Impact investment in 2024: A world where no one is left behind?

The year 2023 saw a big drop in venture capital flowing into impact start-ups. More resources are needed to address growing and severe social and environmental challenges, says Roberta Bosurgi, CEO of Impact Europe. Here, she reviews the last year in impact investing for Alliance and offers hope that new finance structures, proven returns and more involvement from governments and institutional investors mean impact money has a better chance of flowing to those who need it most in 2024.

The year 2023 was a year of polycrisis, high inflation and, for the first time, a sharp reduction of private equity and venture capital funding flowing into start-ups. This last part included a big drop in venture capital (VC) investments into impact start-ups, according to a recent Dealroom report.

Despite the efforts of greatly committed capital providers, the gap to achieve the United Nation’s Sustainable Development Goals (SDG) is still €4+ trillion annually. This gap, especially, highlights the need to mobilise more resources to address growing and severe social and environmental challenges.

Mobilising capital for impact

On the positive side, however, more actors in the impact space are recognising the full continuum of capital and its crucial role in mobilising investment and impact. And this gives hope. To quote Debra Schwartz, managing director of impact investments at MacArthur Foundation, speaking at an event for the Catalytic Capital Consortium:

‘More and more investors and asset owners are talking about the spectrum of capital, which is a good sign for catalytic capital providers.’ There is a buzz around those offering catalytic capital providers because they often invest in social good at the start with reduced financial return expectations and this reduces the risk for other investors.

“They (successful exits) also prove that positive financial returns, while producing a strong, measurable impact, are not just possible but increasingly feasible.” 

A good sign, but have we seen any action? Yes, some, though not enough yet. In a hopeful example from December, MacArthur, FMO and Allianz Global Investors announced the SDG Loan Fund.

It mobilised $1.1 billion by providing high-impact loans to impactful companies and projects in low and moderate income countries. The fund has a blended finance structure, including a $111 million first-loss investment from FMO and a $25 million guarantee provided by MacArthur Foundation.

This is an example of catalytic capital in action, demonstrating its power to unlock private sector investment that would not otherwise be possible. Developments like this point to the roles of catalytic capital and blended finance gaining more mainstream understanding and acceptance.

Signs of impact market maturity

We’ve seen recent signs of market maturity reflected in the scaling trajectories of impact enterprises; in successful investment exits – meaning that investment objectives have been met and returns made; in the many new impact funds launched last year, and in the role played by funds of funds.

Starting with scalability, we can point to a positive case from the Nordics. For more than a decade, Ferd Social Entrepreneurs (a social enterprise supporter and investor) has supported Unicus – a Norwegian consulting company whose staff majority is autistic. This was first through grants and non-financial support, then with equity. Unicus has been able to replicate their solution in other Nordic countries, and Ferd has now driven a merger between Unicus and technology company Auticon.

This collaboration has created what is believed to be the world’s largest company where the majority of employees are autistic (600 employees in 14 countries). It’s a success story which demonstrates how a well-designed impact investment strategy, made of tailored financial and non-financial support, can contribute to a scalable impact.

Positive financial returns on impact investment

Triodos Food Transition Europe Fund made a successful exit with DO IT ORGANIC and another successful exit with HARi&CO. We also saw Ananda Impact Ventures successfully exit with what is believed to be Europe’s first-ever VC impact fund (Social Venture Fund 1) which made a 2x return on investment. 

Developments like these build track records and attract follow-on capital. They also prove that positive financial returns, while producing a strong, measurable impact, are not just possible but increasingly feasible.

More than 50 new impact funds joined the European market in 2023. We were surprised that some funds attracted funding beyond expectations. For instance, the diversity-focused British-European VC fund Ada Ventures raised $50 million in capital, surpassing their original cap of $35 million for investment in underrepresented founders tackling social issues.

Another case is the Belgium-based fund Impact Expansion, which raised €100 million in the second fund closing. The strategy is to invest €5-20 million in a dozen companies that aim to achieve systemic changes in the environment, skilling and education, and health areas.

To channel financial resources and catalyse more capital for impact funds, funds of funds are emerging as an important tool. Funds of funds have the potential to mobilise more institutional funding (larger ticket sizes), build new impact investing markets and strengthen existing ones.

Government and institutional investor support impact investment

Government policies and public funding mechanisms took note of the needs of impact capital providers in new ways in 2023. New impact wholesaler funds (designed to support social enterprises which otherwise struggle to raise enough money) were launched with governments throughout the world, from Spain’s Social Impact Fund to Canada’s Social Finance Fund.

We’ve seen growing recognition of impact investing at an institutional level, from banks, pension funds, insurance funds, for example. Laure Wessemius-Chibrac from the Stichting Netherlands Advisory Board on Impact Investing commented that: 

“Public-private partnerships will play a crucial role in tackling challenges and encouraging institutional investments that leave no one behind.” 

These partnerships can provide catalytic capital, de-risk solutions and enhance returns where necessary, making it more feasible for institutional investors to fulfil their fiduciary duty and participate in the impact sector.

Social impact bonds growth

Another positive trend in public-private collaboration is outcome-based finance (investment which specifies certain outcomes) which continues to grow worldwide: INDIGO database, developed by the Government Outcomes Lab, shows 283 impact bonds launched to date, raising more than $753 million and benefitting 2.1 million users across eight different policy areas.

Political influence can be a slow process, but clearly the impact community is getting vocal on policies that aren’t quite a fit. One leading example is advocacy around the Sustainable Finance Disclosure Regulation (SFDR). We’ll update Alliance readers on this soon.

Collective action for impact investment in 2024

As we embark 2024 under our new name Impact Europe (formerly EVPA – European Venture Philanthropy Association, our change reflects the growth of the space we’re in), we will continue our efforts to mobilise more capital and stakeholders for impact. We’ll also continue to catalyse collective action and to apply a global lens to the key social and environmental challenges.

We hope to welcome and onboard many new stakeholders into the impact sector, to report on more funding flowing into impact and impact outcomes and advocate for more enabling policy frameworks on behalf of the European impact sector. In the meantime, let’s stay on course – and get in touch if you want to join forces!

This article was first published in Alliance Magazine