Reshaping Impact Investments in the Pandemic: Understanding the opportunity

May 13, 2020 Ankita Kapoor

Tracking the momentum and pivot in Impact Investment gaining ground

The pandemic is wreaking havoc across the world and reshaping how we need to think of Impact Investments. Nationwide lock-downs to deal with pandemic have taken much toll on the economies, with industries at a halt except for most essentials. With job cuts, lack of public health infrastructure, draining State incomes and migrant workers bearing the maximum brunt, the need of the hour is to think radically on a strategic scale. Stock markets have been volatile, with frequent changes in asset valuation, declaring 2020 as the year of recession. While the private equities, venture capitals have seen a substantial dip, impact investments seem to be gaining ‘mainstream’ position.

While the rest of the share market has been trying to crawl back on feet, ESG projects have been growing with a consideration of potential to get through the setbacks of the pandemic. These have a long-term goal of equipping and maintaining an infrastructure that is strong enough to tackle future pandemic occurrences. As a result, social impact projects have taken a front seat in the race for funds. This will present significant opportunities for investors to innovate and finance projects that contribute to sustainable and inclusive long-term growth as well as address the social issues. Catalytic Capital (investments for sustainable support) can be used as an investment in solutions to prevent environmental degradation. Or for investments that address inequality through solutions that focus on quality job creation or financial inclusion. These investment avenues call for the study of their metrics that help resolving the stressed sectors of the economy.

IMPACT INVESTMENT MANAGEMENT & GROWTH

To help economies recover from COVID-19 will require billions of dollars to revive jobs and value chains, tackle systemic inequalities and promote a greener reconstruction. This calls for a systematic approach to seek impact performance across funds and institutions on key themes such as Education, Healthcare, Job Market and Climate Change. A year ago, a coalition of 60 asset managers and institutional investors adopted ‘The Operating Principles for Impact Management’: a set of clear market standards for how to manage investments aiming to achieve positive impact alongside financial returns. As investors regroup from the market turmoil created by the coronavirus pandemic, the principles provide a clear choice for investors seeking to invest in a better, more resilient, and more sustainable world. This will create clear value for investors and serve as a strategic and operational tool to drive investment where it matters the most.

The base of impact funds across the world has been broadening, with around 26 signatories from across 5 continents have come forward. Most of the signatories are headquartered in North America (33%) and Western Europe (56%). The Japan International Cooperation Agency reflected growing interest of Japan in impact investing. Emerging markets comprise eight signatories managing about $6bn in total. Some of the world’s largest asset managers have confirmed to these principles at a large scale. These include the KKR who recently closed a new Global Impact Fund and the launch of Blackrock’s Global SDG Impact Fund as well as LeapFrog Investments have also been part of the league. Development Finance Institutions (DFIs) continue to be the largest impact investors.

In recent years, mainstream venture capital has also been flowing to this segment as well as private equity as they have longer time horizon. We also expect a greater focus on measuring impact beyond only financial returns.

The coronavirus pandemic calls for urgent attention to sustaining (and even accelerating) of market-based investing with social and environmental impact by supporting the impact goals of portfolio companies.

EMBRACING THE OPPORTUNITY

With each passing day we can say ‘the delta of improvement’ has played a significant role, be it vaccination or recovery drug, technology to keep people connected and employed and to keep the economies running. Analysts are identifying where something is effective in impact, and how fast. We can now see where change is happening and to whose benefit. It all comes down to one question: What is going to be the next normal?

What is important for both sides of the for-profit and not-for-profit divide is not what people are saying – but what they are already doing to be socially impactful.What is the incremental impact of each government or corporate dollar to each SDG needs to be estimated in a way that is competitive, comparative and predictive to recognize the emerging stake points and action centers.

These externalizations have been priced by international organizations like World Bank, WHO and UNICEF, that have estimated that “…. in water supply, sanitation and hygiene (WASH), negative externalities are valued at half a trillion dollars annually. Accenture noted $1 of education investment in India leads to a future economic value of $52. Stop TB calculated that $1 spent creates $45 of economic benefits.”

In an interview, Roopa Kudva, Impact investor Omidyar Network India (ONI)’s, managing director, spoke on the impact of the covid-19 pandemic on investments, valuations and the role of digital channels. From virtual meetings to automated factories, online orders to drone delivery, digital services are growing in importance and penetrating into different sectors. Digitally agile firms are adapting to the ongoing crisis more successfully, and others are rapidly upskilling in response to challenges to their business models. For governments looking to drive economic recovery after the pandemic, supporting such digital competitiveness will be key.

Consequently impact investing space will be more tech-centred as the covid-19 situation increases comfort with using digital channels and with requirements for social distancing expected to continue. Thus, a combination of digital and offline business models where technology will augment delivery of products and services for the “NHB” or Next Half a Billion Indians. Simultaneously this move improves access to employment, productivity and raises income levels.

ENTREPRENEURSHIP

While uncertainties about covid-19 and its impact across sectors persists, for early-stage entrepreneurs, the impact depends on the sector and how much losses it can bear. Ed-tech, digital health, digital content and essential retail trade have seen a perceptible increase in demand since the lockdown. Startups in fintech, particularly lending companies, are adversely affected. In ONI’s portfolio, Vedantu, WhiteHat Jr, Doubtnut (edtech), 1mg and MyUpchaar (digital health), Dailyhunt, Pratilipi and IndusOS (digital content), and DealShare (essential retail trade) have seen positive traction.

A post-covid-19 world will see a tremendous shift in the work culture and daily lifestyle, creating new entrepreneurial opportunities with a greater role of tech-solutions. Various Indian impact investors and VCs have been asking for good business prospects with scalable solutions and strong teams to deploy capital. For instance: “Funders like Omidyar Network India are asking for tech-based solutions to tracking the virus and mobilising the public. Meanwhile, the former president of Y Combinator, Sam Altman, is asking any startup that can rapidly produce masks and/or ventilators to email him about an investment — which could be up to $50m”

GOVERNMENTS ROLE

The World Economic Forum seeks to show policies, regulations and measures that governments can adopt to attract such investment. It focuses on exploring the ‘secret’ to creating a digital-friendly investment climate. The answer will become even more important in the looming downturn in markets where there are fewer resources and more competition to attract scarce capital with a motive to create a positive impact in the economy. Attracting investment requires a conducive regulatory framework, for instance, policies and measures that encourage investment in payment processor in digital infrastructure can much benefit local companies, especially small and medium enterprises.

Recoverable grants, credit enhancement tools (like guarantees), and loans could help bridge the gap until government funding arrives. At the same time, with the hassles associated with accessing public funds, foundations and donors could make place-based impact investments to institutions like day-care centres and expect social returns, in the form of addressing the needs of marginalized communities who are most vulnerable during this crisis. Making impact investments alongside grants and donations will increase and diversify the type of private financial capital available to help struggling non-profits and businesses. Companies can channelize their CSR Funds in such avenues that bridge the gap of capital requirements in projects based on ESG Policy.

The crisis has already shown us what is possible when government, business, investors and civil society all come together. It has also shown us that we need to listen to the science and post-crisis we need to apply these principles and build a society that can resist current and future pandemic crisis effectively.

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