The European Commission published a staff working paper on promoting social investment funds on 13 July 2011.
The importance of "social businesses" was recognised in the Single Market Act of 13 April 2011. A "social business" is generally recognised as a business that targets social, ethical or environmental goals as its primary corporate objective and reinvests profits to maximise its ability to achieve this objective (meaning little to no profit redistribution for investors). They fall somewhere between for-profit companies and solely charitable ventures.
The European Commission has recognised that an increasing number of investors wish to achieve social goals with their investments. There are a number of ways this may be achieved, but the working paper concentrates on one vehicle in particular: private social investment funds.
It is recognised that existing legal and regulatory frameworks in the EU may not be conducive to promoting the establishment of, or investment in, such funds. Some of the issues currently experienced by social investment funds in the EU include:
- consultation on Social Investment Funds
- limitations on investment opportunities under existing frameworks, such as the rules on diversification, liquidity and eligible assets applicable to UCITS funds;
- potential liquidity issues for investors, meaning such investments are often more suited to professional investors; and
- confusion in the investment markets as to the legitimacy of products claiming 'social' credentials.
It will be interesting to see whether an EU 'brand' or kitemark is created for officially recognised social investment funds. With Guernsey and Jersey both recognised as world-leading jurisdictions for the establishment and administration of investment funds and offering a wide variety of fund types with differing levels of regulation, it is to be anticipated that the development of social investment funds may well take place in the Channel Islands. This allows for the flexibility that may not otherwise be available within the EU and could help to ensure the social nature of the fund is not compromised by legal or regulatory requirements.
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