Picture: Mark Koch
KEY POINTS
Impact investing landscape in Europe is still difficult to size due to limited consensus on the definition, lack of statistical data and absent impact measurement system
Welfare policy and economic development state - main factors determining the heterogeneity of European impact investing markets
Key market building driver: collaboration between public and private sectors
Next steps for scaling the impact investing market in Europe
The impact investing landscape in Europe is still difficult to size...
Defined as an efficient blend of strong, positive, environmental and social impact alongside financial returns in an investment, Impact Investing is still considered to be a new trend in the investment world.
Investing in opportunities in both developed and developing markets to support the economic and social development of disadvantaged communities, in areas such as health, education, housing, and financial and economic inclusion, or supporting worthwhile social objectives or environmental objectives such as encouraging diversity, developing sustainable agriculture or clean technologies with an intention to measure and manage social and environmental impact, remains a peripheral sustainable and responsible investment (SRI) strategy to most investors in Europe.
Source: Eurosif
However, it’s importance is rapidly increasing: according to Eurosif, impact investing continues to grow registering a 6-year CAGR of 52% in period of 2011-2017.
Source: Eurosif
For 2019, market size estimates vary from as low as 11,8 billion Euros (Global Impact Investor Network, GIIN) to as high as 108,6 billion Euros (Eurosif), which shows that defining European impact investing market size unilaterally is challenging...
Source: https://impactdatabase.eu/read/
…due to three key factors
Limited consensus on the definition. One of the reasons for such radical difference between estimations is limited consensus among mainstream investors and specialized niche players on the definition of impact investing. The lines between different forms of Sustainable and Responsible Investing (SRI), ESG Investing and Impact Investing are still quite blurry, definitions and calculations vary, which demonstrates that the market is yet to mature.
Lack of reliable aggregated statistical data. That is a known weakness of the on the impact investing market in Europe. GIIN might seem to be one of the most reliable sources for Impact Investing market data, however, it only conducts annual surveys amongst its member list, which does not include all impact investors and not all those on that list might be dedicated to only impact investing. Other sources, such as Eurosif, do report on a broader SRI market, however, recent comprehensive studies on impact investing in Europe in particular are difficult to find.
Absent unified impact measurement system. Since there are no internationally standardized regulations for impact measurement in investments, it is quite easy to self-proclaim as an impact investor, or not categorise yourself as one, which makes it difficult to keep track of all impact investors.
Welfare policy and economic development - main factors determining heterogeneity of European markets
Western Europe dominance. In Europe, impact investing markets vary greatly from country to country. Impact investors have more established presence in Western Europe compared to Eastern Europe due to older traditions of institutional investing, presence of well-established financial actors such as pension funds and insurance companies as well as more engaged action against social and environmental issues.
According to Eurosif, impact investing is notably increasing in Spain and Italy, with positive signs observed in Sweden, Belgium and the UK. In case of the Netherlands, the sharp fall in Eurosif study is “largely explained with a respondent gap rather than a shift in trends”. The country remains one of the most important hubs for developing and implementing the way forward for impact investing.
Source: Eurosif
UK’s leading position. In Anglo-Saxon countries with liberal welfare states such as United Kingdom, impact investing market has been developing much quicker and took a leading position with players such as Big Society Capital. In market since 2012, it manifested as an effort of the UK government to efficiently provide capital for the existing intermediaries and build the market; it remains one of the key British players in the field.
New impact investing hub - Paris. However, due to Brexit taking place, more impact investors are seeking to establish their presence in the continental Europe. Paris, for example, has become an important hub for Impact Investing, with many impact related events taking place in the French capital. Paris Impact Investing Association has taken efforts to create an ever-evolving ecosystem map encompassing at least 30 active impact funds in Paris and beyond further fortifying its position as new impact hub.
Largely unexplored Eastern and Central Europe. While the iron curtain is long gone, the difference between stages of development in impact investing market between Western and Eastern Europe are showing that its effects are still felt. According to the last GIIN Annual Impact Investor Survey (2019), we observe that the number of headquarters of impact investing funds in Eastern Europe combined with Russia and Central Asia reach only 1%. While that is not an indicator of a market size, it does demonstrate that local impact investing market has hardly started to form, as the main investor focusin this region has been economic growth in the past decades.
Eastern Europe, Russia & Central Asia combined: 1%
Source:https://thegiin.org/assets/Sizing%20the%20Impact%20Investing%20Market_webfile.pdf
That does not mean, however, that the market is non-existent. Deloitte has taken on an effort to measure market readiness in Eastern and Central Europe by introducing its Social Investment Leveraging Index. It has indicated that “the highest score was calculated for the Baltic States (50.3), compared with 40.7 in the Balkans and 50.1 in the group in which Bulgaria, Moldova, Romania, and Ukraine were included.” (Deloitte). Such scores show, according to Deloitte,that venture philanthropy and social investments would be worthwhile.
Collaboration between public and private sectors as a key market building driver
While it seems that public sectors are often lagging behind andinnovation is largely driven by the private sector, there is great interest for public sector to engage in facilitating impact investing market growth as it contributes not only to the economic development and drives metrics such as GDP up, but also solves social and environmental issues. Increasing public sector efforts have been observed across Europe not only on the national level, but also EU-wide.
France. One way to explain the boom of impact investors in Paris, for example, is the push from the French government.Article 173 of the Loi n°2015-992 of August 17, 2015 related to the energy transition for green growth imposes impact measurement for bigger institutional investors. This law has indeed driven more investors to report on their impact, however, gaps are still noticeable: since no official methodology has been proposed, the quality of impact reports varies greatly, according to Novethic.
Germany. Development of impact investing market has been slower in countries with strong welfare state tradition such as Germany due to “the fact that mutual adaptation between SII (Social Impact Investing) and existing state-sponsored social welfare ideals has yet to take place.” (Bertelsmannstiftung). Nevertheless, we can observe recent market-building initiatives resulting out of the cooperation between public and private sectors. According to GSG research, Germany’s nascent impact market is gaining momentum: “existing funds have raised more capital, foundations have become active impact investors, existing intermediaries are developing new investment products, impact-driven organizations are increasingly securing investment and the market has stabilized.”
Germany’s challenges such as a small investor base, few intermediaries and little diversification, a limited number of investment products, few investment-ready impact-driven organisations are being actively tackled by a growing network of supporters and advisors, positioning it as an opportunistic growing market to be watched in 2020.
Europe. New EU regulatory efforts such as EU taxonomy for sustainable activities will undoubtedly stimulate EU markets,including the very youngest ones like Eastern Europe. But it will take more than EU’s efforts for these markets to fully mature: stakeholder coalitions and ecosystem building efforts by local entrepreneurs, investors and supporters are necessary for these markets to become investable.
Next steps for impact investing market in Europe
There is no doubt that impact investing is becoming a very important part of the traditional investing landscape. With increasing amounts of proof that purpose-driven projects have increased financial value (Forbes), more and more institutional investors are turning towards investing in such enterprises. However, for impact investing market to flourish, few key market building milestones must be passed.
According to PlusValue research, key priorities for impact investing agenda are, unsurprisingly, establishing common framework for impact measurement, increasing public engagement in impact investing and defining of impact investing itself. This can be achieved by a closer dialog between private and public sectors, awareness raising and active participation of all stakeholders. This would lead not only to accelerated market development in the under-tapped areas of Europe, but also scale it further all over the continent.
Source: PlusValue
Research by @OdysseusPartner / @MortaKaz / @Minh_Q_Tran
For more information, contact: minh@odysseuspartners.com / @Minh_Q_Tran