The impact investing agenda needs new leadership to take European society into the 21st century
Before Brexit, the UK led impact investing in Europe. The UK’s first-of-their-kind innovations in social investment institutions and initiatives (e.g. Big Society Capital; Social Impact Investment Taskforce; Social Impact Bonds) spread through the EU’s innovation policy and practice (e.g. Social Impact Accelerator). Now, Brexit threatens UK’s leading role in European impact investing and, with it, creates an uncertain future for the impact sector in Europe. To identify the most pressing issues, PlusValue with Finance Matters and the Italian Embassy in London organised a round table discussion with leading experts and investors in the field. While we don’t yet have all the answers, we certainly have some insights for the future.
Will Brexit kill impact investing in Europe? Brexit won’t kill impact investing, but it does put a big question mark on Britain’s leadership. Aligning with Trumps’ America in undermining international governance and human rights will surely erode the UK Government’s moral foundations from which to lead the agenda. On the other hand, this could free the impact investing sector from the British regulatory framework, potentially creating the springboard for impact investing to ask the tough questions, address state failure, and transform public services.
What is the real added value of impact investing? Harnessing the power of markets to make public policies and philanthropy more effective is part of the answer. But there’s more. The tough question is to assess if impact investing is more effective than government-led redistribution, or how the two can be complimentary. Impact investing lacks the democratic legitimacy but, when large financial and industrial players are involved, it gains agility and firepower. Industrialists and private investors have deep pockets and few constraints on their choices. More importantly impact investing can address causes beyond national borders – a feature not to be underestimated if government is high-jacked by a nationalist agenda.
Is impact investing about more than transforming the welfare state? It has the potential to transform capitalism, bringing stakeholders and externalities into the equation. The real challenge for impact investing is to embed impact in every business mission, model, and investment. We can start with high potential impact business such as infrastructure projects and urban regeneration. This would inject creativity and innovation to revitalize the economy, shifting towards greater social justice and environmental sustainability. This process has started to gain traction, for example the European Investment Bank includes ‘societal impact’ as an indicator for its €315bn investment programme for growth.
What is a ‘fair’ profit? This is a tricky question that requires a trade-off between investors’ requirements for capital remuneration at a price that accounts for the risk taken, balanced with the type of impact investment opportunities that come with greater complexity, costs, and longer timeframes. Nonetheless, impact investing must promise competitive returns or demonstrate the full value generated in order to appeal to mainstream investors. Currently this is not the case as government subsidies and philanthropy keep it moving, and 4% management fees (as stated by Big society Capital) leave the business to niche and typically non-profit operators.
What is the role of impact assessment? Measuring impact has been seen as an extra burden for frontline organisations, a liability for public officials, and trivial for investors. Impact consultants seem to be the ones driving impact assessment, and we can expect more to come. In our view, impact assessment should focus on a company’s or investment’s ability to create sustainable impact for stakeholders within their community or (eco)system. This in turn drives long-term resilience. Technology could play a key role, with next generation Internet initiatives (e.g. Blockchain, big data) providing new understandings of trust, risk, and pricing (e.g. EngagedX, UNSIF). As it evolves, impact measurement could incentivise public goods provision, subsidies, responsible consumption and production, and much more. For the impact economy to be increasingly viable, it must value those who commit the resources to measure it, while expanding the concept of ‘value’ beyond financial returns to include social and environmental outcomes.
What is the social dimension of impact investing? Beyond the social dimension as “social needs”, the Internet and social media could achieve a deeper and broader goal: collective participation. Progress has been limited to conversations between government, bankers, and philanthropists. We must do more for mass participation, to have the ambition to crowdfund and peer-lend the next generation of schools, hospitals, and other common goods that make a positive difference in peoples’ lives. This could build cross-generational cooperation between baby-boomers and millennials put on a collision course by previous economics. Millennials in particular want to shape their own future – social impact investing seems like the ideal fit.
We don’t yet know the full effects of Brexit. But we are confident that as the UK leaves the EU, the impact investing agenda needs new leadership to take European society into the 21st century. The competition is open!
Filippo Addarii and Joshua Phillips are respectively Co-Managing Director and Researcher at PlusValue, a research and strategic consultancy company.
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