Impact investing: Opportunities abound in India’s education sector

By: Sanchita Mehrotra, Two-Year MBA ’21
A picture of Sanchita Mehrotra standing in the midst of young adults in a classroom with computers.

Sanchita Mehrotra, MBA '21, (standing) volunteering at India’s NIIT Foundation, where she helped to train underprivileged youth for employment opportunities

Education has always been close to my heart. Prior to attending Johnson, I volunteered at NIIT Foundation, which aims to train underprivileged youth to improve their employment prospects. During that time, I interacted with students and heard first-hand accounts of the struggles their families face to ensure their children receive the education they deserve.

headshot of Lydiah Bosire
Lydiah Bosire, MPA ’02, founder of 8B Education Investments, an impact investing company

Last spring, when I heard Lydiah Bosire, MPA ’02, speak in the Finance and Sustainability Colloquium, her story resonated with me. Bosire founded 8B Education Investments, an impact investing company that provides affordable financing solutions for African students to attend university. Like Lydiah, and as a Johnson Environmental Finance and Impact Investing (EFII) fellow, I wish to build a career at the intersection of finance and sustainability and mobilize investments into socially viable opportunities to strengthen developing economies. Lydiah’s presentation made me wonder about other impact investments within the education sector, specifically in my home country, India.

Literacy in India

While India has made great strides in improving the literacy rate amongst its population, it still has a long way to go. According to the 2018 UNESCO report, Accountability in Education: Meeting Our Commitments, 35 percent of the world’s illiterate population live in India. Almost a fifth of the country’s population—266 million adults—is still unable to read and some 12 million children are not enrolled in school.

Despite the vast amount of money spent on education and many well-intended alternative interventions from government, NGOs, and the private sector, the country has yet to see any substantial impact at a grassroots level. In my opinion, this provides a significant opportunity for impact investors.

Apprehension for investing in education

Until recently, impact investors represented a relatively niche market. However, the sector has grown quickly and the most recent report by the Forum for Sustainable and Responsible Investment estimates that in 2018, “sustainable, responsible, and impact investing” accounted for $12 trillion in assets under management.

That said, impact investing has not grown evenly, as investors have begun gravitating toward a few sectors—particularly energy, microfinance, and food and agriculture. The opportunity for impact investors certainly exists but it has not translated to substantial dollars flowing into the education sector. Nevertheless, as I dug deeper, I was excited to find two innovative initiatives in India.

Notable education impact investments in India

Indian School Financing Company

The Indian School Financing Company (ISFC) provides schools, especially those with limited access to credit, with financial resources to improve infrastructure and increase the quality of education offered. It largely assists low-fee private schools that serve roughly 30 percent of India’s 300 million school-age children. These schools primarily cater to poor families, who are drawn by the opportunity to have their children educated in English rather than the regional language government schools teach in.

In a pilot initiative in 2015, the Michael and Susan Dell Foundation worked with ISFC to create a new financing mechanism that linked learning outcomes to financial incentives. The foundation lends to ISFC, which, in turn, provides a three- to six-year loan to private schools at a variable interest rate. At the beginning of the loan, an independent agency (Gray Matters India in this case) assesses learning outcomes and sets a baseline for the school. After two years, an end-line assessment is conducted. If students’ test scores improve by five to ten points, the school can get up to a 10 percent rebate on its loan. Even with the rebate, ISFC generates enough in interest payments to cover both the total rebate amount and student testing costs (approximately $1.30 per student).

This innovative design ensures that the foundation pays only for demonstrated outcomes, while incentivizing affordable private schools to prioritize learning improvements.

Educate Girls Development Impact Bond

The world’s first development impact bond (DIB) for education, the Educate Girls DIB, was launched as a proof-of-concept project in Rajasthan from 2015 to 2018. The investor, UBS Optimus Foundation, provided upfront capital to Educate Girls (the service provider) for executing their programs. Optimus received a 15 percent internal rate of return from the outcome payer, the Children’s Investment Fund Foundation, when agreed targets were met, as evaluated by an independent third party, IDinsight.

The Educate Girls DIB had two target outcomes: to improve learning outcomes in English, math, and Hindi (80 percent focus), and to increase enrollment of out-of-school girls (20 percent focus). The program ultimately exceeded its target outcomes but, as with most social impact bonds, learning outcomes that emphasize quality proved more difficult to achieve.

In year two, through annual performance measurements, it was found that Educate Girls had lower-than-expected learning outcomes. As a result, in year three, the team adapted the program by increasing the number of teaching sessions, aligning teaching groups to competency levels, and emphasizing personalized learning. Consequently, the team was able to improve the learning outcomes and exceed the defined target outcomes.

The Educate Girls DIB provided a template for future social impact bonds in this sector. In fact, the newest impact bond in India—Quality Education DIB, launched in September 2018—builds on the learnings of the Educate Girls project, but on a more ambitious scale, with the potential to improve learning outcomes for over 300,000 children in grades one through five in Delhi and Gujarat over the course of four years.

Looking into the future

As I think about my career journey, I realize that classes at Johnson not only help develop skills for a career in business but can also provide a glimpse into the future and the unique opportunities that are available to use an MBA for social impact. The Finance and Sustainability Colloquium, coupled with Lydiah’s inspiring story and presentation, piqued my interest to learn more about impact investing with a special focus on initiatives that are being implemented in my home country.

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headshot of Sanchita Mehrotra

Sanchita Mehrotra, Two-Year MBA ’21

Sanchita Mehrotra is a second-year MBA candidate at Johnson. Prior to business school, she worked at Ernst & Young in risk advisory services. At Johnson, she is pursuing her passion for impact investing through the Environmental Finance and Impact Investing (EFII) Fellows program to better understand the role capital markets can play in driving positive social impact. She is co-president of the Investment Management Club, a portfolio manager in the Cayuga Fund, and a member of the Sustainable Global Enterprise Club. This past summer, Sanchita interned at Goldman Sachs in the global investment research division, where she will return full time upon graduation. She holds a bachelor of commerce degree from the University of Delhi and she has completed all levels of the CFA program.