European social entrepreneurship funds

KEY POINTS

• Social businesses address social objectives as their corporate aim rather than simply maximising profit. It is a growth sector, representing 10% of all European Union (EU) companies and employing over 11 million people. While they often receive public support, private investments from funds that invest in social entrepreneurs are vital for their success.
• These funds face two problems:
  • it can be costly and difficult to set up such funds and attract investors, especially cross-border investment;
  • it is not always easy for investors to identify such funds or compare the advantages of different types.
• To remove these barriers, the EU has adopted legislation creating a label for EuSEFs, making it easier for investors to know the destination of their investments.
• The label:
  • makes it easier for investors to identify and choose EuSEFs;
  • helps social businesses through easier access to finance;
  • enables investment fund managers to raise finance with less cost and complexity.
• Funds that market themselves using this label have to direct at least 70% of their investments to social businesses.
• In addition, they have to provide key information to investors in a standardised way. This information covers areas such as:
  • the fund’s social objectives;
  • the social businesses it invests in;
  • how it assesses whether these businesses achieve their social objectives.
• Once a fund has provided the required information and has met important conditions on its organisation and operation, it can gather investments from across the EU without incurring major costs.
• In addition to the 70% rule, a fund manager must demonstrate good conduct of the business and effective systems and controls, and avoid any conflict of interest. The funds are supervised by the national authorities in the country where they are based and the label can be withdrawn if they do not fulfil any of the essential conditions.
• In 2014, the European Commission adopted an implementing act (Implementing Regulation (EU) No 594/2014) which deals with the notification of events related to the passport of the managers of qualifying social entrepreneurship funds and with aspects concerning the removal of a EuSEF manager from the register.
• As one of the measures under the Capital Markets Union initiative, the EuSEF regulation was amended by Regulation (EU) 2017/1991 designed to open the market for eligible social entrepreneurship funds to increase scale effects, reduce transaction and operating costs, increase competition and strengthen investor choice. It extends the use of the ‘EuSEF’ designation to managers of collective investment undertakings¹ authorised under Directive 2011/61/EU — see summary.
• Delegated Regulation (EU) 2019/819 supplements Regulation (EU) No 346/2013 laying down rules with regard to conflicts of interest concerning:
  • the types of conflicts of interest;
  • the requirement to establish a written conflicts-of-interest policy and the procedures and measures this policy must include as a minimum;
  • managing conflicts of interest;
  • strategies for the exercise of voting rights to prevent conflicts of interest;
  • the disclosure of conflicts of interest.
• It also details procedures to measure positive social impact and requirements regarding pre-contractual information provided to investors in the area of EuSEFs.