COMMISSION STAFF WORKING PAPER EXECUTIVE SUMMARY OF THE IMPACT ASSESSMENT
Date: 2011-12-07
Institutions: European Commission
Subjects: aid to undertakings, cross-border cooperation, investment, sustainable development

EUROPEAN COMMISSION 

Brussels, 7.12.2011 
SEC(2011) 1513 final 

COMMISSION STAFF WORKING PAPER 

EXECUTIVE SUMMARY OF THE 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) 1512 final} 

 
 
 
 
  
 
1.  INTRODUCTION 

This  impact  assessment  is  on  social  businesses  and  their  financing  by  private  investment 
funds. 

Social  businesses  are  enterprises  whose  primary  objective  is  to  make  a  social  impact.  They 
bring innovative solutions to bear on social or environmental problems. Financial returns are 
ploughed  back  into  the  enterprise:  a  business  form  brings  access  to  private  finance  and  a 
sustainable  footing  for  the  enterprise.  Social  entrepreneurs  typically  also  manage  their 
enterprises  in  an  accountable  and  transparent  way,  in  particular  by  involving  workers, 
customers and stakeholders affected by their business activity.  

Social businesses are growing significantly; already 10% of EU businesses broadly fall in this 
category,  employing  11  million  paid  employees.  Their  focus  on  social  and  environmental 
innovation  means  these  business  are  by  definition  key  to  smart,  sustainable  and  inclusive  
growth.  The  vital  importance  of  such  growth  emerged  from  the  consultation  on  the  Single 
Market  Act,  which  identified  social  businesses  as  one  of  12  'key  levers'  for  an  effective 
relaunch of the single market.  

While investment funds are a key conduit for the funding of social businesses, since they can 
widen  and  deepen  available  funding,  consultations  with  stakeholders  have  shown  that  such 
funds are not fulfilling their potential. Fragmentation in national rules, and a lack of a clear 
approach across the EU to such funds, is undermining their emergence, thereby hampering the 
development  of  a  robust  social  business  sector  and  allowing  this  sector  to  develop  in  an 
uneven fashion. 

This  impact  assessment  examines  therefore  options  for  ensuring  such  funds  can  effectively 
and  efficiently  fulful  their  potential.  Given  the  EU  asset  management  sector  currently  had 
more  than  EUR  8  000  billion  of  assets  under  management  in  2010,  efforts  to  improve  the 
contributions  of  this  sector  to  the  funding  of  social  businesses  could  reap  strong  benefits  in 
the future.  

2.  WHAT IS THE PROBLEM? 

Social  businesses  are  often  dependent  on  grants.  Investment  funds  that  can  are  help  them 
address  this  are  however  typically  small  (around  EUR  10  to  EUR  20  million  in  size)  and 
thereby stretched, and have developed in a patchy fashion across the EU (thinly spread, while 
clustering  in  one  or  two  Member  States).  Meanwhile,  investors  seeking  to  target  social 
businesses or the EU social economy can find it difficult to identify and trust the investment 
funds  available  to  them:  there  is  a  confusing  proliferation  of  competing  labels  and 
designations of funds that purport to offer investments into social entrepreneurship. For funds 
to gain access to investors cross-border is costly due to fragmentary rules: funds are localised, 
and  in  smaller  markets  difficult  to  get  off  the  ground  so  as  to  reach  viable  sizes.  Levels  of 
cross-border fundraising are currently low (one estimated puts them at less than 4%). 

These  problems  are  all  rooted  in  the  specific  qualities  of  social  businesses:  their  pursuit  of 
social goals through business means raises new challenges for investors, funds and financial 
services  intermediarias,  and  regulators  alike.  The  impact  assessment  identified  three  key 
drivers for problems.  

Key Problem Driver 1: lack of clear and comparable information  

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Information  about  social  investments  and  funds  targeting  social  businesses  is  difficult  for 
investors  to  use.  Understanding  and  comparing  investment  propositions  is  unnecessarily 
complicated, with competing, contrasting and overlapping terminologies, labels and concepts 
emerging. The labels which are developing on a self-regulatory basis do not operate across the 
whole  EU,  and  do  not  help  investors  targeting  social  businesses  in  particular  to  identify 
relevant funds and understand and compare the offerings of these funds. 

Key Problem Driver 2: measuring or assessing social returns is difficult 

Providing information to investors about social impacts is a key challenge related to the social 
mission of social businesses. A profusion of tools for assessing and analysing social impacts 
or performance are emerging. Competing, contrasting and overlapping approaches raise costs 
for  businesses  and  funds,  and  make  it  harder  for  investors  to  compare  different  funds  or  to 
track how well the investments they make achieve the social impacts promised.  

Key Problem Driver 3: lack of tailoring of fund structures to needs of social businesses  

National and EU rules governing the fund structures used for funds targeting social businesses 
are  not  always  well  suited  to  the  needs  of  these  funds,  and  fragmentation  in  these  rules 
impedes cross-border activity. This leads to uncertainty for fund managers, a proliferation of 
different fund forms and approaches across the EU, and thereby a less efficient and effective 
market for such funds in the EU. 

3.  WHY EU SHOULD ACT, AND CONSEQUENCES OF NOT TAKING ACTION 

If the EU does not act this could forestall the development of social businesses as a trusted 
model  across  Europe.  Investment  funds  targeting  social  businesses  would  not  achieve  the 
scale  necessary  to  make  a  difference,  depriving  social  businesses  of  heterogeneous  and 
resilient funding. In addition, funds would remain geographically uneven in dispersal.  

National  supervisors  would  have  little  guidance  in  how  to  assess  funds  that  claim  to  fund 
social businesses. The Commission's historic experience in the area of investment funds and 
recent  experience  gained  in  the  area  of  venture  capital  funds  is  that  in  the  absence  of  EU 
coordination,  divergent  approaches,  whether  self-regulatory  or  at  the  level  of  national  rules, 
would  emerge  to  address  the  problems  identified.  This  would  notably  be  in  relation  to  the 
definition of social investment funds and the transparency measures necessary for these funds.  

A common and uniform frame for the sector across the EU can only be set at the EU level; 
this  would  be  efficient  for  bringing  clarity  and  focus  at  a  vital  phase  of  the  secotor's 
development.  Carefully  calibrated  measures  now  are  likely  to  be  more  efficient  than 
intervention later. 

4.  OBJECTIVES 

In general, the objective is to ensure social businesses and entrepreneurship are able to fully 
contribute to EU growth goals on jobs, social inclusion and cohesiveness. Social businesses 
are  key  drivers  for  such  growth,  and  supporting  them  will  help  ensure  a  smarter,  more 
inclusive and sustainable EU economy in the future.  

More  specifically,  investors  should  be  able  to  have  confidence  in  the  investment  funds  that 
target  social  businesses,  these  funds  should  be  able  to  gather  investments  from  investors 

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throughout  the  EU  in  a  cost-efficient  manner,  while  social  businesses  themselves  should  be 
able to efficiently raise capital.  

To achieve these specific objectives, three operational objectives can be identified, targeting 
the problem drivers outlined above:  

– 

– 

– 

improve clarity and comparability of social investment propositions; 

improve tools for assessing and analysing social impacts; and 

ensure  regulatory  frameworks  across  EU  are  proportionate  and  effective  for 
maximising fundraising opportunities for social entrepreneurship funds. 

5.  OPTIONS 

Options were identified and assessed for each of the operational objectives separately, though 
these options are cummulative and to a degree dependent on one another. Initial options were 
also  assessed  in  regards  the  best  way  of  circumscribing  the  investors  for  whom  the  other 
options would be tailored. 

General – Options on eligible investors 

Description of options 

G1 

No further action. 

G2 

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

G3 

Align with MiFID rules on professional investors. 

G4 

Include mass-market retail investors. 

The  investment  market  targeting  social  businesses  currently  mostly  takes  the  form  of 
institutional funds, with much funding coming from 'high net worth' individuals and 'business 
angels', as in the Venture Capital market. This is largely due to the risk profile and liquidity of 
such  investments  –  they  represent  a  long-term  commitment.  However,  growth  in  the  future 
could well be strongest from the mass retail market.  

In  order  to  ensure  effective  take-up  by  existing  investors  and  a  proportionate  regime,  and 
given  the  current  development  of  the  market,  option  G2  is  preferred  at  this  stage.  Future 
review should however consider possible meaures to widen access for retail investors. 

A – Options on improving clarity and comparability 

Description of options 

A1 

No further action. 

A2   Develop  a  non-binding  approach  on  information  that  should  be  provided  about 

investments targeting social businesses. 

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A3 

Establishing  a  EU  label  or  brand  for  social  entrepreneurship  funds  (EU  SEF),  with 
linked transparency measures. 

Options  A2  and  A3  both  could  improve  the  clarity  and  comparability  of  information  about 
social investments targeting social businesses. Option A2 would follow non-binding steps to 
this end, seeking to facilitate coordination in self-regulatory and national steps, while option 
A3 would establish a EU approach, by introducing a label ('European social entrepreneurship 
fund') with associated quality standards, which could only be used by funds that comply with 
common  disclosure  obligations  and  a  common  fund  profile  (i.e.  predominant  investment  in 
social businesses). Under A3, a common framework could be established for information on 
the kinds of social businesses individual funds will invest in and the support offered to the the 
social  businesses  targeted.  Information  would  also  be  provided  on  possible  impacts  of  the 
investment. 

While a label as under option A3 requires care in making sure it is strongly enforced and not 
misused,  it  could  stand  the  best  chance  of  improving  the  clarity  and  comparabilty  of 
information and trust and confidence in investment funds targeting social businesses. It would 
provide  a  strong  'seal  of  approval'  to  the  identified  social  business  sector.    Option  A3  was 
thereby preferred.  

B – Options on improving tools for assessing and analysing social impacts 

Description of options 

B1 

No further action. 

B2  

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. 

B4 

Set common measurement approach now for social impacts across EU. 

Option B4 was discarded because of the risks to the standard setter at this stage. The emerging 
and  evolving  nature  of  tools  for  assessing  and  analysing  social  impacts  suggests  options 
directed  towards  encouraging  and  facilitating  further  research  and  dialogue  would  be 
preferable. Options B2 and B3 were both preferred. (They are not mutually exclusive). Note 
that while option A3 is not dependent on these options, progress on them could in the future 
feed into further standardisations of disclosures under option A3. 

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

Description of options 

C1 

No further action. 

C2  

Encourage  development  of  funds 
frameworks. 

targeting  social  businesses  under  existing 

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C3 

Develop targeted amendments to existing frameworks. 

C4 

Create a standalone EU regime including passport for EU SEF. 

Options  C2  was  discarded.  Existing  EU  frameworks  are  not  tailored  to  emerging  funding 
needs of social businesses, so this approach, while having very low cost implications, would 
also be very limited in its effectiveness. Option C4 was preferred to option C3, as it showed 
greater  effectiveness  in  supporting  social  entrepreneurship  funds;  cost  impacts  for  the  two 
options  would  largely  be  similar  (they  differ  mostly  in  regards  legislative  forms  rather  than 
content of measures). 

Summary of overall proposal 

Uninform rules as under option C4 would combine with transparency measures and a label as 
under  option  A3,  to  establish  a  common  EU  notion  of  social  entrepreneurship  funds.  To 
ensure effective take-up, the fund managers would be able market designated funds across the 
EU once they had completed a simple registration procedure (this would offer a passport to 
fund managers for this purpose that do not receive one under the AIFM-D). Each fund would 
need to be predominantly invested in social businesses, and avoid the use of leverage. Some 
general  rules  on  the  conduct  of  business  and  organisation  of  the  manager  would  apply,  and 
steps  would  need  to  be  taken  on  reporting  and  transparency,  including  on  the  social 
performance  of  the  funds.  Competent  authorities  of  Member  States  would  be  required  to 
supervise the funds and withdrawal the registeration of non-compliant managers.  

The  approach  is  staged  and  incremental,  allowing  for  greater  standardisation  of  social 
performance  measurements  and  possible  extensions  to  retail  investors  in  the  future.  In 
addition,  a  second  level  of  implementing  measures  subject  to  further  impact  assessment  are 
envisaged on transparency measures. 

6.  IMPACTS OF THE PROPOSED APPROACH 

Benefits 

Under a staged approach in an emerging market segement, incremental benefits are expected 
initially, but with the potential for more signficant benefits over time as the market matures.  

The scale of immediate and future benefits is necessarily difficult to quantify. Improved trust 
in the sector, more efficient cross-border fundraising, and clearer demarcation of investments 
targeting social busiensses from other investments would aid funds, leading to strong inflows 
of capital, better geographic distribution  and  viability  for  funds, and a more developed eco-
system capable of reducing costs for social businesses.   

Improved  trust,  access  to  funds,  and  comparability  of  investments  would  aid  investors  in 
efficiently allocating their capital and reduce the potential for mis-sales and a loss of trust in 
social investments more widely.  

Such  impacts  for  funds  and  investors  would  clearly  aid  social  businesses  –  supporting  the 
continued emergence of the sector and the variety and sustainability of available finance. A 
thriving  social  business  sector  across  the  EU  would  contribute  to  increasingly  smart, 
sustainable,  and  inclusive  growth.  Improved  private  investment  in  social  businesses  would 
also reduce fiscal and other stresses on public finance. 

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Costs 

Transparency and reporting measures are likely to incur some compliance costs for the fund 
industry,  related  to  changes  to  systems  and  procedures  for  gathering  and  providing 
information, and costs on publication of information.  Streamlining cross-border fundraising 
would however reduce costs for funds seeking to do this. Since costs are only borne by those 
seeking access to the new EU social investment fund label and associated passporting rights, 
so are proportionate to the business opportunities the new framework opens up.  

New requirements could also indirectly impact social businesses themselves; costs might be 
incurred  related  to  requests  for  reports  and  data  necessary  for  improved  fund  transparency, 
and could include associated systems or data gathering costs. However, such costs are likely 
to  be  absorbed  by  business  as  usual  costs  related  to  becoming  'investment  ready'.  Better 
coordination of measures across EU should also provide an opportunity to reduce overlapping 
or competing steps and lead to a more rationalised social business eco-system. 

It is possible that new measures would lead to some re-allocation of investments from other 
kinds of social investment fund or philanthropic giving, however there is little evidence on the 
scale of any such impact that might be expected. 

Monitoring and evaluation 

Significant steps on future monitoring and evaluation will be needed, particularly in light of 
the incremental impact of measures.  

The impact of the measures identified here on the efficiency of the market, including on levels 
of take up the new framework, of cross-border fundraising and the size and costs of EU social 
entrepreneurship  funds, will need  careful monitoring so as to allow for future calibration of 
the framework. Assessments of indirect costs for social businesses, including any impacts on 
businesses that benefit from the measures compared to those that do not and the geographic 
dispersal  of  funds  will  need  to  be  reviewed  in  the  future.  The  monitoring  of  levels  of 
compliance with the measures at national and EU level will also be important.  

The  refinement  of  measures  on  the  assessment  of  social  and  environmental  methodologies 
will be a key area for further work. 

7.  CONCLUSIONS 

This  impact  assessment  supports  EU  steps  to  develop  a  coordinated  and  coherent  EU 
framework for investment funds targeting social businesses. A lack of trust and confidence in 
social  investment  propositions  holds  back  the  development  of  funds  supporting  social 
businesses, while poorly developed fund regimes and inefficiencies in cross-border access to 
investors are hindering growth. 

To  tackle  these  problems,  this  assessment  concludes  that  a  dedicated  European  social 
investment fund framework which gives passporting rights to the managers of these funds is 
the  most  effective  and  efficient  approach.  To  succeed,  such  funds  must  be  predominantly 
invested in social businesses and provide clear and effective disclosures, including on social 
performance. 

By  acting  now  Commission  can  aid  the  growth  of  the  social  business  sector,  stimulate  and 
broaden  investment  choices  across  the  EU,  and  deepen  the  pools  of  capital  that  funds  that 

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invest  in  social  business  can  tap  into.  This  will  contribute  to  an  EU  that  makes  a  strong 
commitment  to  social  entrepreneurs  and  the  smart,  inclusive  and  sustainable  growth  they 
bring. 

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