestic and international impact funds such as Aavishkaar Capital (India’s first for-profit impact fund) and Acumen Fund (which raises charitable donations to make equity investments in early-stage companies that provide a product or service to the poor), which rely on ESG metrics as drivers of investment decision-making. Funds such as Omidyar Network India, Elevar Equity and Proparco continue to deploy funds in India, targeting ventures that both employ capital impactfully and target financial goals. In fact, as business models in sectors such as financial inclusion, agri-business and clean energy have scaled, a wider set of investors have begun to participate, with conventional private equity funds, venture capital funds and family offices sitting alongside traditional impact investors.
In terms of enabling regulatory measures, the Indian government has recently approved the regulatory framework for sovereign green bonds for mobilising global and domestic debt investment for environmentally sustainable and climate-aligned public sector projects. Corporate green bonds sales are already underway, primarily for renewable energy projects. The Securities and Exchange Board of India (“SEBI”) has also amended three key existing regulations to pave the way for setting up a social stock exchange in India to channel greater capital to not-for-profit organisations and for-profit social enterprises, in line with the goals of financial inclusion and inclusive growth. SEBI has also introduced a new instrument termed ‘zero coupon zero principal bonds’ which does not require the issuer to repay principal or interest amounts to investors, thus opening up the stock market to charity investing.
While impact investing in India has tremendous potential to scale further, the ecosystem is not without challenges. ‘Impact’ itself is loosely defined, with impact indicators being chosen in an ad hoc manner and differing across investments. This makes it tricky to measure actual impact, could blur the line between commercial and sustainability investing and also leaves scope for ‘greenwashing’ (where a company overinflates its positive social impact). In this respect, standardised metrics are needed to measure impact (potentially along similar lines to those relied on in mainstream investing). This would benefit investors by making investments comparable and hold businesses accountable and, equally, help investee companies more effectively demonstrate the impact of their business.
The industry would also benefit from more transparent standards for diligence and reporting. At present, ESG disclosure requirements apply only to the top 1000 listed companies by market capitalisation. A more universally applicable reporting requirement would bring greater transparency, accountability and help investors make better decisions as they would no longer be reliant on anecdotal data in narrative formats.
when making investment decisions (potentially driving additional capital to the ecosystem). To this end, the proposed SEBI stock exchange does contemplate a framework for annual disclosure but the accuracy and openness of the information gathered, and its effectiveness in enhancing transparency and governance, can only be assessed once rolled out.
Another critical consideration in determining whether impact investment will achieve scale is whether the market is prepared to accept muted returns during the ‘proof of concept’ or market development stage. If not, ESG-focused investing may end up remaining a fringe pool of capital and not achieve the participation required to expand the ecosystem and unlock additional sources of funding. While we see large family funds and state funds moving towards impact investment, other significant pools of commercial capital appear to be (perhaps consciously) silent about their ability to deploy impact funds. Therefore, it remains to be seen whether impact investment will gain the traction necessary to effectively bring it into the mainstream.