Impact investing on the rise

ESG, short for Envi­ron­men­tal, Social and Gover­nance , essen­ti­ally expres­ses the social and envi­ron­men­tal respon­si­bi­lity of compa­nies. Going one step further is typi­cally Sustainable Invest­ment, which actively invests in speci­fic areas that are conside­red sustainable. Impact inves­t­ing goes one step further. In the field of impact inves­t­ing, the impact is a further invest­ment criter­ion in addi­tion to or even before the return. of the respec­tive invest­ment. Impact inves­t­ing prio­ri­ti­zes the social, econo­mic and envi­ron­men­tal respon­si­bi­lity of capi­tal in its purest form.

In response to the signing of the Paris Climate Agree­ment and the UN 2030 Agenda for Sustainable Deve­lo­p­ment, in 2018 the EU issued the Action Plan: Finan­cing Sustainable Growth. — It sets out the Euro­pean Union’s road­map for how private money flows should also be chan­ne­led into sustainable invest­ments. It conta­ins both a taxo­nomy regu­la­tion and a strict disclo­sure regulation.

Curr­ently, for regu­la­tory reasons, true impact funds are largely denied large capi­tal inflows from insti­tu­tio­nal inves­tors. The main reason for this is that the invest­ment of capi­tal is not at the discre­tion of the life insu­rance company or pension fund. While there is grea­ter free­dom for large insu­rance compa­nies since the intro­duc­tion of the Solvency II Direc­tive than under the invest­ment regu­la­tion still appli­ca­ble to other profes­sio­nal inves­tors, the gene­ral invest­ment prin­ci­ples of safety, liqui­dity and profi­ta­bi­lity still apply.

The so-called impact funds are of a rather newer nature — invest­ment vehic­les that coll­ect capi­tal from third parties in order to subse­quently invest it in the spirit of impact. Yet many products exist that even coll­ect capi­tal from small inves­tors to achieve a speci­fic social or envi­ron­men­tal purpose, i.e. from inves­tors who do not spend immense finan­cial resour­ces. These include micro­fi­nance funds, impact-orien­ted funds, social impact funds and green bonds. Howe­ver, the typi­cal subscri­bers to impact funds are larger private fortu­nes, such as successful entre­pre­neurs, high net worth indi­vi­du­als, as well as foun­da­ti­ons and family offices — all inves­tors who do not have to deal with the regu­la­tory hurd­les highlighted.

The constant presence in the media of major socie­tal chal­lenges, first and fore­most climate change, is crea­ting an ever-incre­asing aware­ness that some­thing needs to change. The invest­ment volume in impact private equity and impact venture capi­tal has increased more than tenfold in the last five years. In 2020, this figure is expec­ted to exceed EUR 880 million, with a large propor­tion of the corre­spon­ding offers still clearly prac­ti­cing “finance first” in terms of invest­ment crite­ria, i.e., the focus is clearly on the profi­ta­bi­lity to be achie­ved, and only a small propor­tion prac­ti­cing “impact first”. The topic of impact inves­t­ing in the form of “finance first” will only be able to gene­rate really large volu­mes if access is also made easier for inves­tors regu­la­ted under Solvency II.

Dr. Gerhard Schwartz is Mana­ging Part­ner of Wi Venture, an impact venture capi­tal fund that invests in climate tech start­ups to fund inno­va­tive ideas to combat climate change. He also works as a lawyer at LPA-GGV, an inter­na­tio­nal law firm focu­sing on real estate and rene­wa­ble energy. Gerhard Schwartz has been invol­ved with the topics of energy tran­si­tion and climate change for over 12 years in various roles with asset mana­gers and as a lawyer for insti­tu­tio­nal inves­tors, among others. He says he wants to make a contri­bu­tion to making our planet fit for grand­child­ren. www.wiventure.de