Impact investing – Importance, tax breaks & challenges

For decades, the world was only concerned with making more and more profits without accounting for the impact it has on the planet and our future generations. However, we have now woken up from our deep slumber and realized that protecting our climate and the planet is the need of the hour. There needs to be a conscious use of the limited resources and innovations to reduce the devastating impact we have on the climate if there is going to be any possibility of a stable future for our generations to come. Therefore, public and private organizations alike have stepped up in their efforts for the same and started with projects that will not only bring development but will be sustainable development without damaging our home. This impact investing model is not gaining a foothold worldwide. 

Given below is the core meaning of impact investing, what it means for India, and the challenges faced by us in shaping it. 

What is impact investing and why is it important? 

Impact investing, as discussed above, is the drastic change in the investment model adopted by the world since the start of industrialization. Earlier the only basis for evaluating a project would be the risk and return analysis or the cost-benefit analysis. The impact investing model adds the analysis of the impact project can have on society and our climate as a whole. 

One of the prime shifts of focus on climate saving efforts is the importance given to sustainable energy and clean energy by the governments and the public at large. The automobile sector has one of the largest carbon footprints in the modern world. 

Today there is a conscious effort by the government to create green corridors that push electrical vehicles in the market and the public too is participating by gradually shifting towards the same. Such is the scale of efforts that our Minister of Road Transport and Highways, Honorable Mr. Nitin Gadkari, has said on record that India will not need petrol for its transport sector in the next 5 years. This is no doubt a tall claim but it definitely shows the commitment of the state and the citizens alike to even make one.

Impact investing focuses on various sectors like healthcare, housing, renewable energy, education, sanitation, agriculture, etc. The investment into these sectors is usually made by HNIs (High Networth Individuals), Non-Profit Organizations, Pensions Funds, Government budget allocations, etc., which can be made in diverse asset classes similar to usual investment options like shares, bonds, various funds, ETFs, venture capital or private equity, as well as fixed income instruments. 

The increase in the impact investments is on account of the increasing millennial investor’s awareness of sustainable developments. These projects are usually capital intensive and take a longer gestation period to turn profitable. Hence, investors expect low to moderate returns initially that are usually below the market average but make a good addition to the overall investment portfolio. 

Will tax breaks promote impact investing?

India is a country that understands finance as the basis of its decision-making as it all boils down to money for the majority of individuals. It has been the policy of the government to push social initiatives in the form of tax breaks and incentives to make them more popular and in turn, impact the social fabric of the country. 

Impact investing in India, although growing since it was launched in 2010, is still very much in its nascent stages and needs a lot of funds from the impact investors as well as a public-private participation model to create innovations that can help society and the climate. Currently, there are no special tax concessions or exemptions for the businesses in the impact investing space. However, tax incentives in the form of tax holidays or reduced tax rates will incentivize the participants and increase the overall inflow of funds for projects under impact investing. 

Recently our Honourable Finance Minister also talked about launching an SSE (Social Stock Exchange) where the securities of the companies involved in social and environmental benefits can be listed and traded. This will bring higher transparency, awareness, and access for impact investors and help it grow leaps and bounds. This idea was followed up by SEBI and a working group for the same was formed with their report put in the public domain for feedback from various stakeholders. 

What are the challenges of impact investing?

The Indian impact investing space has many roadblocks right from registration to administration and various other avenues. Some of the prime challenges in the impact investing sector are,

1. Lack of a structured taxation system specifically for impact investing ventures that can provide tax incentives, tax breaks in the form of exemptions or deductions
2. Since impact investing in India is at a nascent stage, the costs of registration, compliance, as well as the overall cost of business, are higher. Coupled with lower returns, this often discourages private participation as well as potential investors. 
3. Another deterrent to the impact of investing is the high level of bureaucracy in the country for starting any project and the lack of ease of doing business in many parts of the country. However, the government has taken note of this and there are structured initiatives taken to improve this hurdle. 

Conclusion

The impact investing market in India is quite huge even if it is in its initial stages. The overall investments in this sector are in billions already and have been attracting more from various avenues. It has long been realized that sustainable development is the key to surviving and eventually growing and the world as a whole is working towards it at a greater pace. 

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