Impact investing: Making money care more?

One of the more encouraging developments for those of us who worry about tomorrow, is the impressive growth of the field of impact investing in recent years; a breath of fresh air against a historical backdrop of businesses driven exclusively by profit.

This is about investing in businesses that combine financial return with social return, whether that is in the form of employing people from vulnerable population groups, reducing food waste and helping those in need, reintegrating ex-convicts into society and into the labour market, or the increasingly relevant fields of climate action and environmental sustainability. A business with a cause, as it were, and the investment ecosystem behind it, are on a strong growth trajectory.

This growth is reflected not just in the numbers — with the impact investing market topping $500bn in 2019 according to the IFC — or the strong public policy shifts in this direction, but also in the type of actors that populate the stage.

Impact investing is no longer the arena of just philanthropists, business angels, mission-driven private investors and foundations, as much larger, institutional investors have taken to the field.

“Compared to 2015, proposals we’re receiving in the impact investing space have quadrupled,” says the EIF’s Cyril Gouiffes.“

Ten years ago? Spain was a desert in terms of impact investing,” adds Xavi Pont of Ship2Be, a Barcelona-based impact investing fund. “Now it´s gone mainstream.” In 2019, Xavi calculated that the impact investing market in Spain was around €239m, and in 2020 more than €500m, with big players in the economy coming into this space.

The impact investing scene is now loaded with more mature fund managers with greater experience and better insights.

But as the market grows, and the topic attracts ever-more attention, is there really something to it? Is it proven to be investible or is this just hype?

Florian Erber of Ananda Impact Ventures, based in Munich, has no doubts: “Ten years ago it was an immature market, with no lingo, no terminology and vague notions. Our peers from VC at the time would look at us and wonder ‘What are you doing? Can you really make money?’ But we’ve had some strong exits to show, with high returns, like the sale of Kinderzentren Kunterbunt or Arbor Education. And at the same time, companies like Auticon are real global leaders in their field.”

In the absence of decades of data to prove the attractiveness of this field in terms of financial return, investor concern over the trade-off between financial and social returns would not appear misplaced. But recently we’ve been seeing more and more social businesses not only doing well, but approaching unicorn status, particularly in education, healthcare and the circular economy. And on top of that, there’s also a very important third dimension — volatility.

If there’s one thing the impact investing space can pride itself on, it’s an investment proposition characterised by lower volatility. Impact investing funds like Ananda, Oltre Ventures and Ship2Be all boast very few write-offs. “This is our value proposition to institutional investors,” explains Luciano Balbo of Oltre Ventures, Milan. “The risk of write-off is lower than, say, developing a new device.”

The stability in the risk profile can compensate for potentially lower financial returns. “It’s not just a trade-off between financial returns and social impact, because there’s the risk dimension too. The stable risk profiles offset the lower financial returns,” explains Florian. “We’re talking about stable businesses, robust companies… If you can get more over the finish line, that security is very important for investors.”

As the field grows however, along with opportunities come new risks. For all the merits of signalling effects and seals of approval, with a broader and more diverse range of actors, the alignment of interests starts to become more complicated and the pressure on financial returns grows. Larger institutional actors will typically work with larger ticket sizes, seeking appropriately-sized ventures to invest in. This inevitably changes the scene. Smaller, very local ventures with high social impact could get left behind.

At the same time, there is also a natural confluence of various flows of financing developing: as philanthropy, public support and private actors come together, boundaries are blurring and dividing lines are overstepped. With this, the need arises to break the boundaries between all these different actors working separately on societal issues.

Connecting investors from diverse backgrounds, however, is not straight-forward. “We need to get them all around the same table,” says Xavi. “And that’s a big challenge. They speak different languages, they have different values, they’re radically different…”

Speaking different languages isn’t just about values. It’s also about definitions, metrics and how you go about measuring impact. Yet despite significant efforts from public policy and industry actors, the absence of common definitions and impact measurement methodologies remains a lingering weakness, a sort of Achilles Heel that opens the doors to impact-washing.

Nevertheless, despite the increasing risk of impact-washers flocking to join the party, there is also a sort of authenticity about the impact investing scene that’s difficult to quantify in a report and can’t really be backed up with hard data. You could call it a sense of solidarity perhaps, with fund managers cooperating, helping each other and regularly sharing deal-flows.

“I’m an emotional person. I’ll admit that,” says Elemer Eszter of Impact Ventures in Hungary. “I was in real estate between 2000 and 2010 before I moved into impact investing. I used to attend conferences all over the world and I can tell you everyone was always extremely tight, rigid, motivated by primary interests. But in the impact investment field, if you go to a conference, everyone is open to discuss, the level of cooperation is extremely high, people look for synergies… I was convinced this is my field. I love to do business, to figure out solutions, to be creative, but on top of that, I can create social and environmental value. I need that as well.”

The EIF has been investing heavily in this space, doing its part in building up the impact investing ecosystem with dedicated instruments, and looking ahead, is keen to maintain the momentum in this area. But it also harbours a different level of ambition. “Seeking only financial returns got us where we are today in the first place,” explains Cyril, who often worries about tomorrow.

“Our vision for a sustainable future is one where there’s a positive correlation between financial success and social impact. And in this respect, we have to think beyond the narrow confines of any one sector. Impact investing is here to stay, but I think that it can grow beyond being a niche within the venture capital space. Our ambition is that it will steer a whole new way of going about venture capital in the future, factoring in more parameters than simply financial performance in making an investment decision. It’s no longer going to be a choice between doing good or making money…”