Differing perceptions of fiduciary duty is one of several reasons why European and US investors diverge in their strategies when seeking to make an impact.
The divide between the EU and the US on approaches to impact investing is well illustrated by a survey from Dutch-based consultancy Phenix Capital Group.
In a recently-published Impact Report, Phenix analysed information from its Impact Database, which tracks the allocation of capital to impact investing. The database contains 33% more EU-domiciled funds (1,160) than US funds (773) carrying out impact investing, and 44% more European impact investors (775) than US impact investors (433).
But the clearest evidence of differing attitudes is shown by looking at where the money is being invested. There are 71% more public equity funds in Europe on the database compared to the US, while 86% more assets are allocated to public equity markets by European impact investors compared to their US counterparts. The flip side of this is that 58% of US funds are private equity funds, compared to 42% in Europe.
Different views on risk
Why the difference?
Phenix notes the distinct evolution of funding for social and environmental improvement in the two regions. European investors pioneered impact investing and have traditionally targeted financial inclusion as a means of furthering development aims, even if it means a small reduction in the rate of return. A colonial past also means European investors have a longer history of investing in emerging markets and feeling more secure in doing so.
The US, by contrast, has a longer history of venture capital investment. Philanthropy also plays a much bigger role than in Europe, with many potential investors preferring to maximise their profits, and then give money to charitable organisations, in part because of the tax breaks they receive for doing so.
The differing view of risk associated with impact investing is another hurdle to the wider uptake of impact investing in the US.
Citing a recent PitchBook survey, Phenix noted: “North American investors ranked concerns about – or simply perceptions of – sustainable investing resulting in negative returns as their greatest challenge, with 42% of respondents ranking it among their top three roadblocks. Only 20% of European respondents agreed.”
This partly reflects differing views of fiduciary duty. Europeans tend to view incorporating sustainable outcomes into their operations as an integral part of their fiduciary responsibility, while US investors are more concerned that it would run counter to a perceived legal duty to maximise profits for shareholders and investors.
The divide risks becoming more entrenched as regulatory and political forces pull in different directions.
In the EU, strong support for impact investing is underscored by a regulatory framework driving companies to become more sustainable themselves and to make sustainable investments, even if that framework remains a work in progress.
The Corporate Sustainability Reporting Directive (CSRD) requires companies with activities in the EU to produce sustainability reports alongside their annual financial reports, while the EU’s green investment taxonomy under the Sustainable Finance Disclosure Regulation (SFDR) is designed to encourage green investment.
In the US, there is political pressure to head the other way, given several states are bringing in laws restricting the degree to which ESG concerns should influence investment strategies.