International Impact Investing: Findings from the 2011 Virtual Volunteer Project – Part 2

> Posted by Anne Ackermann, Marika Canonica, Emaan Mahmood, and Laura Spicehandler, Credit Suisse Virtual Volunteers
In an earlier blog post, we explored the major challenges the United States and United Kingdom are facing with regards to impact investing, including investing in microfinance in developing countries. In this post, we look at the current state of impact investing in Luxembourg, Switzerland, and the Netherlands, in an attempt to understand how tax and legal frameworks are promoting impact investing in these countries.
Switzerland has been a leader in creating and managing some of the first and largest microfinance investment vehicles (MIVs), with more than 20 MIVs either managed or advised in Switzerland. As of December 2007, 1.5 billion Swiss Francs (approximately USD $1.65 billion), 25 percent of all international private microfinance investments worldwide, were managed in Switzerland. The MIVs present in Switzerland are generally funds and are regulated by the Swiss Financial Market Supervisory Authority (FINMA). FINMA has authority over banks, insurances companies, stock exchanges, securities firms and collective investment schemes.
The Swiss Capacity Building Facility for Income and Employment Generation (SCBF) recently launched a facility that will connect capacity builders and social investors in Switzerland with financial intermediaries in developing countries, helping them to scale up their outreach to underserved populations and small businesses. The Swiss Agency for Development and Cooperation (SDC), Credit Suisse, FIDES Financial Systems Development Services AG, Swisscontact, Swiss microfinance holding (SMH), and Zurich Financial Services Group forged the SCBF as a public-private development partnership in April 2011.
One explanation for the large concentration of MIVs in Switzerland may well be its proximity to Luxembourg. Many of the Swiss social investment funds are in fact registered in Luxembourg and therefore fall under its legislation.
Currently, 51 percent of MIV assets are in Luxembourg, which includes five of the world’s ten largest MIVs. Luxembourg has emerged as a first mover in the domicile of MIVs for a number of reasons, including:

  • Exemption from “subscription” taxes (an annual tax on net assets paid by investment funds);
  • Strong support from the financial regulator and the Luxembourg government favoring a transparent and responsible microfinance sector.

These conditions have led to the development of:

  • A wide range of available investment vehicles suitable for microfinance;
  • A center of expertise in the field, with a range of institutions and a core of MIV professionals,

A major player in Luxembourg’s impact investing landscape is LuxFLAG, an agency that aims to promote the raising of capital by awarding a recognizable label to eligible MIVs and environment investment vehicles (EIVs). Its objective is to reassure investors that the MIV/EIV actually invests, directly or indirectly, in the microfinance/environment sector. As of October 2011, 17 MIVs had obtained the LuxFLAG label.
The Netherlands
The Netherlands has also witnessed a rapid growth in microfinance impact investments due to three important factors. The most important of these is favorable tax treatment. Since 2004 the income tax system has granted individuals tax exemption for income derived from environmental and social-ethical investments up to € 55,145. In addition, there is a tax rebate of 1.3 percent of any amount invested in such investment vehicles. Recently, the tax credit has been reduced, and is slated to gradually disappear, which will significantly diminish the incentive to invest in green or social investments.
Other incentives operating in the Dutch environment include societal pressure on pension funds to invest in a socially responsible way and major involvement from the government, including financial contributions as well as a coordinating and monitoring role. Due to a growing involvement of private and commercial organizations in microfinance, the Netherlands Platform for Microfinance was created in 2003 to convene banks, insurance companies, microfinance investment companies, and development finance organizations for the purpose of coordinating microfinance activities.
These European countries have made great strides in promoting impact investing through favorable tax treatment, support and involvement of governments, and a concerted effort to bring transparency to the sector. It will be interesting to see if they can continue on this positive trajectory and whether their Anglophone counterparts will be able to follow their example.
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International Impact Investing: Findings from the 2011 Virtual Volunteer Project – Part 1