Proposal for A Regulation of the European Parliament and of the Council On European Social Entrepreneurship Funds
The principal aim of this proposal is to provide support to the market for social businesses by improving the effectiveness of fundraising by investment funds that target these businesses.
Social businesses1 are an emerging sector in the EU. Social businesses are undertakings whose primary objective is to achieve social impacts, rather than generate profits for shareholders or other stakeholders. In achieving social impacts, social business seeks to build on business techniques – including business finance. While the sector is new, it is characterised by rapid growth. According to the Global Enterprise Monitor 2009 report, between 3% and 7.5% of the workforce in selected EU Member States were employed in various forms of social businesses.
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.2
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 businesses has taken shape. In order to distinguish such targeted funds from social investment funds more widely, these targeted funds are referred to as social entrepreneurship funds in this proposal. The growth of social entrepreneurship funds 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 for financial returns.
Evidence on regulatory and market failings shows two problems are limiting the growth of social entrepreneurship funds.