EU wants to see more social investment funds

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New European regulations for social investment funds may give social entrepreneurs better access to capital. A new EU Regulation is to be approved in 2012, and will also apply in Norway.

A ‘social business’ is a company that principally seeks to resolve a social problem. Despite the value of social businesses, both in social and commercial terms, investors are not always willing to invest in this kind of company. Social entrepreneurs often find it difficult to grow and establish a sustainable scale of operations because of a lack of financing.
This is a problem that the European Commission, the EU ‘government’, wants to address. On 7 December 2011, the EU Commission published its proposals for a new regulatory framework for social investment funds. The Commission’s objective is to make it easier to establish and operate investment funds that specialise in social businesses. It is anticipated that a better regulatory framework will encourage more social investment funds and so improve access to capital for social entrepreneurs.

“Social businesses embody just the kind of smart, inclusive and sustainable growth and innovation that is so important for today's European economy. Our new measures will help build these businesses across Europe, ensuring they get the financial support they need so that they can grow – especially in these times of crisis,” commented Michel Barnier, the EU’s Internal Market Commissioner, who heads up the Commission’s work on social investment funds.

A central feature of the EU’s social strategy
The new regulations for social investment funds are part of the European Commission’s program of work on social business. The Commission published its action plan for social business in the form of a Social Business Initiative in October 2011, and the initiative recognises that improved access to financing is an important part of the overall strategy. Prior to publishing its proposed EU Regulation for social investment funds, the Commission carried out an open consultation on social investment funds in September, and Ferd was one of the 67 interested parties that submitted a response to the consultation. Ferd’s response can be seen here.

A European ’passport’ for social investment funds
The European Commission believes that there are two main reasons why Europe does not have more social investment funds. Firstly, the current regulatory framework does not pay sufficient attention to social investment funds, and there are big differences between different European countries. This makes it difficult for this kind of fund to operate, particularly across national boundaries.

Secondly, the concept of ‘social business’ is relatively little known, and investors that might be interested in investing in social businesses do not have access to sufficient information. This tends to undermine trust in the social business market.

The new EU Regulation specifically addresses the needs of social businesses, investors who wish to invest in social businesses and the mechanism that brings them together, namely social investment funds. The Regulation will apply to the whole of the EEA, including Norway, and will take precedence over national legislation.

An important feature of the new Regulation is that it creates a common ’brand’ for social investment funds. Funds that satisfy specific criteria will be permitted to describe themselves as ‘European Social Entrepreneurship Funds’. This kind of fund will be free to operate in all EEA countries through a European passport arrangement - if the fund is approved in one EEA country, it will automatically be admitted to operate in all other EEA countries.

At least 70% investment in social businesses
The Regulation stipulates certain criteria for a fund to be approved as a European Social Entrepreneurship Fund. The fund must be a collective investment undertaking, and must invest at least 70% of its capital in social businesses (capital is defined as the aggregate of capital contributions and uncalled committed capital). European Social Entrepreneurship Funds will only be permitted to offer their services to professional investors. Certain categories of private investor will be able to invest subject to satisfying various criteria, including a minimum investment of NOK 800,000.

In terms of investment management, a fund will be permitted to use defined investment instruments such as equity investments and both short-term and medium-term loans. Since the focus for social businesses is to achieve social results, funds will be required to establish procedures for monitoring and measuring the social results achieved by companies in their portfolio. In order to ensure transparency, the Regulation also imposes requirements on the information that funds must provide to their investors.

EU’s first definition of a social business
In order to make it possible to regulate the composition of the portfolios held by social investment funds, the new Regulation also introduces the first EU definition of a social business.

According to the Commission’s proposal, a social business is a company that has the achievement of measurable, positive social impacts as a primary objective rather than profit maximisation. Such companies will provide services or goods to vulnerable or marginalised persons, and an example of this would be a company that offers fitness training for older people. A social business can also operate in a manner that embodies its social objective, without necessarily delivering goods and services that in themselves fulfil a social objective, and an example of this would be the Danish company Specialisterne, which employs people with autism and delivers IT services.

A social business will be permitted in certain circumstances to distribute profit to its owners, but the Regulation provides guidelines for how this is to be carried out. These include a requirement for the company to have predefined procedures and rules for the circumstances in which profits are distributed to shareholders and owners, and the company must also confirm that a distribution does not undermine the company’s primary social objective.

Will also apply in Norway
The proposed Regulation will not come into force until it has been approved by the EU's two legislative bodies, namely the European Parliament and the Council. These bodies must agree the details of the proposed Regulation, and they are due to start this process in spring 2012.

If the Regulation is approved, it will come into immediate effect in all EEA countries, including Norway. For Norway and Norwegian players this will mean, for example, that a social investment fund approved in Portugal will be able to operate in Norway. If the proposed Regulation is approved in the way the Commission expects, this may also make it easier for Norwegian social entrepreneurs to access capital.

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