European Social Investment Facility – to finance the social economy

Commissioned by E!Sharp, Brussels based Journal – 23 Oct 2011

Fiscal consolidation within the European Union means that a stronger social economy is required to underpin the creation of socio-economic prosperity where the state no longer has the resources to act.

More non-public capital must be attracted for this purpose via a better functioning social investment market, one that is integrated across Europe. For this reason, Euclid Network and FEBEA (Fédération Européenne de Finances et Banques Ethiques et Alternatives) assembled a task force of experienced European social investment practitioners to identify how the European Commission can most effectively use its limited financial resources for this purpose.

The task force for a European Social Investment Facility (ESIF) was launched at the 2nd Active Europe Conference on the 9 Sept 2011. The primary objective of the launch event was to identify how a sustainable financing vehicle could be established that uses European funds most effectively in attracting non-public money towards investing in the European social economy. It is anticipated that the 2014-2020 European Commission’s budget will see dedicated funds allocated for this purpose.

Raymond Maes of the European Commission, representing the Social Business Initiative, backed ESIF at the Active Europe conference by saying ‘there is a political momentum for the social economy and social enterprise in Brussels’ and added ‘the Commission recognises the need for additional financial support’. In September 2011, the task force prepared a Communiqué to European Commissioner Barnier as part of their submission to his consultation on how private investment funds can support the Social Business Initiative.

The Communiqué , informed by the experience of social investment practitioners from across Europe, includes 12 guiding principles that form a design brief for how the European Commission can establish a financial mechanism to encourage more social investment – and importantly a mechanism that is flexible enough to respond to local bottom-up requirements but that also aligns with the EU wide objectives of strengthening economic, social and territorial cohesion.

Alignment with 2020 Goals

The ESIF mechanism can deliver substantial (and much needed) non-public finance to the social economy and thereby enable it to play a major part in supporting the European Commission’s 2020 goals of smart, sustainable and inclusive growth – particularly because ESIF could play a key role in supporting the attraction of private funds for Michel Marnier’s Social Business Initiative, one of the 12 levers of the Single Market Act. Furthermore, ESIF is specifically being designed with the social economy in mind, particularly to enable more finance for social enterprise, social entrepreneurship and social innovation – its crucial components.

The ESIF model is not grant dependent, it is a sustainable investment vehicle that is seeded with Commission funds. It incorporates a principle of double leverage – European level funds leverage in National level funds, and public funds leverage in non-public funds.

Not another top-down bureaucracy

The social economy and social investment market are diverse and often fragmented. Supporting them properly requires a mechanism that can accommodate plurality, with decision making authority (and accountability) sufficiently delegated to local experienced practitioners who understand their markets.

Implemented correctly, this model will also contribute positively towards increased systemic stability of the financial system because heterogeneous financial environments are inherently more resistant to contagion and system shocks. The benefit will be proportionate to the size of the social economy compared with the traditional economy – a compelling reason in itself to grow the social economy and integrate it more broadly within the European mainstream economy.

New challenges

The task force for ESIF is in dialogue with DG Internal Market and Services of the European Commission. Both would like to avoid establishing a new European institution and therefore a partnership agreement is being negotiated with the European Investment Fund (EIF) with a view to them implementing ESIF. The EIF has been developing a similar concept and therefore this partnership is welcome and likely to be mutually supported.

The objective is to evolve the 12 principles of the Communiqué into a technically robust and financially sustainable model so that it can be adopted by the European Commission. An initial budget for pilot projects is being finalised with the EIF, with seed capital expected from the European Investment Bank (EIB). Private match funding for the pilots will be sought from 2012. The pilot phase will run for the next two years until the 2014-2020 European budget is implemented.

There is a lot of work to be done

Some principles of the Communiqué challenge the status quo in Brussels and Luxembourg. For example, the EIF typically invest equity capital on a pari passu basis with co-investors – but this will be difficult for ESIF to achieve.

Investors with national priorities (such as KfW, CDC or Big Society Capital) are unlikely to invest at a European-wide level if those funds are not explicitly committed to their own regions. International and commercial investors (such as Deutsche Bank, Société Générale or JP Morgan) may be attracted, but probably only to invest by way of debt obligations and not equity capital.

Something must give. For ESIF to attract non-public capital in a meaningful way, it will need to be tailored to both the interests of nationally based investors and international investors. A small number of private foundations or niche investors may otherwise be attracted, but the large pool of non-public and commercial capital is unlikely to budge.

This is just one of the conundrums that will need to be unpicked during the pilot phase from 2012 – 2013. There are other issues such as risk appetite, types of capital required, and the need to build capacity amongst local investors and intermediaries.

Fortunately the ESIF Communiqué is a roadmap for resolving these issues.

An open platform going forwards

The task force for ESIF is an open platform and seeks to create a representative and authoritative voice for social investment practitioners across Europe in influencing how the ESIF mechanism should be structured. Social investors and alternative financiers are invited to join and support the task force, to strengthen the body of experience and to participate in the pilot phase.

For more information about the task force, contact Karl H Richter, Social Impact Investment Advisor, Euclid Network


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