Assessing opportunities for social impact investing

THE BACKGROUND

Globally, diversified sustainable finance for social impact mechanisms are in place. Capital providers are increasingly interested in ESG and/or social impact investment as a way to diversify their investments, improve risk management, and pursue societal and financial goals. These include public investors – governments, multilateral development banks, development finance institutions (DFIs), etc. – and private investors such as equity funds, foundations, high net-worth individuals and philanthropists, banks, pension funds, sovereign wealth funds, and other financial services firms and intermediaries.

However, capital intensity for social projects has to be significantly increased in the future. EU countries are today faced with long-standing social development and inclusion challenges that pre-date the COVID-19 and Ukraine crises. Progress has stalled or slowed down in key areas of the 2030 Agenda, including for eminently ‘social’ SDGs.

Despite positive developments in the past decade, one in five Europeans remains at risk of poverty or social exclusion. Some groups of people are particularly affected, especially those that are young, unemployed, of migrant origin, with disabilities or with low education levels. Many European regions are suffering from economic stagnation or decline, while flourishing cities are facing growing polarisation between and within communities.

THE PROJECT

A team of consultants assessed the current state of play of sustainable finance for social impact in the EU, focusing on investment gaps and challenges faced by market participants. We sought to fully understand the complex sustainable financial system targeting social impact, and the available options to strengthen social investing.

Specific challenges have been identified on the social front, each of them requiring substantial social investments:

• Public service and administration: Equal access to public services remains a challenge in many EU member states, with negative consequences for health, safety, environmental protection, social inclusion and the capacity to face crises. Many Europeans still lack access to good quality education, healthcare, housing, water and sanitation and this increases their vulnerability.
• Health care and social care: Access to healthcare, as well as its affordability and quality, are not evenly distributed across or within countries. Healthcare investment needs remain high and are expected to grow as the European population ages. Non-communicable diseases are posing an increasing threat to European life expectancy and quality of life, especially for low-income and vulnerable groups. The COVID-19 pandemic had severe compounding effects requiring more funding. Unmet healthcare needs are much higher among low-income households, particularly in countries with greater reliance on out-of-pocket payments.
• Social and affordable housing: The need for new social and affordable housing units will continue to increase in Europe due to rising prices, a looming economic downturn and migratory dynamics. Social and affordable housing needs are rising rapidly across Europe, as growing numbers of people are priced out of housing markets and live in substandard, overcrowded and sometimes dangerous conditions. This situation is likely to worsen with inflationary pressures, especially in some countries. In addition, a large share of the existing social housing stock needs renovation interventions to meet quality and energy efficiency standards, e.g. in terms of energy efficiency and renewable energy requirements under the EU Green Deal.
• Gender: Gender equality has yet to be achieved, and existing disparities generate significant costs for society. Despite advancements in recent decades, European women still have more limited access to financial resources, exhibit lower labour force participation overall and in quality jobs in particular, are paid less for equal work, earn less over their lifetime, and find themselves at higher risk of poverty than men. This also limits their access to basic services, including health and social care for disabled and elderly women.
• Education and vocational training: Social impact funding are required in many countries to support inclusive, equitable, high-quality education that fosters better learning outcomes and social cohesion through environmentally sustainable and climate adapted solutions. Social investment in this sector is required to support the expansion, rehabilitation and modernisation of education infrastructure and its efficient use, to enable innovative teaching and learning methods, boost energy efficiency and strengthen resilience to a changing climate. It will also invest in school design that can increase overall community resilience.
• Migration and asylum: Since the height of the migration crisis in 2015, several measures and policies have been implemented by the EU. Millions of migrants and asylum seekers have reached the EU since the heigh of the migration crisis in 2015, fleeing conflict, persecution, and instability. The COVID-19 pandemic exacerbated the vulnerabilities of this population, relating to issues such as overrepresentation in precarious work, financial precarity, inadequate housing and working conditions, and educational inequalities.

THE RESULTS

Our consultants proposed specific recommendations for strengthening the social impact investment framework in EU capital markets and increasing the flow of capital into critical social sectors such as health, education, social housing, migration and asylum, etc.