At a panel titled “Enabling Social Venture Entrepreneurs for Development” on Day Two of the 2017 edition of the One Globe Forum, impact investing experts discussed the various issues and ways forward in this sector. Moderator Amit Bhatia, Founder of Aspire India, kicked off the discussion with the question of what distinguished impact investing from philanthropy.

Panelist Debasish Mitter, Country Director – India at the Michael & Susan Dell Foundation responded by saying that the first question impact investors ask is: ‘What’s the problem we are trying to solve?’ The Dell Foundation, for instance, focuses on education, jobs and livelihoods, and financial inclusion. “We try to understand what is the model that can best solve that problem,” he said. “Based on the model, we consider the best investment tool – a grant, equity, non-convertible debentures (NCDs), contracts with strategic consultants, and so on.”

Mr Mitter noted that systemic change – bringing about ecosystem platform development – was best supported by grants, because such programs generally did not have a revenue play. But, he added, “They are important from a social development perspective, and also because many for-profit ventures that get equity need to have that platform to operate.”

In the case of for-profit ventures or social enterprises, the solution could be equity or NCDs, he said. He noted that in the case of large-scale systemic transformation – for example, Dell Foundation is working in Haryana and Rajasthan to drive school transformation – it was necessary to draw on the best brains. “In those cases, we have even enlisted and paid for the services of consultants like McKinsey or BCG, who work with the chief minister’s office to design and implement those projects,” he said.

Turning to the topic of the growth of the social sector in India, Mr. Bhatia noted that total social sector spending in India was $120 billion, of which 90% came from the government. The remainder, $12 billion, comes from private-sector philanthropy, impact investors and the like, and was growing at 20% a year, he added. He noted that impact investing is growing at over 20% CAGR.

Panelist Kartik Desai, Principal at Asha Impact, recalled that when he moved back from the US to India in 2005, there were 4 or 5 impact investing funds active in India, including the Dell Foundation. “Over the last 7-8 years, the sector has grown dramatically,” he noted. He said part of the reason was just the simple scale of the need in sectors such as education, health care, energy, and food and agriculture.

A second factor was the availability of capital, he said. “There’s a lot of venture capital out there and people are looking for opportunities,” he said. “People have seen the financial scale and returns. There have been some successful exits.” The third factor in social sector growth was the availability of problems to fix. He said, “Every problem in the world exists in India – but potentially also the solutions, as we have a massively strong entrepreneurial climate.”

Lastly, he noted that the government had played a significant role, not just in providing a stable governance and economic framework, but also launching specific initiatives in every sector that impact investors talk about: Jan Dhan Yojana, Digital India, Make in India, Swachh Bharat Abhiyaan.

Fellow panelist Preeti Sinha, who is Senior President at Yes Bank, & Glocal Convenor of the Yes Institute, made a strong case for increasing the involvement of mainstream investors in development. She said, “Mainstream private capital has to be involved in a country’s development. Otherwise the ecosystem of the country will not change.”

She said the Yes Institute aimed not only to bring more mainstream investors into development, but also to bring in innovative financial instruments such as social impact bonds, as it is doing with an educational institution in South India. It was also working on a crowdfunding platform for culture and green bonds issued by the private sector, and sold to the public sector, she noted. “Basically we are trying to increase the pool of capital that does development,” she said.

Panelist Ranjna Khanna, Director of the Impact Investors Council (IIC), said she believed the impact investing community would substantially contribute to India’s growth by investing at the grassroot level and creating jobs at the bottom of the pyramid. She said, “In the past few years we’ve been seeing a lot of positive changes, all aimed towards the under-served. For example, the priority sector guidelines of the Reserve Bank of India direct bank financing towards the bottom layer, particularly recent changes in priority sector lending to include social infrastructure and renewable energy. That will open a lot of opportunities for banks to invest viably in these sectors, and we will certainly see creation of more schools, healthcare and sanitation facilities.”

On the funding side, she noted that the alternative investment funds (AIF), including social venture funds, were largely created to pool Indian and foreign capital for investing in India for pre-defined social impact goals. “From 2015, with the tax pass-through happening for Category I and II AIFs, this will give a fillip to the entire industry,” she said.

Additionally, she noted, there was the India Aspiration Fund of the Small Industries Development Bank of India – a fund of funds aimed at investing towards VC funds that provide equity support to small enterprises, especially at the startup level. She said, “We clearly see the policy environment getting more and more conducive for the social entrepreneur.”

She said IIC was committed to align policy changes further for the benefit of impact investing. “Areas where we would like to go forward include making India ready for more innovative products such as social impact bonds, which increase accountability in social financing,” she said. She also favored creating more opportunities for social enterprises to access ECBs so that their debt costs could come down. One could also look at creating institutions like Big Society Capital in the UK, which could mobilize funds lying dormant within the banking system, she said.

Mr Bhatia raised the concern of the skewed distribution of social sector capital. He said, “Most issues we read about daily get no funding. Gender issues, disabilities, climate change infrastructure beyond than solar power – next to nothing. In social impact investing, almost 94% goes to just two sectors: financial inclusion and clean energy. On the philanthropy side, over 90% goes to just four sectors: education, health care, disaster relief, and rural development. How do we see the diversity of our fundraising and expenditure?”

Mr Mitter noted that it was easiest to attract investment in financial inclusion. He said, “Areas like education or jobs/livelihoods are much tougher. The reason is that impact investors are mostly looking at financial returns. Of course they have a social agenda, but the financial return is important.”

He noted that other areas, such as education, skills, livelihoods, were in a phase where they required “capital of a very different nature – capital that is very patient, has a higher risk appetite that philanthropic organizations can take, proving that it is safe and at a stage where it can attract private capital.

That’s the reason we believe there’s a very important role for philanthropic capital to demonstrate models in areas such as education, where it is difficult to create viable business models.” By contrast, he said, areas such as MSME finance were challenging but there was a line of sight to financial viability. “Different capital needs to play different roles,” he said, adding that thought leaders and influencers should step forward and deploy whichever type of capital deployment fit their strategy.

Ms Khanna underscored the importance of drawing in retail investors into impact investing, through crowdfunding, by creating structures that let them invest in social impact bonds, and so on. India could also look at setting up exchanges like the Impact Investment Exchange, Singapore, which does market assessment and dealing in securities in the social sector, she said.