The US-Europe divide in the development of impact investing
The United States is the birthplace of many financial innovations, from exchange traded funds (ETFs) to digital payment platforms. Innovation is in the DNA of our financial system. In the case of the growing financial phenomenon that is impact investing, however, the US is generally lagging behind Europe.
Around 15 years ago, the impact investing industry was still in its infancy and consisted of a few firms in the US and fewer across the Atlantic. Soon, more and more European firms began emerging and scaling faster than their US counterparts. Today, there are several successful impact investing firms in the US, but their numbers pale in comparison to the landscape in Europe. For instance, several microfinance investment vehicles (MIV) in Europe have surpassed $1 billion in AUM, a milestone not yet reached by a US MIV.
There are a variety of factors that explain why impact investing has developed and matured more fully in Europe than in the US. The crucial one is cultural and institutional differences in the two regions concerning charitable giving and private investment returns. European investors tend to view impact investing and financial inclusion as important and necessary for the world. This view on financial inclusion is not ubiquitous amongst US investors. They often require convincing.
There is a strong connection between taxes and charitable giving. The US gives more on a per-capita basis, and as a percentage of GDP, than any other developed nation. The US is home to more than 120,000 charitable organizations and since the IRS recognizes Program Related Investments (PRIs) aimed squarely at those foundations, charitable giving enjoys significant tax breaks. These historic tax incentives often encourage US investors to take a black and white view to impact, preferring to maximize profits and then later donate it to a social cause. Comparatively, Europeans might more readily accept a commercial, yet slightly moderate, return to pursue their social and environmental impact objectives.
Another financial factor behind the divide is the current interest rate environment. Many European countries are in a negative interest rate environment, so a 2-4% return that is standard for a private debt impact investment in microfinance looks attractive in comparison. There is also a misperception amongst many US investors that impact investments are high-risk with little financial returns, while in fact, the actual risks may be lower than perceived.
There are also non-financial factors that help to explain the divide. Due to geographic location and travel preferences, Europeans are more likely than Americans to have seen firsthand the emerging markets that many impact investments reach. Europeans also often have historic and linguistic ties to emerging markets that Americans do not. Europeans’ familiarity with these countries may make them more comfortable with investing in such places, whereas for Americans unfamiliar with emerging markets, these places seem all too foreign.
In less than two decades, impact investing has made tremendous strides in Europe. As US investors’ relationship toward money evolves, and they become more familiar with emerging markets in an increasingly globalized world, their ideology is changing in a way that is accelerating the movement. Institutional investors are now allocating to the sector, impact investing ecosystem builders are providing much needed educational resources to the public, and US consumers are demanding impact investment products. According to the Global Impact Investing Network’s 2017 Annual Survey, impact investing is now a $114 billion sector, and 40 percent of funds originate in North America. This shows that the US is coming along, but there is still plenty more work to be done.
Disclaimer: This document is being distributed for information purposes only. This does not constitute an offer or a solicitation to purchase or sell any security, and nothing herein should be construed as such.
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