Sustainability, technology, and innovation: Driving Impact 3.0

In 2020, the World Economic Forum announced that there is a $2.5 trillion annual gap in the funds needed to deliver the Sustainable Development Goals (SDGs) by 2030. The same year, the Covid-19 pandemic has put the spotlight on how building resilient business models which balance sustainability with economic development and equitable growth is the need of the hour. As 2021 comes to a close, it is clearer than ever that the world needs more investments that generate quantifiable social, economic, and environmental impacts without compromising on the value of capital.

Large, dedicated capital pools are required to find solutions in sectors such as sustainable agriculture, renewable energy, conservation, microfinance, and affordable and accessible housing, healthcare, and education. Private funds will be integral to solving issues that have been traditionally under the purview of the public sector.

Even in India, where the social enterprise ecosystem holds great potential; a barrier to unlocking this potential is the struggle to access the capital. According to a 2019 report by Brookings, a survey of Indian social enterprises, 57% identified access to debt or equity as a barrier to growth and sustainability.

However, the recurring verdict over the past decade is that capital will only enter these sectors at scale if it sees commercial returns in defined timeframes.

The Changing Face of Impact Investing: From Philanthropy To Commercial Capital

The impact investment approach draws from a dynamic history of the global investment landscape, where the definition of impact investing as well as impact itself has undergone paradigm shifts every few years.

From the environmental movement of the 1970s to the anti-apartheid divestment campaigns of the 1980s, and the modern fair-trade consumer and socially responsible investing movements in the 1990s, and the blended investment models in the 2000s.

These venture philanthropies have since been key investors for both nonprofit and for-profit organizations, with financial returns on investment being a supplementary goal and not the driver behind these funds.

Even in India, the social impact ethos of the country is deeply rooted in its bottom-up entrepreneurial attitude, a testament to this is the success of Amul which was a supply chain professionally managed by low-income farmers, and FabIndia that upskilled and provided sustainable employment to rural artisans.

In more recent years, large capital allocators across the world have started to reach a collective consensus that profit and purpose must go hand-in-hand. There is a strong need for integrated, scalable business solutions that address the bigger, deeper problems facing the world and also yield profits and value on capital.

Change in consumer behavior, government mandates, and climate change are causing the capital allocators to back integrated business models that are sustainable and inclusive, and this shift will be the driving force for economic growth in the years to come.

The role of sustainability and impact in the foreseeable future will be akin to that of digital and technology over the past few decades. Businesses that don’t embrace the change, risk getting left behind, while those that adapt rapidly and create shared benefits for all stakeholders, can unlock significant value.

As capital shifts to focus on sustainability, it will build on its earlier focus on digitalization. The manner in which innovation and technology are woven into these next-generation businesses will play a key role in the scaling of these sustainable businesses. Technology can help solve for access and affordability at hyper-scale. The intersection of technology and innovation with sustainability can be seen in paradigm-shifting solutions such as electric vehicles, solar power, carbon capture, and storage technology, etc.

The shift is also perceptible in retail investments in public markets, with the launch of ESG funds on the bourses, and the introduction of the Business Responsibility and Sustainability Report (BRSR) by SEBI, an enlightening and forward-looking regime change, which will be useful for both risk management as well as capital management. ESG has found its way into the boardrooms of listed companies, and is no longer restricted to compliance, but has become integral to business strategy and value generation.

In India, investments in sectors such as education, healthcare, and agriculture have all grown in the past 10 years. Financial inclusion and clean energy accounted for 64 percent of the deals in 2016, compared with 88 percent of the total in 2010. This shows investors are shifting from the perspective that “impact and positive returns are inversely related.”

Large institutional capital in public markets is gradually becoming cognizant of adopting this responsible investing approach or what we should rightly call — Impact 3.0, with a vision to create long-term value. With industry players like Credit Suisse raising a US$ 500 million fund of funds that will invest in agricultural opportunities in Africa and JP Morgan establishing a Social Finance unit in 2007 that actively co-invests in impact investment funds.

Over a decade ago, when JPMorgan and the Rockefeller Foundation, and Global Impact Investing Network (GIIN), published a report, that forecasted impact investment as an emerging asset class that would reach between $400 billion and $1 trillion in assets under management (AUM) by 2020, it was considered aspirational. However, all doubts were squelched when ​ the market reached roughly $502 billion in AUM according to GIIN, in 2020.

As Impact 3.0 trickles into private markets, it is also changing the way the world looks at investing. It is bringing us back to the fundamental purpose of investing i.e. to serve and bridge the bigger, real needs of our communities and our world and define the kind of world we want to live in.

Impact 3.0 & Beyond

Climate change has added a new dimension to the impact investing ecosystem. According to the United Nations-backed Principles for Responsible Investment, nature-based solutions will generate nearly $7.7 trillion through 2050. Organizations are now “investing for net-zero 2050” by backing companies that aim to innovate, decarbonize and transition — and play a significant role in decarbonizing economies. As we shift towards building a low-carbon, climate-resilient, just economy, sustainability is becoming an important driver of economic growth.

Evidently, Impact 3.0 is about investments that start with the question — “How does this impact our communities, our climate, our economy, our society?” As this becomes the new normal, spurring systemic change across global financial markets, there’s a better understanding that investing in sustainability does not have to be bereft of value on capital. In the global impact investing market, proactive investment in innovative, technology-driven, scalable solutions can have enormous commercial viability, while simultaneously resulting in substantial, measurable, and sustainable impact.

In the 2020 annual impact investor survey conducted by GIIN, 88% of respondents reported meeting or exceeding their financial expectations, while 99% reported meeting or exceeding their impact expectations. The top sectors for capital allocations reported by respondents are energy and financial services, excluding microfinance. Respondents who also participated in the 2016 survey reported 17% compound annual growth, up to $98 billion from $52 billion.

This result is rooted in the fact that when you are using technology to solve population-scale problems, the potential to scale exponentially and generate value is immense. When we innovate at the nexus of essential issues and untapped application of innovative technology, we are building for a market that already exists and is hungry for solutions.

Needless to say that for every seemingly impossible crisis, there will always be an exceptional entrepreneur who is innovating and creating disruptive, radical solutions. As investors, it is our greatest privilege and advantage to back and support such entrepreneurs with the best resources to fearlessly scale up into impact unicorns. How we invest shapes the world in which we want to live. Business success and impact are not mutually exclusive, but rather complement each other; and businesses founded on the idea of changing the world for the better tend to outperform in the long run.

Our respective futures are inextricably linked. We have a moral obligation as investors, innovators, and humans to address the global population and planet’s challenges. Through Impact 3.0 investing that is focused on sustainability and commercial returns, we can be agents of social change while also achieving (and frequently exceeding) our independent goals as entrepreneurs and investors.

Note: This piece was first published by the authors Anjali Bansal and Shruti Srivastava, Avaana Capital, as an opinion piece for the Times Of India.