What is impact investment?

“Impact investment isn’t philanthropy,” said Elena Andonova. Instead, it is a form of investment located midway between financial returns and social impact. The finance itself can come from any regular investor: banks, pension funds, private sources, public institutions or donors. The only thing that marks them out from other investors is their willingness to combine financial returns with positive social outcomes. Always linked to concrete projects, it typically involves partnerships between public institutions and the private sector, with the partners defining the outcomes they want to achieve from the project in advance.

Europe has already spawned a number of successful examples. In Portugal, the government used outcome-based contracts to increase efficiency gains in key public policy areas. And in Brussels, the Actiris employment agency successfully launched a loan structured as a social impact bond, to finance a programme to equip jobseekers with digital skills. Only last year, the Asian Development bank published a paper highlighting the potential of social impact bonds, with examples ranging from France to India.

Western Balkans: a challenge and an opportunity

In the West Balkans, the key challenge is the region’s low economic development with regard to its EU neighbours. Big gaps exist with the EU, on indicators ranging from standard of living to per capita GDP. But in a region where 99% of companies are SMEs and in which SMEs employ anything from 60% to 80% of the workforce, supporting innovation in SMEs is a solution with great potential. “By boosting innovative SMEs, we can achieve a higher growth rate and close the development gap with the EU,” said Nikica Mojsoska-Blazevski.

Impact investment has an important role to play in that process, by compensating for the low level of private and public investment in human capital development across the region. “Impact investment fulfils several key goals at the same time,” said Mojsoska-Blazevski. “It supports skills development, it supports the growth of innovative SMEs, and it also supports the green and digital transition of the economy.”

Investing in the future

With that in mind, the European Commission has launched a joint platform with investment banks, aimed at leveraging resources to boost skills development in the Western Balkans. It focuses on both capacity – by boosting entrepreneurial culture in schools and higher education – and resources, by providing access to finance with a focus on innovative start-ups. “The idea is facilitating the region’s transition to a competitive, knowledge-based economy with a skilled workforce,” said Aleksandra Kostova. The platform is ideally placed to support the riskier, high potential investments that are often ignored by the traditional banking system. Early successes include providing venture capital to local funds, and supporting youth employment via concessional guarantees for employers.

Yet significant challenges remain. The discussion highlighted how regional employers still need to be convinced that investing in skills can yield high returns. The region has yet to attain the critical mass of skills in the workforce to drive a self-sustaining network of innovative SMEs. And in a context in which investment is often focussed on physical infrastructure, there is a parallel need to focus on developing leaders and encouraging more political commitment.

With its focus on public/private partnerships, impact investment brings together organisations that are not typical players in the skills environment. “So trust can be a big issue,” Siria Taurelli explained. “They’re not necessarily used to talking to each other.” And by fostering new ways of doing things within the public sector, impact investment can be perceived as a disruptive influence and provoke a degree of institutional resistance.

Yet with social impact bonds having already demonstrated their ability to enhance skills development in several EU countries, the new approach has proved its worth. “Investors get a return on their investments, and governments get to reduce their costs,” said Elena Andonova. “It’s a win-win situation.” And with 30 initial investments already up and running under the joint European Commission/EBRD impact investment fund, the Western Balkans will soon be among the winners.             

Read the full European Commission/ETF joint study here:

https://www.etf.europa.eu/en/publications-and-resources/publications/exploration-impact-investment-skills-creation-existing

Watch the live interview here under the link below or click on the source page.