The Single Market Act of 13th April 2011 outlined the importance of what can be termed “social businesses”. In preliminary discussions with different actors of social businesses (the “stakeholders”), it pointed the common features of the social businesses as a primary corporate objective on the achievement of social, ethical or environmental outcomes, reinvestments of profits so as to maximize its ability to deliver on its primary objective and specific governance arrangements. The Act places the achievement of social impacts above the delivery of financial returns. The European Union (“UE”) has planned a “social business initiative” in autumn 2011 for which one of the objectives is the “setting up of a European framework facilitating the development of social investment funds” so as to contribute to a favorable financing framework for social business. The UE has issued a consultation on July 13th 2011 in relation with this objective.
The two current sets of rules governing EU-wide investment funds might not be suited to the channel funds toward social businesses. On the one hand, the UCITS requirements on diversification, rules on liquidity and rules on eligible assets may limit the effectiveness of UCITS for the promotion of targeted investments in social businesses. On the other hand, the AIFMD rules apply to investment funds for professional investors only whereas the experience in some Member States suggest that there is strong retail interest in social businesses.
Therefore, the consultation envisages a new fund framework tailored for the needs of social business on the basis of the core features of the UCITS framework :
- Liquidity: What should be the appropriate time frame for redemption of units in a social investment fund for balancing the liquidity that small retail clients might be seeking with a focus on a long-term time horizon?
- Risk diversification: What should be the optimal diversification rules applicable to social investment funds (minimum investments in highly-liquid transferable securities and diversification in different types or numbers of social business)?
- Types of assets and strategies: What types of assets should a social investment fund be able to invest in? Should the funds be limited to certain kinds of strategies?
- Asset valuation: At which frequency should be valued the social investment funds to avoid high valuation costs? Which tools would be used to evaluate the social impacts: savings for society, positive social and/or environment impacts and benefits for individuals directly helped by social businesses?
- Investor participation: How should the investors be able to influence the decision-making processes? May it contribute to the success of these funds?
- Risk management: Which particular features of social investment funds might require specific risk management requirements?
- Depositary: What should the role of the depositary be for each class of assets held by the social investment fund?
- Remuneration and cost structures: Which cost structures could be attractive for the asset management industry in social businesses?
In addition, the consultation proposes to improve the transparency for investors about the investments in social businesses and for the fund managers about the social businesses which they target. Additional steps might be taken to establish common approaches to defining, rating and labeling funds specifically targeting social businesses so as to more strongly foster confidence amongst investors. Yet raises the question as to what organization or body might be in charge of developing and defining common criteria at the necessary level of detail and how to ensure appropriate relevance, independence, objectivity, and compliance with the criteria. All the measures and steps outlined in this consultation paper contribute towards the effective development of an EU brand or label for social investment funds.
Finally, the consultation recognized that the effectiveness of the social investment funds depends on the intermediation between the fund and its target investments, the intermediation involved in the distribution of the fund to end investors combined with tax and other incentives to maximize access and attractiveness for the investors.