Impact investors are now looking at India as a compelling opportunity. Here’s why

This article is brought to you thanks to the collaboration of The European Sting with the World Economic Forum.

Author: Ramraj Pai, CEO, Impact Investors Council, Devansh Pathak, Strategy and Community Engagement, World Economic Forum

• As the 2030 milestone for progress on the sustainable development goals (SDGs) draws near, more funding into achieving the SDGs is needed and a rethink of financing flows from established and emerging economies.
• Impact investments are those made to achieve a positive social and economic impact as well as a financial return, but more financing is needed at the growth stage of a project, not just the early stages.
• A new report from the Impact Investors Council shows an acceleration of Indian impact enterprises graduating to later funding stages, presenting attractive opportunities for asset managers.

As the United Nations Decade of Action has come into its third year, seeking to accelerate sustainable solutions to the world’s biggest problems, the need for new markets and funding flows is clear.

The financial industry, which oversees 90% of the world’s liquid assets, will be key here and, most importantly, the financial hubs of the United States, China, the European Union and later, India. They will be the most influential arbiters of financing decisions between now and 2050 and can help bridge lagging funding for the Sustainable Development Goals (SDGs) as the 2030 milestone draws near. Aided by impact investments, these economies could seed the needed 16-20% of gross domestic product for SDG funding from the current 4-5% of GDP rates annually spent.

For those unfamiliar with the term, impact investments aim to achieve positive social or environmental impact alongside a financial return. Most impact investment funds across categories earn a market rate of return, contrary to the belief that chasing social or environmental good means foregoing financial gain. And India is one of the most fertile environments for impact investors to seek opportunities.

What’s happening in India?

The venture approach is the most common business model for impact investments in India, which encourages investing early in for-profit enterprises in markets catering to the vulnerable, weaker and underserved sections of society. However, mainstream investors have invested significantly at the early stages of sustainable businesses and the first round of venture initiatives, obscuring the distinction between them and impact investors.

There exists a “missing link” in the market: the absence of India-focused growth-stage impact funds that can finance the transition of impact enterprises beyond early venture funding. Growth-stage funding is necessary to scale solutions where they can have a planet-level impact and move the needle on SDGs.

Now, a new report from the Impact Investors Council (IIC) has spotlighted impact investment opportunities in India for growth-stage investors. We can see an acceleration of Indian impact enterprises graduating to later funding stages, presenting attractive investment opportunities for asset managers focusing on growth-stage impact enterprises with sound fundamentals.

India’s upswing impact investment market

The impact investing market in India has grown significantly in recent years. Big ticket deals (more than $10 million) have more than doubled in the past five years or so, with the number of deals in the $20 million or more range having increased by a factor of times 2.3.

Nowhere is there a greater need for the resolution of environmental and social challenges than in emerging markets – hosting 86% of the world population and nine of the top ten cities most vulnerable to climate change.

Among the emerging markets, India is the biggest investment destination with good investor confidence but investment interest is still far less than it needs to be. So far, focus has lingered on early-stage investments in solutions that didn’t necessarily scale. But impact investments in India are now expanding beyond financial inclusion into emerging sectors such as agriculture, technology for good, healthcare, education and livelihoods.

India’s unique position

Multiple factors drive this growth in investor confidence and impact investments in India, compared to other emerging markets:

• Next half billion (NHB): India has overtaken China as the most populous country in the world. Being a democracy, with access to a young and skilled talent pool, makes India a favourable destination. The rapid internet penetration and 5G technology presents a significant chance for impact-driven enterprises to create low-cost offerings for customer groups previously overlooked. In India, this is called the “next half billion” narrative – referring to the massive and fast-growing bottom half of the Indian economy.
  
• Innovative impact-oriented business models: Digital penetration in India has allowed tech-enabled businesses to scale impact and drive innovation across sunrise sectors, such as climate-tech and future of work. This diversification and proliferation of impact-oriented business models is reflected in the shift away from microfinance towards technology-driven models such as sustainable mobility and small and medium-sized enterprise (SME) finance (16.7% and 11.2% of total equity impact capital was raised in 2022, respectively).
  
• Aligning impact with robust returns: The Indian market presents substantial opportunity for social entrepreneurs to create impact at scale and generate returns for investors. Equity impact investments in India, with a typical holding period of around 5.2 years, have generated an overall internal rate of return of around 30% over the past decade while impacting more than 500 million lives across the country, as analysis from the IIC has shown.
  
• Maturing Indian ecosystem: The Indian impact investing ecosystem is gradually evolving, supported by stakeholders working to create a catalytic environment for such investments. That includes the emergence of ecosystems, such as the IIC, which focuses on increasing the flow of private capital into social impact through research and advocacy. Similarly, domestic impact fund managers are more experienced sourcing financially sustainable impact enterprises and incorporating better impact management practices to scale the impact of their portfolios.

India’s investment projects

Several policy initiatives by the Indian government are further facilitating a growth-stage impact investing landscape in India.

Atal innovation mission

The Indian government’s flagship initiative, Atal Innovation Mission, launched in 2016, aims to provide technical and infrastructure support to startups that focus on creating positive social and environmental outcomes. One of its key initiatives, Atal Incubation Centres, is dedicated to nurturing impact-driven startups that bring technological innovation in areas such as energy, health, education, agriculture and artificial intelligence.

Social stock exchange

The Indian government’s Social Stock Exchange (SSE) is a ground-breaking platform designed to bridge the gap between investors and social enterprises focused on promoting social welfare and environmental sustainability. After receiving final approval from the Securities and Exchange Board of India (SEBI) in 2022, the SSE is poised to establish a new asset class for investors to enhance access to capital for growth-stage impact-driven enterprises.

The Samridhi Fund

The Samridhi Fund, launched by the Small Industries Development Bank of India (SIDBI), seeks to provide capital to financially viable social enterprises. The emergence of such government-backed funds can boost confidence among early-stage impact investors, encouraging them to support growth-stage companies expanding with innovative business models, products and technologies that hold significant potential for scaling up.

In all, the environment in India is ripe for impact-focused limited partners and asset managers – domestic and international – to support financially attractive and socially impactful companies with large target markets.