Margot Brandenburg and Paula Goldman: Not London, Not New York - Emerging Center...
Global, March, 22 2013 -
India and South America house immense innovation that can, and should, be centers of gravity for impact investing -- and a source of socially impactful innovation for the rest of the world.
Since the term "impact investing" was coined in 2008, the movement has gained tremendous momentum. Until recently, the de facto home for most self-identified impact investors -- investors looking to generate both social and environmental good, along with financial return -- has been the U.S. and Europe. But that is changing rapidly. In the words of Vineet Rai of India-based investment fund Aavishkaar, the global south is "not just a source of deal flow" for investors in the north. Increasingly, emerging markets are taking a leading role in the industry's growth as sources of growing wealth and investing talent.
To help strengthen this trend, we recently convened hundreds of industry leaders in Sao Paulo and Bangalore to discuss what it will take to strengthen the local markets for impact investing in Latin America and India, respectively. These events were organized by The Rockefeller Foundation and Omidyar Network, in conjunction with local partners Avina Foundation and Dasra, and the support of Monitor/Deloitte.
Below are some of our findings about the similarities and differences in the impact investing industry in Latin America and India. While it is perhaps unfair to compare a single country to an entire continent, we offer these observations as initial contributions to the discussion about regional variations and trends in impact investing.
Global Forces, Local Trends
To understand the forces giving rise to robust impact investing markets in Latin America and India, we first have to look at global macro-trends. Income and wealth inequalities and their concomitant social and economic problems are rising in most countries. There exists a growing sense that "business as usual" is neither sustainable nor desirable. Wealth is being rapidly accrued or inherited by more diverse and younger individuals, many of whom are seeking to manage it in alignment with their values.
Latin America and India are prime examples of these forces. In both geographies, newly-acquired wealth is creating a new generation of philanthropists and investors who are excited about impact investing. In both India and Latin America, there exists a diverse and growing range of impact investment opportunities. Last year, Lok Capital, an impact investment fund focusing on serving the lower income and base of the pyramid (BOP) customer segments, made their first investment in the education sector. They co-invested Rs. 7 crore in Hippocampus Learning Centres (HLC), a for-profit rural education service provider in India.. In Colombia, Chile, and Argentina last year, 40 companies became certified 'empresas b' last year, meaning they legally obligate themselves to create material value for employees, consumers, communities, and the environment, as well as shareholders.
In addition, Latin America and India have seen the development of enabling policy and regulatory frameworks for impact investing in recent years. Witness the recent formation of the the India Inclusive Innovation Fund, which is sponsored by the Indian government, or Pioneros de la Innovacion Social, a collaboration between the Colombian government, IDB, and several of Colombia's biggest companies providing seed funding and mentoring to impact oriented start-ups.
India and Latin America share common challenges to creating their impact investing markets. The infrastructure that has accelerated the development of impact investing globally is often not tailored to the specific needs and circumstances of investors in those regions. There exists too little capital and too few supports for social entrepreneurs, many of whom struggle to become viable let alone to grow to scale. This, in turn, creates "deal flow" challenges for investors who are looking to deploy larger or more commercial sources of capital. In both Latin America and India, it remains significantly easier to mobilize impact investing capital from foreign sources than domestic ones. And the capital invested in both places flows disproportionately to markets that are easier to reach, resulting in disappointing vacuums in places like Northeast Brazil and Bihar that are most in need of resources. Impact capital also flows disproportionately to established sectors such as microfinance and less to emerging impact sectors such as education and healthcare for the base of the pyramid.
Ahead of both the Bangalore and Sao Paulo convenings, we polled participants in order to get a sense of people's beliefs about the challenges and opportunities the industry faces in those regions. Across the board, a majority of respondents described impact investing as "in its infancy and growing," which is more encouraging than the alternative -- "a lot of talk, not much action" -- but still short of "in its prime" or "about to take off." Participants in both locales represented diverse perspectives on impact investing and were about equally likely to describe themselves as seeking market rate and concessionary returns. Both groups were also engaged in a range of sectors, with education named the most common sector of interest and activity among participants in both places.
Our recent experiences with industry leaders in both geographies suggest there are also some noteworthy differences between the two. While leaders in both regions identified the chicken-and-egg challenges associated with simultaneously building supply and demand for capital, Latin American participants identified "strengthening demand" as a bigger challenge than "unlocking supply" -- in India, the reverse was true. This is a general challenge for the industry globally, although it takes on a number of nuances in the context of specific countries and regions. In India, for example, challenges in mobilizing capital may stem in part from a general weariness of investing in funds or other intermediary products.
Awareness of and engagement with social enterprise and impact investing appears greater in India, with more people self-identifying as social entrepreneurs or impact investors than in Latin America. Industry leaders in Latin America articulated the need to increase education and awareness of impact investing, as well as support for the incubation of viable, investment-ready opportunities. Investors in India appear ready, and anxious, to move the industry into its next phase of maturation. The conversation about the potential benefits and pitfalls of impact investing in India felt more nuanced, perhaps owing to the fact that India is a singular polity, allowing for a more cohesive conversation on topics such as policy and regulation).
The Next Phase: Strengthening Local Markets
The time has come to develop regional, national, and even sector-level infrastructure for the field of impact investing. These events, and the conversations they sparked, are an early step in that direction. We launched regional Impact Economy Challenge funds after both events, soliciting proposals for initiatives designed to accelerate impact investing locally to address problems affecting poor or vulnerable populations in each region. We are excited to see the winners in Latin American test their models, and to see the proposals generated in India.