The European Sustainable Investment Forum (Eurosif) produced their 5th Sustainable and Responsible Investment (SRI) study this year. For the first time, it includes a brief review of the European impact investing market, as it’s being referred to as the “most talked about new investment strategy” in Europe.
The review is an attempt to measure the market and collect qualitative information. To gather insights, a questionnaire with a separate impact investing section was sent to respondents in their traditional coverage. A second smaller questionnaire was sent to 74 European organizations that have identified themselves as impact investors. So what do we know now about impact investing in Europe?
Impact investing is currently characterized more as an “investment philosophy” than a “distinct process” because investments are highly differentiated. It may range from profit-first to social impact-first investments and the investees may operate on a spectrum of revenue models. For sake of simplicity, the SRI study adopts the GIIN definition of impact investments as those made with the intention to generate social and environmental impact alongside a financial return, and it should be financially sustainable in the long run.
Traditionally, the only capital on the market tackling any sort of social or environmental problem is philanthropy, so impact investing sits between philanthropy and sustainable investing (focusing on environmental, social, and governance – or ESG – opportunities), responsible investing (focusing on ESG risks), and traditional investing (focusing on finance only).
The study mentions two main ways to view impact investments. Those that are “thematic” or those that are “impact-first”. Both thematic and impact-first investors seek the same impact, but impact-first investors may bear some financial tradeoff, while thematic investors identify the opportunities for market-rate or market-beating returns. Some business models may not generate market-rate returns due to the nature of their impact. Either way, both are classified as impact investments because of their ability to generate impact and differ only in their ability to generate competitive returns. An example of impact-first investments is investments funds that provide debt or equity to social enterprises. A thematic investment typically focuses on a niche (with commercial opportunities for investors) such as clean energy, healthcare, or microfinance.
In addition, impact investments in Europe are grouped into three categories: microfinance, social business, and community investments. Investments into microfinance improve access to financial services in emerging and developing economies. Investments into social business are intended to help the business generate a social or environmental impact alongside financial returns. And investments into community are intended to focus on affordable housing, small business creation, development of community facilities, job creation, and the empowerment of minorities. Any or all of grants, loans, and equity are used in structuring these investments.
Market Size, Barrier, and Opportunity
For the first time, Eurosif estimates the current European impact investing market at €8.75 billion. This number includes the invested assets of institutional and individual investors. Microfinance leads the way with a 55% market share.
In terms of qualitative data, respondents were asked to rank the importance of motivations for and barriers to impact investing. The top three motivations for impact investing are: contribute to sustainable development, contribute to local community development, and looking for stable long-term return. The top three barriers to impact investing are: lack of viable products/options, lack of qualified advice/expertise, and performance concerns.
Because impact investing is attracting attention from investors, researchers, and legislators, its growth seems guaranteed. But as seen from the microfinance sector’s woes, it will likely encounter concerns over quality and commitment on the path to growth.
Social Enterprise Buzz is a media company dedicated to covering social enterprise news from around the world. We publish a range of stories from startups to entrepreneurship, innovation, and finance, which showcase business making the world a better place. Read more.