For decades, European foundations didn’t have a reputation for being fast movers. The journey from traditional grantmaking to catalytic capital to impact investing proved to be a rather crawling process, with some notable exceptions. Heavyweights such as DOEN Foundation or BMW Foundation, or smaller punchers like GLS Treuhand or Vector Stiftung were early pioneers making the jump.
In a region with 180,000 philanthropic organizations holding €650 billion across 24 countries, stepping up to fill the abyss left by the ODA crisis — using programmatic and endowment investments — shouldn’t be such a daring adventure.
So, will European foundations rethink their role in the wake of the “big crunch”? While lying low seems to be the default strategy in the United States, there are signs that Europe might choose another, more progressive route.
From capital preservation to impact investing
Several forward-thinking players are pondering structural changes like managing their endowments for impact or even giving up on the idea that foundations should exist in perpetuity. We have seen this dynamic firsthand in our work at the pan-European impact advisor FASE.
One example is the Germany-based Vector Stiftung. Edith Wolf, the foundation’s CEO, recalls that “When I took over nine years ago, our foundation’s assets were invested very traditionally, and impact investing wasn’t even on the radar. Gradually, I restructured the portfolio and shifted it towards green bonds, microfinance funds, and Article 8 and 9 funds, such as the European Catalytic Impact Investing Fund, or ECIIF II, which helps impact companies get off the ground.”
This is just one of the concrete signs we have seen since we created ECIIF II. More and more European foundations, including the Greenpeace Environmental Foundation (known in Germany as Umweltstiftung Greenpeace), seem to think about purpose and investing holistically, and don’t want to let them go their separate ways. “Our investments are guided by the same principles that define our Greenpeace Environmental Foundation’s work — protecting the planet and future generations,” explains the organization’s managing director Sandra Guenter. “For us, capital and purpose must move in the same direction.” The foundation supported ECIIF II’s predecessor, the European Social Innovation and Impact Fund, or ESIIF.
Yet for many foundations, pressing questions remain, and they all circle around novelty and risk: How does a closed-end fund exactly work? How do the payments flow if the guarantee is drawn? In which companies do we precisely invest? And what do the local foundation laws actually allow?
Risk mitigation and credible impact
One factor that can make a difference is risk mitigation. For ECIIF II, a catalytic mechanism facilitated through the European Investment Fund will cover 25% of the portfolio up to 80% and has a total guarantee size of €10 million (about $11.5 million), providing a compelling reason for foundations to make the courageous jump.
As we saw with the fund’s predecessor ESIIF, philanthropic players can still realize a cash multiple of close to 1x on portfolio companies even if there are write-offs. Having such a risk limit creates a double win: Investors have clarity on their exposure, and the rest of the portfolio is under less pressure to outperform and compensate for losses.
Another factor is a credible impact focus for underlying investments. For example, ECIIF II has SFDR Article 9 status, the highest level of sustainability certification for an investment fund under the EU Sustainable Finance Disclosure Regulation (SFDR).
ECIIF’s strategy also helps philanthropic players reach beyond the usual VC type of impact ventures focused on fast growth, supporting hidden champions that are not poised for exit or have more unusual business models and legal structures. The larger vision behind this innovation is to help create a new “European impact middle market” and empower the region to fully harness its potential.
An increasing number of European foundations seem to understand that traditional investments won’t solve the mountain of social and environmental challenges that humanity is facing. They are striving to increase their positive impact footprint and respond to the urgent needs before them. We urge others to follow their lead. By managing their endowments for impact rather than capital preservation, Europe’s foundations could become the backbone of a more resilient and inclusive economy. The transition may not be easy, but it is both necessary and overdue.
Markus Freiburg is the Founder and CEO of FASE. Christina Moehrle is the communications manager for FASE.
Guest posts on ImpactAlpha represent the opinions of their authors and do not necessarily reflect the views of ImpactAlpha.
