Making money care more: How social and financial impact can grow together
Why do we need to ensure micro enterprises and social enterprises have access to financing ? Well, because fighting poverty and social exclusion is integral to a well-functioning society. Here’s how we create positive social impact together.
In 2015, a handful of young Finnish entrepreneurs watched as plates of leftover food were scraped into a bin in a central Helsinki restaurant, and inspiration hit. Start up ResQ Club has since united tens of thousands of ‘rescuers’ (people interested in buying restaurant leftovers at a discount), in 80 cities, saving over 140 000 portions of food a month — the monthly CO2 emissions equivalent of a car driven 45 times around the world.
ResQ Club — both a successful business and social enterprise — is proof that financial success and social impact can grow hand in hand. And it is not alone. Hundreds of social enterprises are started across Europe every day. As are micro enterprises — small businesses, perhaps lacking credit history — but who have a valuable role to play in improving the social integration of their founders and of the people that they employ.
But, like all small businesses, micro enterprises and social enterprises share a common challenge: access to financing.
Mounting challenges…
The European Commission recognises the potential of social enterprises for their innovation and their positive impact on the economy and society at large. It also understands that combating social exclusion starts with getting a job, and that micro enterprises (fewer than 10 employees and an annual turnover of no more than EUR 2 million) actually make up nine out of 10 non-financial European businesses, and are an important source of employment.
“The importance of helping these individuals cannot be overstated, for when vulnerable groups succeed they lift everyone around them,” said Per-Erik Eriksson, in charge of microfinance investments at the EIF.
In 2014, the Commission launched a programme for Employment and Social Innovation (EaSI), which aims to promote a high level of quality and sustainable employment, guaranteeing adequate and decent social protection, combating social exclusion and poverty and improving working conditions.
The EIF implements the microfinance and social entrepreneurship axis of this programme, by absorbing some of the risk microcredit institutions take when providing loans to micro enterprises, and is doing the same with banks that provide loans to social enterprises. It even supports capacity-building investments, which help financial intermediaries maximise their expertise and their reach.
And EaSI is not the only European programme that the EIF works with. It also unites resources from the European Fund for Strategic Investments (EFSI), the European Commission, and its own capital for social causes.
The result? Micro-entrepreneurs like Romanian vegetable gardener Catalin Dumitrache are able to expand their business through microcredit and employ more people, and social enterprises, like Neapolide Cooperativa Sociale, which creates jobs for female prisoners, are able to grow financially and increase their social impact. Click here for more stories.
… and how to tackle them
As an AAA-rated investor, the EIF uses European resources to either guarantee a bank loan to a social or micro enterprise, or to make a cornerstone equity investment in a social impact fund which invests in social enterprises. With this added security, private investors are encouraged to ‘crowd in’.
In this way, the EIF unites public money, (for example, the EaSI programme) with private money, building a sustainable financing ecosystem that supports micro enterprises social enterprises in Europe.
In the words of Spanish social impact fund, Creas Impacto,
“the EIF’s cornerstone investment has given us the market visibility to encourage others to analyse and enter this market,”
and ethical bank Banca Popolare Etica agrees. “The growth of credit and microcredit at Banca Etica is thanks to the EIF’s support and has helped us to promote microfinance in different geographies.” You can read more about the ecosystem here.
The ‘crowding in’ means is that a relatively small public investment deployed by the EIF makes a much larger volume of capital available to the micro enterprises and social enterprises that need it. EUR 2.4bn total has been catalysed in 2018, across microfinancing (blue), social impact financing (yellow), and capacity building (pink) in Europe.
Social and micro enterprises play a central role social integration in Europe, and are key to the EIF’s work. By backing micro credit institutions, social banks and social impact funds, we are enabling these vital small businesses to get financing, and to make an important social impact.
For a fully comprehensive view of our activity in this area, please click through to Positive social impact: making money care more.
Measuring impact
Measuring financial performance is easy, but measuring impact is more tricky. It is one thing to measure the outcomes of a project or an enterprise’s activity (in ResQ Club’s case, perhaps the number of meals saved), but a different one to look at real outcomes with respect to a concrete impact objective (how much food has been prevented from going to waste?)
It’s an important distinction to make, for focusing on outputs alone can sometimes incentivise the wrong behaviour –social sector organisations ‘cherry picking’ the simplest outcomes and ‘parking’ the trickier, for example.
“Our aspiration is zero-food-waste, globally. So far we have focused on the very end of the supply chain — but how I see it is that the problem is a bit bigger than the ‘last mile’, said ResQ Club’s Sauli Böhm. Therefore I see that it’s important to start extending this impact further upstream in the supply chain and thus tackle food waste both pro- and reactively.”
At the EIF, we are applying a more holistic approach, encouraging financial intermediaries and social enterprises to set outcomes objectives and proactively managing impact as an integral part of their business activity.
It implies looking at the needs of the people intended to benefit from a project or activity, getting clear about the impact goals with respect to stakeholders and considering negative unintended effects in the net impact of the project. This way, we avoid so-called ‘impact washing’ where often random outcomes accounting is applied retrospectively at the end of an investment.
Additionally, we use investment structures that attribute concrete economic value to outcomes delivered. Social impact bonds (SIBs), for example, use per unit impact values as the basis of the compensation of social sector organisations delivering impact. In order to read more about our support to innovative structures like SIBs, please click here.
Making money care more
Both micro and social enterprises exert a powerful positive effect on the society around them. As institutional investors become more conscious of investing in a socially impactful way, the EIF expects more capital to flow into this space.
As this happens, encouraging and incentivising the investment industry to actively manage a better social output will become an important part of the EIF’s work.
“Social enterprises have become role models for future-proof businesses,” says the EIF’s Uli Grabenwarter.
“They are seeking to bring lasting solutions to societal challenges with business models where impact and economic value are growing hand-in-hand. “The EIF, with a portfolio of funding tools, is able to support these impact-centric enterprises at each stage of their life cycle,” adds Grabenwarter.
To read more about the EIF’s impact in the social space, please click through to our online resource: Positive social impact: making money care more.
