There’s great potential for Europe’s policies to better support what impact investors do best: deploy capital to solve social and environmental challenges. What impact investors seek from policymakers can be boiled down to policies to enable and align this growing community.
And it is growing – European impact investment assets under management grew by a substantial 26% from 2020 to 2021 – with an outsize contribution to solving the world’s social and environmental challenges. Impact investors are focused on driving measurable positive impacts, more so than their cousins in ESG (a distinction not always crystal clear in regulations).
Impact investors want recognition of what’s impact, what’s not, but also what’s in-between. Without these distinctions, in policy, the framework that allows impact investors to measure what they do starts to fall apart.
Policies aimed at classification have not fully accounted for the scope of impact investing activities. While the current policy framework doesn’t prevent impact investors from adopting best practices, such as incentives alignment with impact performance, a proper regulation helps to unlock and accelerate the path towards catalysing investors at scale to make this transition a reality.
Fortunately, a key policy affecting impact investors is open for revision, so there’s time to get it right.
When the EU opened up the Sustainable Finance Disclosure Regulation (SFDR) for a public consultation this year, impact investors shared their views with the aim of making this regulation more fit for purpose. These voices included recommendations from Impact Europe (formerly EVPA) and the #UnitedforImpact initiative, which RAISE Impact joined alongside 31 impact funds from 14 countries.
In short, the EU Sustainable Finance Disclosure Regulation ignores several impact investing nuances, including two of its pillars: intentionality and additionality. Impact investors do not merely invest with impact, as an ESG investor does, but rather for impact, by establishing whether an investment intends to generate a positive social or environmental impact (intentionality), and how it generates an impact that would have not happened (additionality).
The regulation falls short of recognising these distinctions. So, the SFDR should include a separate category for impact, as it was recently proposed by the Dutch financial market’s regulator, AFM. AFM’s suggestion was to create labels for “transition”, “sustainability”, and “sustainability impact”.
Impact investors already typically report on their positive contributions; keeping the focus on doing good, not avoiding harm, should be eased, not constrained. Should it be revised, the SFDR should align its reporting requirements with the investment strategy of the financial product, rather than predominantly looking at negative impact disclosure (Principle Adverse Impacts). For impact funds, it could rely on the widespread trinity of intentionality, additionality and measure.
But this can only hold if the market moves beyond the current hesitation around standardising social impact measurement. In many ways, it’s more difficult for organisations to measure social impact, than environmental impact, because it’s far from easy or commonly agreed upon. But when policymakers have put a great focus on mitigating climate change, we have to ask – where’s the social counterpart?
The people – those who benefit from social impact investments – sometimes seem puzzlingly far from the centre of discussions around the Transition. If we're to put people back at the centre, or at least on equal footing with the planet, the expertise of social impact professionals can be a significant asset to policymakers.
We, the authors, represent two organisations ready for more open dialogue with policymakers: RAISE Impact is contributing to the French National Advisory Board on Impact Investing’s working group on an industry-led social taxonomy; Impact Europe, having launched our recommendations on SFDR, now set our sights on crafting an impact manifesto in 2024. Together we call for a renewed political commitment to not only our transition to environmentally sustainable European society and economy, but also to work with the impact sector to increase investments for a positive social impact.
Impact investors are living in a time of half-open doors. Better policies could open more of them. And if too many doors remain closed, we risk shutting out some of Europe’s most effective contributors to meeting the Sustainable Development Goals by 2030.