Philanthropic donors, private banks and corporate foundations are already helping this sector pursue its innovations. But when it comes to new business models and when scaling up is necessary, these social enterprises need investment, not subsidies. That said, this could change as regulators are working on ways to channel more savings to the financing of small and medium enterprises (SMEs), including those in the social economy.
If the financing power of large institutional investors like pension funds could be opened up to the social economy, what potential could it offer for investors and for social businesses? And could the French ‘90/10’ model be replicated in other countries to inspire long-term investors to take part in financing the real economy for social benefit?
Two million social enterprises, 11 million employees
The European Commission estimates there are two million social economy enterprises in Europe, which equates to 10% of all EU businesses. More than 11 million people – about 6% of employees in the EU – work for the social economy. They have different legal forms and cover various activities from agriculture and banking to providing employment and sheltered workshops. They all have one aim in common: to reinvest their profits to achieve social objectives. These enterprises are also an engine for social innovation: they fulfil the specific needs of large numbers of under-privileged people – such the long-term unemployed, ‘Gig economy’ employees, those who are excluded from or have difficulty in accessing social housing or health services, as well as the handicapped and the elderly – whose situations are not fully addressed by the state or the private sector.
A way for institutional investors to improve their environmental, social and governance (ESG) impact
As nearly all social enterprises are unlisted SMEs, investment in them can appear incompatible with most investors’ allocation strategy. However, we would argue that it is possible to connect the financial needs of these enterprises to secure financing for scaling up their operations with the objectives of responsible, long-term institutional investors to diversify their investments and to improve their ESG performance.
The ‘90/10’ mechanism in France is being regarded by many countries as the next big thing to be implemented in Europe to help this dynamic sector play a greater role in generating GDP growth and resolve some of the biggest challenges facing 21st century economies.
For more than 15 years, France has had in place an unrivalled solution to channelling savings to the social economy, and it has proven effective. There is a regulatory obligation for companies to give their employees the option of at least one social business fund (‘fonds solidaire’) in their voluntary employee retirement schemes (2001) and employees’ savings schemes (2008).
90/10 solidarity funds: Six-fold growth in seven years
Most such solidarity funds are so-called 90/10 funds, as 90% is invested in SRI large capitalisation equities or bonds, and the other 10% in social entrepreneurs/businesses through debt, capital or via microfinance funds. The power of this approach is that it effortlessly mobilises private capital from non-qualified investors into social and ‘green’ SMEs and is ‘almost painless’ thanks to the 90% of the fund that is invested ‘classically’, thus providing almost the same financial performance, liquidity and risk. As 90/10 funds invest in the most established social businesses offering the best likelihood of measurable social impact and financial soundness, it essentially overcomes the risk of default.
90/10 funds are becoming ever more popular among employees, with the result that the market is growing rapidly – indeed, six-fold in seven years, from EUR 1 billion in 2009 to EUR 6.2 billion at the end of 2016 (see Exhibit 1). This can be explained by savers becoming more aware of the social economy through the social impact reports published by the solidarity funds, which show tangible benefits: unemployed people who have found a job, poor families who have been housed, entrepreneurs who have been able to launch their own business.
Exhibit 1: Assets under management in solidarity funds are growing rapidly
Source: Finansol, as of 15/06/2017
Imagine for a moment that just 1% of all French savings were to be invested in 90/10 funds. It would automatically make EUR 2 billion available to be invested in social and green SMEs (European Investment Bank (EIB), 2016). This is the idea currently circulating among the G7 countries (see G7 Global Social Impact Investment Steering Group), as providing a potentially easy and powerful way to boost the social economy and to give employees and individuals the opportunity to contribute to this change.
In the UK, Big Society Capital has been assessing the French 90/10 approach and is now actively promoting its adoption by British investors. Big Society Capital participated on 11 May 2017 in a UK government and World Economic Forum co-hosted conference “Exploring impact investing for the mainstream”, at which 90/10 funds received strong support from the audience of asset owners, asset managers and private bankers. The 90/10 idea has also been embraced by a UK government expert working group seeking to develop inclusive finance.
Even if one is convinced by all this, there remain some barriers to be lifted. In many countries, there is still a need to update the status of mutual funds to allow a certain percentage of diversification into non-listed issuers. This would involve raising awareness in the financial industry to make these solidarity funds available and attractive, and ensuring there is a liquidity ratio/an adapted mechanism within the fund discipline to absorb the fluctuations of assets to prevent putting too much pressure on non-listed companies’ financial health.
Social innovation and economic growth
Nonetheless, it seems clear that the next stage in the evolution of social impact finance will have a greater focus on the social economy. In our view, this fit-for-purpose third sector between the private and public sectors has much to offer. It has solutions for our modern societies’ problem areas and left-behind people. It mixes social innovation with economic growth. We believe it fully merits being on long-term investors’ agenda.
The investments in the funds are subject to market fluctuations and the risks inherent in investments in securities. The value of investments and the income they generate may go down as well as up and it is possible that investors will not recover their initial outlay.