What is impact investing — how it differs from traditional funding

Impact debt vs impact equity investments

While equity is the more common instrument in impact investing, impact debt investing is a growing sector.

"Impact debt providers make debt investments in venture equity-backed impact enterprises or bootstrapped impact focused companies or special types of companies like farmer-owned companies," Gupta told CNBC-TV18.com.

"Whether the business is bootstrapped or venture funded, debt is needed for growth needs. Even if a company raises external equity capital, it should be blended with the right amount of debt to achieve capital efficient growth. Unfortunately, debt is not that easily available from traditional financing sources.

"Impact focused corporates have characteristics that make it difficult for traditional lending institutions to lend — they are set up by first generation entrepreneurs, the businesses is complex and innovation driven and more often than not, they have asset light business models or use assets that are less well understood by financiers. It is here that impact debt providers can assess the real risk and provide financing when the traditional lenders fail or do not want to enter given the perception of risk," he explained.

Impact debt providers can provide plain vanilla debt as well as structured products like venture debt or quasi equity or results-based finance products.

Key sectors that impact investors in India focus on

According to Gupta, impact investors provide capital to address the world’s most pressing challenges in sectors such as sustainable agriculture, renewable energy, conservation, financial inclusion, and affordable and accessible basic services including housing, healthcare, and education.

"Apart from these sectors impact investors also invest in enterprises which promote gender equity, improve employability, and restore and enhance livelihoods," he said.

Challenges 

The capital is not available evenly across sectors, stages, and instruments. The interest in sectors keep changing and capital is largely available as equity in early stages.

"Further, impact measurement and reporting is complex and without common agreement on standards like say financial accounting. Much of the recent ‘impact capital’ expectations on return and time to return is influenced by past successes in the microfinance sector. There is lack of clarity in the nomenclature and sometimes it is clubbed with zero return grants and other times with ESG investments, which are not the same. While the funding models of impact equity investing is well-established, the models for impact debt investing is still evolving," Gupta told CNBC-TV18.com

Additionally, most of the impact capital is still coming from foreign sources. While it is simpler for such entities to provide equity in India. It is significantly difficult for the foreign impact minded investors to provide debt or grants in India.

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