In 2013 the Commission introduced an innovative new investment fund framework aimed at channelling private finance into small companies set up to achieve a positive and measurable social impact. A key requirement of this new European Social Entrepreneurship Fund, or EuSEF, is that the managers of these funds must measure whether the companies they invest in actually achieve the social impact they are aiming at. Here James Hopegood, policy analyst in DG FISMA's asset management unit, explains how this will be done.

Social goals

Social enterprises aim at achieving social as well as financial goals. This often makes it hard for them to find financing as traditional lenders do not always understand their not-for-profit or low-profit business models. But investing in social businesses is attractive to many investors who are prepared to take a social rather than a financial return.

This is not the same as giving money to a charity, for example. Investors want to see whether the money they put in actually enables social businesses to achieve their intended impact. This is where social impact measurement comes in.

The Commission has been working on how to do this for three years and we believe that we have created an innovative, credible and reliable way of doing it. This ground-breaking work has been developed with the help of a sub-group of the Commission's GECES expert group of social enterprise stakeholders. This work has in turn influenced the G8 Social Impact Investment Taskforce. Crucially it takes into account the very wide variety of social enterprises and their often very small scale.

The first step has been to develop more detail on what social business actually is, so that EuSEF managers can have a clear view of what it is they are expected to measure. In doing this we are looking at an indicative list of activities that will take account of the sheer diversity of the sector. It also means new, emerging work in this innovative sector can be accommodated without the need for legislative changes.

The next step is for managers to decide on the best methodology to measure the impact of the particular social businesses they invest in. A wide range of methodologies have been created which suit different types of businesses and managers must choose the most appropriate one.

Standardised and comparable

However, the way the measurement is carried out has to be done in a standardised way so that the results are always reached using the same steps and can be compared. The GECES sub-group has developed a five-step process to do this:

1. Identify the social business, the outcomes sought and how this will be done;
2. Identify who all of the stakeholders who will benefit are;
3. Set the measures and indicators to be used;
4. Measure the outcome, including assessing if it would have happened anyway;
5. Report the results and use them to learn and improve.
    

ESMA, the European Securities and Markets Authority, has developed detailed rules for us along the lines outlined here. We are now closely assessing them and plan to have final rules in place soon.

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