INSIGHT by Uli Grabenwarter, Deputy Director – Equity Investments at European Investment Fund (EIF)
Newspapers, conferences, podcasts, book publications around the globe are suggesting that the moment has arrived: Impact investing has become mainstream. It is no longer a religious debate on the boundaries of impact investing that determines whether the USD 1 trillion threshold has been surpassed.
New targets are proposed: USD 30 trillion by 2030? USD 100 trillion?
In a way it is fascinating to see how financial market commentators can be passionate about these threshold games… and in doing so, entirely miss the plot.
Seven years after the birth of the Sustainable Development Goals (SDGs) in Paris we celebrate record sums deployed in sustainability investing. We are perfectly on the path to raise the additional USD 30 trillion of sustainability-dedicated finance we had estimated back in 2015 to be needed by 2030. Total sustainability investment assets under management were at USD 22.8trn in 2016, reached 35.3trn in 2020 and meanwhile comfortably exceed USD 40trn. (Source: Global Sustainable Investment Report 2020)
Yet, at the same time, the Global Investors for Sustainable Development Alliance estimates the yearly funding gap to reach the SDG targets to be some USD 4.3trn, which predominantly reflects the SDG funding needs in developing countries. (Source: SDG Knowledge Hub / IISD)
This means that despite having raised trillions for funding SDGs since 2015, we are today further away from reaching the SDGs than we were in 2015 and we have less time to solve them. Hence, something must have gone wrong with impact investing.
The flaw is in one of the proclaimed very foundations of impact investing: the hypothesis that there is no trade-off to be made between impact and financial return. Or, in other words, that you can do good and do well at the same time.
The flaw is in one of the proclaimed very foundations of impact investing: the hypothesis that there is no trade-off to be made between impact and financial return. Or, in other words, that you can do good and do well at the same time.
Sir Ronald Cohen, one of the founders of the impact investment movement and one of the most altruistic figures pushing this movement forward summarised the ambition of impact investing once by saying that we need to “make capitalism deliver on its promise to increase prosperity and social progress for all”.
What sounds like the pursuit of a very noble cause faces a fundamental problem: capitalism has never made the promise to increase prosperity and social progress for all – and hence will not deliver it.
For more than a decade we have succumbed to the illusion that there is no trade-off to be made between societal impact on one side and financial return on the other side. This illusion may very well prove true if we look at a very narrow slice of economic activities that positively correlate net-positive societal impact (i.e. impact net of any negative side effects or collateral damage for society) with economic return. It is the type of impact that is brought to us as “investment opportunities” which we then fund through what I call opportunistic impact investing. But, since these are investment opportunities, they are, at the end, merely opportunities to increase prosperity which we may have invested in also if we were totally agnostic to any impact dimension.
For all other impact objectives that are placed outside the mainstream investible risk-return spectrum this “no-trade-off” concept of impact investing is an outright lie. It no longer takes science to acknowledge that, if we are serious about our survival as human species (I mean collectively and not as one privileged individual seeking protection in a high-tech shelter that resists the forces of nature), we will have to make massive trade-offs: trade-offs with respect to the natural resources (water, air, fertile soil, …) we rely on, trade-offs with respect to all type of scarce raw materials, energy resources we use, trade-offs in our food supply chain, etc…
These trade-offs are already present today and have become a striking reality that simply can no longer be ignored. It is time that we accept this reality and move out of denial – also as the impact investing community.
We can debate who is going to bear the cost of this trade-off. Whether it is the investor, the consumer of products and services of enterprises, or the society at large in paying for collateral damage to our living base through taxes. All this we can debate at length. But we need to accept that this trade-off exists and has economic consequences that someone has to bear.
As the impact investing community we need to accept that opportunistic impact investing, in substance, is not impact investing. From now onwards, we ought to focus on impact-centric investing in pivotal solutions for sustainability and on construing funding solutions to make this impact happen.
As the impact investing community we need to accept that opportunistic impact investing, in substance, is not impact investing. From now onwards, we ought to focus on impact-centric investing in pivotal solutions for sustainability and on construing funding solutions to make this impact happen.
We are capable of doing so, but we need to shift our mindset. We are still complaining that there are not enough investment opportunities for creating impact. We are competing for “investible” mainstream investment targets, which drives valuations of assets up until they no longer make sense whatsoever, while we are celebrating record allocations to impact investing. We stone-blindly overlook that the bulk of the increased volumes dedicated to “impact investing” have been deployed to overpay for the sparse “impact assets” there are and create the next bubble that unavoidably will implode. Which will then make us conclude that impact investing doesn’t work. What a pertinent logic for a humankind that faces extinction and wonders why?
If we want to break this cycle, we need to create honesty about the real cost caused by humankind living on this planet and integrate it in economic decision-making.
〉We may use concessionary capital, catalytic philanthropic capital or grants to subsidise the returns of investors who got used to taking a free ride on natural resources (air, oceans, drinking water reserves…) because they seemingly don’t belong to anyone specific
〉We can factor cost of pollution, scarcity of primary resources etc into market prices and have consumers pay for it
〉We can pay taxes to offset and repair the harm our economic system is doing to the natural ecosystem we depend on
〉We can accept as investors that the profit margins of our businesses and the returns on our investment products shrink or seek ways to monetise the value we create to society, net of any cost or damage we cause
〉Or we can choose to use any combination of the above to lead our economies to a system change that doesn’t trade in the very essence of the natural ecosystem for maintaining the illusion of “sustainable market returns”.
If we truly want to use the financial markets system for securing our perennity as a society, we will have to give up on merely trying to fix the system so that it can continue to serve the same ill-designed purpose. Instead, we will have to redefine the purpose of the financial system and measure the holistic value it creates rather than accounting for the financial profit it generates at the expense of our own living base in a zero-sum game. Impact weighted accounts may be a valuable yardstick on this journey but if we wait for moral pressure to naturally align corporates behaviour with the imperatives for our own survival, we most certainly will run out of time.
However, if only a fraction of reported impact-conscious capital from philanthropic capital on one side and return-seeking capital on the other side really exists, then there must be a massive opportunity for impact expertise as a unique selling proposition. Engineering funding solutions for tailored impact projects would be a very convincing differentiating element for asset managers competing for investors across the entire range of financial instruments, from equity products to debt instruments and outcome-based contracting.
However, if only a fraction of reported impact-conscious capital from philanthropic capital on one side and return-seeking capital on the other side really exists, then there must be a massive opportunity for impact expertise as a unique selling proposition. Engineering funding solutions for tailored impact projects would be a very convincing differentiating element for asset managers competing for investors across the entire range of financial instruments, from equity products to debt instruments and outcome-based contracting. It would also be the first credible pathway to blended finance, a theoretical concept that has been talked about for more than two decades but in essence has never materialised, for the absence of financial engineers with expertise to combine concessionary capital and return-seeking capital at fair and balanced terms.
Financial intermediaries that take the lead in developing impact-centric investment products in a new form of financial engineering could very quickly become the new sought-after zebra because it runs faster than all unicorns put together-. It just takes the first one to set the herd in motion. But will there be a first mover? Why bother if there is still so much “easy” money to be made? Right?
| about
Uli Grabenwarter, is Deputy Director – Equity Investments at European Investment Fund (EIF). In this capacity he oversees EIF’s activities in Venture Capital, Impact Investing, and Technology Transfer, with EIF being Europe’s biggest Fund-of-Funds Investment platform in these markets. Previously he was responsible for EIF’s strategic development in the equity investment and in this context has led the build-up of the Social Impact Accelerator, the first pan-European impact investing fund-of-funds. From 2010 to 2012 he conducted a 20 months research project on impact investing in collaboration with IESE University of Navarra in Barcelona and the Family Office Circle Foundation based in Switzerland, analysing best- market-practices for impact investing in the private equity and venture capital space. He is a visiting Professor for Private Equity and Venture Capital at IESE University of Navarra and, in his personal capacity, is an angel investor in life sciences companies. From 2018 to 2021 he served as a Trustee of the Global Steering Group for Impact Investment. He currently is on the Board of several asset management companies and family office structures. He regularly publishes articles and white papers on venture capital and impact investing. Uli is also member of several expert groups on impact investing and impact metrics across Europe. Uli holds a Master’s degree in Business and Finance of the University of Graz.
| All opinions expressed are those of the author and/or quoted sources. investESG.eu is an independent and neutral platform dedicated to generating debate around ESG investing topics.
