Impact investors are now looking at India as a compelling opportunity. Here's why.

As the United Nations Decade of Action has come into its third year, seeking to accelerate sustainable solutions to the world’s biggest problems, the need for new markets and funding flows is clear.

The financial industry, which oversees 90% of the world’s liquid assets, will be key here and, most importantly, the financial hubs of the United States, China, the European Union and later, India. They will be the most influential arbiters of financing decisions between now and 2050 and can help bridge lagging funding for the Sustainable Development Goals (SDGs) as the 2030 milestone draws near. Aided by impact investments, these economies could seed the needed 16-20% of gross domestic product for SDG funding from the current 4-5% of GDP rates annually spent.

For those unfamiliar with the term, impact investments aim to achieve positive social or environmental impact alongside a financial return. Most impact investment funds across categories earn a market rate of return, contrary to the belief that chasing social or environmental good means foregoing financial gain. And India is one of the most fertile environments for impact investors to seek opportunities.

The venture approach is the most common business model for impact investments in India, which encourages investing early in for-profit enterprises in markets catering to the vulnerable, weaker and underserved sections of society. However, mainstream investors have invested significantly at the early stages of sustainable businesses and the first round of venture initiatives, obscuring the distinction between them and impact investors.

There exists a “missing link” in the market: the absence of India-focused growth-stage impact funds that can finance the transition of impact enterprises beyond early venture funding. Growth-stage funding is necessary to scale solutions where they can have a planet-level impact and move the needle on SDGs.

Now, a new report from the Impact Investors Council (IIC) has spotlighted impact investment opportunities in India for growth-stage investors. We can see an acceleration of Indian impact enterprises graduating to later funding stages, presenting attractive investment opportunities for asset managers focusing on growth-stage impact enterprises with sound fundamentals.

The impact investing market in India has grown significantly in recent years. Big ticket deals (more than $10 million) have more than doubled in the past five years or so, with the number of deals in the $20 million or more range having increased by a factor of times 2.3.

Nowhere is there a greater need for the resolution of environmental and social challenges than in emerging markets – hosting 86% of the world population and nine of the top ten cities most vulnerable to climate change.

Among the emerging markets, India is the biggest investment destination with good investor confidence but investment interest is still far less than it needs to be. So far, focus has lingered on early-stage investments in solutions that didn’t necessarily scale. But impact investments in India are now expanding beyond financial inclusion into emerging sectors such as agriculture, technology for good, healthcare, education and livelihoods.

Multiple factors drive this growth in investor confidence and impact investments in India, compared to other emerging markets:

Several policy initiatives by the Indian government are further facilitating a growth-stage impact investing landscape in India.

The Indian government’s flagship initiative, Atal Innovation Mission, launched in 2016, aims to provide technical and infrastructure support to startups that focus on creating positive social and environmental outcomes. One of its key initiatives, Atal Incubation Centres, is dedicated to nurturing impact-driven startups that bring technological innovation in areas such as energy, health, education, agriculture and artificial intelligence.

The Indian government’s Social Stock Exchange (SSE) is a ground-breaking platform designed to bridge the gap between investors and social enterprises focused on promoting social welfare and environmental sustainability. After receiving final approval from the Securities and Exchange Board of India (SEBI) in 2022, the SSE is poised to establish a new asset class for investors to enhance access to capital for growth-stage impact-driven enterprises.

The Samridhi Fund, launched by the Small Industries Development Bank of India (SIDBI), seeks to provide capital to financially viable social enterprises. The emergence of such government-backed funds can boost confidence among early-stage impact investors, encouraging them to support growth-stage companies expanding with innovative business models, products and technologies that hold significant potential for scaling up.

In all, the environment in India is ripe for impact-focused limited partners and asset managers – domestic and international – to support financially attractive and socially impactful companies with large target markets.