The promotion and development of the social economy in Europe is a crucial part of the drive to revive the economy and boost jobs and growth. The social economy employs an estimated 11 million people – roughly equivalent to the population of Belgium – or 6% of total employment across the European Union.
Plug the gap left by governments
The continuing squeeze on spending that results from the austerity programs in place in Member States often results in governments withdrawing from or reducing the roles they play in welfare provision. Increasingly the private sector is being asked to plug the gap in welfare and social services that this creates.
Social enterprises (those which have a measurable social impact, regardless of their legal form) are ideally positioned to meet this rising demand. They can provide highly innovative and flexible responses to social needs. But these social businesses and enterprises are very often small scale and operate non-profit or low profit business models. As a result traditional lenders can find financing them a challenge as they are not familiar with social enterprises' not for profit or low profit business models.
How, the question goes, can you invest in a business where you cannot see the return it generates? The answer is to be able to measure the social outcome or impact that the business you are investing in achieves.
The creation of a reliable and comparable method of measuring the impact that social enterprises have is something that has occupied the European Commission for the last three years. We believe we have a credible solution to this difficult issue which gives investors the ability to see whether the capital they commit is used to achieve the result they intended. Crucially, the solution our experts have devised takes fully into account the enormous diversity of businesses operating in the social economy as well as their small scale and often their unfamiliarity with corporate reporting standards.
In doing this the European Commission is breaking new ground. At the end of this process, which is expected before the end of this year, Europe will have the first set of legally enforceable rules that set out how social impact should be measured. The innovation demonstrated here is showing the way to a number of related initiatives, one of which, the Social Impact Investment Taskforce established by the UK presidency of the G8, has had close Commission involvement.
A European investment fund framework to pool private capital
The Commission has long recognised that the lack of traditional financing is a serious problem that can hold back the potential of this vibrant and important sector of the economy. The Social Business Initiative, announced in the Single Market Act of April 2011 and launched in October of the same year, puts in place a roadmap aimed to promoting the ecosystem of social enterprises and increasing public, private and hybrid investment in it. Importantly, the Commission put in place an expert group of social enterprise stakeholders, called the
The main key action of this Initiative has been the creation of an investment fund framework which empowers willing private investors to pool their capital and invest in social enterprises. Investment funds governed by this framework are European Social Entrepreneurship Funds or
EuSEF funds must invest the bulk of the subscriptions they received in social enterprises which we define as unlisted small and medium sized enterprises which have the achievement of measurable, positive social impacts as their primary objectives. The EuSEF Regulation puts responsibility for doing this on the manager of the fund. This brings us back to the question of how in practice those impacts are measured.
To do this the European Commission in October 2012 set up
The
The recommended methodology to measure impact
The GECES sub-group report recognises that a 'one size fits all' approach to social impact measurement will not work. This faces the fact that the social economy is an enormously diverse sector and any attempt to force a single way of measuring different enterprises' work and its consequences is bound to fail. Measuring the impact of for example, a business rehabilitating offenders in France will be completely different to measuring the success of adoption services in the UK. This is reflected in the fact that a very wide range of methodologies have already been developed to measure the social impact different types of businesses have.
What the sub-group recommends is that social businesses themselves in partnership with the EuSEF managers, who are responsible for measurement, choose the methodology that is most suited to the EuSEF. The way in which the methodology is then applied should then follow a standard five-step format. This will create a standard way of reporting on impact measurement and its results that will be clear to all stakeholders – social business, investors and fund managers.
The five steps are the following:
1. The social objective the social enterprise aims to achieve must be clearly identified in terms of who the beneficiaries are, what the outcome being sought is and how this will be done.
2. All of the stakeholders, who will gain from the activities and who will provide services, need to be identified.
3. The measurements and indicators of the outcomes achieved must be set. This is a three step process which looks in turn at:
- The inputs or resources which the social enterprises use, for example, people, financial resources, buildings, equipment and so on.
- The outputs or the result of the activities. In other words, what the social enterprise has actually done.
- The outcomes which are the effects that the social enterprises' activities have on their target population.
5. Report the results. This needs to be done in a clear way that allows the social enterprises to learn from it and improve the services they offer, allows the EuSEF manager to assess whether the investment objectives are being achieved and lets the investors understand how their money has been used.
ESMA’s consultation feedback
These recommendations form the heart of ESMA's consultation on the detailed rules for EuSEF which took place late last year. ESMA received feedback from a wide range of organisations in the private and public sectors as well as from European Union institutions such as the European Economic and Social Committee which has taken a close interest in the social economy.
ESMA has now considered all of the feedback received and has sent a report to the European Commission setting out its recommendations for how the detailed rules should be put in place. In doing so they have also taken into account the need for proportionate rules. EuSEF funds are not expected to be very big and the social businesses they invest in will usually be small and so do not have the resources to deal with metres and metres of red tape.
In addition to its recommendation on social impact measurement ESMA has also given advice on how to define what a social business is, how any conflicts of interest should be managed and how important information should be provided to investors. There is also a recommendation on how conflicts of interests are managed in EuSEF's sister regulation on European Venture Capital funds.
We in the Commission are now assessing the advice we have been given by ESMA. We hope to have all of the final rules in place well before the end of 2015. This will give more EuSEF managers the certainty they need to set up and run these highly innovative new funds.
