Recommendations seek to free up stalled new European social fund regime

European Securities and Markets Authority wants EuSEF rules relaxed

European financial regulator the European Securities and Markets Authority (ESMA) has recommended that the European Commission relax many of the principles of European Social Entrepreneurship Funds (EuSEF) regulation, including who is eligible for funding and the process of impact measurement.

The EuSEF framework was proposed in 2012 but so far just two funds have been set up, by Germany-based social investor BonVenture and PhiTrust, the French corporate governance activist manager.

The ESMA recommendations will be seen as a way to rectify some of the issues that have hindered take-up of the regime, which some have called a ‘disaster’.

The European Commission requested technical advice from ESMA on what is called “level 2” of EuSEF regulations last year. It held a consultation and a number of meetings with social entrepreneurs, impact investors and fund managers, and has this week released its advice.

In terms of defining the eligibility for EuSEF funding, ESMA recommends a looser principles-based approach, rather than on a proscriptive list format, to encompass “the widest possible population of social enterprises”. This would also, it is hoped, provide a clear framework to differentiate between social and non-social enterprises.

ESMA had originally suggested a list to define qualifying organisations, but many stakeholders objected to this as being too narrow.ESMA recommends that the primary purpose of the enterprise, irrespective of the legal form, shall be to address a social problem secured in its articles of association or statutes – and that the enterprise shall use its profits primarily to achieve social objectives.

It notes that ordinary companies having a positive social or environmental impact, including a CSR plan, that is incidental to their commercial activities do not qualify.

The watchdog also recommends a liberal approach to impact measurement, suggesting that EusEF managers can decide on how to measure social impact of their funds how they see fit, and do it themselves or with a third party.

Amundi, France’s biggest asset manager of SRI funds, had been sharply critical of the EuSEF regime, calling it a ‘disaster’ and the result of a ‘fundamental misunderstanding’. It opposed social impact measurement being imposed by regulation and the requirement for third party criteria.

The EuSEF advice also includes suggestions on conflicts of interest and information that EuSEF managers should provide to investors.

The European Commission will now decide whether to implement part or all of ESMA’s advice. EuSEFs fall within the portfolio of Commissioner Jonathan Hill, who has responsibility for Financial Stability, Financial Services and Capital Markets Union. Link