Impact investors seek to self-regulate. Will it work?

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Some interesting news came in earlier this week from the impact investing space. Nine impact investors, including Aaviskaar, Omidyar Network, Elevar Equity and Unilazer Ventures, have come together to set up a self-regulatory body called Indian Impact Investor Council (IIIC), reports The Economic Times. Unitus Seed Fund is also a founding member. The trigger for the initiative appears to be the recent microfinance crisis, which saw several impact investors (venture capital investors who focus their investments on opportunities at the bottom of the pyramid) burn or struggle to salvage a significant chunk of their investment portfolios.

IIIC proposes to make it binding for members to conform to certain best practices while pursuing their investment objectives. These could range from defining the sectors that qualify for impact investments, the tenure of investments and metrics for measuring returns. The body aims to have 30 members by the end of the year and also plans to include DFIs (developmental finance institutions) such as USAID and IFC. The World Bank-backed IFC seems to have given it nod to the initiative. “We will come in. It’s a good idea,” the report quotes Anil Sinha, regional head, advisory services, South Asia, IFC.

The move to self-regulate is well intentioned. There is certainly a need to give impact investing a clear and distinct identity, separate from conventional venture capital investing. But there are bound to be challenges. For instance, the tenure of investments and metrics for measuring returns could be a tricky area to navigate. Many impact investors collaborate with conventional venture capital investors on deals more often than not. While conventional venture capital investors also have fairly extended holding periods, usually 5-6 years, their exit considerations are often dictated by market considerations rather than social impact.

It’s early days and more clarity will emerge no doubt as IIIC defines its contours. Globally, some pointers on how impact investors self-regulate can be found at the Global Impact Investor Network (GIIN), a Rockefeller Foundation-backed initiative started in 2008, which has developed a standardized framework for assessing social and environmental impact.

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