Collection: Frontier Finance
Why does Europe seem to underperform in impact investing?
Those pushing impact investing need to address at least three key questions if it is to grow its relevance and fulfil its supposedly transformative potential. In the second of a three-part series, Gorgi Krlev, whose research at the University of Heidelberg’s Centre for Social Investment focuses on social enterprise, innovation and impact, asks: why does Europe seem to be left behind – and does it matter?
Last week, I argued that impact investing becoming ‘fashionable’ is a positive thing.
But as regards mainstreaming, one is left to wonder what is going wrong with impact investing in the European context. While 58% of investors of the overall $502bn market are situated in North America, only 21% are based in Europe, according to the Global Impact Investing Network. The German market – impact investments made by investors based in Germany into investees either in Germany or elsewhere – totalled a mere €70m back in 2016, as estimated by the Bertelsmann Foundation, when the data available suggested a global market of at least $15bn. Germany is Europe’s largest economy, so why is the impact investing market so tiny?
Germany is Europe’s largest economy, so why is the impact investing market so tiny?
The reason is one of definition, and of history. One factor is ‘within region’ investment – that is, when investor and investee are situated in the same region. Most European countries traditionally have a strong welfare state, where many services are provided by government itself or through public contracting on highly regulated quasi-markets. Some time ago the German ‘third sector’, comprising big charities such as Caritas and Diakonia, was estimated to produce 4% of Germany’s GDP, the equivalent of the construction or automobile industries. As a consequence, we have relatively fewer ‘gaps’ in Europe than in more liberal welfare states, where health insurance, unemployment benefits or childcare are considered private matters.
In more liberal systems such as the USA or the less developed welfare contexts in many developing countries, any increase of something like social service provision can be considered an impact investment, since it meets an unsatisfied social need. The establishment of a new childcare centre with private money, for instance, would fall under that category. In European countries, meanwhile, this would hardly be the case, since childcare provision is often a legal obligation of the state. To be categorised as an impact investment, a new facility would need to be progressive in some way, for example, be more effective in enabling learning.
Impact investing within Europe will always serve a different function than elsewhere
The point is impact investing within Europe will always serve a different function than elsewhere. The ‘additionality principle’, as explained by Oltre Ventures’ Luciano Balbo, underscores that to be considered investing for impact, private money shall not be employed to replace existing public structures, but instead needs to be more innovative and ultimately achieve something that wouldn’t have otherwise happened. This not only restricts the possibilities for impact investing, but also makes the criteria of what qualifies as such an investment more demanding.
What follows is that the size of the overall market tells us little about its transformative potential. For impact investing to play any part in Europe’s new mission-oriented innovation strategy, the market most likely will need to grow. So, yes, the relatively small market is cause for some concern. However, to really understand the difference impact investing makes, we need to capture the impact of investments made, not only their size. In this regard and for the above reasons, the European market may turn out to be more potent than others. At present, we simply cannot tell, because we lack appropriate data. As we advance, analysts must make sure they consider not only the size of impact investing markets, but the distinctive feature giving them their name: impact.
The post is inspired by a panel discussion at the Social Innovation Summit 2019. The author owes credit for impulses to the speakers and commentators of the event: Volker Then of CSI Heidelberg (Panelist) on welfare contexts and Giulio Pasi of the European Commission’s Joint Research Centre on additionality.
Let us know what you think by tweeting us @pioneerspost and @gorgikrlev. Next week: How to open the black box of impact investing?
Header photo by Michael Gaida from Pixabay.
