- Over $5.2 billion has been invested in creating social impact since 2010 but that number can grow ten-fold, the authors argue.
- A number of valuable projects for SRI investing can potentially be sourced in the context of the CSR legislation in India.
- Therefore, there is enough reason for Finance Minister Nirmala Sitharaman to encourage investment that is not just looking for profit, but also looking to cause a change.
SRI is finding its ground in India. Over $5.2 billion has been invested in creating social impact since 2010, according to a McKinsey report. That number can easily grow ten-fold by 2025 given the sheer scale of untapped opportunities in the country.
And, that is why Finance Minister Nirmala Sitharaman must incentivise those looking to pump in money not just for profit, but also to create social change.
Socially-responsible investing is quintessentially ‘Indian’
A report by cKinetics indicates that funds deployed towards SRI-aligned strategies by international investors in India have increased by 4% since 2017 and SRI assets managed by domestic asset managers have grown by 70%.
The increased adoption of SRI will help to institutionalise a culture of giving that is already rooted in local traditions and culture. This synthesis of new investing strategies and traditions offers Indian financial services providers a significant opportunity to step up SRI; helpfully, increasing numbers of businesses that require investment are also recognising the growing awareness and interest that stakeholders, including critically many customers, especially millennials, have in sustainable growth practices.
It’s ‘for profit’ and ‘for change’
India faces large socio-economic challenges, including urban and rural poverty, unemployment, a water crisis with demand outstripping supply, overflowing landfills in megacities and increasing income inequality.
However, the SRI funds that have been created, both in number and in value, are relatively small compared to the size of these problems. Two of the early entrants operating in India for the past two decades, Acumen and Aavishkaar, between them have deployed over $300 million.
An analysis of deals between 2010 and 2015 suggests that investments during this period were able to achieve a gross internal rate of return (IRR) of 11% on exit and the top one-third of investments achieved a median IRR of 34%.
As SRI expands in India and gains in maturity and sophistication, we believe the range of these IRR numbers can be easily maintained, giving a substantial thrust to projects that deliver good social and environmental outcomes and ultimately combine profit with purpose.
CSR funds can be deployed in the right places, with the right people
A number of valuable projects for SRI investing can potentially be sourced in the context of the CSR legislation in India. This will, however, require a clear definition and taxonomy— simply put, classification— of what outcomes such investments are expected to deliver and what kinds of projects would qualify for such support.
If handled well, this could yield significant new funds to support a large number of social entrepreneurs, and address the biggest challenge India faces today on the economic front - the creation of meaningful jobs for the million young people entering the workforce every month.
Precedents on nomenclature and taxonomy are available from the way in which the Green bond market has evolved overseas, especially in the European Union.
An idea for
Given the government’s willingness to course correct on the CSR legislation, reflected for instance in its decision to allow R&D activities funded by corporates within universities, to qualify as CSR spending, a new dimension could be added by allowing SRI to also qualify as CSR spending.
Moreover, where funds are loaned, every rupee of such lending can lever significantly more funds through additional borrowings. Ways to extend this opportunity could include allowing funds to be raised on the proposed new social stock exchanges that the Finance Minister outlined in the last budget, and facilitating the entry of foreign capital in this space.
With some innovative thinking and by employing creative financing mechanisms such as crowdfunding, we believe a whole new paradigm might emerge that draws substantial new funding into the socially responsible investing space.
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