Q&A: Social impact integral to competitive businesses

Alice Murray: How has the EIF's involvement with social impact investing come about?

Uli Grabenwarter: EIF started exploring concrete steps for introducing impact investing into its business activities in 2010 as a natural extension to its equity activities in venture capital and lower-mid-market fund investments. We felt there was a market segment to be developed around a new concept of entrepreneurship, which is looking at business models that derive their competitiveness from the positive correlation between the contribution they make to society - be it on environmental grounds or social grounds - and the economic value they can generate.

AM: Why is social impact investing important for the European Investment Bank?

UG: We are entering a time when the integration of societal value into the way we run businesses has to undergo fundamental changes. Competitiveness is no longer solely driven by the profitability of a company, the attractiveness of its products or the pertinence of its marketing channels. Companies are exposed to an ever-increasing complexity of stakeholder management, driven by externalities, consumer behaviour and pressure caused by transparency in a globalised and digitised market.

At the same time, we face unprecedented challenges in the way our society functions: our welfare state concept needs to rethink the way the public and private sector can cooperate in securing its sustainability; we need to find new solutions to issues linked to education, employment and social inclusion. We face demographic challenges never seen before, all amplified by the big question: how are we going to cope with the integration of millions of migrants into our society?

These challenges require innovative solutions that need us to break out of historic and often outdated thinking patterns to deal both with the novelty of challenges we face and also their unprecedented scale.

EIF's role is to pioneer concepts for funding this emerging market segment and we have started doing so with the launch of the first pan-European fund-of-funds in social impact investing in 2013, our Social Impact Accelerator (SIA). Since 2014, this is a mainstream activity of EIF's investment business, which we are now seeking to enrich with further instruments tailored to specific market segments and types of enterprises.

AM: As social impact investing is an emerging strategy, are there enough funds and managers to invest with?

UG: Social impact investing is clearly a novel investment approach that has to build its foundation like any new strategy. We see the market being populated from two directions: formerly philanthropy-oriented players that explore impact investing in order to increase the impact they can create with the resources they have. Many of the societal issues taken on in the past by philanthropic activities can actually be delegated to market-based models and become economically self-sustainable. On the other side of the spectrum we see more and more fund managers that have always been driven by financial return and now adopt impact-focused strategies because they have found evidence that this sector generates very sound business models, which create societal value while generating economic value to their investors. Our portfolio of the SIA fund-of-funds is convincing evidence of this trend, dispelling the perceived contradiction between social impact and financial return.

AM: One key issue around social impact investing has been measuring social impact - how do you require managers to report on this?

UG: Impact measurement is indeed one of the biggest challenges of impact investing. Since impact investing claims to differentiate itself by the intentional and tangible positive societal impact an investment enables, such impact needs to be traceable. Metrics are therefore key. The debate on suitable impact metrics is incomplete and will continue to evolve as the market matures, but certain key elements of an emerging consensus on impact metrics are becoming visible.

There is an increasing understanding that impact metrics in the first place need to be representative of the social enterprise's theory of change (ie what social impact it seeks to achieve). Historically, this objective has been sacrificed for the sake of comparability of impact indicators or for enabling an aggregation of them across investment portfolios, fund managers etc. Today, we understand that any excessive simplification of indicators for the sake of comparability deprives them of information value for any stakeholder along the value creation chain. This is why more recent approaches encourage indicators tailored to the context in which the impact is targeting.

The SIA impact metrics approach adheres to this thinking and uses such indicators as an input to a multiple-based impact investment performance measurement approach, which ultimately evidences the impact performance at portfolio level.

AM: Do you think there is a trade-off between financial and social returns, or can social impact funds be as financially successful as classic funds?

UG: Actually, from a statistical point of view, investments in social enterprises have a far lower default rate than technology-driven venture-backed companies. Obviously, there are also less companies that really hit it off. However, if we compare volatility of returns considering losses on investments, I consider social impact investments an institutionally investable value proposition.

AM: Can you see a future where all fund managers, regardless of strategy, will be required to report on the social impact of their investments?

UG: Like in the business world, considering social and/or environmental impact is about to become a factor of differentiation and hence a factor of competitiveness. The stakeholder community of our economic system becomes more and more sophisticated and that includes the stakeholders of asset managers and fund managers. Hence, impact conscious investment strategies are not just a question of doing good to the planet or to the society, it is also about the sustainability of asset managers' business models.

AM: Do you think more investors will look to invest in social impact funds?

UG: Undoubtedly, as evidenced in every study that hits the market. The impact consciousness of investors is constantly growing, asking for an increasingly sophisticated offer of impact funds. A gigantic opportunity to be taken...or to be missed.

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