Social Economy Takeaways from Torino

People first! Profit second.

That is how the European social economy works. It places social and environmental purposes first, reinvesting most of its entities’ profit back into the organisations. The social economy does this for a long list of reasons:

>to create and retain quality jobs
>to contribute to social and labour-market inclusion of underserved groups
>to create equal opportunities for all
>to drive sustainable economic and industrial development
>to promote the active participation of citizens in our societies
>and to play an important role in Europe’s welfare systems. 

2.8 million social economy entities in Europe means 2.8 million potential ways to make a change. When it comes to leveraging that potential, stakeholders in the social economy are now posing an important question:

‘How to foster the social economy’s growth in Europe?’

We gathered purpose-driven leaders at Impact Week 2023 in Torino to search for a viable answer. But first, we celebrated a milestone: the European Commission earned applause for the second anniversary of launching its Social Economy Action Plan. With impactful voices from the impact investing sector, the European Commission and the European Investment Fund (EIF) we assembled a panel focused on building on this achievement.

In the panel discussion, Brigitte Fellahi-Brognaux Head of Social and Inclusive Entrepreneurship Unit at the European Commission’s DG EMPL, shed light on the European Union’s efforts to address further challenges in the social economy ecosystem. She outlined the successful deployment of EU funding programs, like InvestEU and ESF+; the inauguration of the Social Economy Gateway;  and the accelerated adoption of the Council recommendation for the social economy’s legal framework in each member state.

On this last point, the Council recommendations, big bravo to the Spanish Presidency, which led the speedy negotiations and ensured necessary support from the member states!

Member states committed to either developing or improving strategies to strengthen the social economy, addressing areas like state aid, taxation, access to finance and impact assessment. What’s left is the implementation of the Council recommendation. Member states have two years to formulate their strategies and kick-start their smooth execution.  
 

EIF’s growing mandate

Learnings from the European Investment Fund (EIF) took centre stage at Impact Week, with a particular focus on how the fund deployed InvestEU. Cyril Gouiffes, Head of Social Impact Investments at the EIF, highlighted the remarkable evolution of EIF's mandate for social impact investing as it grew from €25 million a decade ago to an impressive €2 billion today.

There was a secret ingredient that helped with the accelerated deployment of InvestEU. Cyril pointed to collaborative efforts with the European Commission, combined with a higher budget, and years of expertise in fostering social impact investing from prior mandates.

The impressive figures continue when looking at the one-year deployment of InvestEU: around €360 million deployed in guarantees for microfinance and microcredit, €170 million allocated to equity for social enterprises and €60 million for social infrastructure. This swift deployment is especially noteworthy given the challenging market environment (due to a series of shocks that affected the European economy – war in Ukraine, energy crisis, rising inflation, slower growth and higher budgetary pressures). 

InvestEU's core financial instruments offer diversity: equity, guarantees and subordinated loans for capacity building are strategically designed to complement one another so that they can address the actual and distinct market gaps.

InvestEU also supports newcomers to the social impact sector. Cyril spoke of EIF’s commitment to fostering the growth of emerging or first-time teams: “We also view our role as not exclusively investing in those who are already impact literate, but making sure we also promote the spread of best practices, and market knowledge, so that new players arise and ultimately cover as best as possible the European Union.” 

EU & Erste in Central and Eastern Europe 

Next in the spotlight: Peter Surek, CEO at Erste Social Finance Holding and Head of Social Banking at Erste Group Bank, who offered insights on the social economy in Central and Eastern Europe (CEE). Did his collaboration with EU institutions help boost the ecosystem in the region? Has the 40-year disparity between Western and Eastern Europe in the social economy sector been resolved?

Certain challenges persist. The social economy is predominantly characterised by smaller organisations grappling with financial instability. The mindset favouring state-provided social services over NGOs and social enterprises doesn’t help. However, positive trends have emerged as we witness more volunteering, environmental activism and the growing generosity of new generations of wealthy people allocating capital to philanthropy.

Peter shared that Erste's experience partnering with the European Commission and the EIF has been a game-changer. “We could not have started without the guarantees from the European Investment Fund,” he said in the panel. The instrument addressed the banks' initial concerns with the risks involved with financing micro-entrepreneurs and social enterprises in the region by sharing the risks with the EIF.

But the collaboration didn’t stop there. Three years ago, Erste Social Finance Holding^[1] also received the Commission’s EaSI grant. This was crucial to launch the quasi-equity instrument benefiting seven CEE markets. Just last year, the Group additionally secured a 70-million-euro umbrella guarantee across all markets, enabling it to sustain the support for social enterprises and NGOs in the realm of social investments and skills development.

New financing opportunities in the region, backed by the EIF, are likely on the horizon, too. Erste’s team is receiving support from the EIF to structure and launch its first impact fund, focused on social infrastructure, an area substantially less developed in Eastern Europe compared to Western Europe. 

According to Peter, “You hardly find private investors willing to invest, because we are talking about a horizon of 20 to 30 years, very small returns, in an unregulated sector in these countries. So, I think the support of EIF will be very crucial to help us to structure the fund properly, to be able to be impactful.”

Next steps discussed 

To address social infrastructure gaps in Eastern Europe, such as social housing and student housing, Peter emphasised the urgent need for EU-wide definitions and incentives for terms like 'social enterprise' and 'affordable housing.' This would standardise the approach and incentivise the evolving social economy ecosystem in Central and Eastern Europe. As Peter put it, “We currently have only two countries in our market with a definition of social enterprise, that's Slovakia and Romania. But in practice, the incentives are not applied. So, it's very difficult to create these positive incentives for enterprises to move in the direction of becoming social enterprises.”

As Brigitte noted during the discussion, the Council recommendation emphasises criteria over a specific definition for social enterprises at this time. Nonetheless, achieving consensus on these criteria signifies progress toward harmonisation and unlocking incentives in the sector, including taxation benefits. 

What else can we expect from Commission’s plans for 2024? Brigitte shared the commitment to enhance trust in the social economy ecosystem. This will involve fostering research on social impact measurement and management, as well as launching a call to establish impact performance intelligence services. These activities aim to fill the gap of intermediaries, like financial ratings agencies, and enhance impact measurement and management practices, supporting the sector's development and innovation.

When shaping future EU financial instruments for social impact, EIF’s contribution will centre on fostering close collaborations with policymakers in co-designing future EU funding mandates to be aligned with the market needs, drawing from its past experiences in deploying InvestEU. 

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By November 2024’s Impact Week, the updates here may already feel outdated – superseded by new milestones and the spread of impactful policies throughout the EU. In fact, we’re working to ensure that swift movement happens. Stay updated on EU Social Economy actions by joining policy hubs – or subscribing to the policy newsletter!

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^[1] Erste Social Finance Holding is the result of an interactive collaboration between the foundation and the bank, striving to harness the collective strengths of both organisations to deliver impactful financial solutions within the region.