COMMISSION STAFF WORKING PAPER IMPACT ASSESSMENT
Date: 2011-12-07
Institutions: European Commission
Subjects: aid to undertakings, corporate finance, fund (EU), small and medium-sized enterprises, social impact, sustainable development

EUROPEAN COMMISSION 

Brussels, 7.12.2011 
SEC(2011) 1512 final 

COMMISSION STAFF WORKING PAPER 

IMPACT ASSESSMENT 

Accompanying the document 

Proposal for a REGULATION OF THE EUROPEAN PARLIAMENT AND OF THE 
COUNCIL 

on European Social Entrepreneurship Funds 

{COM(2011) 862 final} 
{SEC(2011) 1513 final} 

 
 
 
 
  
 
Table of Contents 

1. 

2. 

2.1. 

2.2. 

2.3. 

2.4. 

2.5. 

3. 

3.1. 

3.2. 

3.3. 

3.4. 

3.5. 

3.6. 

4. 

4.1. 

4.2. 

4.3. 

Introduction .................................................................................................................. 5 

Procedural Issues and Consultation of Interested Parties ............................................ 7 

Overall context ............................................................................................................. 7 

Public consultation and consultation of other parties .................................................. 7 

Related initiatives......................................................................................................... 8 

Impact Assessment Steering Group ........................................................................... 10 

IAB opinion and remarks taken into account............................................................. 10 

Key characteristics of social investment funds and their investors............................ 11 

SEF are a key financing tool for social businesses .................................................... 11 

Investors are increasingly seeking 'social returns'...................................................... 12 

SEF are currently a small player in the investment fund sector................................. 13 

Majority of SEF are institutional................................................................................ 14 

SEF are thinly capitalised and clustered in only a few Member States ..................... 14 

The target undertakings of SEF are active in a wide range of activities.................... 15 

Problem definition...................................................................................................... 18 

Challenges establishing an operational definition of social businesses ..................... 18 

Social businesses access to investment capital constrained....................................... 19 

Investors targeting social businesses face difficulties................................................ 21 

4.3.1.  Key Driver 1: Investors face challenges identifying and understanding social 

investment propositions ............................................................................................. 21 

4.3.2.  Key Driver 2: Measuring or assessing social returns is difficult.............................. 22 

4.4. 

The potential of SEFs are not fully realised............................................................... 23 

4.4.1.  Key Driver 3: Existing rules are fragmentary and poorly tailored to the needs of 

SEFs ........................................................................................................................... 23 

4.5. 

4.6. 

Summary of Consequent Problems............................................................................ 26 

Evolution of the market without EU action ............................................................... 27 

4.7.  What is the added value of early EU action in relation to the above problems ......... 30 

4.8. 

EU’s right to act and justification for acting.............................................................. 33 

5. 

Objectives................................................................................................................... 35 

5.1. 

General objectives...................................................................................................... 35 

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5.2. 

5.3. 

6. 

6.1. 

6.2. 

6.3. 

6.4. 

7. 

7.1. 

7.2. 

7.3. 

7.4. 

7.5. 

7.6. 

7.7. 

Specific objectives ..................................................................................................... 35 

Operational objectives................................................................................................ 35 

Identification of Policy Options ................................................................................. 35 

Options in relation to eligible investors ..................................................................... 36 

Options on transparency on investment strategies related to social business ............ 36 

Options on the measurement of social impact ........................................................... 37 

Options on an European regulatory framework for social investment funds............. 37 

Analysis and Comparison of Policy Options ............................................................. 38 

Options on types on investors to be addressed........................................................... 38 

Options for Objective A – Improving clarity and comparabilty of investment 
propositions ................................................................................................................ 40 

Options for Objective B – Improve tools for assessing and analysing social impacts43 

Options for Objective C – Ensure regulatory frameworks across EU are 
proportionate and effective for maximising  fundraising opportunities for social 
investment funds ........................................................................................................ 45 

Choice of instruments ................................................................................................ 49 

Summary of Retained Options ................................................................................... 49 

Cumulative assessment of preferred options.............................................................. 52 

7.7.1.  Assessment of take-up of the proposed EU framework for SEF ............................... 52 

7.7.2.  Benefits ...................................................................................................................... 55 

7.7.3.  Costs........................................................................................................................... 57 

7.7.4. 

Impacts for other stakeholder groups, Employment, SMEs, and Third Countries, 
including assessment of administrative burden.......................................................... 59 

8. 

8.1. 

8.2. 

8.3. 

8.4. 

8.5. 

9. 

Synergies and Risks ................................................................................................... 61 

Interaction with parallel proposals on Venture Capital.............................................. 61 

Interaction with the general rules on alternative fund managers (AIFMD)............... 63 

Interaction with work under the Social Business Initiative more widely .................. 63 

Risks linked to creating a EU brand for SEF ............................................................. 64 

Risk associated with early action ............................................................................... 64 

Monitoring and Evaluation ........................................................................................ 65 

GLOSSARY OF TERMS ........................................................................................................ 68 

ANNEX I – EMERGENCE OF A SOCIAL INVESTMENT MARKET ............................... 71 

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ANNEX III – CURRENT EUROPEAN FUND REGULATION ........................................... 80 

ANNEX IV – ISSUES WITH INVESTMENT FUNDS WHEN FUNDING SOCIAL 

BUSINESSES ............................................................................................................ 82 

ANNEX V – ESTIMATING ADMINISTRATIVE COSTS AND BURDENS...................... 84 

ANNEX VI – SUMMARY OF IA........................................................................................... 85 

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This report commits only the Commission's services involved in its preparation and does not prejudge 
the final form of any decision to be taken by the Commission. 

1. 

INTRODUCTION 

The subject matter of this impact assessment is social businesses and their funding.   

Social  businesses  are  an  emerging  type  of  business,  which  seeks  to  achieve  social  goals 
through  the  use  of  business  techniques.  Such  enterprises  draw  on  a  wide  range  of  funding 
sources – public money in the form of grants, charitable donations, direct investments – but 
take a business form so they can draw on support from the financial markets.  

Social  business  is  a  significant  part  of  the  European  economy.  Consultation  on  the 
Commission's Social Business Initiative has shown the wide range and growing maturity of 
this sector. External assessments show that the number of social businesses and their impact 
is growing: the 2009 GEM survey1 estimated the share of the population involved in social 
entrepreneurship  as  4.1%  in  Belgium,  7.5%  in  Finland,  3.1%  in  Germany,  3.3%  in  Italy, 
5.4% in Slovenia, and 5.7% in the United Kingdom. Approximately  one in four businesses 
founded in Europe would therefore be a social enterprise. These estimates suggest this is not 
a small sector, and in absolute terms the number of EU citizens directly employed within or 
indirectly impacted by the sector is significant.   

There  is  a  growing  awareness  of  the  distinct  nature  of  the  social  business  sector.  The 
development  of  the  European  Venture  Philanthropy  Association  to  135  members  across  20 
countries  demonstrates  growing  awareness  of 
investors  and  market 
participants.2 

this  amongst 

Social  businesses  are  almost  exclusively  SMEs.  The  social  mission  of  social  businesses 
correlates with a strong focus on sustainable or inclusive development, and on tackling social 
challenges across EU societies: this means that investment in social businesses are likely to 
have  a  greater  positive  social  impact  than  investment  in  SMEs  more  general.  Given  some 
estimates, such as by J. P. Morgan, suggest social investments could grow rapidly to become 
a  market  well  in  excess  of  EUR  100  billion,  underlining  the  potential  of  this  emerging 
sector.3 

Ensuring  this  sector  continues  to  grow  and  flourish  would  therefore  be  a  valuable 
contribution to meeting the objectives of the Europe 2020 Strategy. 

Social  businesses  derive  significant  proportions  of  their  funding  from  grants,  whether  from 
foundations, individuals or from the public sector. As businesses, however, their sustainable 
growth depends on drawing on a wider range of  investments and financing sources. In this 
regard, the EU market for investment funds has begun to play a significant role. A market for 
investment funds whose main objective is investing in social undertakings has taken shape. 
This reflects the increasing interest of many investors in making investments –  typically as 
part of a wider portfolio – that aim to achieve positive social effects over and above the quest 

1  

2  
3  

Terjesen, S., Lepoutre, J. , Justo, R. and Bosma, N. 2011. Global Entrepreneurship Monitor Report on 
Social Entrepreneurship, 
http://www.gemconsortium.org/about.aspx?page=pub_gem_special_topic_reports  
Presentation from EIF to Commission. On EVPA see http://evpa.eu.com/about-us. 
See J.P.Morgan,Impact Investments: An Emerging Asset Class, 2011.  

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of financial returns. Investment funds targeted at social undertakings are one important form 
of such investments.   

But social investment funds are typically small, with concomitantly high relative costs, and 
they  face  certain  specific  difficulties  scaling  up  their  fund-raising  and  buidling  trust  across 
the  EU.  Underlying  this  are  specific  market  problems  related  to  the  identity  and  goals  of 
these funds, which are compounded by competing self-regulatory initiatives to address them. 
In addition regulatory problems can be identified related to the application of rules on private 
investment funds to these funds, undermining their efficiency and access to the single market.  

The  aim  of  this  impact  assesmsent  is  therefore  to  clarify  the  nature  and  scale  of  these 
problems,  to  assess  possible  measures  for  ensuring  social  investment  funds  can  flourish  in 
Europe, and to assess the potential impact of different options and the likely overall impact of 
potential measures.   

This impact assessment complements work being carried out under the Commission's Social 
Business  Initiative  on  supporting  social  businesses  more  widely,  including  through  other 
forms  of  funding  for  social  businesses.  This  impact  assessment  concentrates  solely  on  the 
role of investment funds. Measures to address issues examined here could be complemented 
by other measures taken to build the financial eco-system in which social businesses operate. 
This includes measures at the level of the Member State to provide specific incentives, such 
as  tax  benefits  for  investors  when  they  invest  in  social  businesses  (that  would  have  to  be 
designed  in  line  with  state  aid  rules  and  the  EU  Treaty).  While  the  effectiveness  of  these 
other measures will have a strong impact on the take-up of the measures identified here, the 
justification for these latter measures is not dependent on the wider Social Business Initiative.   

Note on terminology 
Throughout this impact assessment, reference to social businesses should be read – unless 
explicitly qualified – in a broad and inclusive way. Social undertakings, enterprises and 
businesses should be read as interchangeable (terminologies sometimes vary according to 
source). Social businesses include businesses focused on environmental or ethical missions.   

References to social investment should be taken broadly. To ensure a clear distinction 
between social investments as such, which can include any investments in which social 
impacts are being considered by the investors, and investment funds specifically targeting 
social businesses as their investment target, the latter are referred to here as ‘social 
entrepreneurship funds’ (SEF).  

This reference does not cover funds that do not specifically fund social businesses, 
irrespective of whether they follow socially responsible investing guidelines or not. 
The focus of this Impact Assessment is on SEF in particular, rather than social investment 
more widely. Further details on these concepts and their interactions can be found in Annex I. 

This  impact  assessment  should  be  read  alongside  the  impact  assessment  on  the  European 
Venture Capital market (VC IA).4  

4  

[Reference to insert once published]. 

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2. 

PROCEDURAL ISSUES AND CONSULTATION OF INTERESTED PARTIES 

2.1. 

Overall context 

This work has a broad context.  The Treaty of Lisbon refers to "a highly competitive social 
market economy, aiming at full employment and social progress". The EU2020 strategy and 
the Single Market Act seek to this end to identify and take concrete steps towards sustainable, 
inclusive  growth.  The  Communication  on  a  European  Platform  against  poverty  and  social 
exclusion identified in addition the necessity of "mobiliz[ing] the potential inherent [in] the 
social economy".5  

The financial crisis has once again underlined the vital importance of steps to support growth 
in all its forms. Sustainable and inclusive growth has a particular and vital role to play. The 
social business initiative is therefore a key step in this agenda, as set out in the Single Market 
Act: “The tremendous financial lever of the European asset-management industry … should 
be used to promote the development of businesses which have chosen – above and beyond 
the legitimate quest for financial gain – to pursue objectives of general interest or relating to 
social, ethical or environmental development.”6 

The establishment of a European framework for social investment funds has been identified 
by the Commission as a 'locomotive' for the social business initiative, one of 12 'key levers'.7 
The  options  to  be  identified  and  assessed  in  this  impact  assessment  form  the  basis  for  the 
Commission's actions on this 'locomotive'.  

2.2. 

Public consultation and consultation of other parties 

On  13th  July  2011,  the  Commission  services  launched  a  public  consultation  on  possible 
measures to improve the access of social businesses to finance by means of investment funds, 
which  closed  on  14th  Sept  2011.8  Contributions  received  were  67  in  total  and  can  be 
consulted online.9 The consultation process has been open and transparent. The consultation 
has  been  published  on  the  Commission  website  and  announced  in  a  press  release  and 
complies  with  the  minimum  standards  for  public  consultation  of  interested  parties.  A 
summary of responses to this consultation is available in Annex II.  

In  general,  the  value  of  EU  action  in  the  area  of  social  business  and  more  specifically  on 
social  investment  funds  has  been  strongly  endorsed  across  different  types  of  stakeholders 
(including  key  Member  States  already  active  in  this  area,  other  public  authorities,  fund 
managers  including  those  investing  into  social  businesses  already,  as  well  as  other  social 
investors, social entrepreneurs, industry associations, spokespeople for the foundation sector, 
and  consumers).  Many  stakeholders  underline  growing  appetite  for  investments  into  this 
sector,  and  note  that  while  the  sector  is  young,  it  could  grow  very  rapidly,  generating 
opportunities  for  coordinated  action  now.  Of  course,  action  now  carries  risks,  and 
stakeholders  have  been  open  in  discussing  and  present  these  risks;  views  vary  as  regards 
details of action and the timing of different measures at the EU level. Generally, respondents 
underline the importance of the EU taking a careful and staged approach in this area. 

5  

6  

7  
8  
9  

See http://ec.europa.eu/social/main.jsp?langId=en&catId=961, and for the text of the Communication, 
http://ec.europa.eu/social/BlobServlet?docId=6393&langId=en. 
See section 2.8 of the Single Market Act, SEC(2011) 467 final, which can be found at: http://eur-
lex.europa.eu/LexUriServ/LexUriServ.do?uri=COM:2011:0206:FIN:EN:HTML.  
See http://ec.europa.eu/commission_2010-2014/barnier/docs/news/2011/smact_timetable_en.pdf.  
See http://ec.europa.eu/internal_market/investment/social_investment_funds_en.htm. 
See http://ec.europa.eu/internal_market/investment/social_investment_funds_en.htm.  

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Given  the  emerging  nature  of  the  social  investment  market,  the  analysis  contained  in  this 
impact  assessment  draws  strongly  on  the  contributions  of  stakeholders  to  the  consultation, 
including when providing data on the size and nature of the market. It also draws on market 
analysis by the Commission services. 

In  addition,  regulators  and  supervisors  were  also  consulted  via  the  European  Securities 
Committee  (ESC),  including  through  a  questionarie  requesting  details  on  existing  national 
regimes for social investment funds. 

This falls within the wider context of the Commission's work and consultation on the Single 
Market Act, where the  role  of  social  businesses and their financing was also identified and 
explored with stakeholders and participants in that consultation. 

2.3. 

Related initiatives  

• 

EU Passport for Venture Capital 

Since  many  social  businesses  are  also  SMEs,  measures  that  facilitate  access  to  finance  for 
SMEs could also help social businesses. In this context, of notable importance are the support 
and regulatory frameworks for venture capital, in particular the steps to be taken to develop a 
EU  passport  for  Venture  Capital  funds.  The  extent  to  which  work  on  establishing  such  a 
passport might aid social businesses is central in considering the effectiveness and efficiency 
of the options identified in this impact assessment.  

In general terms, social businesses facing funding shortfalls are SMEs, and investment funds 
targeting social businesses can be viewed as a specific type of venture capital fund; for this 
reason  the  analysis  in  this  impact  assessment  will  consider  whether  the  situation  of  social 
investment funds targeting social businesses warrants additional steps over and above those 
taken on venture capital funds. 

• 

Social Business Initiative  

As  noted,  actions  foreseen  within  the  Social  Business  Initiative  (and  on  Corporate  Social 
Responsibility  and  Socially  Responsible  Investing)  could  also  contribute  to  addressing  the 
issues explored in this Impact Assessment. Actions under the Initiative have been laid out in 
detail  in  the  Social  Business  Communication  adopted  on  25th  October.10  These  range  from 
introducing  as  an  investment  priority  "social  enterprise"  in  the  scope  of  actions  under  the 
future  ESF  and  ERDF  regulations,  and  identifying  and  developing  best  practices  for  social 
businesses  or  the  creation  of  a  database  for  existing  labels  and  certifications  of  social 
enterprises, to measures aiming to strengthen the professionalism and managerial capacities 
within  social  businesses.11  Other  measures  pertain  to  the  development  of  a  European 
Foundation  Statute  and  measures 
to  public  procurement.  Furthermore, 
consideration will be given to a possible simplification of the state aid rules with respect to 
social businesses.  

in  relation 

10  
11  

See http://europa.eu/rapid/pressReleasesAction.do?reference=MEMO/11/735.  
A related initiative ("A European Code of Good Conduct for Micro-credit Provision") has been 
developed successfully in consultation with representatives of the banking and non-banking micro-
credit sectors, as well as with other stakeholders. This comprehensive document aims at providing 
standards and processes that should lead to meaningful improvements in the operations and governance 
of micro-credit providers from the point of view of consumers, investors, funders and regulators. to 
provide standards and procedures. See 
http://ec.europa.eu/enterprise/newsroom/cf/_getdocument.cfm?doc_id=6978.  

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• 

Programme for Social Change and Innovation 

A  programme  for  Social  Change  and  Innovation  has  been  adopted  by  the  Commission  on 
October 6th, in order to improve access to finance for social enterprises, alongside measures 
to support micro-finance. This programme provides for a financial instrument for the start-up, 
development  and  expansion  of  social  enterprises.  This  includes  a  legal  definition  of  social 
enterprise (see section 4.1.1 below).12 

• 

Single Market Act 

The  Commission,  in  the  Single  Market  Act13  (SMA)  undertook  to  put  in  train  several 
measures  to  ensure  investment  funds  focused  on  funding  social  undertakings  can  flourish. 
The current proposal on a European framework for social investment funds is one initiative 
that delivers on that commitment.  

The  principal  aim  is  to  increase  the  effectiveness  of  the  fundraising  by  social  investment 
funds,  and  to  achieve  a  high  level  of  clarity  as  to  the  characteristics  that  distinguish  social 
investment  funds  from  the  wider  category  of  alternative  investment  funds.  Only  funds  that 
comply  with  these  characteristics  shall  be  eligible  to  raise  funds  by  virtue  of  the  proposed 
European  framework  for  social  investment  funds.  The  Regulation  forms  part  of  the 
Commission's Social Business Initiative (COM(2011) 682/2). 

• 

Existing EU rules on private investment funds 

EU rules on investment funds are already in place. For institutional funds, the broad focus of 
this  impact  assessment,  AIFMD  has  introduced  a  new  passport,  and  work  is  ongoing  on 
developing  detailed  implementing  measures.  For  retail  funds  UCITS  IV  changes  –have 
recently been implemented to improve the efficiency of the Single Market and to strengthen 
investor  protection.  Currently,  adjustments  to  rules  on  depositaries  and  remuneration  of 
managers are being considered as part of a revision of the UCITS rules (UCITS V).  

Linkages between Commission initiatives under SMA 

Initiative 

Social Business 
initiative 

Relationship 
with other 
intiatives 

Part of SMA 

Areas covered 

Interactions  

Public procurement, 
foundations, red-tape for social 
businesses, public financial 
support, development of social 
business 'eco-system' 

These measures compliment 
measures on SEF.  

Social 
Entrepreneurship 
Funds (SEF) 

Programme for 
social change and 
innovation 

Part of SBI 

Private finance for social 
businesses through funds 

Subject to assessment here. 

Part of SBI 

Public finance for social 
businesses 

Compliment measures on SEF. 

SEF measures increase impact. 

12  

13  

http://ec.europa.eu/social/main.jsp?langId=en&catId=89&newsId=1093&furtherNews=yes; and for the 
regulation: http://ec.europa.eu/social/BlobServlet?docId=7148&langId=en.  
http://ec.europa.eu/internal_market/smact/docs/20110413-communication_en.pdf 13 April 2011 

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EIF Fund of Funds  Part of SBI 

Public / Private finance for 
social businesses. 

Strongly compliment measures on 
SEF. 

SEF measures increase impact. 

SME Action Plan 

Part of SMA 

Public / Private finance, 
development of eco-system for 
SMEs 

Compliment measures on SEF. 

SEF measures increase impact. 

Venture Capital 
Funds 

Part SME 
Action Plan 

Private finance for SMEs (may 
cover some social businesses) 

These measures compliment 
meausures on SEF.  

As  can  be  seen  from  this  table,  measures  on  SEF  compliment  other  measures  and  could 
amplify their impact too. The impact of the various measures together is likely to be stronger 
than their impact individual. Notably, measures by the EIF to provide seed finance via fund 
of  fund  structures  to  funds  targeting  social  business  could  strongly  complement  steps  to 
create a EU framework for such funds, by increasing investments into such funds. Also, EU 
steps  to  create  such  a  framework  could  increase  the  effectiveness  of  the  EIF  steps,  by 
reducing search costs for the EIF fund of funds and ensuring a readier supply of funding from 
private sources to compliment the public money available via the EIF fund of funds. 

However, while the scale of the impact of measures on SEF may be sensitive to the impact of 
other measures, this impact assessement considers measures on SEF in isolation. 

2.4. 

Impact Assessment Steering Group  

An  Impact  Assessment  Steering  Group  was  established  in  July  2011.  Colleagues  from 
Directorates General Competition, Enterprise and Industry, Employment, Social Affairs and 
Inclusion,  Health  and  Consumer  Protection,  Internal  Market  and  Services,  Taxation  and 
Customs Union, the Secretariat General and the Legal Service participated in the discussions.  

The  Group  met  3  times  ahead  of  the  finalisation  of  this  report.  The  group  met  on  22  July 
2011, 8 Sept 2011, 19 Sept 2011.  

Minutes of the last meeting of the IASG that took place on 19 Sept 2011 are attached. 

2.5. 

IAB opinion and remarks taken into account 

IAB meeting took place on 9 November 2011. The IAB issued its opinion on 11 November  
2011.  Subsequent  to  this  opinion  a  number  of  significant  modifications  were  undertaken, 
both in terms of the presentation of the problems and in relation to the options andi the policy 
choice. The resubmitted version of 14 November contains the following improvements:  

1. In line with the IAB’s request, the wider context of the present initiative was presented in a 
more  comprehensive  manner,  clarifying  that  the  initiative  on  social  investment  funds  was 
only a small piece in a wider set of initiatives aiming to address social business.  

2. The modified version of this impact assessment report also stresses the crucial importance 
in developing a common understanding of the essential characteristics that would distinguish 
a  social  business  from  other  undertakings  engaged  in  commerce.  The  report  now  clearly 
shows  the  emerging  contours  of  the  notions  of  ‘social  business’  (Section  4.1.1)  while 
acknowledging that further refinements might become necessary as the regulatory framework 
for  social  business  funds  takes  shape.  This  is  why  the  proposed  rules  will  contain  an 
empowerment to further refine the notion of 'social business'.  

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3. In addition, the modified IA report contains a clearer description of the key features that 
distinguish a social investment funds from the wider category of alternative investment funds. 
In  line  with  the  IABs  request,  the  report  clarifies  that  the  essential  features  of  a  social 
investment  fund  are  linked  to  the  social  undertakings  it  targets,  the  composition  of  its 
portfolio (at least 70% of investor capital invested in qualifying target undertakings) and the 
investment  tools  it  employs  (equity,  quasi-equity,  debt  instruments  but  no  leverage).  In 
analogy to the approach taken in relation to venture capital funds, the distinguishing criteria 
are  therefore  threefold  and  refer  to:  (i)  investment  targets;  (ii)  investment  instruments;  and 
(iii)  portfolio  composition.  As  with  venture  capital,  this  IA  report  concludes  that  these 
building  block  define  a  social  investment  fund  with  the  requisite  level  of  detail,  thereby 
allowing a clear distinction between social investment funds and other alternative investment 
funds.  

4.  The  report  also  contains  additional  arguments  on  why  EU  action  in  relation  to  social 
investment funds is beneficial at an early stage, before different initiatives develop divergent 
approaches  in  the  area  thereby  causing  confusion  among  those  willing  to  invest  in  social 
business and the funds that support their activities.  

5. All policy options are described in further detail, especially with a view to their practical 
implementation,  effectiveness  and  efficiency,  especially  with  respect  to  their  regulatory 
enforcement.  

6. Throughout the report, additional attempts have been made to reflect stakeholder’s views 
on problems that arise and preferences for different policy options.     

The resubmitted report was further improved following a second opinion from the IAB, by, 
amongst other things: 

• 

• 

• 

• 

• 

Including more details on interactions between these measures and other initiatives 
under section 2.3; 

Including detail on proposed venture capital requirements under section 4.4; 

Including a new section, 4.7.7, addressing certain risks of early intervention; 

Clarifying further the phasing of options, their interactions, the costs and benefits of 
the approach to phasing of options, e.g. under sections 6, 7 and 8; 

Outlining in more depth impacts for Member States under section 7.7.4. 

3. 

KEY CHARACTERISTICS OF SOCIAL INVESTMENT FUNDS AND THEIR INVESTORS 

3.1. 

SIF are a key financing tool for social businesses 

Private investment funds are a vital financing vehicle across all types of business activity in 
the EU, including for social businesses. At the end of 2010, the European asset management 
industry managed assets worth around EUR 8 trillion in investment funds.14 

14  

Source: EFAMA Investment Fund Industry Fact Sheet. This figure is equivalent to over 50% of EU 
GDP and around 33% of global fund assets. 

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Social  investment  funds  targeting  social  businesses  (SEF  in  this  impact  assessment)  have 
emerged as a key financing tool for those businesses. This development has been supported 
by respondents to the Commission's consultation on social investment funds, since funds are 
a flexible tool of choice for making risky investments.  

SEF  also  act  as  key  intermediaries.  As  Avanzi,  an  Italian  think-tank,  notes  "…  investment 
funds can play an important role because they can minimise the information asymmetry. The 
problem  of  social  businesses  is  that  they  don’t  speak  the  same  language  of  [traditional] 
investors; and these are not eager to invest time to know more and eventually understand a 
model  that  is  miles  away  from  their  standard.  The  market  would  need  specialised  players, 
who  know  their  counterparts,  the  context  in  which  they  operate;  their  logic  and  their 
approach. In order to became a specialist, one need to reach the critical mass that allows the 
investment needed for knowledge – which is in fact the case of a fund".15 

3.2. 

Investors are increasingly seeking 'social returns' 

Investors are increasingly seeking to achieve positive social or environmental or other goals 
with  their  investments.  As  the  Global  Impact  Investing  Network  (GIIN)  puts  it,  social 
investments  "aim  to  solve  social  or  environmental  challenges  while  generating  financial 
profit".16 The focus on 'social returns' by some investors makes SEF a natural target for these 
investors.   

in  social  business  aim 

Investments 
to  generate  positive  social  or  environmental 
consequences. These externalities can be characterised in a variety of ways – environmental, 
social,  or  ethical  impacts,  such  as  reduced  use  of  pollutants,  jobs  for  excluded  sections  of 
society.17  While  all  business  activity  produces  a  range  of  impacts  on  society,  social 
businesses  specifically  target  positive  social  or  environmental  outcomes.  These  'social 
businesses' offer a focal point for investors seeking social returns. They also offer a chance to 
‘leverage’ the impact of social investments.18 

While investors in social businesses are seeking social returns, this is not to the exclusion of 
financial  returns.  For  instance,  while  social  businesses  will  typically  not  offer  dividends  to 
investors, but will re-invest any  financial surpluses in the business, this does not mean that 
there will be no financial return for investors over and above the return of capital.  

15  
16  

17  

18  

Response to Commission consultation. 
Annex I contains more detail on this, including the relations between investments targeting social 
business and other kinds of 'social investment' that have been emerging. See, e.g., EVPA: Social 
Enterprise: From definitions to developments in practice, EVPA Knowledge Centre Research Paper, 
2010; EBAN White Paper: European Early Stage Impact Investing (EBAN), June 2011; Monitor 
Industry: Investing for Social & Environmental Impact, A Design for Catalysing an Emerging Industry, 
2009; ClearlySo: Investor Perspectives on Social Enterprise Financing (ClearlySo) July 2011, 
NESTA: Understanding the Demand and Supply for Social Finance (NESTA1), 2011, p. 10-15; 
NESTA: Growing Social Ventures (NESTA2), 2011; J P Morgan: Impact Investing: An Emerging 
Asset Class (JPMorgan), 2010. For a global perspective, see also the GIIN work on social investments / 
impact investing: http://www.thegiin.org/cgi-bin/iowa/home/index.html.  
For more externalities and their importance in relation to conceptualising social entrepreneurship, see 
http://www.socialenterpriseportal.org/files/Library/Social-Entrepreneurship-Felipe-Santos.pdf, p.17-
20. 
See NESTA1, p. 12, JPMorgan, p.33. The rise of national sustainable investment forums or SIFs over 
recent years provides an indication of the growing importance of a wider frame in investment thinking: 
Twelve European countries have SIFs today, a majority of which are members of Eurosif, the pan-
European Sustainable Investment Forum established in 2001.  

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Many  stakeholders  note  that  investors  in  social  businesses  are  happy  to  make  a  'trade-off' 
between expected financial returns and 'social returns' (which can be characterised as taking 
on more risk for the same returns or lower returns for the same risk).  As the European Social 
Investment Taskforce notes "Social investors … seek a financial return – usually the aim across 
the portfolio is to at least recover the capital so that it can be recycled elsewhere, but may charge 
below commercial rates, and overall aim to break even as opposed to generate financial returns."  

The following diagram sets out these dynamics: 

Source: Adapted from Cheng, 'Access to capital for social businesses',  p. 17. 

3.3. 

SEF are currently a small player in the investment fund sector 

Estimates  of  the  size  of  the  EU  market  for  SEF  vary,  but  current  'best  estimates'  by  the 
European  Investment  Fund  (EIF)  are  that  there  are  around  50  funds  verified  by  them  as 
focusing  on  social  businesses,  though  they  note  this  could  extend  up  to  around  200.  The 
average size of the funds is very small – between EUR 10 and 20 million – with only one or 
two  exceptions  (e.g.  BridgesVentures  in  UK,  which  is  around  EUR  115  million).  A  rough 
estimate based on these fund sizes and numbers of funds therefore gives a market that could 
be of around EUR 500 million to around EUR 4000 million (Recent EVPA estimates put the 
'venture philanthropy' market at around EUR 1000 million).19  

By  way  of  comparison,  VC  assets  under  management  were  around  EUR  50  billion  and 
private  equity  (PE)  assets  under  management  were  around  EUR  500  billion  at  the  end  of 
2010 (SEF are mostly a subset of these figures). Even the most aggressive assessment of the 
size of the social investment market puts it at less than 10% of the size of the VC market, and 

19  

Presentation from EIF to Commission. For EVPA figures, see http://evpa.eu.com/blog/2011/11/evpa-
releases-first-ever-data-on-vp-industry-in-europe/. 

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less than 1% of the size of the PE market; a more realistic assessment would be around 2% 
and 0.2% respectively. 

EVPA  note  that  EU  SEFs  "are  typically  below  EUR  20  million  in  assets,  and  below  the 
critical  mass  needed  to  make  larger  investments  and  to  cover  the  real  costs  of  the 
management team necessary to run the operation".20 

It is also important to note that social investment funds have a more targeted focus on 
investing in a select group of social enterprises which makes them different from the more 
general set of funds that claim to be supporting 'socially responsible investment' (SRI). 
Annex I places the SEF market in the context of the wide SRI market. 

3.4.  Majority of SEF are institutional 

The  investor  base  of  SEF  is  currently  largely  professional  rather  than  retail,  though  retail 
funds that in part target social businesses are sold, for instance, in the French, Luxembourg, 
Dutch and Belgian markets. The French retail market is large; while the funds are not limited 
to  targeting  social  businesses,  in  practice  fond  solidaire  often  act  as  conduits  for  social 
businesses.  

Stakeholders  and  consultation  respondents  suggest  that  existing  inflows  are  mostly  derived 
from  high  net  worth  individuals  (HNWI),  who  traditionally  have  been  a  mainstay  of  the 
philanthropic  sector.  As  the  European  Venture  Philanthropy  Association  (EVPA)  put  it 
"social business funds should primarily be opened to professional and qualified investors, as 
the social enterprises which they fund will require both funding and non-financial support to 
accelerate their growth".21 The social business' need for 'patient capital' sits at the core of its 
demand on capital markets, yet such capital exhibits low degrees of liquidity and long time 
periods before returns are likely.  

3.5. 

SEF are thinly capitalised and clustered in only a few Member States 

As mentioned in Section 3.1, average sizes of social investment funds are small. The largest 
investment  funds  are  clustered  in  either  France  or  the  United  Kingdom.  For  example, 
BridgesVentures (EUR 115 million) is located in the UK, Alter Equity, Citizen Capital, NEF 
Capital éthique (EUR 30-50 million) are all located in France, and BAC Partenaires, Catalyst, 
and the Social Enterprise Investment Fund (EUR 15-25 million) are located in France (BAC) 
or the UK.   

The  only  substantial  social  investment  fund  domiciled  outside  these  two  countries  that 
Commission research indicates as exceeding the EUR 25 million threshold is Karmijn Capital 
in the Netherlands (EUR 50 million).  It appears that the largest Italian venture capital fund is 
Oltre Capital with only EUR 10 million in assets under management while all the examples 
for Germany (BonVenture, Social Venture Fund)  do not exceed EUR 10 million.  Member 
States with a smaller investor base generally have no social investment funds of any notable 
size domiciled in their territories (there are exceptions, such as a fund operating in Hungary).    

The following table shows some of the most important EU social investment funds and the 
range of their investment activities: 

20  

21  

Submission to Commission consultation on social investment funds. Their figures as noted under 
footnote 19 put the median fund size at EUR 11 million. 
Submission to the Commission consultation on social investment funds. 

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Source: EIF 

3.6. 

The target undertakings of SEF are active in a wide range of activities 

While  the  overall  capitalisation  of  social  investment  funds  remains  very  low,  the  range  of 
activities  financed  by  these  funds  is  extremely  diverse.    Social  business  financed  by  these 
funds  covers  an  area  ranging  from  the  provision  of  infrastructure  in  deprived  urban  areas 

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15 

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in  deprived  areas  (BridgesVentures,  Citizen  Capital), 

(BAC  Partenaires),  catering  to  the  needs  of  energy,  the  environment,  education  and 
the  provision  of 
healthcare 
microfinance to SMEs in deprived areas (Planet Finance), bio products and fair trade (NEF 
Capital  éthique),  the  provision  of  goods  and  services  for  socially  excluded  sectors  of  the 
population  (Oltre  Capital),  to  the  provision  of  social  services  (social  enterprise  investment 
fund).    It  is  fair  to  say  that  there  is  an  almost  inverse  relationship  between  the  breadth  of 
ambition pursued by social undertakings and the thin capitalisation of their sponsors.     

The  Commission  has  identified  at  least  four  discrete  clusters  of  development  in  social 
businesses: the UK, with a social investment market that has matured in the course of the last 
20  years,  partly  in  reaction  to  active  public  policy;  Member  States  with  a  social  economy 
tradition (such as France); Member States where private sector provision can be characterised 
as  developing  rather  independently  from  public  policy  (such  as  Germany);  and  finally, 
Member  States  without  strong  developments  so  far  in  either  public  policy  or  the  private 
sector.  A  significant  proportion  of  the  responses  to  the  Commission  consultation  on  social 
investment funds were from stakeholders located in the UK or France. 

Examples of social businesses22  
In Italy, a medical centre provides high-level specialised assistance to people in need 
(immigrants for example), particularly in areas poorly served by public services. 

In Romania, a company with five members of staff and five volunteers has been working 
since 1996 to provide cultural services in the Romanian language to approximately 90 000 
blind people by adapting media (especially audio books and films) to their needs. 

In 2004, in France, a business launched an innovative concept of water-free car washing 
services by using biodegradable products and employing unqualified or marginalised staff in 
order to reintegrate them in the labour market. 

In Hungary, a foundation set up a restaurant employing disabled staff (40 employees) and 
provided them with training and childcare to ensure the transition to stable employment. 

In The Netherlands, a company teaches reading using innovative digital tools and a method 
based on playing. This method is particularly suitable for hyperactive or autistic children but 
can also be used for illiterate people and immigrants. 

In Poland, a social cooperative comprising two associations employs long-term unemployed 
and disabled staff. It provides a variety of services: catering and food services, small 
construction and handicraft jobs and employability training for disadvantaged people. 

In Germany, a business organizes exhibitions and business workshops in total darkness. 
Blind guides lead attendees through a completely dark environment, where they learn to 
interact by relying on other senses than sight. 

In Denmark, a business exclusively hires employees with autism spectrum disorder (ASD). 
The business' objective is to tailor a working environment for specialist people such as people 
with ASD in order to let them solve valuable tasks for the business sector at market terms. 

In some jurisdictions specific legal forms have been developed so as to aid wider steps to 
support such enterprises, such as 'Impresa a Finalità Sociale' in Italy, or a 'Community 
Interest Company' in the UK. 

22  

See also box 1, NESTA, Growing Social Ventures , p. 13. 

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PROBLEM TREE 

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4. 

PROBLEM DEFINITION 

Structural problems in the SEF market impede the matching of supply of private capital from 
investors with demand for such capital from social businesses, so such businesses are often 
strongly dependent on public finance and investors are unable to allocate their capital as they 
might wish.  

4.1. 

Challenges establishing an operational definition of social businesses 

4.1.1.  The contours of social business are still emerging 

Over  the  last  decade,  a  consensus  has  emerged  that  'social  businesses'  can  be  distinguished 
from  other  types  of  businesses.  Stakeholders  have  confirmed  that  social  businesses  are  a 
distinct sub-set of SMEs, but which share specific characteristics not shared by other SMEs. 
At  the  most  basic  level,  social  businesses  are  those  enterprises  that  explicitly  combine  a 
social  mission  with  a  financial  one,  with  the  social  mission  as  dominant.  Often  this  social 
mission is enshrined in the undertakings charter of association and is rather precise as to the 
field of activities that are covered.  

In terms of delimitating what is a social business and what is not, the Commission set out, in 
the  Communication  on  Social  Business,  a  definition  of  the  term  'social  enterprise'  to  cover 
those businesses for which the social or societal objective of the common good is the reason 
for  the  commercial  activity,  often  in  the  form  of  a  high  level  of  social  innovation,  where 
profits  are  mainly  reinvested  with  a  view  to  achieving  this  social  objective,  and  where  the 
method  of  organisation  or  ownership  system  reflects  their  mission,  using  democratic  or 
participatory principles or focusing on social justice. This same definition was also reflected 
in 
Innovation 
(SEC(2011)1134).23 
Three core elements therefore can be seen for differentiating a social undertaking from other 
entities active in the field of commerce:  

the  Regulation  on  an  EU  Programme 

for  Social  Change  and 

• 

• 

• 

their primary objective is to achieve social impact; 

the  almost  complete  reinvestment  of  surplus  into  the  promotion  of  the  social 
business (no dividends); 

the  particular,  most  often  inclusive  manner,  in  which  a  social  undertaking  is 
managed vis-à-vis its employees and external stakeholders.  

This  definition  is  broad  and  inclusive  in  terms  of  the  determination  of  what  is  a  social 
objective. Nevertheless, the typology of activities that fall under this definition has solidified 
over  the  last  decade.  Social  entrepreneurship  is  usually  associated  with  small  start-up 
engaged in local efforts.  Although  they often tackle issues  that are of global relevance  (the 
persistence  of  poverty,  access  to  basic  services  for  marginal  groups,  social  integration  of 
people with a disability), the focus of their activity is almost essentially local.  

23  

See COM(2011) 682 final; also for the Regulation on an EU Programme for Social Change and 
Innovation, see http://ec.europa.eu/social/BlobServlet?docId=7148&langId=en.  

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The  very  breadth  of  activities  and  ambitions  pursued  by  social  businesses  is  at  once  a 
strength, a corollary to innovation, but also a source of problems. For many investors entering 
this field, the contours of social business is still a large tent where many different activities 
are  assembled.  Naturally,  this  gives  rise  to  an  initial  impression  that  the  concept  of  social 
entrepreneurship  is  still  poorly  defined  and  its  boundaries  with  other  type  of  economic 
activity remain fuzzy. This conceptual fuzziness invites a European approach that consists in 
attempting  to  provide  sharper  contours  and  define  a  well-established  core  of  activities  that 
would  be  deemed  social  business.  In  this  manner,  European  action  could  shape  the  field's 
further  development,  and  on  this  basis  the  operational  definition  above  has  been  adopted 
throughout this impact assessment. 

The  possibility  of  including  the  definition  of  social  business  as  one  of  the  problems  was 
considered but rejected, as arguably it would impede any action or solution to the identified 
problems.  This  approach  has  been  confirmed  with  stakeholders,  including  fund  operators, 
social businesses and investors operating in the field. 

The definition set out above will therefore be employed as the legal definition for the purpose 
of  assessing  options  in  this  impact  assessment.  However,  it  is  important  that  the  impact  of 
measures introduced on its basis be subject to further assessment and monitoring, precisely so 
that the definition might be refined and developed in the light of the further evolution of the 
market.  

4.1.2.  Conventional financial intermediaries unfamiliar with social business 

The combination of social and financial goals by social business is its key quality, yet many 
conventional  financial  intermediaries  are  not  well  prepared  to  address  the  concept  of 
investing to support a social mission (this is set out in the next section from the perspective of 
the investor).   

As  the  European  Social  Investment  Taskforce  set  it  out:  "the  Financial  mechanisms  in  use 
have  been  adapted  from  commercial  use  and  rarely  take  into  account  the  ‘social  return’ 
element  of  the  investment.  Social  return  is  assessed  in  wildly  different  ways,  by  social 
businesses  themselves  as  well  as  by  social  investors.  Investors  take  different  approaches  to 
assessing  risk,  return  (financial  and  social)  and  how  their  pricing  reflects  that.  Few  are 
transparent  about  their  approach,  making  it  difficult  for  social  businesses,  among  others,  to 
assess  who  is  providing  what  and  why.  Indeed,  the  pricing  of  investment  rarely  links 
coherently to the expected social return of the investment, leading to confusion".24  

4.2. 

Social businesses access to investment capital constrained  

Stakeholders  widely  accept  that  social businesses need better finance. The European Social 
Investment Taskforce submission to the Commission consultation on social investment funds 
argued that "lack of access to capital is acting as a barrier to social businesses … achieving 
their social mission".25 

Two issues emerge: a possible overdependence on public finance and charitable support, 
and challenges in gaining access to so-called 'patient capital' -- suitably heterogeneous and 
sustainable sources of private finance that takes a long-term view. 

24  

25  

European Social Investment Taskforce (EUSIT) submission to Commission consultation on social 
investment funds/Cheng, Access to capital for social businesses, p. 16 
EUSIT/Cheng, p. 9. 

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Since  social  businesses  are  in  almost  all  cases  SMEs,  the  financing  patterns  in  the  SME 
sector as explored in the VC IA also apply to them. For SMEs, financing typically varies in 
nature  and  balance  as  enterprises  develop.  Entrepreneurs  move  from  informal  funding 
(friends  and  family)  through  different  forms  of  debt-based  financing,  with  a  growing 
proportion of equity-based financing then developing, before the enterprises are listed (which 
offers  initial  investors  an  exit  opportunity).  OECD  data  from  2009  showed  funding  for  EU 
SMEs was dominated by lending from banks.26  

However, while the financing mix for social business is to a degree similar to that for other 
SMEs, evidence from stakeholders suggests that there are crucial differences in the balance 
struck between sources and associated funding forms (grants or donations from public bodies, 
foundations,  and  individuals  have  a  role  for  social  businesses  that  is  more  dominant 
compared to conventional SMEs).  

For  instance,  UK  data  shows  public  finance  dominates  the  sector  in  that  Member  State: 
figures27  show  that  over  the  last  ten  years  over  STR  350  million  flowing  into  the  social 
enterprise sector was from public sources, with less than STR 50 million from philanthropic 
and commercial or mixed sources.  

ClearlySo,  in  a  report  on  financing  social  enterprises  for  the  City  of  London  Corporation, 
noted  "the  sector  has  been  heavily  dependent  on  government  and  philanthropy,  and  these 
need  reinforcement.  The  global  pools  of  capital  which  operate  out  of  the  City  of  London 
could provide exactly that".28  

The European Social Investment Taskforce underline this: "the sector is dominated by grant 
funding,  both  in  terms  of  the  amount  of  supply  and  the  cultural  dominance  of  this  form  of 
funding.  …  There  is  a  finite  supply  of  charitable  money,  and  insufficient  to  go  round  –  a 
situation  which  will  only  worsen  in  the  coming  years.  Therefore,  the  efficient  use  of  those 
funds  becomes  imperative,  to  ensure  that  grants  are  used  where  most  appropriate.  …  The 
majority of capital funding available is for fixed assets. … There is some evidence of banks 
providing secured lending for more general purposes, although this of course relies on social 
businesses having assets (or directors being willing to provide personal guarantees) – and we 
know  social  businesses  are  undercapitalised.  The  handful  of  other  mechanisms  available  – 
underwriting,  unsecured  loans,  quasi-equity,  equity  –  are  barely  used.  …  Little  genuinely 
patient capital/soft loans are available, yet such finance would seem necessary in a sector in 
which success is rarely achievable in the short-term (tackling poverty, improving education, 
etc)".29  

Other  stakeholders  broadly  concur:  a  central  issue  for  social  businesses  is  their  over-
dependency on grant-based or public financing and their adaptation to it. The transition into a 
'conventional'  financial  landscape  may  be  particularly  challenging  for  social  businesses 
compared  to  other  businesses,  as  these  businesses  fall  between  the  targets  accepted  by 
foundations for grants and the enterprises normally targeted by VC.30  

26  

27  

28  
29  
30  

There is a typical SME 'lifecycle' as an enterprise migrates through different funding sources as it 
grows and develops. See VC IA. 
See: http://www.youngfoundation.org/files/images/Growing_Social_Ventures.pdf; UK data from: 
http://www.socialinvestmenttaskforce.org/downloads/SITF_10_year_review.pdf. 
ClearlySo, Investor perspectives on Social Enterprise Financing, 2011, p. 5. 
EUSIT/Cheng, p.16. 
The migration through different financing sources can be different for social businesses, as can be 
starting points (for instance, some social businesses evolve out of associations or other cooperative 
groupings, and so can rely on different early funding sources than seen with non-social SMEs). There 

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In contrast with the venture capital markets (which are focused on raising equity and quasi-
equity financing), a number of respondents to the consultation noted that a wider range and 
variety  of  instruments  or  funding  conduits  are  vital  for  the  smooth  operation  of  social 
businesses. For example, the French Authorities noted the central role of certain specific non-
transferable  debt  instruments  in  the  financing  of  social  businesses  in  France.  EVPA  also 
recently has undertaken a comprehensive market survey for the social business sector, which 
has underlined that the social business sector is highly dependent on grants and other forms 
of non-investment funding.  The clear  implication is that financing tools designed for social 
businesses are broader in scope than those used by SMEs.31  
As  EVPA  noted  in  their  submission  to  the  Commission  consultation  on  social  investment 
funds, "…social investments need to be long-term and patient in their nature".  

4.3. 

Investors targeting social businesses face difficulties 

4.3.1.  Key  Driver  1:  Investors  face  challenges  identifying  and  understanding  social 

investment propositions 

A common theme in the responses of stakeholders to the Commission consultation on social 
investment  funds  was  the  impact  of  confusion  and  a  lack  of  consistent  disclosures  about 
social investments, even for professional participants already operating in the social business 
sector.  

Core elements of this problem related to investment funds include:  

• 

• 

difficulties  investors  face  in  discerning  which  funds  are  truly  investing  in  social 
businesses, given a lack of common criteria for what such funds might do; and 

a lack of sufficient consistency in regards information on what each fund does: on 
what  it  will  or  will  not  invest  in,  on  its  criteria  for  establishing  this  and 
methodologies followed, on the degree of support it provides to social businesses it 
targets. 

Responses to the Commission Consultation on social investment funds have underlined these 
concerns.  

The Financial Services User Group (FSUG) noted: "there is much scope for investors to be 
misled  by  market  operators  jumping  on  the  social  business/social  investment  fund 
bandwagon.  There  seems  to  be  quite  a  broad  range  of  social  investments  funds/financial 
instruments.  For  example:  social  'impact'  bonds;  social  purpose  companies/funds;  social 
investment  bonds  (SIBs);  and  some  for-profit  companies,  which  claim  that  their  activities 
have a social benefit. FSUG believes there is a substantial bit of work needed to ensure that 
categorisations  and  definitions  are  right.  …  It  is  important  that  consumers  can  easily 
recognise,  immediately  and  without  any  doubt,  what  social  businesses  and  what  private 
investment funds in supporting social businesses are". 

Finnish public authorities also noted: "There are currently no standard disclosure practices or 
e.g.  comparable  performance  data  to  present  an  investment  case,  which  includes  a  social 
engagement.  Issuers  of  financial  instruments  either  advocate  that  they  are  normal  investees 

is much evidence of growing work on developing wider understanding and comprehension of the 
investment proposition posed by social entrepreneurs: see, for instance, the Social Investment Manual 
launched recently by the Schwab Foundation for Social Entrepreneurship (http://wef.ch/pdf). 
http://evpa.eu.com/wp-content/uploads/2011/11/VP-Industry-data_for-press.pdf. 

31  

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and  tone  down  their  social  nature,  or  identify  themselves  as  philanthropic. There should be 
practices to present investment cases with a middle approach. This  should be done  through 
elaborating  e.g.  the  profit  distribution,  investment,  personnel  or  environmental  policies.  …  
[R]equirements  comparable  to  UCITS  Directive  and  AIFMD  [are  needed],  supplemented 
with  an  obligation  to  report  on  investments  in  social  businesses,  in  particular  reporting  on 
special  features,  particularly  on  how  to  measure  social  performance  when  not  seeking 
financial return on investments (i.e. non-profit character)." 

The  Banque  Populaire  Caisse  d'Epargne  (BPCE)  also  commented:  "BPCE  accorde  une 
attention particulière à la transparence et à la qualité d’une information claire et fiable qui est 
dispensée  aux  consommateurs,  de  plus  en  plus,  intéressés  par  ce  type  de  produits.  C’est 
pourquoi,  une  action  européenne  semble  nécessaire  pour  déterminer  les  critères  qui 
pourraient  permettre  à  une  entreprise  de  se  prévaloir  d’un  ou  plusieurs  labels  de  type 
« entrepreneuriat solidaire »." 

4.3.2.  Key Driver 2: Measuring or assessing social returns is difficult 

Measuring  and  assessing  the  social  returns  of  investments  is  central  for  investors  in  this 
sector. This reflects the hybrid nature of social businesses and the investor's interest in social 
returns alongside financial returns. 

Yet the EIF have highlighted that there is a "lack of standard metrics for social performance. 
85%  of  impact  investors  have  developed  their  own  measurement  systems  (source:  J.P. 
Morgan), resulting in a lack of comparability between investors and projects". They note that 
"measuring impact appears complex, expensive and subjective". 

In light of this, many indexes or measures of performance for social investments have been 
emerging under self-regulatory steps.   

The  EIF  underline  the  development  since  2008  of  the  Impact  Reporting  and  Investment 
Standards  (IRIS).  (The  GIIN  includes  a  good  resource  on  this  work  on  social  performance 
and reporting: http://iris.thegiin.org/materials.) 

Different measures tend to focus on different aspects or approaches to assessing performance. 
For  instance,  the  Social  Return  on  Investment  approach  (SROI)  seeks  to  measure 
performance in dollar terms, to allow comparisons across a wide range of different types of 
company. The B-Ratings System uses a matrix approach, focusing on five key stakeholders 
perspectives  (consumers,  employees,  suppliers,  the  community,  and  the  environment).  The 
HIP  (Human  Impact  +  Profit)  framework  also  focuses  in  on  five  areas,  this  time  thematic 
(health, wealth, earth, equality and trust). 

The  competition  between  different  measures  is  illustrated  by  three  indicative  and  different 
methodologies  emerging  even  within  one  sector:  recent  discussion  with  stakeholders  has 
highlighted  three  methodologies  emerging  across  the  housing  sector  (IPD/  AeDex  Social 
Housing  Property  Index  (Netherlands),  Urban  returns  (Germany),  Social  Return  on 
Investment – SROI (United Kingdom, Netherlands)).  

As can be seen, different purposes can drive different approaches.  

There is global work ongoing in this area, with widespread academic and commercial 
attention. The Social Performance Task Force in the US is a good example of the range of 
initiatives; http://sptf.info/resources/sp-initiatives lists five different strands of work.  

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Yet  the  explosion  in  research,  innovation  and  competing  standards  itself  carries  risks  and 
leads to problems. This plurality can be confusing for investors, as information can conflict 
or use similar concepts in different ways, reducing trust. Conflicts or overlapping information 
can  also  undermine  the  capacity  of  investors  to  compare  different  investment  propositions 
where claims about social returns subject to different measurement criteria or methodologies.  

In  addition,  it  can  be  argued  that  self-regulation  in  this  area  is  unlikely  to  lead  by  itself  to 
consistent  or  comparable  overall  approaches,  though  it  may  be  too  early  to  draw  that 
conclusion.  The  incentives  for  industry  participants  may  not  be  strong  enough  to  lead  to 
sufficient  individual  or  collective  expenditure  on  developing  sophisticated  approaches  or 
buy-in to using them. 

Consultation respondents noted the importance of addressing potential confusion in this area. 
The  EIF  have  reached  interim  conclusions  in  favour  of  supporting  and  driving  forward 
further  work  in  this  area,  so  that  there  can  be  precise  and  objective  criteria  for  investment 
decision making on social performance. 

For instance, ALFI noted: "[c]onsideration of social returns should be a key element of the 
investment  process  (and  not  just  a  reporting  consideration).  …  Social  investors  are  looking 
for  information  on  the  social  outcome  (“impact”,  “performance”,  “return”)  of  their 
investments."    The  European  Social  Investment  Taskforce  also  makes  similar  comments, 
amongst others. 

4.4. 

The potential of SEFs are not fully realised 

4.4.1.  Key  Driver  3:  Existing  rules  are  fragmentary  and  poorly  tailored  to  the  needs  of 

SEFs 

The rules under which SEF operate are not tailored to the specific needs of such funds, and 
different rules can apply in different Member States or to different types of fund. 

Existing social investment funds (SEF) typically take the form of closed-ended funds. (These 
will  in  the  future  be  Alternative  Investment  Funds  (AIF)  under  the  AIFM-D  but  since 
existing  funds  are  small,  they  mostly  fall  under  the  threshold  for  the  AIFM-D  so  its  rules 
would not automatically apply.) 

In  France  and  Luxembourg  (amongst  a  small  number  of  other  cases),  some  funds  also  fall 
under national open-ended fund rules (UCITS-like regimes): these funds typically will have 
reduced levels of investment in social businesses, will be subject to more robust regulation, 
and  may  in  some  cases  be  offered  (depending  on  the  fund)  to  retail  investors.  The  French 
fond solidaire market has not been included in our assessments of the size of the EU social 
investment  fund  market,  as  the  target  of  these  funds  is  not  always  social  businesses  with  a 
social mission as defined in the Social Business Initiative. However, some of this market will 
be supporting social businesses.   

In general there are no specific rules targeted at social investment funds (with the exception 
of the fond solidaire model).   

As analysed under the IA for VC, eight member states have specific rules applying in relation 
to VC, which have served to fragment the EU landscape for VC funds. For non-VC funds and 
for those member states where VC regimes do not apply, a patchwork of requirements exists.  

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Note under this table all funds are AIF under AIFM-D, but existing social investment funds 
would all fall beneath the AIFMD-D threshold rules so in practice would remain under 
national rules. 

Fragmentation between Member State and EU regulation applying to different fund types  

Type of fund 

National fund 
regimes (retail) 

National fund 
regimes  
(institutional) 

Other national 
rules on 
managers  

Other [where 
no national fund 
or manager 
rules apply] 

Existing requirements 
Content 
In some larger Member States with more mature 
financial services markets: these regimes typically 
include detailed fund and fund management rules 
similar to UCITS, but more flexibility in eligible 
assets compared to UCITS.   
Funds of this kind can be found in all major fund 
markets such as UK, France, Germany, Luxembourg, 
Ireland. 
AIFM-D will impact here. 

Eight Member States have VC regimes (Austria, 
Germany, Estonia, France, Italy, Portugal, Spain, 
UK). These vary in terms of content (e.g. on eligible 
investors, portfolio composition, reporting and 
transparency requirements, etc., as set out in VC IA).  
In Luxembourg, UK and Germany, amongst other 
larger markets, open-ended institutional funds are 
permitted under relevant regulations that can be used 
to target social businesses. These regimes can include 
requirements on reporting, qualified investors, fund 
rules in some cases, and so forth.  
VC proposal will impact here. 
AIFM-D will impact here. 
Some Member States have rules applying to 
managers (e.g. UK).  On registration, reporting, broad 
principles.  
Some apply MiFID rules on conduct in some 
contexts. 
AIFM-D will impact here. 
All MS, but content varies significantly. 
Prospectus requirements relating to public offerings; 
national requirements relating to public offerings; 
company law 
German closed-ended funds currently fall under this 
category. 
AIFM-D will impact here. 

Relevance for SEF 
France, Luxembourg have funds 
that are broadly marketed as social 
investment funds under this 
category; French regulation 
includes specific rules tailored for 
such funds. These funds are not 
however targeted at social 
businesses as defined in this impact 
assessment and the Commission 
Social Business Initiative. 
Most of the UK SEF market sits 
under this category; in general 
most SEF in other Member States 
also fall under this category where 
national rules exist. 

Not known, not extensive (only in 
most developed fund markets). 

General requirements apply to all 
existing SEF, as with other funds, 
unless national rules explicitly 
exempt them. 

As  this  table  shows,  rules  vary  materially  and  significantly  across  different  member  states, 
depending on how existing social investment funds are structured. As noted above, evidence 
from stakeholders, including EVPA, is that the vast majority of social investment funds fall 
either under a national retail regimes (mostly in France and Luxembourg, though these funds 
vary in the extent that they target social businesses or are able to target retail investors), or 
under other national regimes as may apply for PE or VC closed-ended funds (in UK but also 
most other jurisdictions that have social investment funds). 

While AIFM-D will apply to all non-UCITS EU asset management, social investment fund 
business  will  almost  entirely  fall  under  the  threshold  for  that  framework,  and  so  existing 
fragmentation in national rules will apply to social investment funds.   

The fragmentation in rules facing social investment funds can be summarised thematically: 

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Requirement 
Eligible investors 

Portfolio composition 

Rules on conduct 

Rules on transparency 
and reporting 

Other general 
requirements 

Extent of Fragmentation across EU member states 
Rules vary significantly. 
Under VC, where there are national frameworks these typically set out who might 
be qualified. (Same for other fund types).  
Prospectus and MiFID rules apply in some MS or for some fund types.  
Rules vary significantly.  
Under VC frameworks, different MS have different thresholds for investments 
into SMEs. 
Otherwise rules mostly (with some exceptions) only apply for retail funds (e.g. 
French  fonds solidaire, which mostly follow a retail framework similar to 
UCITS and confine investments into social businesses to a 10% slice of the 
overall fund). 
While France has rules specific to social investments broadly understood, these 
rules are not targeting investments into social businesses as such. In other 
jurisdictions national rules on marketing may apply in regards claims made about 
the portfolio composition, for instance against misleading claims (a fund must 
invest in the assets it says it does). 
Rules vary significantly.  
In jurisdictions with non-harmonised retail funds, these rules are often similar to 
UCITS; requirements vary significantly across other fund types and different 
jurisdictions. 
In the future managers will be subject to AIFM-D rules if they fall in scope (are 
large enough). 
Rules vary significantly. 
Retail funds are subject to extensive transparency and reporting requirements in 
general, and these are not harmonised (since UCITS funds are not able to be 
SEF). Where such rules contain specific measures regarding social investments 
(e.g. requiring certain disclosures on SRI policies, etc.) these are not harmonised 
at the EU level. 
Other funds or their managers may be subject to reporting requirements, but not 
currently in all jurisdictions. 
In the future managers will be subject to AIFM-D rules. Those that fall above the 
AIFM-D threshold have to fulfil strong transparency and reporting requirements. 
Rules vary significantly. 
They can include registration or authorisation requirements, requirements on 
'fitness and properness' of persons carrying on substantively the business, 
requirements on capital, etc. 

Self-regulatory developments – discussed later in section 4.6.1 – are likely to contribute to a 
fragmentary  picture,  even  though  these  necessarily  do  not  carry  the  force  of  regulatory 
requirements.  Such  fragmentation  extends  beyond  the  fragmentation  between  different 
Member  States  and  rules  applying  to  different  fund  types,  so  fund  managers  can  be  faced 
with competing initiatives even for the same fund or in the same fund sector. This is outlined 
above.  While  Eurosif  are  actively  pursuing  greater  consistency  and  coverage  in  regards 
existing  initiatives  related  to  social  investments  more  widely,  they  are  not  specifically 
addressing the needs of funds investing into social businesses as defined here. As set out in 
section  4.6.1,  the  work  of  Eurosif,  while  very  valuable,  is  unlikely  to  fully  address  the 
fragmentation issues outlined here. 

Fragmentation has impacts on costs for funds that are the same as those outlined in the VC IA 
(the  procedural  steps  and  costs  associated  with  raising  capital  in  several  jurisdictions  are 
described in Sections 5.1.2, 5.1.3, 5.1.4 and 5.1.5 of that IA). As with venture capital funds, 
the major costs result from the necessity to obtain national distribution licenses (EUR 20.000-
40.000  per  country),  the  requirement  to  entertain  a  local  presence  (EUR  25.000  per  year), 
prospectuses (around EUR 40.000 per country). Lesser costs, that multiplies with the number 
of  jurisdictions  targeted  by  the  fund,  result  from  the  need  to  update  various  other  legal 
documents (e.g., securities legends).  

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Proposed rules on Venture Capital 
The Commission has separately been assessing possible new uniform rules on European 
Venture Capital funds. Under that assessment, measures are considered to set a common EU 
standard and label for such funds, defined as funds with a minimum of a 70% investment in 
SMEs, with these investments made solely by means of equity or quasi-equity instruments.  
While social businesses are mostly also SMEs, the SEF sector has grown separately from the 
venture capital fund sector (though in legal terms SEF may overlap in form with venture 
capital funds). In addition, the focus the venture capital fund sector has been squarely on gaps 
in equity and quasi-equity funding, given the problems EU SMEs face in gathering such 
funding.  
For social businesses, funding solely through venture capital funds could therefore pose 
particular problems and lead to distortions in available finance. Firstly, VC funds would not 
permit non-equity based support from funds to social businesses; evidence from the social 
business sector and existing practitioners in the SEF market has been that a breadth of 
instruments is vital in supporting social businesses, precisely because these businesses have 
specific funding needs related to the development of innovative financial instruments 
combining public and private investments, or equity and debt.  Secondly, the focus point of 
the VC market is on financial returns over the longer term, rather than the achievement of a 
mix of financial and social returns; this difference in focus is likely to undermine the extent 
to which VC funds would be successful in supporting social businesses. 

4.5. 

Summary of Consequent Problems  

Direct consequences  

Problem drivers one and two combine to undermine trust in the social investment market, 
and to reduce competitive efficiency in the market.  

The  lack  of  coherence  and  coordination  in  information  provision  also  increases  the 
probability of mis-buying scandals which would undermine trust even further.  

Problem  driver  three  increases  costs  for  funds,  limits  the  efficiency  of  their  investment 
strategies (so they can comply with fund rules not tailored for the purposes of SEF) and their 
capacity  to  grow,  and  reduces  awareness  of  and  take  up  of  SEF  strategies  amongst  fund 
managers.  

Key consequence: severely restricted cross-border activity 

The  fragmentation  in  rules  across  fund  types  and  member  states  correlates  with  (and  likely 
leads to) very low levels of cross border activity. Evidence from EVPA indicates that cross-
border activity in the social investment fund market is only 4%. (To provide context for the 
figure of 4% from EVPA: the VC IA noted that VC funds raised 12% of funds cross border 
between  2007  and  2010,  and  that  this  compared  poorly  with  20%  for  PE  over  the  same 
period.) 

EVPA  underline  their  view  that  this  is  far  too  low  and  note  that  they  believe  "distribution 
across Europe should be facilitated to allow European investors to invest in other EU country 
funds and/or in funds investing across all of Europe. Innovations in social enterprise models 
could thus be developed / extended across Europe and the development of EU wide funds is a 
key step in such a process".  

This  might  imply  that  the  social  investment  fund  market  is  currently  so  small  and  under-
developed that it has not been able to avail itself of significant opportunities for cross-border 

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activity. On the other hand, it might imply that specific barriers apply for social investment 
funds that have a greater impact than for VC more widely.  

The  key  distinction  for  social  investment  funds,  compared  to  VC  funds,  is  divergent 
disclosure and transparency practices across different jurisdictions, and reduced visibility of 
the funds and clarity as to their identity and nature. 

Secondary consequences 

Continued  fragmentation  in  capital  pools  between  Member  States  limits  the  potential  for 
growth and the extent to which larger, more efficient funds can develop capable of driving a 
larger and larger social business sector, particularly where local Member State capital pools 
are limited.   

Smaller funds are proportionately more expensive to run. In addition, this can contribute also 
to reduced market liquidity, undermining the market's capacity to match investors and social 
businesses.  This  can  act  as  a  'limit'  to  the  emergence  and  growth  of  the  sector.  As  noted 
above  in  section  4.4,  investments  funds  can  be  vital  intermediaries  in  'crystallising'  an 
investment sector. 

To  the  extent  that  such  effects  occur,  the  wider  consequences  are  clear:  social  businesses 
would  find  it  more  difficult  to  secure  funding,  investors  would  not  be  able  to  find  the 
investments they are seeking, or would make investments which do not perform as expected. 
Confidence in the social investment market (and investment markets more widely) would be 
undermined, contributing to increasing inefficiencies in capital markets. 

In general terms, in so far as such impacts impede the emergence of a vibrant social business 
sector, they contribute to reduced levels of sustainable and inclusive growth across the EU. 
SMEs  are  a  core  potential  driver  of  growth32  and  social  enterprises  in  addition  are  a  key 
component in driving social innovation. Reduced effectiveness in funding these thereby has 
the potential for much wider impacts. 

4.6. 

Evolution of the market without EU action 

4.6.1. 

Social investment will not develop as a business model trusted across Europe 

Social  investment  as  a  business  model  will  not  prosper  without  improved  quality  of 
information. In the  absence of  a coordinated  approach on how this information is collected 
and  presented,  the  sector  will  be  weakened  by  the  proliferation  of  self-regulatory  labelling 
and transparency initiatives.  

While  these  initiatives  increase  the  volume  of  information  available,  they  tend  also  to 
fragment that information or make it increasingly difficult for investors to compare between 
different  investment  propositions.    This  is  particular  the  case  where  the  investors  might 
examine propositions from different Member States subject to different national traditions.  

In  the  absence  of  a  coordinated  European  approach,  different  labels  for  different  types  of 
social  investment  funds  have  emerged  through  self-regulatory  interventions.  Labels  are 
mostly  based  on  self-regulatory  initiatives  of  the  industry  such  as  the  label  Finansol  or  the 

32  

See, for further information, the Impact Assessment on Venture Capital [Reference to insert once 
published]., Annexes I-II. 

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label Novéthique in France, or the Lux Flag Label on Microfinance in Luxemburg.  However, 
although  these  labels  share  certain  common  features  (e.g.  transparency  as  regards  the 
selection  of  the  investment  targets),  the  criteria  for  granting  the  label  vary  for  instance  as 
regards concrete elements of the investment strategy of the funds. This variety in approaches 
is  likely  to  create  confusion  for  investors.  Furthermore,  these  labels  are  limited  in  their 
geographical scope and not easily recognisable for investors in other countries. Finally, they 
do  not  specifically  address  the  issue  of  investing  into  social  businesses  –  as  in  the  case  of 
Luxembourg,  labels  are  more  linked  to  the  wider  field  of  socially  responsible  investing  or 
microfinance and do not allow the precise identification of social undertakings targeted.  

Alongside these national approaches, there are also industry led pan-European initiatives to 
create a label for social investments such as by Eurosif.33 Eurosif has also developed a logo 
which investment funds, which adhere to the criteria for the use of the label. However, this 
label  is  not  specifically  dedicated  to  investment  funds  investing  into  social  businesses,  and 
does  not  help  investors  identify  such  funds.  It  is  also  a  non-binding  self-regulatory  tool; 
therefore,  divergent  approaches  by  Member  States  are  not  excluded.  Furthermore,  Eurosif 
works in partnership with the national networks for social investments, which also have the 
task of promoting the label; these national networks have developed different approaches to 
the  Eurosif  criteria.  Therefore,  despite  the  common  basis  provided  by  Eurosif  the  labels 
remain restricted to the respective national context. 

4.6.2. 

Social investment funds will not achieve the scale necessary to make a difference 

The current legal framework harmonising the rules on social fundraising discourages social 
investment fund managers from raising capital on a European basis. Capital sources remain 
confined  to  national  investors  –  for  social  investment  funds  domiciled  in  smaller  Member 
States this will often lead to an extremely narrow investor base. Funds that operate in such 
Member  States  do  not,  therefore,  benefit  from  access  to  a  large,  liquid  and  integrated 
financial  market  and  will  face  difficulties  in  increasing  the  relatively  small  sizes  of  current 
social investment funds (on average these funds do not exceed €10-20 million). These small 
sizes  are  not  conducive  to  deeloping  the  necessary  sectoral  specialisation  that  social 
investment demands.  

At present, raising investment capital for social business across border entails a cumbersome 
and  costly  process,  which  (as  with  Venture  Capital  Funds)  includes:  identification  of  the 
suitable  regime  for  potential  investors,  creation  of  complex  parallel  fund-raising  structures, 
submission  and  approval  of  sales  prospectuses,  foreign  registrations  or  authorisations,  the 
establishment  of  a  local  distribution  office  and  on-going  regulatory  compliance  processes 
involving a multitude of host Member States. 

Such  formalities,  coupled  with  the  small  size  and  therefore  limited  financial  and  human 
resources  available  to  the  average  social  investment  fund,  effectively  skew  the  cost  vs. 
benefit  analysis  against  seeking  capital  beyond  the  fund's  home  jurisdiction.  This  makes  it 
hard  for  social  investment  fund  managers  to  achieve  sufficient  economies  of  scale,  which 
results  in  too  many  small  funds  with  a  suboptimal  size  of  assets  under  management.  In 
consequence, not enough capital or other funding is available for individual social businesses. 
Due  to  the  wide  variety  of  business  ventures  to  which  social  investment  funds  could 
contribute, small funds are currently too thinly spread to achieve optimal outcomes.  

33  

Eurosif are an organization active at the European level – composed of members at the national level – 
that is seeking to coordinate the provision of information related to socially responsible investing. See  

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The scale of the inefficiencies caused by the fragmented regulatory framework is difficult to 
capture and quantify, however the anecdotal evidence cited in Section 4.4 indicates that the 
cost  and  complexity  of  fund-raising  in  multiple  jurisdictions  often  outweighs  what  a  small 
fund operator can afford, both in relation to financial and personnel resources.  

As  a  consequence  of  fragmentation,  various  inefficiences  can  be  expected  to  continue  and 
grow: (i) larger social investment funds, in terms of assets under management, are likely to 
remain  concentrated,  essentially  in  two  Member  States  with  a  relatively  large  domestic 
investor  base  (the  preponderance  of  larger  social  investment  funds  identified  in  this  IA 
involve  France  and  the  UK34);  (ii)  SEF  funds  operate  with  capital  commitments  that 
essentially equate to a single or small number of investment projects (€ 10-20 million); (iii) 
as    consequence  of  the  low  capital  commitments,  social  investment  funds  can  either  not 
invest in more than one project or need to spread their investments so thinly that they cannot 
maintain  the  necessary  level  of  involvement  with  the  social  target  undertaking;  (iv)  the 
absence  of  better  endowed  funding  infrastructures  is  detrimental  to  the  more  rapid 
development  of  a  social  investment  sector;  (v)  the  absence  of  a  privately  funded  social 
investment  sector  prevents  tackling  persistant  poverty  and  wealth  disparities  in  Europe 
(which risk to be increased as a consequence of the financial crisis).  

4.6.3.  Potential social investors will not invest in social investment funds 

The complexity and costs associated with developing and providing relevant information for 
their investors by social investment funds reduces choice. Investors currently have a choice to 
donate  to  charities,  engage  in  philanthropy  or  invest  in  social  investment  funds.  The  latter 
alternative  supports  a  strong  expectation  that  the  investment  will  be  dealt  with  in  a 
commercial manner with an aim to maximise social impact.  

The  current  regulatory  complexity  around  fundraising,  will  lead  to  lower  capital  inflows  to 
social investment funds which, in turn, leads to less opportunities for portfolio diversification 
for potential investors. Furthermore, the limited amount of supply side opportunities reduces 
competition  among  social  investment  fund  managers.  Less  competition  impacts  investors 
who may be faced with higher placement transaction fees and, generally, less opportunities to 
achieve social impact with their investments.    

4.6.4. 

Social business will have fewer funding sources 

In the absence of policy action in favour of larger privately financed social investment funds, 
social business has fewer alternative sources of capital to draw on. Instead of being able to 
select from a larger pool of competing, sufficiently capitalised and highly specialized social 
business  funds  that  operate  across  borders  to  achieve  size  and  economies  of  scale,  social 
business will remain overly dependent on charity or public finance. The alternative of private 
'patient capital' will not be exploited sufficiently, especially since public financing is subject 
to budgetary constraints and austerity measures adopted within the context of the 'sovereign 
debt' crisis.  

This absence of more diverse sources of financing will lead to higher cost of finance, and less 
resources that social business can dedicate to achieve the desired social impact. Less funding 
for social target undertakings decreases the social impact that these undertakings can have on 
society.  

34 

See Section 3.5 above.  

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Last,  but  not  least,  the  geographic  imbalance  in  the  supply  of  private  funds  for  social 
investment will persist. As this impact assessment demonstrates, social investment funds are 
centred  in  a  few  big  Member  States  -  all  larger  funds  are  essentially  domiciled  either  in 
France  or  the  UK.  In  consequence,  Member  States  with  a  smaller  investor  base  essentially 
have no social investment funds of any notable size domiciled in their territories. As social 
investments are predominantly local, this implies that social undertakings in these countries 
will  remain  precluded  from  access  to  private  capital  supplied  via  the  investment  fund 
channel. Their heavy dependence on public grants will persist.   

4.6.5.  National  supervisors  will  have  little  guidance  in  how  to  assess  social  investment 

claims 

In  the  absence  of  EU  action  to  bring  greater  consistency  in  the  essential  characteristics  of 
social  investment  funds,  public  authorities,  in  allowing  a  private  placement  by  social 
investment  funds,  will  have  to  make  comprehensive  assessments  of  these  funds,  their 
managers and the often heterogeneous regulatory requirements that such funds would need to 
comply with. This is especially true for, but not limited to, the cross-border marketing of a 
foreign-domiciled social investment fund.        

4.6.6.  The European economy will be less diverse and less resilient 

Without EU action, the supply of finance by social invesmtent funds to social businesses will 
remain far below an efficient scale. The sheer heterogeneity of rules with which such funds 
would need to comply with, especially in cases of fundraising in multiple jurisdictions, would 
deprive the European economy of the potential benefits of the increase in financing for social 
business  that  is  associated  with  specialised  social  investment  funds.  An  economy  that  does 
not cater to the population at the margins of society risks upheaval and will be less resilient to 
withstand  financial  and  societal  ‘shock  events’,  such  as  the  financial  crisis  or  a  potential 
severe downturn in mainstream economic activity.    

A  lack  of  coordinated  action  in  this  field  would  lead  to  –  (i)  lack  of  capital  commitments 
preventing  capital  from  professional  and  institutional  investors  to  flow  more  efficiently  to 
undertakings  that  produce  the  desired  social  impacts  (ii)  high  transaction  costs  and  lack  of 
liquidity for endeavours in the social field, (iii) a less diversified and less innovative financial 
system for the social sectors and (iv) foregone opportunities to pool risk in order to achieve 
social  impact,  (v)  a  less  resilient  economic  infrastructure,  (vi)  diminished  capacity  to 
withstand economic and societal tension.  

4.7.  What is the added value of early EU action in relation to the above problems 

Apart  from  tackling  the  issue  of  market  fragmentation  in  the  field  of  'private  placements' 
outside a social venture fund's home jurisdiction (this problem is akin to the one faced by the 
venture capital industry), the creation of a fully fledged EU framework for social investment 
funds  is  motivated  by  a  preventive  approach  -  trying  to  address  certain  issues  before  they 
emerge into full view. This is particularly true for the pre-emptive intervention in relation to 
the  classification  of  social  undertakings,  the  definition  of  benchmark  criteria  for  measuring 
social  impacts  and  the  creation  of  a  harmonised  'EuSEF'  label.  If  the  European  legislator 
waits too long before clarifying and harmonising such matters at EU level, it might be very 
difficult to retrieve the situation at a later stage.   

The  pre-emptive  approach  is  motivated  by  several  considerations:  (i)  historic  experience  in 
the  area  of  investment  funds  and  (ii)  recent  experience  gained  in  the  more  mature  area  of 
venture capital funds and (iii) experience in the field of investor protection.   

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4.7.1.  Historic experience in the area of investment funds 

The  European  legislator  did  not  await  significant  proliferation  of  divergent  retail  schemes 
before embarking on the UCITS regulation. As early as 1985, a common approach to investor 
protection was taken in UCITS. Action in harmonising the key features of retail investment 
funds were therefore taken already in the run-up to the creation of a single market by the end 
of 1992. The wisdom of this approach is borne out by the difficulty that the legislator would 
have faced in creating a common UCITS brand, if this task was left for a stage when Member 
States  have  acted  unilaterally  and  thus  have  created  national  preferences  and  entrenched 
regulatory cultures. Experts in the field of investment management services would converge 
in  agreeing  that  a  common  UCITS  brand  could  no  longer  have  been  introduced,  with  any 
promise of success in take-up, at a later stage, say in 2000.   

Experience therefore militates in favour of early action, when markets are still emerging and 
when differences in regulatory cultures have not yet taken hold. Especially when regulation 
at  EU  level  aims  to  launch  a  new  market  (such  as  UCITS  did  for  pan-European  retail 
investment funds which were safe and liquid enough to be suitable for all retail clients across 
Europe) intervention has to be times carefully so as to achieve maximum effect and take-up 
in  the  market.    This  issue  of  potential  take-up  is  crucial  for  voluntary  schemes,  such  as 
UCITS,  which  coexist  alongside  national  schemes  and  apply  only  to  those  operators  who 
wish to engage in cross-border activities.   

To  a  large  extent,  the  early  success  of  the  UCITS  brand  (which  has  lost  none  of  its  appeal 
over the three decades of its operation) can be attributed to the fact that national regulators 
had  not,  in  1985,  developed  significant  and  divergent  approaches  on  their  own.  Also,  there 
was  no  jurisprudence  in  place  that  would  have  given  rise  to  reticence  over  the  new 
investment  fund  rules.  While  it  is  appreciated  that  experience  in  emerging  markets  is  a 
valuable  tool  in  formulating  a  regulatory  response,  waiting  too  long  risks  increase  the  cost 
and effort of adapting national schemes to the proposed EU approach.  Also, waiting too long 
makes  it  more  difficult  to  integrate  the  EU  approach  into  established  national  ways  of 
conducting  fundraising  in  respect  to  social  business.  All  of  these  factors  will  make  early 
adoption of the new rulebook and its ultimate take-up by the relevant economic operators less 
likely, especially if the scheme is not imposed on all investment funds that exist at the time of 
adoption,  but  is  one  that  provides  new  extraterritorial  marketing  and  distribution 
opportunities once an investment fund complies with the new rulebook.     

4.7.2.  Recent experience gained in the area of venture capital funds 

Examples  for  a  possible  baseline  scenario  (should  no  pre-emptive  action  be  taken)  can  be 
gleaned  from  events  in  the  area  of  venture  capital:  already  eight  out  of  27  Member  States 
have  established  different  and  mutually  incompatible  schemes  to  foster  the  promotion  of 
venture capital funds.  As described in the IA report on venture capital funds, many of these 
schemes  –  essentially  on  account  of  their  limitations  in  terms  of  territorial  reach  -  have 
produced little effect in establishing bigger and more diversified venture capital funds. On the 
contrary,  as  national  fund  schemes  only  facilitate  private  placements  to  investors  in  the 
respective  national  territories,  the  proliferation  of  national  schemes  has  resulted  in  a 
proliferation of small funds that operate at sub-optimal sizes.  

In  addition,  several  of  the  venture  capital  schemes  examined  in  the  IA  report  on  venture 
capital funds face additional limitations as to the eligible investment targets: often a fund that 
wants to benefit from the special rules on venture capital placements needs to invest all or a 
certain percentage of its aggregate capital commitments in companies active nationally or in 

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certain  (eligible)  regions  within  a  Member  State.  All  of  these  constraints  have  resulted  in 
national venture capital schemes having little result and often very low take-up. For example, 
stakeholders  report  that  the  constraints  placed  on  venture  capital  funds  by  the  German 
WKBG (investments only in entities with less than € 10 million in annual turnover, less than 
10 years of existence and registered office in Germany only) have led to no venture capital 
fund taking up the opportunities associated with compliance with the WKBG35.  

4.7.3.  Experience in the field of investor protection 

Another  example  concerns  'packaged'  investment  products  offered  to  retail  customers 
(PRIPS)  where  certain  Member  States  have  forged  ahead  with  particular  approaches  to 
investor protection.  Evidence for the fragmentation of investor protection in this area is the 
fact  that  packaged  products  are  regulated  differently,  in  dependence  on  which  channel  of 
distribution is used. For example, insurance products have different requirements from those 
that  are  offered  by  banks  or  by  the  asset  management  industry.  Different  rules  apply 
depending on whether such products are offered as investment funds, investments packaged 
as  life  insurance  policies  or  retailed  structured  products,  including  bank  deposits  where  the 
return is exposed to the performance of assets or reference value other than an interest rate.    

This fragmentation has proliferated despite the fact that 'packaged' investment products aim 
for  the  same  result:  to  provide  investment  opportunities  for  retail  clients.  In  these 
circumstances,  it  has  proven  very  difficult,  if  not  impossible,  to  'turn  back  the  wheel'  and 
create  a  common  and  coherent  EU  view  on  the  disclosure  rules  applying  to  packaged 
investment products offered by different suppliers in the financial services industry.   

On the other  hand,  there are important  opportunities associated with early intervention in a 
nascent marketplace, the development of which the European policymaker wishes to foster. 
These  include:  (i)  the  early  establishment  of  a  trusted  notion  of  what  constitutes  a  'social 
undertaking'; (ii) an early approach to avoid investor confusion; (iii) an early opportunity to 
decisively influence (and harmonise) metrics for social impact assessments.    

4.7.4.  An early approach on 'social business' provides a distinct profile to this sector      

As explained in this IA report, a first step in identifying a 'social business' is to have recourse 
to  certain  essential  features  which,  also  in  the  stakeholder  community,  are  already  used  to 
distinguish  social  businesses  from  other  lines  of  commerce.  An  operational  definition  of 
social  business  would  rely  on  three  planks:  (1)  Social  goals  or  impacts  are  part  of  the 
undertakings articles of association; (2) a majority of the surplus achieved by the undertaking 
is reinvested in the social business; and (3) the undertaking is managed in a transparent and 
accountable manner, involving employees, customers or other stakeholders.   

This  definition  sets  out  the  core  parameters  of  what  makes  a  social  business  different  from 
other  commercial  actors;  an  early  agreement  on  these  features  as  differentiating  criteria 
would allow European policy to shape the field's further development, give it a distinct and 
operational profile and, on this basis, allow for a more rapid development of the sector and 
the financing tools that are at its disposal.  

4.7.5.  An early approach pre-empts investor confusion  

In  addition,  as  potential  investors  are  confused  by  the  proliferation  of  so-called  social 
investment propositions, labels, certificates and other means to promote the social credentials 

35  

Cf. Section 5.1.1 of the IA report on venture capital.  

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of  various  investment  strategies,  this  confusion  must  be  addressed  early  on  and  before  it 
becomes a serious disincentive against investing in the social business sector. Already, there 
are signs that social business is struggling to gain investors attention and that the divergent 
investment policies offered under its tent are leading to investors holding back (see potential 
investor's statements in Section 4.3).   

If  this  confusion  were  not  addressed  at  this  early  stage,  European  policy  forfeits  an 
opportunity  to  create  clear  rules  on  what  a  social  investment  strategy  should  be,  what  the 
characteristics of a social investment fund should be (e.g., portfolio composition, investment 
tools  and  target  undertakings)  and  how  the  desired  social  impacts  are  measured.  Clear  and 
transparent EU rules on these matters would create investor confidence and be an incentive 
for  more  funds  being  channelled  into  social  investment.  Waiting  until  the  market  develops 
these criteria on its own might have serious repercussions on the attractiveness of investing in 
social business.     

4.7.6.  An early approach allows common metrics for the measurement of social impact  

In this respect, the IA report concludes that a first step would be to require social investment 
funds to give an account of their investment strategies, screening criteria for selecting target 
undertakings  and  their  criteria  for  measuring  the  social  impacts  achieved  by  their  target 
undertakings.  On  this  basis,  measurement  tools  and  methodologies  to  precisely  determine 
social  impacts  can  be  developed.  Here  again,  if  disclosure  requirements  are  allowed  to 
develop in an uncoordinated manner, they will be of little value as a basis for developing a 
common approach to social impacts and the metrics used for their measurement. 

4.7.7.  Risks of intervention 

While it is clear that there are risks related to a failure to intervene now – and higher costs 
with intervening later – there are also of course risks with any early intervention. 

Notably, shaping a market now as it develops could lead to distributional impacts, supporting 
social  businesses  and  the  funds  investing  in  them  that  fall  within  the  scope  of  the  new 
approach, while reducing support for those that do not fall within the scope. This militates in 
favour  of  a  wide  definition  of  the  scope  of  the  initiative  –  supported  by  monitoring, 
evaluation  and  better  specification  of  the  scope  over  time  to  ensure  its  appropriateness.  On 
this basis it should be possible to mitigate such risks of intervention over time, as the market 
evolves and grows.  

Another  notable  possible  risk  relates  to  an  intervention  reducing  levels  of  philanthropic 
giving,  channelling  such  towards  investments.  SEF  however  can  be  seen  as  an  additional 
channel for such giving: the choice over how to give and where to give remains, as it should, 
a  personal  matter.  Indeed,  better  clarity  in  relation  to  SEF  should  in  practice  enable  those 
wishing to undertake philanthropic activities to do so in a more effective manner. 

4.8. 

EU’s right to act and justification for acting 

The 17 June 2010 European Council endorsed the Commission proposal for a Europe 2020 
Strategy  for  jobs  and  smart,  sustainable  and  inclusive  growth.  Social  enterprises  can  act  as 
drivers of a social change by offering innovative solutions and therefore and therefore make a 
valuable contribution to meeting the objectives of the Europe 2020 Strategy. The European 
Council’s conclusions call for the mobilisation of all EU instruments and policies to support 
the  achievement  of  these  objectives.  Measures  to  improve  the  quality,  clarity  and 
comparability  of  information  about  such  investments  as  a  means  to  further  develop  the 

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market  of  social  investment  funds  and  to  better  channel  money  to  social  businesses 
constitutes an important step towards achieving these objectives.   

According to the principle of subsidiarity laid down in Article 5(3) of the Treaty, action on 
EU level should be taken only when the aims envisaged cannot be achieved sufficiently by 
Member  States  alone  and  can  therefore,  by  reason  of  the  scale  or  effects  of  the  proposed 
action, be better achieved by the EU.  

The key added value of EU action is better coordination and coherence compared with action 
purely at the Member State level.  In addition, given the development of EU rules already on 
fund  transparency,  EU  steps  in  this  regard  are  likely  to  be  more  efficient  and  potentially 
effective than steps at the Member State level.  

In addition, EU action would provide a basis for and impetus to the emergence of a stronger 
and  more  effectively  regulated  social  business  sector,  a  key  priority  for  the  EU.  This  is 
particularly important given the nascent form of this sector: action by the EU now is likely to 
be  more  efficient  than  action  later,  after  increasing  divergences  in  national  or  sectoral 
approaches to transparency.  

Increasingly  investors  are  looking  to  achieve  positive  social  outcome  through  their 
investments  beyond  the  generation  of  financial  returns.  Investment  funds  targeted  at  social 
enterprises  are  one  important  form  of  such  investments.    It  can  be  observed  that  different 
labels, designations, descriptions and understandings are emerging across Member States for 
such  types  of  investments.  Such  differences  lead  to  investor  confusion  and  can  therefore 
impede  efficient  flows  of  money  to  social  enterprises.  They  also  create  an  obstacle  to  the 
further cross border development of the market for social investment funds. 

A  response  by  Member  States  to  increase  the  clarity,  comparability  and  credibility  of  the 
information  on  social  investment  funds  is  necessarily  limited  in  its  geographical  scope  and 
cannot be compared with or substitute a coordinated or systematic response on the EU level. 
Furthermore,  investment  funds,  and  more  particularly  transparency  requirements  for  such 
funds,  are  now  regulated  under  EU  law  to  create  a  Single  Market  for  investment  funds 
(Alternative 
(AIFMD)).  These 
requirements  limit  the  possibility  of  Member  States  to  act  on  a  national  level  in  relation  to 
transparency measures also for investment funds investing into social enterprises.  

Investment  Fund  Managers  Directive  2011/61/EU 

In respect of cross-border access to investors interested in investing in social businesses, the 
VC IA outlined how a solution based on action by Member States had already been tested, 
and  failed  to  achieve  the  intended  goal.36  The  conclusion  that  only  targeted  action  on  the 
European level can address the existing regulatory fragmentation of European venture capital 
markets  along  national  lines  and  identified  weaknesses  in  existing  EU  law  stands  also  for 
funds targeting social businesses  

The principle of proportionality as articulated by Article 5(4) of the Treaty will be at the heart 
of this initiative. The European market for funds investing into social business is still young 
and  developing.  Unnecessary  burdens  to  the  social  enterprises  themselves  should  also  be 

36  

It notes: "[b]acked by the Member States, The Commission proposed in 2007 mutual recognition of 
venture capital funds by Member States as the way forward in the short term to reduce the regulatory 
fragmentation of venture capital markets in the EU. However, in a report of December 2009 the 
Commission concluded that this process based on mutual recognition has not contributed to a reduction 
of the fragmentation of venture capital markets in the EU and has not brought the expected results." 

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avoided. Given the underlying objective, the success of this initiative will to a large degree 
depend on achieving the right balance between proposed rights and obligations. 

5. 

OBJECTIVES 

5.1. 

General objectives 

(a) 

(b) 

The contribution of social businesses and entrepreneurship to EU goals on inclusive, 
sustainable growth should be fully realised.  

Social businesses should be able to flourish across the EU and fully take part in the 
benefits of the single market. 

5.2. 

Specific objectives 

(a) 

(b) 

EU investors should have confidence and trust in the social investment funds offered 
to  them.  This  requires  that  such  funds  have  defining  characteristics  differentiating 
them from other alternative investment funds. 

Social investment funds should have better access to interested investors across the 
EU.  

(c) 

Better allocation of existing capital to social businesses. 

5.3. 

Operational objectives 

(a) 

(b) 

(c) 

Improve clarity and comparability of social investment funds. 

Improve tools for assessing and analysing social returns. 

Ensure  regulatory  frameworks  across  EU  are  proportionate  and  effective  for 
maximising  fundraising opportunities for social investment funds. 

6. 

IDENTIFICATION OF POLICY OPTIONS 

Policy  options  on  content  will  be  examined  separately  from  the  issue  of  instruments  that 
might be used for delivering these options. 

Policy  options  on  content  are  presented  with  the  principal  aim  of  establishing  a  framework 
defining  the  essential  characteristics  differentiating  social  investment  funds  from  other 
alternative investment funds. This differentiation is introduced at four distinct levels: (i) the 
group  of  investors  that  are  eligible  to  invest  in  social  investment  funds;  (ii)  the  clarity  and 
comparability of investment strategies pursued by social investment funds; (iii) the tools to 
measure social impacts to be achieved by target undertakings of social investment funds; and 
(iv)  the  regulatory  framework  most  conducive  to  increase  the  capital  inflow  to  social 
investment funds.      

Policy options are identified against each of the three operational objectives outlined above. 
However,  these  options  interact  strongly  and  overlap  with  one  another.  They  are  kept 
separate  for  analytic  purposes,  to  clarify  the  most  effective  and  efficient  package  of 
interventions. In particular, measures to improve transparency combine with steps on analysis 

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of  social  returns,  while  measures  to  ensure  proportionate  and  efficient  fund  frameworks 
would entail steps on transparency, as disclosures and reporting requirements are also a key 
element of fund frameworks.  

Voluntary  nature  of  measures:  given  the  youthful  nature  of  the  SEF  market,  all  options 
identified are being conceived as voluntary in nature. That is, the intention is to create new 
opportunities  or  conduits  for  financing,  not  to  impose  or  disrupt  existing  ones.  The  options 
identified here should complement existing structures, and should be developed in a carefully 
phased  way  so  as  to  allow  unintended  consequences  and  possible  disruptions  to  existing 
business to be monitored and addressed.  

Phasing  of  options:  also,  given  the  youthful  nature  of  the  SEF  market,  all  options  will  be 
considered in relation to measures that might be usefully taken now and measures that might 
need to be taken in the future. 

Definition of social businesses: For the purpose of assessing options, the definition set out in 
section 4.1.1 is employed as a legal definition of the target undertakings for investment funds. 
However,  it  is  important  that  the  impact  of  measures  introduced  on  its  basis  be  subject  to 
further  assessment  and  monitoring,  precisely  so  that  the  definition  might  be  refined  and 
developed in the light of the further evolution of the market.  

6.1. 

Options in relation to eligible investors 

Objective  

Options identified 

G – Types of 
investors to be 
addressed 

G1 

G2 

G3 

G4 

No policy change 

Align with the approach identified in the VC IA: The VC IA supports an approach for 
VC funds whereby VC funds are opened to certain groups of qualified investors (family 
offices, angel investors, sector experts, wealthy individuals) and professional investors 
as defined in MiFID. This harmonises different notions on how to determine who are 
qualified investors under existing national VC regimes, applying some key criteria to 
exclude retail investors. 
Align with MiFID rules on professional investors: As the VC IA has set out, MiFID 
classifications of investors exclude certain qualified investors typically investing in 
venture capital in some of the national VC regimes. 
Include retail investors: Retail investors are a potential future growth area for SEF. 
However, developing options for improving the EU SEF market that target retail 
investors raises particular challenges. 

6.2. 

Options on transparency on investment strategies related to social business 

A1 
A2 

A – Improve 
clarity and 
comparability of 
social 
investment funds 

A3 

No policy change 
Develop a non-binding approach on information that should be provided about 
investments targeting social businesses: More consistency and harmonisation in 
identifying social investment strategies could be achieved through dialogue with 
stakeholders, workshops to be hosted by the Commission, memoranda of 
understanding and codes of conduct. The topics to be covered in the various 
stakeholder for a would be possible additional criteria that could be applied to 
distinguish social businesses from other forms of commercial activity, investment 
strategies and portfolio composition of social investment funds, the screening of 
social business, continuous monitoring of social impacts.  
Establish a EU label or brand for social investment funds and linked measures on 
transparency (phased approach): This would entail establishing a common 
designation for EU SEF, and applying consistent criteria for transparency for all 
funds using the designation. This option would also require that the social investment 
fund entertains a regular dialogue with the target undertakings in relation to the 

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latter’s social goals and the measurement of their impacts. This option therefore 
interacts strongly with the selection under objective C (steps to create a common EU 
framework for EU SEF would include standardising the notion of what a EU SEF 
does), and practically entails determining a common standard for the investment 
strategies of EU SEF. [Common portfolio for EU SEF of a high percentage of 
committed capital into social businesses]. 
A phased approach can be envisaged: the designation and transparency requirements 
would not need to be strongly harmonised in all respects initially, but standardisation 
could be developed and assessed in the future if necessary.   
Information covered would include: the fund's investment objectives and strategy for 
delivering on those objectives (for instance the kinds of social businesses it will focus 
on, the extent to which the fund concentrates on supporting such social businesses or 
combines such investments with other investments); how the fund goes about 
choosing social businesses to invest in and how these investments are made and 
monitored; any support or other activities undertaken to aid the social businesses; 
and assessments of possible social impacts, to aid comparisons of different 
investments.  
Options are mutually exclusive. 

6.3. 

Options on the measurement of social impact 

B – Improve 
tools for 
assessing and 
analysing social 
impacts 

B1 

B2 

B3 

B4 

No policy change 

Establish a forum or group for stakeholders to coordinate development of tools on 
social impacts 
Launch a study assessing possible approaches to assessment and analysis of social 
impacts for investment funds 
Set common measurement approach for social impacts across EU 

Note options 2 and 3 are not mutually exclusive.   

6.4. 

Options on an European regulatory framework for social investment funds 

C – Ensure 
regulatory 
frameworks 
across EU are 
proportionate 
and effective for 
maximising  
fundraising 
opportunities 
for social 
investment funds 

C1 

C2 

C3 

C4 

No policy change 

Encourage development of funds targeting social businesses under existing 
frameworks: Funds would be encouraged to target social businesses under the 
proposed VC passport, but without any tailoring of that regime for the purposes of 
SEF. This Option would essentially entail that registered venture capital funds could 
also use the venture capital passport to target social business. The qualifying 
investment tools would, however, be limited to those permitted under the VC passport 
(equity and quasi-equity issued by unlisted SMEs).  
Develop targeted amendments to existing frameworks: Under this approach, targeted 
amendments could be proposed to existing EU asset management frameworks, 
notably the framework established for venture capital funds. Building on the rules on 
investment targets, portfolio composition, eligible investors that were developed in 
the IA on venture capital, a special chapter on ‘social venture capital could be 
introduced. Instead of targeting unlisted SMEs in the early phases of their 
development (achieved by requiring equity investments), the chapter dedicated to 
social ventures would target social undertakings. The latter would be defined 
undertakings whose primary and statutory objective was the pursuit of social impact, 
whose business strategy consisted in the widest possible reinvestment of profits (no 
dividends) and whose organisational structure reflected social inclusion of employees 
in matters of defining business policies. In analogy to venture capital funds, the social 
investment fund would need to invest at least 70% of capital committed by investors 
into such social undertakings. As social undertakings are defined as a tight category 
of undertakings, investment tools could target these undertakings at any stage in their 
existence and comprise equity, quasi-equity or debt instruments.        
Create a standalone EU regime alongside the VC regime, including passport for social 
investment funds: This would establish a bespoke EU framework, containing the core 

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rules needed to ensure an effective EU-wide passport for EU SEF. Since SEF can be 
considered a sub-set of VC funds, this stand-alone framework would be modelled on 
the same essential features as that for venture capital (see Option C3 and the IA on 
venture capital funds). The essential challenge of a stand-alone framework would be 
a definition of social business as the intended investment target that allows 
differentiating those businesses from other undertakings in the area of production and 
commerce. The key elements of this definition would be the same as those described 
in Option C3 above.  

Options are dependent on options A3, A4, B2 and B3 under Objectives A and B. 

7. 

ANALYSIS AND COMPARISON OF POLICY OPTIONS 

7.1. 

Options on types on investors to be addressed  

Identified options 

G1 
G2 

G3 

G4 

No policy change 
Allow investments from certain High Net Worth Investors and other professional investors as under 
MiFID rules 
Align with MiFID rules on professional investors 

Include mass-market retail investors 

Effectiveness of options 

These general options impact all other options. There are two levels to options in this area.  

The first level relates to the extent to which SEF would  solutions should be developed for 
retail investors. The consultation revealed rather mixed views on this point.  

Many stakeholders considered that retail access will be important for the further development 
of the SEF market and that retail investors should not be excluded from the participation in 
the  development  of  the  market.  More  specifically,  a  few  stakeholders  including  one  key 
Member State in the current market, took the view that retail cross-border access should be 
specifically  facilitated  through  targeted  adjustments  to  the  UCITS  retail  framework.  (The 
UCITS  retail  framework,  as  set  out  in  Annex  III,  is  not  currently  used  for  funds  targeting 
social businesses).  

However, other stakeholders thought that the UCITS framework and its key rules designed to 
ensure  the  retail  suitability  of  UCITS  funds,  for  instance  regarding  risk  diversification, 
liquidity and redemption rules, would not be an appropriate framework for investment funds 
targeting social businesses. Some noted immediate challenges with developing a common EU 
retail  fund  regime,  e.g.  as  regards  appropriate  liquidity  and  redemption  rules  in  order  to 
ensure efficient funding for social businesses.  

Given that social investment funds have the potential to be high risk, low return investments, 
other stakeholders were concerned about providing for retail access to such funds, and were 
sceptical  as  to  whether  the  necessary  investor  protection  measures  could  be  calibrated  in  a 
way which did not undermine the efficiency of financing social business.  

The VC IA has also outlined how investments targeting SME entrepreneurs – which have a 
similar  profile  to  investments  in  social  businesses  --  have  typically  been  viewed  as  per  se 
unsuited to mass retail access. The same case holds for investments into social businesses as 

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a subset of SMEs. This is mostly due to their illiquidity (the need for long-term investments 
or 'patient capital' necessary to support the development of a social enterprise), but also due 
to the uncertainty (risk) that characterises such investments.  

As  EVPA  put  it  in  their  consultation  response:  "due  to  the  inherent  characteristics  of  these 
types of investments (requiring both patient capital and capacity building support) and their 
underlying investees, EVPA believes that they are best served through close-ended long-term 
funds  managed  by  professional  teams  and  in  turn  funded  by  institutional  investors  with  a 
clear investment mandate to do so and/or other professional and qualified investors."  

On this basis, this impact assessment has ruled out option G4 at this stage, but notes that this 
should be considered for future development as the SEF sector becomes more mature. Given 
the  investor  protection  issues  raised,  a  regime  for  retail  investors  may  need  to  include 
additional rules. 

The second level of issues relate to the choice between the two remaining options – G2 and 
G3. These follow the same logic as examined in the VC IA, since, as noted, the market for 
SEF can be seen as a specific sub-set of that for VC funds. That is, the key investors in SEF 
are  high  net  work  individuals,  business  angels  and  venture  philanthropists  –  restricting 
permitted investors solely to professional investors as under MiFID, or those that can elect to 
be classified as such under MiFID, would potentially  narrow the  investor base for SEF too 
strongly, undermining take up and effectiveness of any new measures on SEF. On this basis, 
the same conclusions stand under the same considerations and based on the same evidence as 
set out more fully in the VC IA: broader investor base necessary for driving take up, without 
generating material regulatory costs compared to current conditions; option G2 is preferred. 

Efficiency and stakeholder analysis 

Costs / Benefits 

G1 
G2 

G3 

G4 

Investors 
n/a 
+ reflects current state 
of play in SEF market 
(same as VC market) 

- would restrict HNWI 
investors, key source of 
capital 

- short term: investment 
propositions may be too 
risky / illiquid for retail 
investors  
+ longer term: could be 
strong source of growth 
in future 

Funds 
n/a 
+ builds on existing 
frameworks 
+ ensures can use 
lightweight / efficient 
fund structures 
- reduced capacity to 
target high net worth 
indivuduals (HNWI), 
could undermine 
efficiency of funds 
- reduced uptake of any 
new regime 
- short term: investment 
funds to target retail 
market more complex, 
more costly  
+ longer term: could be 
strong source of growth 
in future 

Social Businesses 
n/a 
+ 

Society 
n/a 
+  

- lower capital flows 

- short term: investment 
funds to target retail 
market more complex, 
more costly, reduced 
efficiency in targeting 
social businesses 
+ longer term: could be 
stron source of growth 
in future 

- risk over investor 
detriment greater, may 
undermine further 
development of sector at 
this stage 
+ longer term: could be 
stron source of growth 
in future 

Magnitude of impact as compared with the baseline scenario: ++ strongly positive; + positive; – – 
strongly negative; – negative; ≈ marginal/neutral; ? uncertain; n.a. not applicable  

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Summary of analysis 

Policy 
option 

G1 

G2  

G3 

G4 

EFFECTIVENESS 

EFFICIENCY  

COHERENCE 

0 

+  

- 

- 

0 

+ 

- 

- 

Aligns with approach for VC funds outlined in 
the VC IA 

Magnitude of impact as compared with the baseline scenario: ++ strongly positive; + positive; – – 
strongly negative; – negative; ≈ marginal/neutral; ? uncertain; n.a. not applicable  

Option G2 is preferred, for reasons related to coherence with the approach adopted for VC 
funds more widely, and to reflect the current predominant role of HNWI finance in this 
market. 

7.2. 

Options  for  Objective  A  –  Improving  clarity  and  comparabilty  of  investment 
propositions 

Identified options 

A1 
A2 

A3 

No policy change 
Develop a non-binding approach on information that should be provided about investments targeting 
social businesses 
Establish a EU label or brand for social investment funds and linked measures on transparency (phased 
approach) 

Effectiveness of options 

Existing  fund  regulation  and  national  requirements  already  require  transparency  and 
disclosures for investors and supervisors.  

As  set  out  in  the  problem  description,  there  is  already  work  underway  within  the  fund 
industry on self-regulatory steps  to improve transparency and classification of funds  and to 
seek to provide effective information about the investment strategies of those funds that are 
targeting social investments.  

Option  A2  seeks  to  build  on  these  existing  self-regulatory  and  national  initiatives,  for 
instance by providing fora for improved dialogue to better coordinate these.  

In  so  far  as  stakeholders  engage  with  this  process,  this  could  lead  to  a  greater  degree  of 
consistency and coherence across competing transparency approaches. It could also minimise 
cost  impacts  of  change  for  market  participants,  though  remaining  competing  approaches 
would likely lead to continued inefficiency (e.g. for funds supporting multiple approaches or 
developing their own, for social businesses). 

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However, there would be no guarantee that fragmentation would be reduced, which would in 
turn lead to continued confusion amongst investors. Consultation respondents underlined that 
conflicting  and  patchy 
to  undermine  confidence, 
comparability  and  trust.  Many  products  claim  to  offer  'social'  benefits  or  to  target  social 
outcomes,  but  as  the  problem  analysis  above  noted,  investors  face  difficulties  in  assessing 
these claims or comparing between these products.  

information  continue 

threaten 

to 

Notably,  experience  from  other  areas  in  the  fund  industry  is  that  while  self-regulatory 
measures  can  be  effective  in  tackling  issues  in  isolation,  across  the  EU  divergences  would 
continue  and  these  would  reduce  the  scope  for  integration  and  emergence  of  cross-border 
activity. 

Option  A3  is  a  stronger  intervention.  Unlike  A2,  it  would  create  an  easily  identifiable  EU 
SEF  designation.  The  only  funds  that  could  use  the  designation  would  be  those  that 
predominantly  focus  on  investments  in  social  businesses,  which  means  this  is  a  simple  but 
strong tool for focusing attention on such funds and introducing clarity into the SEF market. 
A designation of this kind would provide a strong focal point for market intermediaries and 
fund  providers,  investors  and  social  businesses.  This  would  effectively  increase  potential 
investment flows.  

The use of the EU SEF designation would be supported by wider transparency requirements: 
to  use  the  designation,  a  fund  would  need  to  make  available  wider  information  about  its 
purpose, the target undertakings it invests in, the criteria for choosing these undertakings, the 
regular  dialogue  the  fund  entertains  with  the  management  of  these  undertakings  on  their 
social impact, the techniques it uses, and its approach to supporting the businesses it invests 
in.  

These requirements would fall under the supervision of the competent authorities, as further 
coordinated by ESMA, to ensure the necessary compliance with these requirements.  

Given  the  developing  nature  of  the  EU  SEF  market,  a  phased  approach  can  be  envisaged, 
whereby  only  common  foundations  are  laid  down  at  this  stage  (a  flexible  framework  and 
principles  on  transparency),  to  be  followed  by  more  detailed  measures  on  the  content  and 
presentation of such information as these may become necessary. (Such measures would be 
subject  to  separate  impact  assessment).  This  coordination  at  the  Community  level  under  a 
staged approach could provide an impetus to further work, helping steer it towards common 
goals, without forcing standardisation at this stage. 

Establishing a common designation and supporting disclosure measures entails risks related 
to the determination of the scope and supervision of the designation, as it would be important 
for the credibility of the designation that it was widely seen to apply only to an appropriate 
set of target businesses, and to guard against regulatory arbitrage. 

Such risks can be mitigated, as in other areas of the financial services, through supervisory 
support,  with  clear  and  strong  responsibilities  for  national  and  EU  supervisory  authorities, 
building  on  capacities  that  have  been  developed  in  regards  other  sectors  of  the  asset 
management sector.  

In addition, a staged approach supported by careful monitoring and  ex poste analysis could 
reduce  risks  by  allowing  for  careful  calibration  and  harmonisation  of  criteria  for  the 
application of the designation in the light of experience.   

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One advantage of a labelling approach would be synergies with other steps being taken on the 
Social Business Initiative more widely, including on the provision of public money directly 
to  certain  investment  funds  that  are  targeting  social  business.  A  label  would  highlight  such 
investment funds and confirm their value as conduits for funding social businesses.  

All labelling requirements – irrespective of their source in self-regulation, national rules, or 
EU  rules  –  entail  costs  for  social  businesses  themselves,  not  only  for  fund  managers.  The 
businesses ultimately are the source of much of the information that needs to be provided or 
verified  under  different  approaches.  A  common  approach  to  labelling  in  this  area, 
coordinated  or  set  at  the  EU  level,  could  therefore  reduce  costs  for  social  businesses  by 
reducing competing claims on them. However, the calibration of detailed requirements needs 
to be carefully undertaken with full consultation with social businesses themselves to ensure 
minimal negative impacts. 

Efficiency and stakeholder analysis 

Costs / Benefits 

Society 
n/a 
≈ Greater support for 
social business sector 
≈ Improved efficiency 
in allocation of capital 

Social Businesses 
n/a 
≈  Greater consistency 
may reduce costs when 
becoming investment 
ready 
- Costs for social 
businesses in meeting 
information needs  
? Lack of alignment in 
requirements  

++ Strong focal point, 
stamp of approval on 
market segment 
+ Greater support for 
social business sector 
- Costs for social 
businesses in meeting 
formation needs  
- Common label could 
increase risks if not 
strongly policed  

++ Strong focal point, 
stamp of approval on 
market segment 
+ Greater support for 
social business sector 
+ Improved efficiency 
in allocation of capital 
- Common label could 
increase risks if not 
strongly policed 

A1 
A2 

A3 

Investors 
n/a 
+ Some increased 
comparability of 
information  
+ Some better 
comprehension 
+ Leading to greater 
trust 
- Inconsistencies remain 
in approach, reducing 
trust 

++ Strong focal point, 
stamp of approval on 
market segment 
+ Easily communicated 
+ strongest basis for 
ensuring growing 
consistency and 
comparability in 
information 
- Common label could 
increase risks if not 
strongly policed 

Funds 
n/a 
≈ Improved consistency 
reduces costs  
+ Self-regulatory 
approaches may 
minimise costs of 
change for firms 
- Continued costs 
assessing information 
approach  
? Costs where 
conflicting standards 
remain in place, e.g. in 
cross-border context 
++ Strong focal point, 
stamp of approval on 
market segment 
+ more consistent / 
defined requirements 
could streamline work 
of investment firms 
+/- Costs for fund 
industry implementing 
label and supporting 
transparency 
requirements (direct 
costs only borne where 
business case can be 
made for individual 
funds) 
- Common label could 
increase risks if not 
strongly policed  

Magnitude of impact as compared with the baseline scenario: ++ strongly positive; + positive; – – 
strongly negative; – negative; ≈ marginal/neutral; ? uncertain; n.a. not applicable  

Summary of analysis 

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Policy 
option 

A1 

A2:  

A3 

EFFECTIVENESS 

EFFICIENCY  

COHERENCE 

0 

0 

+  

++ 

+/- 

Inconsistent with options under C to create 
framework for EU SEF 
Greatest likely support for SBI and SMA 
objectives 
Consistent with options under Objective C  
Can be developed in a phased approach 
Magnitude of impact as compared with the baseline scenario: ++ strongly positive; + positive; – – 
strongly negative; – negative; ≈ marginal/neutral; ? uncertain; n.a. not applicable  

+/- 

Given that option A3 is likely to drive the greatest impacts in terms of improved clarity and 
comparability, it is the preferred option.  

7.3. 
impacts 

Options for Objective B – Improve tools for assessing and analysing social 

Options  related  to  improving  tools  for  assessing  and  analysing  social  impacts  are  linked  to 
those on improving transparency more generally. Information on social impacts is crucial part 
of  disclosures  about  social  investments.  The  focus  under  this  objective  is  on  developing 
better  and  more  coordinated  and  widely  applicable  tools  for  assessing  and  analysing  such 
information,  so  as  to  allow  better  comparability  and  clarity  in  the  information  provided 
'upstream' under options under Objective A. 

Measures  envisaged  under  options  B  are  not  a  pre-condition,  note,  for  the  transparency 
measures  under  Objective  A.    They  provide  a  basis  for  further  developing  the  impact  of 
options under Objective A. 

Analysis and comparison of options 

As  noted  in  the  problem  description,  there  is  currently  a  plurality  of  competing 
methodologies  developing  for  assessing  the  social  impacts  of  investments.  Improving 
confidence in and comparability of information in this area can be considered a key driver of 
growing  trust  in  social  investments  and  understanding  of  and  familiarity  with  the  social 
investment sector. Such developments could also raise competitiveness and efficiency in the 
market.  

The plurality of methodologies reflects a rapid growth of academic, industry and regulatory 
thinking.  This  is  an  area  where  approaches  have  been  evolving  quickly.  It  may  be  that 
heterogeneous  approaches  are  necessary  for  assessing  social  returns,  which  vary  depending 
on the kinds of social businesses in question. Qualitative assessments could well be a strong 
part  of  the  way  forwards.  To  this  end  there  are  potential  risks  associated  with  moving  too 
quickly to harmonise all details on common frameworks without strong supporting work on 
their content or the extent to which harmonisation of measures is possible.  

It  seems  clear  therefore  that  further  work  is  needed  on  social  performance  measurements. 
Options  B2  and  B3  offer  two  approaches  to  facilitating  just  such  further  work.  A  study 
commissioned by the Commission under option B3 would offer a good, independent way of 
establishing  the  state  of  the  art  and  the  prospects  for  developing  common  approaches  to 

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measurement for the purposes of investment fund disclosures. Such a study could be used by 
the Commission to assess the value of further additional steps, including the formation of a 
stakeholder group or forum as set out under option B2. 

As noted, option B4 would appear to carry too many risks at this time for the standard-setter.  

Summary of analysis 

Policy option 

EFFECTIVENESS 

EFFICIENCY 

COHERENCE 

Option B1: No 
policy change 

Option B2: 
Establish a forum 
or group for 
stakeholders to 
coordinate 
development of 
tools on social 
impacts 
Option B3: Launch 
a study assessing 
possible 
approaches to 
assessment and 
analysis of social 
impacts for 
investment funds 
Option B4: Set 
common 
measurement 
approach now for 
social impacts across 
EU 

0 

N/A 

N/A 

≈ 
Continued competing and 
uncoordinated approaches 
could continue to drive 
costs for social businesses 

Consistent with options 
under objectives A and C, 
especially under a 'phased' 
approach 

≈ 
Continued competing and 
uncoordinated approaches 
could continue to drive 
costs for social businesses 

Consistent with options 
under objectives A and C, 
especially under a 'phased' 
approach 

- / ≈ 
Costs for industry from 
changes 

Consistent with options 
under objectives A and C, 
but not under a 'phased' 
approach 

+/ ≈ 
+ Builds on existing 
measurement / rating 
work); organic growth 
- May not strongly reduce 
overlapping or competing 
measurements / ratings  

+  
+ Builds on existing 
measurement / rating work 
organic growth 
- May not strongly reduce 
overlapping or competing 
measurements / ratings  

- 
+ Common framework 
ensures greatest 
consistency in approach  
- Framework may need to 
be too high level to 
achieve consistency in 
approaches at this stage 
-- Risks increase for 
standard setter over 
maturity / quality of 
measurement techniques 

Magnitude of impact as compared with the baseline scenario: ++ strongly positive; + positive; – – 
strongly negative; – negative; ≈ marginal/neutral; ? uncertain; n.a. not applicable  

Both options B2 and B3 are preferred. Steps consistent with both options should be 
developed further in order to facilitate further developments in this vital area, and to better 
establish the scope for future harmonisation of measures.  

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7.4. 

Options for Objective C – Ensure regulatory frameworks across EU are 
proportionate and effective for maximising  fundraising opportunities for social 
investment funds 

Identified options 

C1 
C2 

C3 

C4 

No policy change 
Encourage development of funds targeting social businesses under existing frameworks 

Develop targeted amendments to existing frameworks 

Create a standalone EU regime alongside the VC regime, including passport for social investment 
funds. 

Effectiveness of options 

Note  –  all  of  these  options  follow  the  preferred  option  under  G  –  G2,  a  regime  for 
professional and qualified investors only. 

Option C2 has significant limitations. Existing EU frameworks – UCITS and AIFM-D – are 
not proportionate for SEF for a number of reasons. In regards UCITS, the eligible assets rules 
mean  that  this  framework  does  not  permit  SEF  that  target  social  businesses.  As  regards 
AIFM-D, this framework is designed to address systemically important funds using complex 
investment  strategies  and  investment  instruments.  SEF  are  by  comparison  extremely  small 
and  do  not  use  complex  instruments  or  strategies.  (Mostly  they  operate  without  using 
leverage, for instance).  

The  argument  in  this  case  is  identical  to  that  set  out  in  the  VC  IA:  the  implementation  of 
AIFM-D  will  not  put  in  place  a  framework  that  will  be  effective  in  addressing  the  cross-
border problems faced by the SEF market: opting into AIFM-D is likely to disproportionate 
for SEF managers (these managers will almost entirely be 'sub-threshold' in relation to their 
SEF business, given the small size of the funds).  

The VC framework might be relevant for some SEF. As set out in the VC IA, the preferred 
framework would: 

• 

• 

• 

• 

• 

introduce a simple registration, as a basis for a EU-wide passport; 

introduces a common notion and designation for these funds (each fund must invest 
70% in the equity or  quasi-equity  of  unlisted  SMEs,  and  each  fund  should  not 
employ leverage); 

sets  some  common  standards  for  the  conduct  of  business  and  organisation  of  the 
fund managers; 

sets some common transparency and reporting requirements on the features of these 
funds; 

requires  cooperation  and  coordination  amongst  relevant  competent  authorities,  and 
requires deregistration of VC fund managers where they are not compliant with the 
legislation. 

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As  this  outline  shows,  however,  the  VC  framework  is  restrictive  in  terms  of  the  forms  of 
investment it intends to allow (equity and quasi-equity only) (and it also does not specifically 
address the specific transparency and reporting needs of SEF and their investors, as addressed 
above  under  option  areas  A  and  B).  This  means  this  framework  would  not  be  useful  to  all 
SEF, so its benefits would be curtailed for some.   

As the EIF have noted: "Social enterprise funds serve their investees through a wide range of 
instruments  of  traditional  equity,  hybrid  structures,  and  debt  products  including  micro-
finance instruments especially in the start-up phase. The funding needs of social enterprises 
range from start-up capital to growth and expansion type capital for funding projects and/or 
associated working capital but in a different way than that applied to traditional private equity 
or venture capital funds’ investees." 

In addition, the VC and existing fund frameworks do not address the issues addressed above 
under options for objectives A and B: they do not contain specific rules on transparency in 
relation to particular investment strategies (such as venture capital or social business), and do 
not allow an efficient 'ring fence' of SEF from other kinds of funds. Attempting to deliver on 
objectives  A  and  B  whilst  working  with  the  VC  and  existing  fund  frameworks  as  they  are 
would likely increase confusion and fail to effectively demarcate and identify SEF from other 
fund types. (Even if legislation was brought in to address the designation of a SEF in a cross-
cutting manner). 

In these circumstances, Option C2 will suffer from enforcement complexities that are linked 
to the fact that the distinct group of SEF will have to be subsumed within the more general 
rules that apply to venture capital. Trying to evaluate whether a particular SEF respects the 
confines  of  the  venture  capital  ‘rulebook’  will  take  up  considerable  regulatory  resources. 
Supervision  issues  may  not  be  very  prevalent  in  relation  to  the  determination  of  the  SEF’s 
portfolio composition, or the eligible investment instruments, but the proper identification of 
a  social  enterprise  will  require  considerable  expertise.  It  is  exactly  in  this  respect,  that  a 
combined  approach  will  give  rise  to  potential  regulatory  arbitrage  and  attempts  to  offer  a 
non-qualifying fund under the EU SEF label.  

Option C3, while more ‘made-to-measure’ for SEF, still has important drawbacks.  While it 
might  appear  theoretically  possible  to  create  a  bespoke  SEF  framework  inside  the  general 
rules applicable to venture capital, the risk remains that the specific ‘SEF’ chapter would not 
be sufficiently separate to provide social investment funds with a profile that is sufficiently 
distinct from venture capital. As mentioned throughout this report, while venture capital and 
social business share some important features (both sectors are made up almost exclusively of 
unlisted SMEs that have an insufficient financing mix), important differences exist (the need 
to define to give ‘social business’ very clear contours and the concomitant need to develop 
transparency  tools  in  relation  to  social  investments  and  metrics  to  measure  social  impact). 
The  need  to  provide  detailed  rules  on  these  differentiating  aspects  militates  in  favour  of  a 
stand-alone legal framework for SEF.    

It  should  also  be  noted  that  Option  C3  will  suffer  from  enforcement  complexities  that  are 
comparable  to  those  described  in  relation  to  Option  C2.  Trying  to  differentiate  between 
venture  capital  and  social  business  propositions  will  take  up  considerable  regulatory 
resources. Supervision issues may not be very prevalent in relation to the determination of the 
SEF’s  portfolio  composition,  or  the  eligible  investment  instruments,  but  the  proper 
identification  of  a  social  enterprise  will  require  considerable  expertise.  It  is  exactly  in  this 

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respect, that a combined approach will give rise to potential regulatory arbitrage and attempts 
to offer a non-qualifying fund under the EU SEF label.  

Finally,  the  signal  that  a  bespoke,  stand-alone  initiative  on  SEF  can  give  to  the  investor 
community and society at large should not be underestimated. The benefit for a vibrant social 
business market may not be fully exploited if SEF does not have a stand-alone platform with 
tailor-made rules that make a distinction between venture capital firms and social business.       

Option  C4  would  likely  have  the  greatest  impact:  taken  together  with  options  under 
objectives  A  and  B,  this  would  establish  a  clear  notion  of  EU  SEF  with  a  proportionate 
regime applying. As it exhaustively addresses all aspects relevant for the emergence of a true 
social  business  fund,  notably 
instruments,  portfolio 
composition  and  the  tools  used  to  measure  social  impacts,  it  stands  the  best  chance  of 
creating a specific platform for maximising potential positive benefits for social businesses, 
society, SEF and investors.  While not entirely avoiding the issue of regulatory arbitrage that 
arises in relation to Option C3, the creation of a stand-alone rulebook that pertains only to EU 
SEF will pose the stark choice for a fund to either register as fund compliant with the rules on 
venture capital or with those on SEF.   

investment 

investment 

targets, 

As  already  noted,  a  phased  approach  may  be  envisaged,  given  the  youth  of  this  sector  and 
uncertainties  over  potential  take  up  of  proposed  changes,  notably  in  regards  cross-border 
business. A framework would be established at this stage as a foundation for future growth, 
while the take up of that framework, impact on existing business, and proportionality of the 
elements  of  the  framework,  would  be  carefully  monitored  and  made  subject  to  ex-post 
analysis. 

Efficiency and stakeholder analysis 

C1 
C2 

C3 

Investors 
n/a 
- use of VC framework 
may limit range of 
different forms of 
funding available 
≈ change to investment 
options  

Costs / Benefits 

Funds 
n/a 
- existing fragmentation 
in rules, costs would 
continue  
- use of VC framework 
may limit range of 
different forms of 
funding available 
+ not disruptive 
- Possible investor 
confusion as there might 
be no bright line 
between SEF and VC 

Social Businesses 
n/a 
- lower impact on cross-
border trade 
- use of VC framework 
may limit range of 
different forms of 
funding available 
+ not disruptive 
- potential for regulatory 
arbitrage between VC 
and SEF (VC funds 
could misuse SEF label 
as their target 
company’s social goals 
are not clearly 
circumscribed 

~ emergence of a 
European notion of 
what constitutes a social 
investment fund is not 
optimal when SEF 
become a sub-category 
of VC funds   

- Clarity as to 
investment strategy, 
portfolio composition 
and target companies 
does not emerge so 
clearly when integrated 
into the general VC 
framework  

- Social business will 
still lack a distinct 
framework and profile if 
integrated into VC rules 
- possible regulatory 
overlaps and frictions 
when SEF and VC are 
contained in the same 

Society 
n/a 
≈ more widespread, 
sustainable social 
business sector across 
EU; however 
contribution of SEF 
sector likely sub-
optimal 
Benefit for a vibrant 
social business market 
not fully exploited if 
SEF does not have a 
stand-alone platform 
with tailor-made rules 
that make a distinction 
between venture capital 
firms and social 
business 
 Benefit for a vibrant 
social business market 
not fully exploited if 
SEF does not have a 
stand-alone platform 
with distinct profile 

EN 

47 

   EN 

 
 
 
- Possible investor 
confusion as there might 
be no bright line 
between SEF and VC   

+ Clarity as to 
investment strategy, 
portfolio composition 
and target companies 
(70% in business that 
follow the above 
described ‘social 
business’ strategy) 
provides EU SEF with a 
clearer profile   

‘rulebook’ 
- potential for regulatory 
arbitrage between VC 
and SEF (VC funds 
could misuse SEF label 
as their target 
company’s social goals 
are not clearly 
circumscribed 
+ more vibrant SEF 
market leads to better, 
more varied financing 
+ more vibrant SEF 
market leads to richer, 
deeper eco-system 
+ may facilitate access 
to wider / deeper capital 
pools (e.g. for 
geographically 
disadvantaged social 
businesses) 
- may lead to additional 
reporting, other costs 
? may be disruptive  
(Benefits likely to be 
long term rather than 
short term) 

C4 

+ emergence of a 
European notion of 
what constitutes a social 
investment fund 
increases investor 
confidence and 
willingness to invest in 
SEF 
+ access to wider range 
of SEFs (range of 
markets, more efficient 
specialisation) 
+ SEFs cheaper 
(Benefits likely to be 
long term rather than 
short term) 

+ more vibrant social 
businesses 
+ inclusive, sustainable 
growth and jobs 
(Benefits likely to be 
long term rather than 
short term) 

Magnitude of impact as compared with the baseline scenario: ++ strongly positive; + positive; – – 
strongly negative; – negative; ≈ marginal/neutral; ? uncertain; n.a. not applicable  

Summary of analysis 

Policy 
option 

C1 

C2:  

C3 

C4 

EFFECTIVENESS 

EFFICIENCY  

COHERENCE 

0 

-  

≈  

0 

- 

≈  

Needs of SEF not fully coherent with existing 
regulation (AIFM-D, UCITS), limiting 
effectiveness 
Limits to extent to which VC framework is 
fully coherent with goals of SEF (i.e. 
permitted investment instruments, designation 
of funds) 

+ 

++ 

Coherence with SBI and SMA commitments 
Coherence with VC by following – in most 
part – same structure, minimises impact 
Consistent with options under Objective A 
Magnitude of impact as compared with the baseline scenario: ++ strongly positive; + positive; – – 
strongly negative; – negative; ≈ marginal/neutral; ? uncertain; n.a. not applicable  

Option C4 is preferred. A standalone passport for SEF offers greater effectiveness, efficiency. 
It is particularly coherent with Commission objectives under the SBI and SMA. 

EN 

48 

   EN 

 
 
 
 
 
 
 
 
 
 
7.5. 

Choice of instruments 

Option C4 must take the form of legislation in order to ensure the basis for rights to passport 
(market)  cross-border  can  be  achieved.  The  choice  of  instrument  should  be  consistent  with 
that  adopted  for  the  VC  framework;  see  the  IA  for  that  initiative  for  a  discussion  of  the 
instrument.  

Option A3 could in principle either the take the form of a recommendation or a legislative 
instrument (Directive, Regulation).  

There  is  however  a  very  strong  dependency  between  option  C4  and  option  A3  –  a  new 
fund framework would entail a label and linked transparency measures, so that prima facie 
the instrument required for option C4 should also be used for delivering option A3. This is 
particularly  the  case  in  regards  a  label  attached  to  rights  afforded  to  funds  under  a  new 
legislative framework as under C.  

A  recommendation  could  be  used  for  transparency  measures  to  reduce  fragmentation  and 
achieve greater consistency and comparability in information, thereby raising comparability 
and  clarity.  For  such  a  'soft-law'  intervention  there  would  be  some  scope  for  further 
development and the EU would retain the option of hard law intervention later if this proved 
necessary.  Such  an  approach  could  thereby  take  due  account  of  the  fact  that  the  social 
investment  market  is  still  emerging  and  developing.37  However,  as  a  soft-law  intervention, 
there  would  be  limits  on  the  scale  of  benefits,  due  to  likely  variations  in  national 
implementations. This could increase confusion.  

For  this  reason,  a  legislative  instrument  seems  appropriate  for  all  aspects  of  delivering  on 
option A3.  

Legislation  for  transparency  measures  could  take  a  'framework'  approach,  allowing  for 
detailed  implementing  measures  or  supporting  technical  standards  and  guidance  to  be 
developed  where  needed  for  achieving  tailoring  and  adaptations,  as  and  where  necessary. 
Establishing  common  EU  requirements  through  binding  measures  could  also  reduce 
inconsistencies,  and  hence  compliance  costs.  Also  legislative  measures  could  better  guard 
against regulatory arbitrage.  

As  to  options  B2  and  B3,  further  work  needs  to  be  undertaken  on  how  existing  informal 
structures  could  be  used  to  establish  a  forum  or  arena  for  further  debate  amongst 
stakeholders. If there is a need for a more formal instrument this would be accompanied by 
further IA work. Launching a study would follow the normal Commission procedures. 

7.6. 

Summary of Retained Options 

Option 

Description 

G2 

37  

Allow investments from certain High Net Worth Investors and other professional investors as 
under MiFID rules 

It has also been argued that non-binding rules can have the same political and social effects and 
benefits as hard law. Borchardt, G. M. and Wellens, K. C., Soft Law in European Community Law, 
European Law Review, 1989. 

EN 

49 

   EN 

 
 
                                                 
A3  

Establish  a  EU  label  or  brand  for  social  investment  funds  (with  supporting  transparency 
measures) 

B2 and B3 

Establish  a  forum  or  group  for  stakeholders  to  coordinate  development  of  tools  on  social 
impacts 

Launch a study assessing possible approaches to assessment and analysis of social impacts for 
investment funds 

C4 

Develop passport regime for European Social Investment Funds, based on VC passport  

As noted, option A3 and option C4 fit together and practically should be delivered together, 
to provide a single package in the form of a new legislative instrument (under the VC IA a 
regulation is proposed). (Options under B2 and B3 can be developed separately.) 

As noted, this would be a voluntary regime. No fund would be forced to follow the regime, 
including funds already being sold cross-border under existing arrangements.  

Those  who  wish  to  use  the  new  passporting  rights  and/or  label  themselves  as  a  'European 
social  investment  fund'  would  be  required  to  follow  the  regime.  The  key  content  of  these 
requirements would be: 

• 

• 

• 

• 

• 

the fund manager would need to register in order to market his funds throughout the 
EU;  

for each EU SEF, the fund manager would follow simple portfolio investment rules 
(the fund would be invested at least 70% in social businesses, and would avoid the 
use of leverage at the level of the fund); 

the fund manager would need to follow some key rules on his conduct of business 
and organisation;  

competent  authorities  would  need  to  coordinate  and  cooperate  their  supervision  of 
the funds and mangers, and would have the power to deregister any manager who is 
not complying with the requirements of the framework; 

for each fund, the manager would need to make available key information as regards 
the  social  investment,  as  set  out  in  the  option  description.  These  requirements  are 
likely to have impacts for social businesses themselves as well as the fund. 

There  are  therefore  two  crucial  distinctions  with  the  VC  passport  regime.  First,  EU  SEFs 
would  be  able  to  invest  through  a  wide  range  of  instruments,  so  as  to  reflect  financing 
innovations  in  the  social  business  market  that  distinguish  this  market  from  the  wider  SME 
market. Second, EU SEFs would be required to comply with specific transparency measures 
related to their social objectives. 

Phased approach 

EN 

50 

   EN 

 
 
Given  the  youthful  nature  of  this  market,  measures  for  improving  transparency,  the 
understanding and communication of social returns, and the proportionality and effectiveness 
of fund rules should be taken in a careful and incremental fashion.  

There are two ways in which this can be achieved:  

• 

Detailed  measures  should  be  developed  subject  to  further  analysis  in  regards  their 
appropriate  content,  as  is  possible  through  the  legal  technique  of  Level  2 
implementing  measures.  These  will  be  subject  to  separate  impact  assessment,  and 
developed  with  the  benefit  of  advice  from  the  European  Securities  and  Markets 
Authority (ESMA). Such measures should be developed so as to be readily open to 
review and assessment in the light of experience in the development and application 
of the framework.  

Such measures can be envisaged in particular in relation to detailed requirements on 
transparency  and  reporting,  including  on  the  possible  content  and  presentation  of 
these, and on the clarification of the criteria for identifying social businesses.  

The calibration of such detailed requirements needs to be carefully undertaken with 
full  consultation  with  social  businesses  themselves  to  ensure  minimal  negative 
impacts on them. 

• 

The  design  and  implementation  of  some  measures  should  be  phased,  with  certain 
steps  taken  now  and  other  steps  reserved  for  the  future  once  the  market  has 
developed further.  

The aim at this stage should be to set in place a broad, principles-based framework, 
rather than resolve all detail on all elements.  

This then can be used as a platform for ongoing debate with stakeholders on the best 
overall development of this sector, and can be elaborated or adjusted over time as the 
market  evolves  and  innovates.  To  support  this,  robust  commitments  to  review  and 
monitoring and ongoing work are necessary. 

Measures  envisaged  under  options  B2  and  B3  are  not  a  condition,  note,  for  the 
transparency  measures  under  option  A3.  Transparency  measures  can  be  developed  and 
will be efficient without harmonising at this stage the methods on measuring social impact. 
As evidenced by work in other areas on disclosure (e.g. PRIPs), more standardised disclosure 
as such will already increase reliability of information. Within the phased approached as set 
out above it will be possible to lay down a common framework which can then complimented 
by more harmonised methods on measurement at a later stage.  

Summary of timing of measures and their content 

Option 

Proposed solution 

Now 

Level 2 measures  

Future development 

G2 – Investors 

Institutional investors + 
some HNWI 

A3 – Label 

Set common framework 
for  EU label 
Content: 
Common designation for 

Set out precise 
application of criteria on 
which social businesses 
are in scope 

Assess measures / scope 
for widening for retail 
access? 
Assess measures / scope 
for widening for retail 
access? 

Magnitude of 
impact 

Significant over 
longer term. 

EN 

51 

   EN 

 
 
A3 – 
Disclosures 

EU SEF that meet 
minimum standards (70% 
investment in social 
businesses) 
Common principles for 
disclosures, but not 
complete standardisation 
of content 

Set out details on 
application of principles 

Increased standardisation 
of information 

Content: 
Stronger standardisation 
of disclosure 
requirements, 
specification of content of 
these disclosures and 
mechanisms for 
supporting reporting.  
Build on work on social 
returns. 

Assess new measures to 
support widening for 
retail access? 
Standardised measures 
comparable across all 
Funds? 
Assess measures for 
widening for retail 
access? 

Medium to 
significant over 
longer term. 
Incremental 
now; medium 
over longer 
term. 

B2, B3 – 
Social Returns 

Study / working group 

May feed in to Level 2 
measures in the future? 

C4 – SEF 
passport 
regime 

New passport attached to 
EU label – does not 
displace existing funding 
conduits, but adds a new 
conduit 

7.7. 

Cumulative assessment of preferred options 

7.7.1.  Assessment of take-up of the proposed EU framework for SEF 

An essential consideration in structuring the preferred instrument is the maximisation of take-
up  by  fund  operators  and  their  sponsors.  Therefore,  the  regulatory  framework  for  social 
investment funds should be carefully conceived so as to provide the maximum expectation of 
take-up by the relevant operators. Several considerations are relevant in this respect: (i) the 
rules  on  portfolio  composition  should  be  ambitious  and  realistic  at  the  same  time;  (ii)  the 
qualifying  investment  instruments  should  correspond  to  the  identified  financing  needs  of 
social business; (iii) the creation of a sufficiently large investor base; and, last but not least, 
(iv) the creation of a framework where investors can trust social investment propositions and 
the stringency with which their success is monitored. In order to demonstrate the efficiency 
of the policy choice, the fours aspects will be assessed in turn.  

7.7.1.1.  Ambitious, but realistic rules on portfolio composition 

The  issue  of  the  optimal  composition  of  a  social  business  fund's  portfolio  will  evolve  in 
parallel to the debate on the optimal portfolio composition of a venture capital fund. Many of 
the considerations of the venture capital IA report will therefore be relevant in the context of 
the  social  business  fund  as  well.  As  with  venture  capital,  a  key  concern  in  devising  the 
appropriate  fund  regulations  for  social  business  funds  is  to  make  these  funds  sufficiently 
distinct  from  other  investment  propositions  in  the  alternative  fund  sector.  Should  the 
envisaged  regulatory  framework  fail  to  achieve  the  requisite  level  of  distinction,  investors 
will not trust it and unscrupulous fund operators are prone to use the special social business 
framework  as  a  tool  to  circumvent  the  stricter  rules  on  operating  conditions,  reporting 

EN 

52 

   EN 

 
 
 
  
 
 
obligations,  valuation  or    risk  management  that  they  would  have  to  comply  with  under  the 
AIFMD.  

Therefore,  a  very  high  percentage  of  capital  committed  by  socially  motivated  investors 
should indeed be invested in those businesses that qualify as social businesses that fulfil the 
essential characteristics of such businesses, as described in on assessing Section 4.1 of this IA 
report.  A high percentage is necessary to comply with the very specific expectation of this 
particular  investor  group.  Ideally,  therefore,  90%  of  all  capital  committed  to  a  social 
investment fund would be invested in social businesses. This would leave the fund operator 
with  a  10%  margin  to  manage  daily  liquidity  needs  (liquidity  in  relation  to  a  social 
investment  fund  is  not  comparable  to  that  required  of  other  alternative  investment  fund  as 
social  investors  constitute  patient  capital  that  remains  invested  during  the  entire  lifetime  of 
the fund which is usually seven to ten years).  

But, as pointed out in the IA report on venture capital, there are some important drawbacks to 
a  90%  investment  threshold.  In  particular,  stakeholders  point  to  the  fact  that  initial  take-up 
might  be  maximised  if  the  investment  target  was  somewhat  below  90%.  Especially  in  an 
initial  phase,  the  sponsors  of  a  social  business  fund  will  need  more  latitude  in  their 
investment policies. They will also need to establish an image of reliability and, despite the 
expectation  of  predominantly  social  return,  of  a  certain  profitability  of  their  funds.  This  is 
because even socially motivated investors remain interested that their capital is professionally 
managed and that there will be some return on invested capital at the end of the commitment 
period.  

These considerations militate in favour of granting the social venture fund a higher degree of 
latitude in respect of their investment portfolio. It is therefore proposed that at least 70% of 
capital committed by investors is invested into social businesses, the remainder being at the 
fund  manager's  disposal  to  manage  liquidity  of  the  fund  but  also  to  enhance  its  initial 
profitability.  

On  the  other  hand,  the  lower  threshold  of  50%  of  committed  capital  dedicated  to  social 
business would dilute the profile of a social investment fund. Dilution would run counter to 
the  stated  aim  to  increase  the  distinct  identity  of  a  social  investment  fund  and  differentiate 
such  funds  from  the  wider  population  of  alternative  investment  vehicles.  This  is  because 
many alternative investment funds would be tempted to align their investment policies with 
this  threshold  without  developing  the  experience  and  dedication  necessary  to  fulfil  the 
envisaged profile of a social investment fund. In this context it should not be forgotten that a 
social  investment  fund  plays  an  important  role  in  providing  expert  advice  and  managerial 
competence to many of the social businesses it invests in. this focus on the social business, its 
success  and  also  the  monitoring  of  the  intended  social  impacts,  might  be  lost  if  the 
investment quota would be lowered to 50% of investors capital.   

In  light  of  these  consideration  an  investment  quota  of  70%  seems,  on  the  one  hand, 
sufficiently  ambitious  to  create  a  distinct  profile  differentiating  a  social  investment  fund 
while,  on  the  other  hand,  providing  a  realistic  expectation  that  the  proposed  scheme  will 
command a high initial take-up by specialised fund operators.  

7.7.1.2.  Qualifying  investment  tools  need  to  correspond  to  the  identified  needs  of  social 

business 

As  this  IA  report  describes,  the  investment  needs  of  social  business  are  somewhat  more 
differentiated  than  those  in  the  area  of  venture  capital.  As  section  4.1.2  of  this  IA  report 
explains, a wider range of instruments than equity or quasi-equity is necessary to ensure the 

EN 

53 

   EN 

 
operation  of  a  wide  variety  of  social  business.  While  it  may  be  the  case  that  some  social 
businesses are start-up ventures that are most heavily dependent on the 'patient capital' that an 
equity investment provides, other social enterprises might find themselves at other stages in 
their lifecycles where recourse to debt instruments would provide a more suitable financing  
tool.  

Therefore,  while  the  analogy  with  the  venture capital  rules  on  equity  investments  might  be 
tempting to delineate a clear and distinct profile for social investment funds as well, current 
business  practice  in  the  social  business  sector  relies  also  on  debt  and  even,  as  the  French 
example  cited  in  Section  4.1.2  shows,  on  non-transferable  debt  instruments.  On  the  other 
hand, as the rather narrow circumscription of what constitutes a social business, coupled with 
a  reasonably  ambitious  percentage  threshold  of  investments  in  such  businesses  (70%) 
provides  criteria  which  allow  a  distinction  between  social  investment  funds  and  other 
investment vehicles that purport to engage in 'socially responsible' investments, the additional 
criterion  of  clearly  delineated  investment  instrument  does  not  appear  indispensable  to 
characterise a social investment fund.  

In light of these considerations, initial take-up by operators and sponsors of social investment 
funds would be enhanced by allowing a variety of debt instruments as qualifying investment 
tools  for  social  investment  funds  without  risk  of  diluting  their  distinct  characteristics.  A 
decision  is  therefore  taken  to  allow  that  a  social  investment  fund  may  invest  in  securitised 
and un-securitised debt instruments, issued by a qualifying portfolio undertaking and shall be 
allowed to grant medium to long term loans to such undertakings.   

7.7.1.3.  A sufficiently large investor base 

Another  essential  tool  to  maximise  initial  take-up  of  the  proposed  framework  for  social 
investment  funds  is  that  the  proposed  rules  create  a  funding  vehicle  that  is  accessible  to  a 
sufficiently large group of socially motivated investors. As this report demonstrates, take-up 
for  the  proposed  funding  vehicle  can  be  enhanced  by  opening  this  vehicle  to  a  group  of 
investors that goes beyond the group commonly described as professional investors in Mifid, 
Annex  II.      This  broader  scope  of  investors  would  comprise  other  groups  of  socially 
motivated  investors  such  as  social  investment  entrepreneurs,  family  offices;  wealthy 
individuals, industry sector experts, angel investors under two conditions: these investors are 
sufficiently  apprised  of  the  investment  risk  associated  with  social  business  and  their 
minimum  initial  investment  is  not  below  EUR  100.000.    Including  these  investor  groups 
would  augment  the  potential  social  investor  base  by  at  least  15%  to  18%.  This  is  because 
wealthy  individuals  currently  account  for  around  10%  of  all  social  investments,  family 
offices 5% and asset managers for another 3%.  

7.7.1.4.  Creation of investor trust 

As this report shows, the measurement of social impacts is important but metrics and tools in 
this area are still at an early phase in their development.  Take-up of a proposed scheme can 
therefore be enhanced in two distinct ways.   

First,  the  new  framework  can  enhance  investor  confidence  by  requiring  basic  elements  of 
transparency in relation to the investment strategies pursued by social investment funds. Such 
elements would comprise the following:  

EN 

54 

   EN 

 
– 

– 

– 

– 

– 

– 

a description of the investment strategy and objectives of the EU SEF, including a 
description of the types of the qualifying portfolio undertakings and the process and 
criteria which are used for identifying and selecting them;  

the positive social outcome being targeted by the investment policy of the EU SEF, 
including  where  relevant,  projections  of  such  outcomes  as  may  be  reasonable  and 
information on past performance; 

the methodologies which will be used to measure social outcomes; 

a  description  of  the  assets  other  than  qualifying  portfolio  undertakings  and  the 
process and the criteria which are used for selecting these assets unless they are cash 
or cash equivalents; 

a description of the risk profile of the EU SEF; 

a  description  of  the  procedures  by  which  the  EU  SEF  may  change  its  investment 
strategy or investment policy, or both. 

These  requirements  would  also  be  subject  to  supervision  by  competent  authorities, 
coordinated further by ESMA, in order to ensure compliance. This will also help to increase 
the trust in these increased requirements. 

Secondly, parallel work should be carried out in developing commonly accepted and uniform 
metrics  for  the  measurement  of  social  impacts.  These  developments  are  undertaken  largely 
with the aim of making social investment propositions comparable on their respective merits. 
Such  tools  would  therefore  have  to  focus  on  impacts  such  as  'outreach'  (e.g.,  how  many 
people are covered by a particular business, how many people with difficulties in accessing 
the labour market have been employed by a social business, how many people with certain 
disabilities have received goods and services by social businesses that have enabled them to 
participate  in  society,  e.g.,  in  terms  of  access  to  higher  education,  vocational  training  or 
health care).          

With  this  phased  approach,  consisting  of  an  immediate  set  of  requirements  that  ensure 
transparent  screening  and  selection  of  social  undertakings,  followed  by  a  more  in-depth 
development  of  assessment  methodologies  to  measure  social  impact,  the  immediate 
framework  for  a  substantial  take-up,  also  from  the  investor's  perspective,  is  achieved.    In 
order  to  ensure  the  sustainable  nature  of  the  initial  take-up,  it  is  important  to  stress  the 
coordinated  work  that  will  take  place,  by  virtue  of  delegated  acts  the  Commission  shall  be 
empowered to adopt, to develop more comparable measurement tools.                 

7.7.2.  Benefits  

Fund Industry  

A new European brand and passport would contribute to increased investor confidence and 
activity,  while  providing  new  marketing  opportunities  for  the  sector,  and  so  contribute  to 
greater fund flows. (The new label in particular might be expected to have a strong effect of 
this kind). This could improve economies of scale and thereby reduce costs for the funds that 
succeed in attracting capital.   

A  more  effective  cross-border  market  would  support  these  impacts,  and  help  such  funds 
develop a  strong identity across  the EU. The  VC  IA estimated that a 1% increase in cross-

EN 

55 

   EN 

 
border  trade  in  the  VC  market  more  widely  would  result  in  an  additional  EUR  50  million 
investments  being  directed  to  SMEs  in  given  year  or  the  additional  amount  would  increase 
the amount invested to existing SMEs.38  

Improved  trust  in  the  sector  could  have  strongly  positive  benefits  for  fund  inflows,  though 
these are difficult to model given uncertainties. Growing trust could be 'catalytic' – spurring 
the emergence of financial intermediaries with expertise and knowledge of the needs of social 
businesses,  of  information  and  exchanges  so  that  social  businesses  themselves  can  prepare 
themselves for investments and are aware of the funding options available to them, and, with 
this, growing understanding and appreciation on the part of investors of the options available 
and  the  differences  between  them.  Better  descriptions  of  and  ultimately  pricing  of  the 
positive  externalities  targeted  by  social  businesses  are  central  to  this.  For  this  reason,  the 
eventual fruition of steps on options B2 and B3 would be central to maximising this benefit. 

Benefits  are  expected  to  be  incremental  to  begin  with.  In  the  medium  to  long  term,  as  the 
market  matures,  the  advantages  of  a  common  framework  are  likely  to  become  increasingly 
substantial (as experienced in the development of the UCITS fund 'brand' over almost three 
decades). 

More  efficient  passporting  of  funds  may  particularly  benefit  funds  operating  in  small 
domestic  markets,  by  allowing  these  funds  to  draw  on  investments  from  larger,  better 
capitalised national markets. It is not expected that the location of funds themselves will be 
impacted,  as  these  in  general  tend  to  be  located  close  to  the  social  businesses  they  are 
investing in. 

Investors 

Improved  labelling  and  transparency  would  aid  investors  in  identifying  appropriate 
investments, allowing for more efficient capital allocations and better investment choices. B2 
and  B3  could  lead  to  the  emergence  of  a  new  asset  class,  as  some  evidence  suggests  that 
assets that focus on positive externalities are not correlated with many other traditional assets. 

Growing  trust  in  relation  to  the  social  investment  market  would  also  likely  to  wider 
availability of and marketing of products, and thereby more choice for investors who seek to 
make social investment part of their wider investment strategy.  

Improved  cross-border  trade  would  likely  contribute  to  a  more  vibrant  and  competitive 
market,  with  a  wider  range  of  options  available  to  investors.  This  could  also  allow  better 
scaling of funds and thereby economies of scale. 

The  scale  of  such  benefits  is  difficult  to  assess  at  this  stage.  Benefits  are  expected  to  be 
incremental to begin with, but could be substantial as the market matures.  

Social Businesses 

A  vibrant  cross-border  social  business  investment  market,  could  significantly  improve  the 
investment  capital  available  to  social  businesses.  Improved  transparency  and  greater  trust 
would  also  support  and  contribute  to  the  emergence  of  a  more  robust  and  effective  eco-
system supporting social businesses. This would help this sector develop the necessary forms 
and mechanisms for supporting social businesses, and social businesses in identifying sources 
of capital and exploiting these. 

38  

Based on last 4 years' average of VC investing €5bn on annual basis to approximately 3.000 SMEs. 

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Since investment funds targeting social businesses typically place reporting requirements on 
those  businesses,  coordination  and  reduced  overlaps  or  conflicts  in  reporting  obligations 
across the EU for the investment funds could reduce costs for social businesses themselves, 
and  lead  to  the  development  of  a  more  robust  eco-system  supporting  social  businesses  in 
satisfying common reporting obligations. 

The  scale  of  such  benefits  is  difficult  to  assess  at  this  stage.  Benefits  are  expected  to  be 
incremental to begin with, but could be substantial as the market matures.  

Wider benefits:  impact on sustainable and inclusive growth, environmental impact  

The likely wider 'social impacts' of measures are of central importance.  

Social businesses act as 'multipliers', that concentrate on developing and delivering 'positive 
externalities'. Social businesses are defined in terms of their concentration on and capacity for 
delivering such social  'impacts'.  These  businesses focus on addressing the social  challenges 
brought  on  by  exclusion,  poverty,  disability,  stretched  public  services,  and  environmental 
challenges,  such  as  regards  dwindling  resources,  pollution,  and  climate  change.  Supporting 
those  businesses  seeking  to  find  innovative  and  sustainable  solutions  to  these  challenges 
offers  therefore  a  direct  opportunity  for  building  EU  capacity  for  positive  social, 
environmental and economic development. 

One  of  the  challenges  being  addressed  in  this  IA  itself  is  the  difficulties  currently  faced  in 
assessing  such  externalities.  Developing  and  facilitating  tools  for  assessing  and  analysing 
social impacts is one of the options highlighted here as a preferred next step. Once such work 
has been developed to fruition better tools for outlining and assessing the social impacts of 
investments in social businesses will naturally be possible. 

A thriving social business sector across the EU can be expected to directly contribute to more 
sustainable, inclusive, and environmentally sound growth.   

The scale of such benefits is difficult to assess at this stage. For the VC IA it was estimated 
that for every additional EUR 1 billion, around 10.000 jobs might be created.39 Given social 
businesses are also SMEs, this estimate could hold for EU SEF. The quality of the impact of 
the investment needs also to be taken into account: social businesses seek to provide jobs and 
growth that are strongly inclusive, strongly sustainable.  

Benefits may be incremental to begin with, but could be substantial as the market matures.  

7.7.3.  Costs 

Fund Industry 

Transparency measures would incur direct compliance costs for the fund industry.  

These  costs  relate  to  changes  to  systems  and  procedures  for  gathering  and  providing 
information,  and  costs  related  to  the  publication  of  information  (including  redrafting  of 
information).   

Disclosure costs for firms have typically been seen as major costs. Data collected on costs of 
the introduction of key investor information disclosures for UCITS funds estimated one-off 
costs of between EUR 290 and 730 million (depending on factors that remained open at that 

39  

[Reference to be inserted to final VC IA]. 

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time).40 This is for an industry of around EUR 7 trillion; for perspective, these one-off costs 
were around 0.016% of assets under management. However, these are estimates for measures 
applying  to  the  universe  of  UCITS  funds  which  required  complete  replacement  of  (retail 
facing) investor disclosures for these funds.  

Transparency measures would not require wholesale revision and replacement of disclosures. 
In addition, 'business as usual' or national or self-regulatory costs will be incurred already in 
the area of transparency. Requirements already apply on all funds to provide fair, clear and 
not misleading information in relation to their strategy and objectives, and to report on their 
performance. Those funds targeting social businesses already need to provide information in 
the  area  covered  by  option  A3.  Self-regulatory  initiatives  also  currently  are  likely  to  be 
applied.  

Greater  consistency  and  harmonisation  of  transparency  measures  under  a  common 
framework  could  therefore  reduce  costs  for  funds  over  time,  particularly  where  they  are 
operating across different markets, as they would have greater certainty over what is required 
for them, and an eco-system of supporting professionals and service providers would likely 
become  available  familiar  with  the  common  standards.  Developing  common  transparency 
measures in a phased manner (as intended for the preferred options) could reduce impacts on 
existing funds, by allowing these to make use of a common framework with minimal changes 
at  this  time.  Under  such  an  approach  costs  of  greater  standardisation  of  transparency 
measures  could  be  absorbed  into  existing  ongoing  costs  of  updating  and  reviewing 
disclosures, with little incremental impact.  

However,  funds  might  in  face  some  possible  additional  data  collection  and  analysis  costs 
related  to  social  performance  in  particular.  Such  costs  can  only  be  fully  assessed  in  the 
context of detailed implementing measures as may be developed in the future, and should be 
subject to additional impact assessment at that time. 

Importantly, the funds impacted by a new European social investment fund framework would 
only be those that chose to use the new framework and label, and existing funds that chose to 
ignore  the  initiative  would  not  be  impacted.  Complying  with  these  proposals  would  be  a 
business decision for the fund.  

Note,  that  registration  and  notification  requirements  under  option  C4  are  expected  to  be 
minimal  in  cost  impact  and  certainly  lower  in  cost  than  current  arrangements,  as  under  the 
assessment in the VC IA.   

Options  B2  and  B3  would  incur  no  direct  costs  for  the  industry.  Any  proposals  for 
harmonisation  of  methodologies  that  emerge  from  such  work  would  of  course  need  to  be 
subject  to  impact  assessment.  Option  B2  might  however  incur  some  marginal  costs  for 
industry participants who wish to participate. 

Investors 

It  would  not  be  expected  that  investors  would  bear  additional  costs,  though  costs  borne  by 
funds could be passed onto investors through higher charges to the fund. 

Supervisors 

40  

CSES study on costs for the UCITS industry from introduction of Key Investor Information document 
proposals. 

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New  requirements  might  increase  costs  for  supervisors,  including  ensuring  cooperation  in 
ensuring effective supervision of funds that make use of the EU SEF designation and cross-
border  marketing  possibilities.    However  the  assessment  of  this  depends  on  the  relevant 
benchmark:  as  the  SEF  market  develops,  it  is  likely  that  competent  authorities  would  be 
increasingly  subject  to  costs  related  to  emerging  problems  in  the  market;  acting  now  to 
coordinate  the  market  is  likely  to  reduce  such  costs  over  the  long  term  by  providing  for  a 
common platform from the beginning. 

Option  B2  might  incur  some  marginal  costs  for  public  authority  participants  who  wish  to 
participate. 

Social businesses  

New requirements could increase costs for social business who wish to receive funding from 
investment  funds  subject  to  more  stringent  transparency  and  reporting  requirements.  (The 
passport under C3 itself would likely have no cost impact on social businesses). 

Costs  would  be  driven  mostly  by  requests  for  reports  and  data  related  to  the  transparency 
measures,  and  would  include  associated  systems  or  data  gathering  costs.  However,  it  is 
unlikely  that  these  costs  would  be  incrementally  larger  than  those  borne  under  business  as 
usual, as social businesses that seek to make themselves investment ready are already subject 
to  costs  associated  with  satisfying  investors  in  precisely  the  areas  of  reporting  envisaged 
under the preferred options identified here. The measures envisaged here can be considered 
more  as  providing  for  a  common  platform  or  foundation  for  future  harmonisation,  in  the 
interest of establishing a more coordinated approach to supporting social businesses through 
investment funds.  

This  coordination  could  indeed  serve  to  reduce  costs  for  social  businesses.  Greater 
consistency and legal certainty as to requirements would aid social businesses in identifying 
the  steps  needed  to  become  'investment  ready'  and  overcome  possible  overlapping  or 
competing requirements from different social ratings entities or other financial intermediaries 
as  may  currently  apply.  The  extent  of  impact  here  depends  on  the  extent  to  which  the 
financial eco-system that supports social businesses seizes the opportunities presented by the 
new European social investment fund framework. This is difficult to assess. 

Options  B2  and  B3  would  incur  no  direct  costs  for  social  businesses.  Any  proposals  for 
harmonisation  of  methodologies  that  emerge  from  such  work  would  of  course  need  to  be 
subject to impact assessment. Option B2 might however incur some marginal costs for social 
business participants who wish to participate. 

The  phasing  of  identified  measures  is  vital,  as  it  allows  for  the  cost  impacts  for  social 
businesses  of  different  approaches  to  be  carefully  taken  into  account  as  more  detailed 
harmonising  measures  are  developed  or  considered  alongside  the  growing  maturity  of  the 
market. 

7.7.4. 
including assessment of administrative burden 

Impacts  for  other  stakeholder  groups,  Employment,  SMEs,  and  Third  Countries, 

As noted these proposals can be expected to have net positive impacts on employment, SMEs 
(given  most  social  businesses  are  SMEs),  and,  indirectly,  on  the  environment  (mediated 
through the environmental mission of certain social businesses). Also, as noted, quantifying 
the scale of such impacts is not possible at this stage, given that steps to improve investment 

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fund  transparency  and  cross-border  marketing  only  influence  the  evolution  of  these  wider 
developments indirectly. 

Note, the value of investments in entrepreneurship is clearly established, as a frame for this: 
according to latest research (outlined in the VC IA) it is estimated that an increase in equity 
investments  of  0.1%  of  Gross  Domestic  Product  (GDP)  is  statistically  associated  with  an 
increase in real GDP growth of 0.30 percentage points. Early-stage investments have an even 
bigger impact of 0.96 percentage points. 

In  relation  to  third  countries,  the  application  of  steps  in  the  EU  to  improve  transparency  is 
envisaged as a voluntary regime, which would not constrain access to EU capital markets for 
third country social investment funds. While funds investing in social businesses are likely to 
concentrate  on  investment  targets  located  in  EU,  the  options  identified  here  would  not 
constrain funds from pursuing investment targets outside the EU. 

Administrative burden 

In regards administrative burden, improved transparency measures imply better data flows in 
the  investment  market  for  social  businesses,  and  these  could  entail  certain  costs  over  and 
against business as usual costs for both SMEs and investment funds. These would relate to 
record  keeping,  information  gathering,  and  information  analysis.  Greater  consistency  in 
requirements could however lead to some reductions in costs for some social businesses. 

As a voluntary regime costs would only be borne those seeking access the funding that the 
regime  makes  available.  Evidence  from  the  evolution  of  the  microfinance  funding  market, 
and  the  development  of  labelling  and  transparency  measures  in  that  area  (such  as  under 
'Luxflag'  quality  standards  as  developed  by  the  Luxembourg  fund  industry),41  seems  to 
suggest that benefits are considered to outweigh costs from the perspective of the funds and 
funding  recipients.  Market  evidence  suggests  such  labels  have  not  faced  difficulties  in 
acquiring members (informal estimates suggest Luxflag may cover 20% of the microfinance 
fund market).42 Participants in the Luxembourg initiative support this view, but have not been 
able  to  confirm  specific  details  on  the  scale  or  nature  of  the  costs  of  complying  with  the 
quality standards. 

The issue of reporting costs for social businesses was addressed above under section 7.7.3. 

For further details, see Annex V. 

Impact on other fund types and investment sources 

EU  SEF  do  not  directly  compete  with  other  types  of  conventional  investment  funds,  given 
their  specific  focus  on  providing  investors  with  a  way  of  combining  social  and  financial 
returns.  EU  SEF  may  compete  however  with  certain  kinds  of  'social  investment'  funds  that 
are seeking to offer such a combination, but which are not directly limited to targeting social 
businesses.  They  may  also  compete  with  national  funds  that  are  not  designated  as  EU  SEF 
but are targeting social businesses.  

Given  the  incremental  expected  impact  of  the  measures  assessed  here,  and  also  given  the 
existing scale of the SEF market and the extent to which EU SEF currently compete on an 
unlevel playing field (facing particular costs as set out in the problem definition in this impact 

41  
42  

http://www.luxflag.lu/MIV_listingProcedure.htm. 
Source: ALFI. 

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assessment),  the  consequential  impact  of  the  measures  to  support  the  SEF  market  on  these 
other  kinds  of  funds  is  expected  to  be  minimal.  In  addition,  it  can  be  argued  that  building 
trust  in  the  SEF  market  will  in  practice  be  complimentary  for  all  other  social  investment 
propositions,  bringing  greater  trust  and  clarity  to  this  market  sector.  A  better  founded  SEF 
market would also be less likely to have unintended impacts on conventional investments. 

In terms of funding within the SME sector, it is not expected that these measures would have 
any material impact on the VC market more widely, given the specific focus of the measures 
here on funds targeting social businesses. 

While  the  development  of  a  more  vibrant  SEF  market  in  the  EU  might  lead  to  reduced 
philanthropic giving, evidence from the UK – a developed market in this respect – does not 
support  such  a  conclusion.  As  noted  above,  it  is  possible  growing  trust  would  in  practice 
enhance a complimentary and integrated approach on behalf of investors and donors, and in 
practice foundations and other charitable organsiations are key investors in EU SEF. 

Impact on EU budget 

This initiative will have no impact on the EU budget. 

Impacts on Member States 

Providing an EU-wide framework for access to investors for SEF could have some impacts 
on  specific  Member  States.  In  general,  it  is  expected  that  funds  would  remain  'local'  to  the 
social  businesses  they  support,  with  some  small  exceptions.  The  closeness  of  funds  to  the 
businesses they support – supported by the close relations between SEF and venture capital 
and  'business  angel'  activities  –  implies  that  this  'localness'  would  not  change  rapidly  or 
materially. However, the measures envisaged in this impact assessment would allow for SEF 
to  draw  on  investments  more  widely.  This  can  be  expected  to  allow  viable  SEF  to  exist  in 
smaller Member States, so long as they are able to find willing investors elsewhere. Evidence 
from  discussions  with  stakeholders,  including  EVPA,  suggest  that  there  are  investors  who 
will be willing to operate in this way – cross-border. To the extent that this is the case, then, 
the measures could see increased investment flows between Member States to the benefit of 
small funds in Member States without current SEF activity.  

There  is  little  evidence  to  suggest  this  would  harm  existing  SEF  activity  in  Member  States 
where this sector has been developing already in a strong fashion. As the market evolves, its 
geographic  dispersion  should  however  be  subjected  to  further  assessment,  to  ensure  the 
benefits of this sector extend across the EU and an effective single market in capital exists to 
the benefit of the sector. 

8. 

SYNERGIES AND RISKS 

8.1. 

Effectiveness of phased approach 

As  set  out  in  section  7.6,  a  'phased'  approach  to  the  various  selected  options  is  envisaged. 
Under this approach uniform rules as are necessary to establish a EU notion of SEF would be 
established  now.  These  would  govern  the  use  of  the  designation,  and  ensure  effective 
transparency around the designation.  

Additional steps would then be envisaged to further elaborate and standardise the disclosures 
and  the  application  of  the  criteria  for  the  identification  of  social  businesses  to  existing  and 

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emerging forms of such businesses. These would include work to develop level two measures 
(implementing  measures)  within  the  frame  and  timing  set  for  the  coming  into  effect  of  the 
new uniform rules, which would be subject to further impact assessment work. They would 
also  include  further  steps,  subject  to  further  assessment  and  analysis  work,  to  develop  and 
deepen methodologies for the calculation of social performance and to assess the grounds for 
widening access to the EU SEF to retail investors. 

This approach allows a proportionate impact to the growth and development of the market, 
while effective and efficient measures to be taken now to address the problems identified in 
this impact assessment. While initial impacts might be incremental, the development of a EU 
notion of SEF and stronger investor trust and confidence in this brand, could strongly aid the 
emergence of the social business sector in the EU, and lay the basis for much greater impacts 
in the future on this sector, for instance through measures to widen access to retail investors.  

A  phased  approach  could,  in  theory,  lead  to  additional  costs  due  to  sequential  and 
incremental changes over time. The approach envisaged here would however be to build on a 
framework  over  time,  and  to  not  wholly  replace  existing  requirements  with  new  ones 
incurring wholesale costs of change for all existing funds. This is particularly relevant given 
the way in which future refinements and changes might impact existing funds: grandfathering 
and  transitional  provisions  can  be  designed  so  that  new  requirements  apply  only  to  new 
funds.  Any  steps  to  apply  new  requirements  should  of  course  be  subject  to  additional  and 
separate  impact  assessment,  so  as  to  consider  any  such  future  costs.  In  practice,  a  phased 
approach  is  appropriate  for  a  growing  and  developing  market,  as  it  should  allow 
proportionality of measures. 

8.2. 

Interaction with parallel proposals on Venture Capital 

As  has  been  noted  throughout  this  report,  the  notions  of  innovative  SMEs  and  SMEs  that 
have set themselves the goal to work as a social undertaking overlap, at least to some extent. 
Both types of enterprises tend to be small and medium sized and face issues in obtaining the 
requisite  level  of  'patient  capital'  that  remains  invested  for  a  seven  to  ten  year  period.  This 
implies  that  there  are  strong  synergies  between  this  work  to  support  social  businesses,  and 
steps  on  improving  the  EU  framework  for  venture  capital  funds.  Social  businesses  are 
effectively a sub-set of SMEs. 

However,  there  are  a  series  of  distinguishing  features  that  prevent  social  businesses  from 
being the primary targets for a typical venture capital fund. The notion of "social business" 
comprises a broad range of companies that aim to achieve 'social returns' over and above the 
generation of profit. This ambition, as stressed throughout the IA report, requires dedicated 
reporting  and  disclosure  requirements  tailored  demonstrating  the  social  investment  strategy 
as  well  as  tools  and  methodologies  to  measure  social  impacts.  Both  elements  are  not  in 
evidence when investments are considered into venture capital funds.   

In  addition,  the  expertise  to  support  a  social  business  will  often  be  different  from  that 
required to advise start-up entities in the venture capital field. Investors in social business are 
often  going  to  be  different  to  those  under  the  wider  VC  work.  Indeed  social  business  and 
venture  capital  investments,  although  sometimes  overlapping,  can  be  seen  as  largely 
complementary; the promotion of one type of investment does not diminish funding available 
for the other.    

Finally, while social businesses are also SMEs, and the funds targeting social business also 
operate  beneath  the  asset-based  thresholds  of  Directive  2011/61/EC,  the  range  of  eligible 

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financing  tools  proposed  in  the  Regulation  on  Social  Investment  Funds  go  beyond  equity 
finance - the typical instrument for start-up enterprises in the technology sector. Apart from 
equity  finance  social  undertakings  also  have  recourse  to  other  forms  of  finance,  combining 
public and private sector financing, debt instruments or small loans. The proposed rules on 
social  investment  funds  therefore  provide  for  a  larger  range  of  qualifying  investment  tools 
that are available for social investment funds.   

The  proposed  fundraising  framework  for  Social  Investment  Funds  is  therefore  construed  to 
be complementary to the proposed framework on Venture Capital Funds. Both proposals aim 
to  achieve  different  goals  and  both  proposals,  if  adopted,  will  coexist  as  autonomous  legal 
acts in mutual independence.  

8.3. 

Interaction with the general rules on alternative fund managers (AIFMD) 

Social Investment Funds focus on providing equity or debt finance to social undertakings but 
typically  do  not  meet  the  asset-based  threshold  that  defines  the  passport  available  for  large 
fund  managers  under  Directive  2011/61/EC  (on  Alternative  Investment  Fund  Managers). 
More  extreme  still  than  venture  capital  funds,  where  98%  of  managers  operate  beneath  the 
threshold,  this  IA  report  has  not  identified  a  single  social  business  fund  whose  aggregate 
assets under management would exceed the AIFMD threshold (as Section 3.3 points out, the 
biggest social business fund (Bridges Ventures) manages assets of around € 115 million).       

In addition, the transparency issues raised by investments into social businesses are distinct 
from  the  general  reporting  obligations  that  are  provided  in  the  area  of  both  venture  capital 
and  in  the  wider  range  of  alternative  investment  funds.  Social  investments  target  a  form  of 
‘social  return’  or  positive  social  impact.  The  proposed  rules  on  social  investment  funds 
therefore contain special sections that focus on information pertaining to social impacts, their 
measurement and the strategies employed to foster their achievement.  

The  proposed  fundraising  framework  for  Social  Investment  Funds  is  therefore  construed  to 
be complementary to the general rules covering alternative investment funds (AIFMD). The 
special  framework  on  social  investment  funds,  being  confined  to  sub-threshold  fund 
managers,  is  entirely  autonomous  to  the  general  rules  and  therefore  avoids  any  regulatory 
friction between the two sets of passports and their respective conditions.  

8.4. 

Interaction with work under the Social Business Initiative more widely 

The  steps  explored  in  this  impact  assessment  clearly  have  very  strong  synergies  with  other 
steps  to  improve  the  wider  eco-system  for  social  businesses,  addressing  professionalism, 
capacity  and  infrastructure  building,  awareness  of  funding  and  growth  opportunities.  These 
have been set out in the Communication on Social Business.  

Of  particular  relevance  in  this  regard  will  be  the  Programme  for  Social  Change  and 
Innovation,  under  which  a  dedicated  instrument  will  be  established  in  order  to  improve 
access  to  finance  for  social  enterprises.  This  will  provide  for  greater  public  funding.    EU 
funding is expected to leverage funding from other sources. 

In  addition,  the  new  Regulation  for  the  European  Social  Fund  (2014-2010)  lists  "Social 
Enterprises"  as  an  investment  priority.  Member  States  can,  for  instance,  set  up  a  specific 
investment fund and use their ESF funds for social enterprise support.  

Linked to this are possible steps by the EIF to provide public money through a fund-of-funds 
structure to specific funds that are targeting social businesses.  

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Steps on transparency and a label for private investment funds, and on improving measures 
on  social  returns  or  impacts,  should  be  coordinated  so  as  to  ensure  the  greatest  degree  of 
coherence between different initiatives.  

8.5. 

Risks linked to creating a EU brand for SEF 

A  specific  risk  relates  to  the  possibility,  through  the  label  and  passport,  of  creating  a  EU 
brand that could be tarnished if strong measures are not in place to ensure it is protected from 
mis-use.  

This  could  occur  where  the  funds  able  to  use  the  label  or  passport  are  not  sufficiently 
delineated  or  transparent,  so  that  investors  mis-understand  what  the  label  is  seeking  to 
indicate  (for  instance,  funds  that  do  not  invest  a  majority  in  social  businesses  labelling 
themselves  under  the  label).  It  could  also  occur  where  the  label  is  not  sufficiently  clearly 
developed. 

The  positive  impact  of  a  new  European  social  investment  fund  label  and  institutional 
passport, with supporting transparency and performance analysis measures, depends therefore 
on their careful development in full dialogue with stakeholders and experts, and careful and 
strong ex post monitoring and assessment.  

This  is  a  key  reason  for  adopting  the  phased  approach  identified  above.  The  key  to  any 
meaningful  action  resides  in  the  establishment  of  transparency  on  investment  strategies, 
screening  of  investment  targets  and  a  tri-partite  dialogue  between  investors,  SEF  managers 
and target companies on the way in which social impacts are achieved.  The phased approach, 
based  on  exacting  reporting  standards  on  the  screening  of  social  businesses  and  the 
evaluation of their social impacts, is also a key reason for ensuring measures are effectively 
supervised and enforced by national competent authorities.  

This is an area characterised by new concepts and analytic tools. Coordinating developments 
effectively  will  therefore  depend  on  a  carefully  calibrated  approach,  building  on  the 
established  concepts  and  consensus.  Measures  on  information  that  do  not  cohere  with 
emerging  needs  of  investors  or  social  businesses  would  likely  have  little  impact,  as  they 
would be discarded in favour of more relevant approaches.  

On  the  other  hand,  if  disclosure  requirements  are  allowed  to  develop  in  an  uncoordinated 
manner,  they  will  be  of  little  value  as  a  basis  for  developing  a  common  and  calibrated 
approach to social impacts and the metrics used for their measurement. 

Common  approaches  to  the  application  of  the  definition  of  'social  business'  and  careful 
supervision of funds that target these businesses are therefore of paramount importance.  

8.6. 

Risk associated with early action 

As  mentioned  above,  a  key  plank  of  policies  pursued  in  relation  to  the  establishment  of  a 
tailor made framework for social investment funds is motivated by a preventive approach - 
trying  to  address  certain  issues  before  they  emerge  into  full  view.  This  is  to  some  extent 
different  to  the  'catch-up'  approach  that  the  parallel  initiative  on  venture  capital  funds 
pursues.  As  explained  in  Section  4.8  ("the  value  of  early  EU  action)  there  is  considerable 
merit  in  adopting  a  pre-emptive  approach,  especially  in  markets  where  the  EU  regulator 
pursues  the  positive  goal  of  establishing  an  innovative  and  well-recognised  investment 
vehicle  that  will  coexist  as  a  European  alternative  alongside  existing  national  schemes.  In 

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support  of  early  intervention,  Section  4.8  cites  the  experience  gained  with  the  early 
establishment of a UCITS vehicle for retail investments.  

Nevertheless, a complete analysis of risks must also comprise the risk that early intervention 
crystallises the emerging marketplace and prevents innovation in the regulated field.  There is 
a risk that early action, when markets are still emerging and when differences in regulatory 
cultures  have  not  yet  taken  hold,  prevents  other  promising  approaches  from  emerging. 
However, as the envisaged European framework is conceived as an additional framework that 
will exist alongside national or emerging frameworks, this risk appears remote.  

An  additional  risk  is  that  premature  action  will  limit  initial  take-up  of  the  new  funding 
framework. If the new framework meets with little take-up, there is the concomitant risk that 
average fund sizes are not increased and economies of scale foregone. However, this risk is 
more than eclipsed by the reverse risk that the absence of a harmonised approach will lead to 
little  change  in  the  already  small  sizes  of  the  present  generation  of  SEF  that  have  been 
described  throughout  this  impact  assessment.  In  addition,  as  Section  7  explains,  the  key 
parameters of the envisaged fund framework have been tailored so as to maximise take-up.   

A  further  risk  is  that  the  rules  on  eligible  investment  targets  (social  undertakings)  is  too 
narrow and prevents certain valuable businesses form being eligible. This risk is linked to the 
emerging nature of the concept of 'social undertakings'. This risk is addressed by the fact that 
the notion of social undertaking is currently defined with reference to three key parameters 
that are sufficiently generic to comprise a vast array of undertakings and fields of activity. As 
the proposed rules on SEF in other respects (e.g., location of the target, absence of turnover 
requirements  or  requirements  on  the  duration  of  corporate  existence)  not  very  prescriptive, 
the  risk  that  socially  valuable  undertakings  are  excluded  from  the  scope  of  eligible 
investment targets appears rather remote.      

9. 

MONITORING AND EVALUATION 

In  line  with  the  objectives  underpinning  the  Commission's  policy  choice,  the  post-adoption 
monitoring and evaluation will focus on three issues: (1) has the new framework established 
a sufficiently precise European notion of what constitutes a social investment fund investing 
primarily in 'social business'; (2) has the new framework contributed to a common regulatory 
approach  governing  clarity  and  comparability  of  investment  proposals  offered  by  social 
investment  funds;  and  (3)  has  the  new  framework  contributed  toward  the  improvement  of 
tools to analyse social returns.  

Harmonised  European  notion  of  what  constitutes  a  'social  entrepreneurship  fund'  and 
'social business'         

A  core  plank  of  the  Commission's  monitoring  activities  in  relation  to  the  regulatory 
framework  for  social  investment  funds  will  consist  in  verifying  whether  the  operational 
provisions  adopted  are  specific  enough  so  that  investments  channelled  through  the  new 
regulatory framework reach the intended beneficiaries (social business).  

–  It  is  therefore  important  to  monitor  that  the  investment  strategies  of  those  funds  that 
operate  under  the  EU  passport  are  sufficiently  tailored  toward  the  acquisition  of  equity 
stakes  or  debt  instruments  issued  by  businesses  that  have  a  proven  track  record  in 
achieving  the  targeted  social  impacts  (see  social  impact  monitoring  below)  and  that  the 

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portfolio composition of a social investment fund reflects the regulatory target percentage 
(70%).  

–  Should empirical data gathered as part of this monitoring (monitoring will be conducted in 
cooperation  with  ESMA  who  is  tasked  with  keeping  a  register  of  registered  social 
investment fund managers) reveal that the chosen portfolio composition is not optimal in 
creating  a  workable  notion  of  a  European  social  investment  fund,  the  regulatory  target 
percentage in favour of investments in social business might be revised. Revisions might 
lead to both an increase (to 90%), or a decrease (to 50%) of this target percentage.  

–  Should  empirical  data  reveal  that  the  description  of  the  target  undertakings  is  not 
sufficiently precise in relation to the intended social impacts, the essential characteristics 
defining a social  undertaking (i.e., (i) statutory goal of achieving social impact over and 
above  profit,  (ii)  large-scale  reinvestment  of  surplus  into  the  social  business  and  (iii) 
socially inclusive governance of the target undertaking) will be reviewed.  

–  Should  empirical  data  reveal  that  the  available  investment  instruments  (equity,  quasi-
equity and debt instruments) are not sufficient to provide finance  to social undertakings, 
the  Commission,  in  cooperation  with  ESMA,  shall  review  the  range  and  breadth  of 
qualifying investment tools.  

–  The  Commission  will  also  monitor  that  the  applicable  rules  adequately  reflect  the 
evolution  of  the  social  investment  sector.  In  this  respect,  the  Commission  will  regularly 
assess whether the core definitions underpinning a social investment fund's eligibility for 
the  new  EU  passport  evolve  in  line  with  changing  business  practices,  at  European  and 
international levels.  

A  review  date  is  envisaged  four  years  from  the  new  rules  coming  into  force  to  assess  their 
effectiveness in targeting social businesses. 

Clarity and comparability of social investment propositions  

With respect to the emergence of an enhanced clarity and comparability of social investment 
propositions,  the  Commission  will  regularly  assess  the  success  of  the  cross-border  fund-
raising passport, both in terms of increased investor contributions to social investment funds 
and in terms of aggregate capital raised by such funds across national borders.  

–  The Commission, in close cooperation with ESMA (who will be tasked with maintaining a 
central  register,  publicly  accessible  by  internet,  which  lists  all  social  investment  fund 
managers  registered  in  the  Union  in  accordance  with  the  proposed  Regulation),  will 
monitor  the  amount  of  fund  managers  that  are  registered  as  operating  a  qualifying 
'European social entrepreneurship fund' (EU SEF) in the European Union.  

–  With  a  view  of  enhancing  the  effectiveness  of  the  registration-based  passport,  the 
Commission and ESMA will also monitor 'de-registrations' and their probable causes.  

–  The  Commission,  in  cooperation  with  ESMA  and  the  social  investment  sector,  will 

regularly assess the impact that the European passport rules have on: 

o 

o 

the amount of capital raised by the social investment funds;  

the financing mix available to social businesses;  

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o  The average size of assets under management in a social investment fund; and  

o 

the compliance costs (especially in relation to social impact measurement and 
reporting) related to the new social investment fund. 

–  The  Commission  shall  furthermore  assess  regularly  whether,  or  to  what  extent,  the  EU 
passport scheme is misused to raise capital for investments, beyond the permitted portfolio 
threshold,  that  do  not  target  'social  undertakings'  within  the  parameters  of  the  proposed 
rules.  

–  The Commission will also assess whether the creation of a special regulatory framework 
for  social  investment  funds  (that  would  otherwise  operate  within  the  framework  of 
national private  placement,  possible  rules on venture capital funds or  within  the rules of 
the AIFMD) has led to regulatory arbitrage.   

A  review  date  is  envisaged  four  years  from  the  new  rules  coming  into  force  to  assess  their 
effectiveness in improving the clarity and comparability of investment propositions. 

Measurement of social returns  

The Commission will monitor whether and to what extent the work launched as part of the 
proposed Regulations have improved the development of metrics to capture the incidence of 
'social returns'.  In this context:   

–  The Commission, in close cooperation with ESMA and the national authorities that will be 
responsible  for  supervising  compliance  with  the  new  EU  SEF  fundraising  passport,  will 
monitor externalities achieved with social investment funds in terms of  

-  Environmental impacts (e.g., reduced use of pollutants);  

- 

social  impacts  (e.g.,  jobs  created  for  socially  marginal  groups,  products  and 
services offered for socially marginal groups); 

-  ethical impacts (e.g., jobs created for people with a disability, special products 

or services offered that cater to people with a disability). 

Measures to develop better methodologies will be assessed over the following years, to feed 
into the envisaged review date four years following coming into force of the new rules. 

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GLOSSARY OF TERMS 

Abbreviations 

AIFMD 

Directive on Alternative Investment Fund Manager 

ALFI 

Association of the Luxemburg Fund Industry 

BPCE   

Group BPCE (Banque populaire/Caisse d'épargne) 

Eurosif  

European Sustainable Investment Forum 

EBAN   
Early Stage Market Players 

The European Trade Association for Business Angels, Seed Funds, and other 

EVPA   

European Venture Philanthropy Association 

FSUG   

Financial Services User Group 

GEM 

GIIN 

IA 

MFI 

NGO 

KPI 

Global Entrepreneurship Monitor 

Global Impact Investing Network 

Impact Assessment 

Microfinance Institution 

Non-governmental organisation 

Key Performance Indicators 

OECD  

Organisation for Economic Co-operation and Development 

SB 

SIB 

SEF 

SRI 

STR 

SME 

VC 

Social Business 

Social Impact Bonds 

Social Investment Funds 

Socially responsible investment 

Pounds Sterling 

Small-medium enterprise 

Venture Capital 

UCITS  

Undertakings for collective investment in transferable securities 

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Definitions of terms 

Asset allocation 

A fund manager’s allocation of his investment portfolio into various asset classes (e.g. stocks, 
bonds, private equity). 

Asset class 

A category of investment, which is defined by the main characteristics of risk, liquidity and 
return. 

Capital market 

A market in which long term capital is raised by industry and commerce, the government and 
local authorities. Stock exchanges* are part of the capital market. 

Closed-end fund 

A fund with a fixed number of shares. These are offered during an initial subscription period. 
Unlike open-end mutual funds, closed-end funds do not stand ready to issue and redeem 
shares on a continuous basis. 

Fund-of-funds 

A fund that invests in other investment funds. 

Listed company 

A company whose shares are traded on a stock exchange. 

Microcredit/Microfinance sector 

Small loans, usually smaller than €25 000, gr anted most often by specialised institutions. 

Social enterprise 

An enterprise whose primary objective is to achieve social impact rather than generate profit 
for owners and shareholders. It operates in the market through the production of goods and 
services in an entrepreneurial and innovative way, and uses surpluses mainly to achieve 
social goals. It is managed in an accountable and transparent way, in particular by involving 
workers, customers and stakeholders affected by its business activity.  

Social entrepreneurship funds 

Private investment funds that target as their core invesetment activity the funding of social 
enterprises, whether through equity investments or by buying debt instruments or providing 
loans. 

Social investment 

Investments – whether directly or through financial instruments such as funds -- that are 
oriented towards social as well as financial outcomes.  

SME – Small and medium-sized enterprises 

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Under European rules an SME should have less than 250 employees, an annual turnover not 
exceeding EUR 50 million, and/or an annual balance sheet total not exceeding EUR 43 m. 

Stock exchange (stock market) 

A market in which securities are bought and sold. Its basic function is to enable public 
companies, governments and local authorities to raise capital by selling securities to 
investors. 

UCITS - Undertakings for Collective Investment in Transferable Securities (acronym in 
EU legislation) 

Investment funds (for retail and institutional investors) that are harmonised at EU level. 

Venture Capital (VC) 

Investment in unquoted companies by venture capital firms who, acting as principals, manage 
individual, institutional or in-house money. In Europe, the main financing stages included in 
venture capital are: early stage, covering seed and start up, and expansion. Strictly defined, 
venture capital is a subset of private equity. Venture capital is thus professional equity 
coinvested with the entrepreneur to fund an early stage (seed and start-up) or expansion 
venture. Offsetting the high risk the investor takes is the expectation of higher than average 
return on the investment. 

Venture Capital Funds 

Investment funds which invest into venture capital. 

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ANNEX I -- EMERGENCE OF A SOCIAL INVESTMENT MARKET 

A 'social investment market' has taken shape in Europe over the last decade. The market 
brings together investors and investment targets, either through the 'linkage' provided by 
financial intermediaries or directly.  

Diagram 1: Key players in an emerging social investment market 

A social investment market have been emerging which shares similar features to other 
financial markets: investors seek to place capital with investment targets, and financial 
services entities broker or manage such investments.  

Key financial intermediaries operating in the social investment market include certain niche 
banks, venture philanthropy funds, social investment funds and bespoke venture capital 
funds, funding consultancies and intermediary platforms, and emergent social stock 
exchanges. These intermediaries typically manage and broker investments through financial 
instruments (including investment funds) that act as conduits. Funding can range from 
conventional investments (whether equity or debt based), to grants or donations where no 
return of capital is made, to mixed instruments that combine these other instruments in 
innovative ways. 

Indications are that many of these intermediaries are specific operators who concentrate on 
the social investment market, separate from conventional financial services providers. 

Broad types of social investment 

This is an emerging sector, so there is a great degree of variety in the vocabulary or concepts 
used for describing the field, the strategies that can be adopted, the targets of investments that 
can be selected, and the instruments that can be used.  

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• 

• 

Conventional investments typically take the form of different kinds of investment 
funds, direct or indirect investments through securities or certificates (taking either 
equity or debt/bond forms), or a wide range of emerging structured products.  

The  most  currently  most  widespread  form  of  investment  with  a  social  aspect  is 
'socially  responsible  investment'  (SRI).    (Such  investments  are  typically  in  the 
form of investment funds and can be seen as part of the particular company's CSR 
strategy).43  

Investments of this type range from what are termed 'negative SRI' (investments that 
apply a variety of criteria to rule out certain investments through a simple screening 
process,  e.g.,  avoiding  companies  that  do  not  fulfil  certain  CSR  /  ESG  criteria),  to 
'positive SRI' strategies (seeking out specific companies that actively pursue goals in 
line  with  the  overall  investment  strategy  being  targeted,  offering  a  more 
concentrated and intensively managed product).44 

These  overlap  strongly  with  conventional  investments.  Those  making  SRI 
investments will typically do so with in consistency with a focus purely on financial 
returns,  though  some  positive  SRI  strategies  may  entail  a  stronger  focus  on  social 
returns  than  is  consistent  with  normal  conventional  investments.  The  investment 
targets  of  SRI  are  not  necessarily  firms  that  possess  a  social,  environmental  or 
ethical  'mission',  though  they  may  be.  For  instance,  SRI  targets  could  include  a 
conventional  for-profit  company  that  fulfils  certain  criteria,  e.g.  relating  to  its 
governance structures. (Such firms might fall under category 5 in diagram 3 below). 

• 

A  more  specific  form  of  investment  than  SRI  has  emerged,  termed  'impact 
investment'.   

These  can  either  specifically  targets  enterprises  or  businesses  (outlined  in  more 
detail  in  the  next  section)  that  have  as  their  primary  mission  social,  ethical  or 
environmental goals, or focus more on identifying and achieving specific outcomes  
and  leave  the  investment  targets  more  open.45  Both  of  these  kinds  of  social 
investment overlap with SRI, and can under some interpretations be viewed as forms 
of SRI. 

The impact or social investment category extends beyond the limits of conventional 
investment, to reflect the importance of social returns for these investments, and the 
fact  that  social  returns  do  not  form  part  of  the  typical  conventional  investment 
decision process.  

Social entrepreneurship funds, as set out in this impact assessment, can be characterised as a 
form or subset of impact investments.  

43  
44  

45 

See http://ec.europa.eu/enterprise/policies/sustainable-business/files/csr/new-csr/act_en.pdf. . 
See Eurosif 2010 survey of European SRI landscape: http://www.eurosif.org/research/eurosif-sri-
study/2010. 
Given that such investments focus on outcomes the strategies could in principle be neutral as to the 
formal nature, governance or other aspects of the investment target, and might not always be a form of 
SRI as conventionally understood. However, strong and convincing methodologies for assessing 
impacts and demonstrating the effectiveness of the strategies in supporting the identified impacts might 
be particularly necessary for such strategies where this is the case, alongside clarity as to the outcomes 
being sought be the strategy. 

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Note  that  neither  SRI  investment  nor  impact  investing,  as  conventionally  understood, 
concentrate on targeting of social businesses, as defined in this impact assessment and 
as determined in the Commission's Social Business Initiative.  

What social businesses are targeted? 

Discussions with stakeholders show that a spectrum of enterprises focus to varying degrees 
on 'social returns' and are already targeted by social investors precisely for their provision of 
such returns.   

In general terms, these enterprises are most typically classified according to their 'mission' or 
focus.46 They extend all the way from foundations, charities or trusts (entities which are not 
run for-profit, and typically will fall under specific national rules relating to not for-profit 
entities), through a range of types of business that target a social mission but also seek 
commercial success, up to businesses that do not directly target a social mission, but instead 
have a normal commercial mission.  

Diagram 2: Investment targets in the social finance market [After CAF et. al.] 

Note that all of these entities could be targets to a degree for investors or investment 
intermediaries seeking to achieve social returns with their money.  

However, since investors are, by definition, not purely philanthropic donors but seek 
investment returns, their focus is likely to mostly concentrate on categories 3, 4 and 5, or 
enterprises in such categories are likely to form the bulk of any investment portfolio, since 
only these categories provide investment returns.  

Social businesses – the focus of this impact assessment – are those enterprises that explicitly 
combine social returns with financial returns, but with social returns as the dominant mission 
of the enterprise.  

Two vital distinctions exist that are important for this impact assessment.  

• 

46  

EN 

The  first  is  between  investing  and  making  donations  or  grants.  Investments  are 
characterised  by  the  expectation  of  a  return  of  capital  and  on  capital  (however 
modest this might be).   

See, e.g., NESTA2 p.12, ClearlySo p.14.  Adapted from CAF Venturesome: Financing the Big Society 
(CAF),  2009. 

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• 

The second is between (mass-market) retail investors and institutional investors. 
In  general  terms,  retail  investors  are  less  able  to  take  on  financial  risks,  and  in 
addition  financial  instruments  or  services  targeting  retail  investors  are  subject,  at 
both  national  and  European  level,  to  more  stringent  regulatory  requirements  for 
purposes  of  protecting  the  interests  of  those  investors.  Such  requirements  carry 
costs. 

Who are the investors? 

Different investors have typically different expectations and needs in relation to such trade-
offs. The following broad classes of potential investors in social businesses can be identified: 

Retail 
investors 

Mass market 

Typically have low risk tolerance or appetite. 
May need high degree of liquidity (e.g. access to savings due to 
unexpected changes in circumstances).  
Some appetite for investments that target social returns and willingness to 
forgo financial returns for this purpose. Some view the retail market as the 
most likely to grow over the longer term. 

High net worth  Mainstay source of philanthropic capital and demonstrated early interest in 

Institutional investors 

social investments. Currently a core capital source for social investments 
(see EVPA, EBAN). 
May have higher risk tolerance, less need for liquidity. May have access to 
non-retail investment products due to profile. 
Some institutions possess missions that call for social investment (or 
donations) on their own account. 
Institutional investors may also invest as intermediaries for other clients, 
or as part of products to be offered to other clients. 

Foundations / trusts or value 
or faith-based investment 
networks 
Public bodies 

Source of philanthropic capital, grants, loans and investments. 

Source of grants, loans, seed investments, loan guarantees, tax and other 
incentives. 

Estimate of growth of market 

There are contrasting estimates on future potential for growth in this sector. For instance, the 
growth of the wider SRI market has been very strong – Eurosif calculate EUR 5 trillion of 
assets under management could be assigned to this market in 2009, which is a large 
proportion of total assets under management (EUR 9 trillion in funds as of 2009).47  

This might imply great potential; however a more prudent analysis would consider the rapid 
growth in the SRI market only as a loose proxy for corresponding growth of social business. 
Following SRI principles can be considered as 'good prudent investment practice' for all 
investors, and investment funds that target accreditation as SRI as simply seeking to follow 
best practices themselves. However, it would be fair to assume that the rapid growth in the 
SRI market reflects a broader interest amongst investors of all types in taking non-financial 
aspects of investments into account when taking investment decisions. Investment funds 
targeting social businesses could be expected to benefit from a wider appreciation of and 
understanding of the role of non-financial aspects of investments.   

47  

See http://www.eurosif.org/research/eurosif-sri-study/2010. 

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Estimates from JPMorgan are that an 'impact investment' asset class (which would include 
investments targeting social businesses, but would extend wider than this to include 
investments in ordinary businesses that might exhibit positive externalities) could hit between 
USD 400 billion and USD 1 trillion globally by 2020.48 The EU proportion of this could be 
around EUR 100 billion and EUR 242 billion, once a rough adjustment for the scale of the 
EU asset management sector has been made.  

The experience in the French market with growth in investment flows into so-called épargne 
solidaire is also indicative of strong potential. This sector has grown rapidly: according to 
AFG: "en 2010, l’encours de l’épargne solidaire représente 3,15 milliards d’euros soit une 
augmentation de 31% par rapport à 2009". This growth is partly triggered by the adoption of 
measures to promote active distribution of social investments: "l'épargne salariale représente 
désormais la moitié des encours de l’épargne solidaire, avec des montants en progression 
rapide (+100% en 2009, +50% en 2010), atteignant 1,5 milliard d’euros au 31 décembre 
2010".49 While the scope and focus of these investments is not totally equivalent to 
investments into social business, the growth of épargne solidaire suggests a potential of 
growth in the social business sector. .  

Another proxy for a possible evolution of the SEF sector is the growth trajectory of 
microfinance funds, which in thirty years has grown into a global sector with approximately 
USD 6.6 billion assets under management;50 this trajectory is in step with JPMorgan 
estimates. 

48  
49  
50  

See JPMorgan p. 6. 
AFG response to Commission consultation on Social Investment Funds. 
Microcredit services represent USD 50 billion worldwide, with 15,000 microfinance institutions 
(MFIs) serving more than 150 million clients. Microfinance funds link international capital investors to 
these MFIs – there are 103 such funds worldwide, with USD 6.6 billion of assets under management. 
Investors in these are primarily institutional investors, foundations, NGOs or networks (42%), with 
retail investors providing 34% and Development Finance Institutions 21%. Analysis draws on figures 
from Technical note on microfinance funds, 11.12.2009, submission by Action Group 'Microfinance 
funds' of European Microfinance Platform during debate on the AIFMD. 

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ANNEX II -- FEEDBACK FROM CONSULTATION ON SOCIAL INVESTMENT 
FUNDS 

General 

The Commissions' initiative is welcomed by the majority of respondents.  

Stakeholders stress that this is a very important initiative/action at the EU level given the fact 
that this is an emerging market. EU action is mostly warmly welcomed as a sign that the EU 
supports this specific market and many stakeholders underline growing appetite for 
investments into this sector and support for steps to help the emergence and growth of the 
sector.  

Stakeholders are keen to engage further as thinking develops. 

Responses show a wealth of (hetereogeneous) experience and strong engagement; many 
however seek further dialogue and time to continue to think through issues, options and next 
steps. 

Respondents stress that since the market structure is developing in this emerging segment that 
the Commission should act very carefully and seek to deepen its insights further before 
drawing strong conclusions. They advise the Commission to engage in further research and 
investigation and dialogue with stakeholders in order to estblish better the emerging needs of 
this market. The Commisison should not move too quickly so as to have unintended impacts 
on the market. 

A number characterised this sector as being now similar to the early years of the venture 
capital sector. A number underlined how social businesses do not only need capital but also 
other non-financial support; addressing matters at the EU level could trigger wider steps to 
support social businesses and have a positive impact on the development of the market. A 
benefit of taking steps at the the EU level would ultimately be, however, the leverage this 
could give to social businesses, allowing successes to more easily be replicated across 
Europe. 

What is a social business? 

Respondents noted a lack of clarity or transparency with respect to what a social business or 
enterprise is. It was underlined that there was much heterogeneity at present: for instance, 
different investment tools or market segments use different terms or understand the same 
terms in different ways. This creates a major challenge for investors; those who are seeking 
to invest in this market can become confused and end up mistrusting the terms used by 
different parts of the industry. This can reduce or limit inflows of capital. For this reason, 
many of the respondents have underlined their view that transparency is extremely important, 
information (to investors) about what a social business is precisely doing or standing for is 
vital, as is clarity from funds and investment vehicles over their strategies, role and actions in 
this regard. 

The Commission's definition was felt by a number of respondents to be not precise enough or 
as was seen to cover the wrong areas; it was recognised that the pace of changes in the 
emerging market made this difficult. Some respondents claimed that if the Commission took 
too restrictive a stance, there would be a risk that important and valuable businesses would 
not be covered; however some respondents argued in favour of a tightly defined definition 
along the lines exposed in the consultation paper. Views varied on how a definition could 

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work; for instance, some felt that public authorities across the Member States should be the 
final arbiters.  

Related to this topic is the question about re-distribution of profits: most larger industry and 
public authority stakeholders emphasized that re-distribtuion of profit should not be excluded 
because this could have a negative impact on investors' appetite to invest (limiting as it would 
investment returns). It was noted that investors would vary in regards the return on 
investment they would be seeking in the social investment sector; for this reason transparency 
on the outcome or return on investment was seen as being of fundamental importance in 
developing the sector further. Some (smaller) respondents stressed that allowing for re-
distribution raised the risk that interventions would not focus strongly enough on the core aim 
of social businesses (the social mission), diluting overall effectiveness. 

Mismatch between supply and demand 

It was noted by a number of respondents that social businesses do not have effective access to 
finance because of an under-developed market structure or a lack of appropriate market 
infrastructure in the social market area. It was felt that investors might be willing to invest in 
social businesses, but do not find appropriate tools or do not have sufficient information. 
Note that some respondents felt that supply of capital was less of a problem than demand: 
that the targets for social investment could be difficult to locate / engage. 

SRI  

Some respondents noted it was very important to be clear as to the distinctions between this 
work on investments in social businesses and wider 'socially responsible investing' steps. 

Small market 

A number of respondents noted a lack of interest on behalf of major financial players due to 
the small size of the market and its particularities (low levels of liquidity, possible low 
returns, lack of a visible track record, lack of familarity with market players and concept of 
social return, etc). This hampered market infrastructure development and reduced levels of 
instutional investment. 

Is an investment fund the appropriate tool for dealing with challenges faced by social 
businesses?  

A few respondents felt that action on European funds was not needed; to this view the market 
was predominantly local, so no cross-border issues arose, while it was also questioned 
whether investment funds were the most relevant funding tool. Issues with funding from 
banks, for instance, were highlighted. 

Most respondents however appreciated the focus on investment funds, and considered this a 
relevant and appopriate focus. It was underlined often, however, that non-financial support 
for small social entrpreneurs was likely to be as important if not more important than 
financial support. 

Retail vs institutional investors 

Many respondents viewed retail access as important in the long run, noting that: 

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institutional investors (such as pension funds) may not be allowed to invest into 

• 
social businesses due to their fiduciary duties / focus on financially competitive returns on 
investment; and 

• 

retail investors are more likely to be committed to supporting social businesses. 

The concept of a passport for retail investors was thereby welcomed. However, many 
respondents also noted a number of issues with retail access:  

• 
more able to take the risks and possible losses linked to these kinds of investments; 

the focus should be on "sophisticated" high net worth individuals, because these are 

the high risk and low return on investment made such investments less suited to 

• 
retail retail investors – they should not be encouraged to invest in such funds, or, where they 
do, necessary safeguards must be in place, notably disclosure steps to ensure awareness of the 
specific features of these investments and what they entail;  

• 
initiatives designed to provide greater retail investor protection; 

encouraging retail investors to invest in such funds might run counter to other policy 

• 
match the financial and non-financial needs of the social business sector itself. 

the requirements of developing products for a mass retail market would not well 

Appropriate fund framework? 

Many respondents noted that the AIFMD framework was likely to be too burdensome or 
costly for small social investment funds. Given investor protection requirements in UCITS, a 
number of respondents argued that a new framework might be best. In this regard, some 
respondents noted that the Commission should be vigiliant in setting up new structures so 
that they could not be used to circumvent requirements under other frameworks (notably, 
AIFMD). 

Some respondents outlined that the Commission's work on venture capital might offer a 
useful framework also for encouraging investments into social businesses. 

For a number of respondents including one Member State changes to UCITS should be 
contemplated as a way of raising investments in social businesses. Such changes might be 
relatively minor, for instance by allowing a certain proportion of non-transferable securities 
to be held, for instance through the 10 percent limit foreseen for non listed assets. Views 
varied on how easy this might be in technical terms. Some believed that UCITS could be 
used in this way without making changes; others noted that Commission has taken the view 
that the 10% limit is restricted in its effectiveness in this regard. 

For some other respondents, it was felt that the risks of making changes to UCITS, and in 
particular altering its qualities as a liquid and transparent retail framework, would be too 
great. It was noted that social business need patient capital, which typically might best be 
delivered through closed-ended rather than open-ended (such as UCITS) fund structures. 

EU label 

Respondents supported the idea of EU intervention to reduce confusion and improve trust in 
the sector. 

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Some respondents noted however that it might be too early for the Commission to develop a 
specific label, since the market is still building up infrastructure and there is not yet common 
understanding to what a social business is.  It was felt that public steps should not dominate 
or force the process, but should follow and support developments in the markets. 

It was also noted that there was a risk that without strong supervision and controls a label 
could be misused to "whitewash" investments that are not appropriately 'social', potentially 
undermining the whole sector. 

Transparency for investors was underlined once again, e.g. via a clear statement in marketing 
documentation that social investment funds may offer less liquidity and a different risk 
profile than more traditional investment funds. Transparency to investors in these points are 
crucial to avoid investors being disappointed. 

Measurement of social performance 

Respondents noted that valuing and evaluating performance of investments in social 
enterprises was difficult. Currently investment funds develop their own standards to measure 
social impacts, as no common defined standards exist yet; transparency is vital so that 
investors can make their own assessments (to a degree institutional and qualified investors 
might be expected to have the ability to enquire further if not satisfied). 

The Commission should also take a closer look at market developments in this area, before 
taking steps itself; this is an area where market developments need to mature more first. 

Elements of a possible future fund framework 

Many respondents had also some concrete ideas as to some the possible elements of a fund 
framework to be developed in the long term. These ranged from suggestions as to the 
percentages of the fund portfolio to be invested into social business (e.g. 30 percent) to the 
frequency of redemptions as well as technical suggestions as to how to deal with the fact that 
returns might be lower than for traditional investments.  

Tax treatment or other incentives 

Many respondents were in favour of tax incentives and gave different views on how to 
structure these/who should profit from these (e.g. the investor or the social business.). Tax 
incentives were considered a good tool for boosting the market; financial guarantees were 
mentioned as another form of public incentive. 

It was also underlined that establishing practical access to distribution was extremely 
important. 

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ANNEX III -- CURRENT EUROPEAN FUND REGULATION 

The EU fund landscape is already very well established and mature, including, under the 
auspices of the Undertakings for Collective Investment in Transferable Securities (UCITS), a 
strong and demonstrably successful cross-border framework for retail funds.  Steps are under 
way, under the Alternative Investment Fund Managers Directive (AIFMD) to also introduce a 
cross-border framework for institutional funds. 

All investment funds in Europe will fall under EU laws on funds (following implementation 
of AIFMD). They will fall either under UCITS (which provides for a retail passport) or 
AIFMD (which provides an institutional passport for Alternative Investment Funds (AIF)). 
Options for a future regime for venture capital (VC) is also currently being assessed. 

Note that while in general retail funds are UCITS and institutional funds are AIF, in certain 
Member States there are existing 'non-UCITS' retail frameworks in place alongside UCITS. 
These non-UCITS retail funds are normally only distributed nationally, (under national 
regimes that are often mostly the same as UCITS).  While these funds will be AIF under 
AIFMD – which provides a mechanism for an institutional passport in some circumstances, 
they have no retail passport. 

Due to the nature of SEF, these mostly currently take the form of what will be in the future 
AIF: there is no EU 'retail' passport that can be used currently by social investment funds. 
The UCITS framework is designed for retail customers, and in practice most investments in 
social businesses and enterprises are currently not possible under this framework. This is 
mostly due to requirements in the UCITS framework related to the liquidity of eligible assets 
– investments must take the form of transferable securities, and this limits the capacity of 
UCITS to invest in social enterprises as these are starting up. 

While SEF would currently be AIF, most are likely to fall beneath the threshold for the full 
requirements of the AIFMD to apply (i.e. for unleveraged funds, EUR 500 million in assets 
under management). They would therefore currently fall mostly under national rules. To gain 
access to the AIFMD passport funds would have to opt to comply into the full AIFMD 
regime. The AIFMD regime is designed to address systemic risks raised by large and 
complex hedge funds, and is not suited to the needs of small SEF that use no complex 
investment strategies.  

An additional fund regime – designed to provide a passport for venture capital funds without 
requiring them to satisfy the strict obligations linked to the AIFMD passport – is currently 
being developed. It is likely that SEF could make use of this venture capital passport, which 
allows for cross-border marketing to professional investors, but the regime is not fully suited 

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to their needs (as set out in this impact assessment), notably in regards permitted investments 
and transparency measures. 

Assessment of Regulatory Barriers 

Institutional While the EU fund landscape (following implementation of AIFMD) lays a 
strong basis for a single market for institutional investors, this framework is not tailored to 
the needs of smaller SEF. It includes reporting, organisational and conduct of business 
requirements suited to addressing risks related to large hedge funds, rather than small long-
only equity funds. As with venture capital,51 costs for social investment funds in making use 
of the AIFMD passport are likely therefore to be disproportionate. No stakeholders operating 
funds in the EU institutional market have indicated that they would seek to make use of the 
AIFMD passport by 'opting' in.  

In practice, therefore, there is currently no cost effective cross-border regime suited to the 
needs of SEF. These would rely instead on existing national private placement regimes and 
agreements for cross-border access.  (Fund of fund structures and other forms of financial 
engineering could however mitigate some of the difficulties of access identified). 

Retail There are currently limits to the development of a single market accessible for retail 
customers seeking to invest in SEF.  

This is largely by design. The investor protection measures necessary for ensuring the broad 
suitability of a fund for retail customers place important limitations on the kinds of risk 
exposure that an investment fund can take on. Specifically, the measures ensure that the fund 
invests in assets which allow for a high degree of liquidity and a transparency in the pricing 
of the fund. 

The nature of the SEF's participation in social businesses – where such funds are wholly or 
mostly invested in social businesses – could undermine these features. Participations in social 
businesses – as with other small enterprises – are likely by definition to be illiquid and 
difficult to price. For this reason social investment funds targeting social businesses would 
typically not take the form of a UCITS. 

Retail access to such funds would therefore mostly be under national rules, subject to specific 
measures to address the additional possible sources of risk for the retail investor created by 
investments in social businesses.   

51  

[Reference to be inserted once published]. 

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ANNEX IV -- ISSUES WITH INVESTMENT FUNDS WHEN FUNDING SOCIAL 
BUSINESSES  

Stakeholders and consultation respondents have highlighted a number of emerging issues in 
their view with the development of investment funds targeting social businesses: 

Stakeholder 

Specific problems raised 

Investors 

•  Confusion over what is on offer / what 'social' means or connotes – 
mistrust in competing labels for products, competing marketing 

Social 
Businesses 

•  Difficulties comparing products / offerings, reducing competition 

•  Products do not offer clarity as to extent/nature of social returns or 
extent/nature of financial risk and/or return. 

•  Market nascent, so track records may not exist. 

•  For retail investors, retail funds targeting social businesses may not be 
available or allowed under national rules. UCITS rules establish a regulatory 
barrier to a EU passport for retail social investment funds.  

•  Lack of awareness of different options for funding: 

• 
Social businesses can face specific challenges in getting 
'investment ready' (See discussions in EVPA, EBAN, NESTA1 and 
NESTA2, ClearlySo; issues here are similar to those raised for SMEs in 
relation to Venture Capital funding; however the specific 'social' nature of 
social businesses is considered to raise additional challenges) 

• 
identifying social businesses and supporting them. 

Existing networks or infrastructures might not be well adapted to 

• 

Orientation is towards grants rather than capital markets. 

•  Not enough 'patient capital' available (i.e. long term investments 
focused on the needs of the business to drive social returns, with strong 
practical support).  

•  Status or legal form can sometimes limit options for gathering 
investments – charitable status might creates tax advantages, but prevent 
issuance of equity for gathering growth capital, for instance. 

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Fund & 
financial 
intermediaries 

Immature networks / infrastructure targeting social business, coupled 

• 
with a lack of sensitivity to the needs of social businesses -- difficulties 
finding and assessing investment targets.  

•  Normal sources of investment may shun social businesses; costing / 
pricing of social return as opposed to financial return.  

•  Competing versions of concept of 'social' returns can impede 
transparency, trust in market: no shared answers to how funds might best 
pursue, document and demonstrate social 'value for money' from 
investments? 

•  Advisors not aware of options, not informed on concept of 'social 
returns'. 

•  Rules on the kinds of assets retail funds can invest in (at national and 
EU levels) can strongly limit their ability to target social businesses. 

Inconsistencies in rules in different MS fragment retail market, limiting 

• 
access to cross-border / single market pools of capital. 

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ANNEX V – ESTIMATING ADMINISTRATIVE COSTS AND BURDENS  

The Commission Impact Assessment Guidelines define administrative costs as "the costs 
incurred by enterprises, the voluntary sector, public authorities and citizens in meeting legal 
obligations to provide information on their action or production, either to public authorities or 
to private parties." 

The preferred options emerging from this impact assessment include stronger standardisation 
and prescription at the EU level of information to be provided to investors by social 
investment funds, and measures on providing information to competent authorities in return 
for a right to market a fund cross-border. Under the Guidelines legal requirements on 
information disclosure to investors, as in the form of a financial prospectus, qualify as 
administrative costs.    

Following the Guidelines, the key areas of costs for funds are likely to be from use of 
external advisors to fill in expertise gaps, putting into place systems in both human resource 
and IT terms for gathering and analysing data, and man hours for drafting and compiling 
information for investor disclosures.  

As noted, existing transparency requirements at EU level require disclosures of the fund and 
on its investment strategy, and business as usual costs related to marketing the fund will 
inevitably incur costs precisely in the areas outlined above. Different expectations from 
investors may well accentuate these costs (leading to overlapping information being 
expected, and so costs raised delivering the information, e.g. under Eurosif-style guidelines – 
which can vary by Member State, trade body guidelines related to social investments or 
impact investing, etc.)  

Given the nascent form of the social business sector, it is difficult to assess the scale of these 
different factors in order to estimate the incremental administrative costs and burdens 
pursuant to steps to enhance transparency measures.  As noted, this initiative is a voluntary 
initiative: costs are only likely to be borne by those who believe the business case is such that 
marketing benefits outweight these costs. Existing labelling measures – such as Luxflag – 
incur comparable costs by standardising information requirements, and indeed include 
membership costs for the agency maintaining the label.52 Market evidence suggests such 
labels have not faced difficulties in acquiring members (informal estimates by the 
Commission suggest Luxflag may cover 20% of the microfinance fund market).53 

What might be the impact of Level 2 measures? 

This impact assessment considers possible framework measures, to be supported at a later 
date by detailed implementing measures and technical standards and guidelines. Specific 
implementing measures and technical standards could have material cost and burden 
consequences, notably in the area of the measurement of social performance or impacts. This 
impact assessment does not seek to justify any specific standardisation or approach in such an 
area; such measures would necessarily be subject to further impact assessment work and 
supporting study work.  

52  
53  

http://www.luxflag.lu/MIV_listingProcedure.htm. 
Pending confirmation from Luxflag. 

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ANNEX VI – SUMMARY OF IA 

Problems 

Objectives 

Proposed solution 

Operational 

Specific 

General 

Now 

Later 

Why current rules not 
good enough? 

Magnitude of 
impact 

Self-regulation 
inconsistent across EU. 

Significant over 
longer term. 

Lack of clear 
and comparable 
information 

Improve clarity 
and 
comparability of 
social investment 
propositions 

Raise confidence 

Increased levels 
of investment in 
social enterprises 

Basic EU label  

Full EU label 

(c.f. energy 
labelling) 

Consider applying to 
some retail funds? 

Social 
performance 
hard to assess 

Regulatory 
barriers / costly 
cross-border 
fundraising / no 
proportionate 
fund rules  

Improve tools for 
assessment and 
analysis of social 
returns 

Ensure EU fund 
regulations 
(cross-border) 
reflect needs of 
SB 

Better access of 
institutional 
investors to range 
of funds 

Ensure efficient 
and effective 
single market 

Common 
framework, but not 
fully standardised  

Increased 
standardisation of 
information 

MS regulation likely to 
develop in different 
ways as market grows.  

Study / working 
group 

Standardised 
measures comparable 
across all funds 

Consider developing 
for retail use? 

New passport 
attached to EU 
label – does not 
displace existing 
funding conduits, 
but adds a new 
option 

Medium to 
significant over 
longer term. 

Incremental now; 
medium over longer 
term. 

MS regulation does not 
currently address 
transparency needs.  

EU-wide label not 
emerging 

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Over medium term, different parts of package support one another – emergence of strong EU brand supported by common rules and measures of social impact, similar to emergence of UCITS 
brand.  Start by setting in place facilitating measures, which set a foundation which can be built on. More effective / efficient to do this at start rather than wait for fragmentation in growing 
sector. 

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