Social investing, also commonly known as impact investing or purpose driven finance, has certainly been drumming up a lot of interest for itself over the past few years. Investors around the world are making social investments to unleash the power of capital for good, and as it makes its way to be a regular, and perhaps uneasy feature, within the circles of investment advisors and investor committees, we simply cannot ignore the fact that, globally, the sector has been expanding at its fastest pace. However, a key question always follows any media whirl ‘are enough investors being converted to social investing by the current buzz for this trend to continue, or do we still have some way to go in convincing the masses that the concept of social investing goes far beyond the current marketing hype that surrounds it?’
If we start at the basics, what do we meant by social/impact investing? The term was coined back in 2007 by the Rockefeller Foundation, and has been defined by GIIN (Global Impact Investing Network) as 'investments made with the intention to generate positive, measurable social and environmental impact alongside a financial return'(1). At its core, social investments aim to provide capital to address the world’s most pressing issues, such as micro-finance, renewable energy, conservation and access to affordable basic services, including housing, healthcare and education.
Figure 1: Net inflows to sustainability-themed funds, 2010-2020 (billions of dollars)
The case for becoming a global trend
Notably, these issues are not new, but have historically fallen within the sphere of charitable donations and philanthropy, which have certainly gone a long way in tackling the afore-mentioned problems. However, significant gaps in financing still exist, and as we see a world being dominated by social unrest, climate change and growing inequality, philanthropic capital can only go so far. Social investing offers a much needed opportunity for investors to advance social and environmental solutions whist still being financially profitable.
With an expected financial return on the investment, social capital can offer significant advantages over philanthropy. Primarily, social investing is more sustainable than philanthropic capital since the former goes towards supporting revenue generating initiatives rather than programs that distribute funds until they run out. Hence, social investing brings with it the opportunity of providing repeated use of capital through re-investment of both the initial principle, as well as any profits that have been generated. Additionally, as this now becomes an investment opportunity rather than a charitable donation, it allows capital that was previously dedicated to only making money to be directed at addressing social and environmental challenges, casting a much wider net with regards to attracting resources to the sector. This is critical in addressing the UN Sustainable Development Goals financing gap.
Figure 2: Deployed assets across eight SDG sectors, 2020 (Billions of dollars)
How one country’s underlying forces have helped them take a leading role
India is very familiar with social/impact investing, itself being a natural test-bed for such investments due to its strong capital markets and high social needs. Between 2010 and 2016, India attracted more than US$5.2 billion in impact investments(2), with financial inclusion and clean energy being the dominant sectors attracting social capital, followed by education, agriculture and healthcare(2). The investments have been dominated by impact investment firms, however, they have swiftly been followed by traditional investors who are seeking to capitalise from the benefits of the social investment sector.
Following this rise in demand and activity, social/impact investing has been fast to gain prominence within the ranks of mainstream media. Most recently, Rang De, a renowned micro-finance player based in Bangalore, hosted a televised telethon on NDTV in April 2020 to highlight the importance of the sector in filling the financing gap to support the education crisis fuelled by Covid. With thepandemic disrupting the livelihoods of millions at the base-of-pyramid and affecting the ability of children to attend school, the importance of financing for education to mitigate against the disproportionate impact the pandemic has had on the most vulnerable in society was brought to the fore. Such noteworthy events raise the opportunity for traditional, individual and mainstream investors to align their investments with their own values, as well as creating an avenue for impact investment firms, such as GreenArc Capital, to align their financial investments with a mission of solving key social challenges that impact society today.
We can see the role of social investing being crucial in tackling economic disparity brought by the current Covid crisis. Exacerbated by the pandemic, inequality and poverty levels have risen globally owing to the unequal access to basic services such as healthcare and education, the cornerstones of poverty alleviation.
In a world that has accumulated vast amounts of wealth, but yet is still dominated by social unrest, political divide, prejudice and elements of nationalism, investing for good can have a sustained positive impact for all of society. Social investing, impact investing, purpose driven finance, whichever the preferred nomenclature, the objective remains clear; it has a key role to play in filling the financing gaps and bridging socio-economic divides, without which inequality and poverty will continue to transcend generations.
References
1 GIIN – Global Impact Investing Network
2 IIC members’ survey; VCCEdge, McKinsey analysis
