Impact investing trends in Spain: the way forward


Lisa Hehenberger, Director of Esade Center for Social Impact

In 2019, we published an article in Forbes in the Spanish impact investing market. The country had just joined the Global Steering Group on Impact Investing (GSG), and Esade had published a number of studies to support the creation of the Spanish National Advisory Council (NAB), now called SpainNAB. At the time, we estimated that Spanish impact investment funds, including some pioneers like Creas, Gawa Capital and Ship2B, managed around € 90 million in assets. A lot has happened in the past two years.

According to the Global Impact Investing Network, impact investing refers to investments “made with the intention of generating positive and measurable social and environmental impact alongside financial return”. In the investment continuum, impact investing falls between philanthropy (requiring no financial return) and sustainable or responsible investing (which seeks to mitigate ESG risk rather than proactively seeking the impact). Globally, the Global Impact Investing Network has estimated that impact investors manage more than $ 715 billion in assets in 2019, a figure which should have increased considerably since then.

This year, Esade’s Center for Social Impact and SpainNAB conducted the first mapping study of impact investment capital in Spain, going beyond private equity and venture capital impact funds to include a larger set of actors. We estimate that the market included $ 2.4 billion in assets under management in 2020. This represents a substantial increase over the previous year, justified by the inclusion of more types of actors such as ethical banks, foundations, insurance companies, pension funds, public funds and crowdfunding entities, as well as larger funds raised by existing impact funds and the entry of new such funds. Interestingly, as researchers, we shaped the boundaries of the market by defining the inclusion criteria for our study. Based on the categories determined by the Impact Management Project and after consultation with other European NABs, we developed a methodology to accurately categorize who was an impact investor and what type they represented. By operationalizing previously abstract concepts such as intentionality, additionality, contribution, measurability and added value, we were able to clearly map the different players and make sense of the Spanish impact investing market. This rigorous research process has become a way to more clearly define the practice of impact investing and, ultimately, the market.

The “impact economy” needs both the supply and demand for impact capital. Impact investors often complain about the lack of good quality deal flow. This of course depends on their investment strategies. Many businesses need financing. We have studied the financing needs of social enterprises in Spain, defined according to the guidelines of the European Commission as having a social mission at their heart, with a business model generating at least 25% of their income from the sale of products or services and with a democratic governance model. We have identified a lack of funding in the early stages of the evolution of social enterprises and the lack of equity investments for these types of enterprises. Social enterprises also pointed out that investors do not seem to sufficiently assess the impact. This aspect is reflected in the lack of impact measurement and management (IMM) systems among social enterprises that claim to need financial and non-financial support for their adoption and implementation.

In our efforts to build the impact economy, we have also participated in the Euclid Network European Social Entrepreneurship Observatory. The aim of the latter is to provide data on social entrepreneurship to improve policy development efforts supporting the sector. Our last Spanish national report included some interesting findings regarding the resilience of the impact economy despite the global pandemic. It revealed that organizations on the ground, those fighting for causes such as reducing inequalities, providing decent jobs and basic health care, and promoting gender equality (more important than never in the time of Covid-19), struggled enormously due to declining income, business closures, difficulties with digitization, lack of physical access to vulnerable groups and lack of funding.

In building the impact economy, as academics and researchers, we have constantly tried to connect the dots and understand what worked and what didn’t. The Spanish impact economy has grown in terms of funding players and assets under management. However, we also see how social enterprises working on the ground struggle to access resources to better serve their beneficiaries and alleviate the increasingly difficult problems we face today. As impact investing generalizes (which we applaud) and raises larger funds, there is a danger of ignoring the needs of the early stages and avoiding riskier ventures. Larger impact funds receive investments from institutional investors with higher financial return requirements, prompting impact funds to target later stage companies with proven track records and strong business models. Therefore, venture philanthropy and patient capital are needed to fill in the gaps at the initial stage; otherwise, impact investors will continue to complain about the lack of deal flow. How to better connect the supply and demand of impact capital?

We certainly don’t have all the answers, but we can make a few suggestions: First, social entrepreneurs can become more attractive to impact investors by clearly demonstrating the impact they have; measuring impact is not rocket science, but it requires reallocating often scarce resources to implement an appropriate IMM process; Second, if impact investors start reporting more clearly that they value impact by investing and offering higher valuations for social enterprises that can demonstrate social impact, social enterprises will find it worthwhile to measure their impact; Third, the public sector can contribute through public contracts that promote social enterprises, again, to require social enterprises to demonstrate their impact; Fourth, mechanisms such as certifications, verifications and social impact audits would help to make the social impact more objective, allowing the investment market to internalize more correctly measures previously considered as externalities and therefore updated or totally ignored in financial models; and fifth, impact investors need integrate impact into their governance structures, including boards of directors and investment committees, so that the impact is taken into account with and at the same level as the financial objectives; in addition, they should integrate impact into their incentive and bonus systems so that impact investing professionals have clear action scripts.

Ultimately, impact investing should generate a positive impact on society. We need to make sure that this growing market is successfully channeling resources to the most influential companies that can make a real difference.

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