European watchdog ESMA launches formal consultation on EuSEF social fund regime

European financial regulator the European Securities and Markets Authority (ESMA) is formally seeking views on the regulatory framework of European Social Entrepreneurship Funds (EuSEF), the nascent social fund regime, including defining the social objectives of businesses eligible for funding, measuring social impact and communication with investors.

The European Commission requested technical advice from ESMA on EuSEF regulations on May 27, and in recent months the Paris-based body has met with a number of impact investors, fund managers and social entrepreneurs across Europe to inform its work.

It has now launched a formal consultation on the regulatory framework of EuSEF and has a stakeholder meeting planned in Paris on November 10. ESMA plans to feed back to the European Commission by April 30 next year.

On defining whether a business is eligible for EuSEF funding, ESMA says the most appropriate approach would be to develop a number of high-level principles that EuSEF managers could apply to assess whether a business embeds a social objective. Further, ESMA says that a EuSEF manager must ensure the impact of its fund is measured, validated and valued, and showwhether targeted outcomes are actually achieved in practice. It also recommends that managers should agree with investors and businesses on the timing, content and format of impact reporting.

The EuSEF regulation passed into law in 2013. It forms part of the Social Business Initiative of the Commission and is aimed at making it easier for Europe-wide investment into social businesses.

It enables investors to easily identify funds that focus on investing in social businesses. To get the label, a fund has to prove that at least 70% of its capital is allocated this way.

Alongside this, there are related European Venture Capital Fund Managers (EuVECA) rules which will do the same for small and medium-sized enterprise. ESMA is also consulting on EuVECA regulations.

Germany-based social investor BonVenture became the first EuSEF registered manager in April. Responsible Investor understands that the Portuguese Social Innovation Bank is also seeking to create a fund under the EuSEF regime and PhiTrust, the French corporate governance activist manager, launched a fund under EuSEF regulations in September. The ESMA consultation ends on December 10.