The opportunities and responsibilities in impact investing

The end of 2024 will mark the hottest decade on record. With it we continue to see the adverse environmental effects that come with it – extreme weather events, loss of glacial ice and rising sea levels to name a very significant few. The end of this decade is also marked by COP 29. The annual meeting of world leaders, this year taking place in Baku, Azerbaijan, are discussing the actions needed for international alignment regarding the climate crisis.

According to UN coverage of the event, due to the focus of this year’s conference it is being called the ‘climate finance COP’. A main point of discussion is securing the significant financial investments needed to reduce emissions and protect vulnerable populations. This is in particular reference to aiding emerging economies adapt to the most negative impacts of climate change and cut carbon output. An ever-important discussion to have, COP 29 punctuates the role of strategic impact investing.

At EIT Urban Mobility impact is at the centre of investment, acting as a constant guide in which direction the investment decision should take. When discussing impact investing there is a natural question; how does this differ from regular venture capital (VC) activity? At a fundamental level it is the emphasis that the investments which are made must have a positive impact from either an environmental and/or societal level.

This consideration adds constraints and steps which are generally absent from the traditional VC model. A model which, among other things, prioritises financial return regardless of the effect it has environmentally or societally.

Aligning with impact

EIT Urban Mobility, an initiative of the European Institute of Innovation and Technology (EIT), a body of the European Union, is here to address critical need. This means focusing on the most pressing challenges facing us all and those companies who create the innovative solutions to address them. To ensure consistent alignment with this pursuit, investments are evaluated based on their own potential to create impact. But what is impact?

Impact refers to the breadth, depth and scale of change an investment can make - or conversely, the lack of impact. EIT Urban Mobility aims to support companies and initiatives that can reach and benefit as many people as possible and/or improve environmental conditions to create liveable cities. Impact investments are evaluated based on their ability to create a positive change to users and community rather than solely the potential of the market size to benefit the investment.

The duration of impact is also considered: For how long will the positive impact be felt? In a way this consideration is akin to the traditional investment view of sustained profits. Longevity is an important factor to consider as investments with lasting benefits should be viewed as more valuable over quick fixes. This means supporting projects and organisations that have sustained business models, strong governance and the ability to grow and maintain their impact over time.

Environmental and social diligence

As expected with all types of investment, due diligence and analysis must be carried out. This takes the form of accessing the market opportunity, business model, the team & founders and risk to name a few. When incorporating the impact of an investment as a primary marker however, EIT Urban Mobility welcomes the additional and necessary steps to fulfil that role.

At the heart of this responsibility lies the rigorous assessment of both positive and negative impacts across four expansive dimensions (Society, Knowledge, Health and Environment) and 19 diverse categories, as delineated by the Upright Project’s Net Impact Model. Paramount to this process is the alignment of companies with the Sustainable Development Goals (SDGs), ensuring that investments resonate with EIT Urban Mobility's core mission and values. The Upright Project uses a model which is based on a network which employs an analysis of 250 million scientific articles, public statistical databases and a proprietary taxonomy of over 150,000 product and service categories to assess impact.

To guide investment decisions, EIT Urban Mobility looks at the Net Impact Ratio (%), which indicates whether, considering both the positive and negative impacts a company has, it is contributing more positively or negatively to the world. The maximum value of the net impact ratio is 100%, symbolising a company with no negative impacts, while there is no minimum value.

What results does this approach produce?

EIT Urban Mobility’s portfolio Net Impact Ratio is +46%, meaning the portfolio creates 46% less negative impacts than positive impacts. This exceeds the benchmark Net Impact Ratio of 37% and converts to real world results when considering equivalent outputs.

In relation to social impact, EIT Urban Mobility’s portfolio generated the equivalent of 1,070 direct or indirect jobs while producing an environmental impact which is comparable reducing 10,027 tonnes of emissions. Regarding knowledge, of which the goal is to contribute to knowledge infrastructure, engineering services equal to 25 years of highly skilled, full-time work. In promoting active forms of active mobility, such as cycling and walking, the health impact of the portfolio corresponds to 242 life years.

The consideration of impact goes further than just the investments themselves but also considers the gender makeup of teams and the region or geography they originate. When taking this into account, it becomes apparent that there are multiple layers to what is collectively referred to as impact investing. However, in properly assessing these layers EIT Urban Mobility can say investing in this way creates a more equitable playing field in the mobility sector: 45% of startups in EIT Urban Mobility’s equity portfolio are led and/or founded by women.

Learn more about impact investing

As more cities around the world deal with the challenges of urbanisation and climate change, targeted impact investing has the power to contribute to its easing. With the correct investments, policies and infrastructures in place, it is possible to create urban environments which are both enjoyable and functional for us and the environment.

To help in gaining a better understanding of this form of investing and its many aspects, EIT Urban Mobility has released its Impact Report. This report explores the importance of impact investing, the considerations of measurement and EIT Urban Mobility’s approach to foster tangible transformations in both society and the environment. Playing a crucial role in seeking to solve complex mobility issues, presented are a selection of startups whose varied and important work makes positive contributions to our daily lives.

To learn more about EIT Urban Mobility’s portfolio, investment strategy and process, read the 2024 Impact Report here.