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What is Social Impact Investment (SII)?

Social Impact Investment (SII) is 'the use of money to generate both social and financial returns at the same time’. It offers a way to help social organisations access suitable financing and improve their ability to deliver impact.

Therefore, SII may be understood as a business case for what was previously considered mostly philanthropic activities. Various organisations were always expected to address social challenges by providing help of some form. However, it was generally understood that such activities would not bring any financial benefits. The SII addresses this stereotype by showing that investors may expect to gain financial returns from addressing social needs.

3 elements of SII

  1. Social impact intentionality: Creation of positive impact by addressing social needs (e.g. unemployment, healthcare, childcare) is the main objective of SII

  2. Impact measurement: The impact of intended social change needs to be measurable and monitored during the entire cycle of investment.

  3. Profit orientation: The money loaned or invested in addressing social needs is expected to generate financial returns.

SII ecosystem

What is Social Impact Investment (SII)? Social Impact Investment ecosystem.

The driving force behind SII is the desire to address social needs.

Capital providers (i.e. investors) are on the supply side of the SII ecosystem. This side includes all of the entities or independent actors that provide financing. Investors may come either from the public or private sector.

Investment targets (investees) are located on the demand side of the SII ecosystem. The demand side consists of a variety of organisations that directly address social needs through their activities. E.g. social enterprises, non-profits, and other.

Investors may provide capital directly to investees and, thus, receive direct financial returns. However, the most common way for mainstream investors to invest in organisations that address social needs is through (social impact) investment funds.

Intermediaries are entities and independent actors that link or provide support to supply and demand side actors of the SII ecosystem. Depending on their function, intermediaries may be labelled as financial entities (for instance, banks) or capacity-building entities (for instance, impact investment advisory consultants).

Finally, the enabling environment refers to all of the legal, regulatory and economic conditions that are necessary for SII. This may include a legal definition for social enterprises, fiscal and tax incentives for mission-led enterprises, etc.

The composition of the SII ecosystem presented above indicates that a well-functioning SII market depends on the successful functioning of all of its components. It presupposes the existence of a necessary legal framework, an adequate and relatively straightforward business environment, the sufficient existence of intermediaries as well as local investors, an awareness of SII along with an ample entrepreneurial spirit and capacity (OECD 2019). This makes the realisation of SII rather complex and calls for additional policy measures that facilitate the development of the SII market.

Theoretical framework distinguishes four general types of policy instruments (i.e. actions) based on their design and purpose: 'steering', ruling, financing, and informing (or strengthening)


STEER: Employing government structure and capacities. Policy initiatives attributed to this category work as the key drivers of SII's market development. This category includes two main activities:

a) the establishment of policy entities responsible for the facilitation of the SII market (For example, seven EU Member States and EU itself have established SII National Advisory Boards (NABs). These NABs liaise between the government and other SII market stakeholders and steer the market development by introducing guidelines, providing advice and other similar actions. In some countries, SII markets are also 'steered' by national (e.g. Finnish Innovation Fund Sitra in Finland).

b) the development of national strategies for impact investing.

There are some examples across the EU proving that employing government structures to ensure the rapid development of the SII market and the development of comprehensive SII strategies are necessary conditions that in turn result in significant positive changes across the entire SII environment in the country (OECD 2019).

For instance, Steering of SII market in Portugal. The rapid development of the SII market in Portugal started around a decade ago when social innovation and social entrepreneurship emerged as priorities in the Portuguese public agenda. Portugal identified these two areas as a key priority of its 2014-2020

Partnership Agreement with European Commission. The entire SII development process in Portugal was led and managed by several dedicated organisations. The Portuguese Social Investment Taskforce (also called the Portuguese NAB) was launched in 2014.

The actions of the Social Investment Taskforce resulted in the creation of 'A Blueprint for Portugal's Emerging Social Investment Market', which is Portugal's national strategy for investment and social innovation that sets clear goals and provides direction for the creation of new legislation and policies.


RULE: Setting and enforcing rules. This category refers to various regulatory, legislative and fiscal measures that could be used to foster SII. These regulatory measures might include adopting social impact reporting standards, improving the public procurement process or removing existing barriers for investment. Legislative measures may include legislation targeted at social enterprises (e.g. their definition), fiduciary duties and pensions or other various measures undertaken within the domain of a particular social issue (e.g. energy, healthcare, etc.). Finally, fiscal measures may include tax incentives, investment relief or fiscal regulation to improve the business environment.

Examples: definition of social enterprises. Challenges: variety of definitions + some organisations that solve social challenges and theoretically would be able to receive SII, such as profit-with-purpose businesses are excluded from definitions and legally not interpreted as potential investees in the impact investment related legislation.

Challenges related to the definitions of SII and SII actors can be addressed by using the power of public institutions to rule the SII market. As many as 18 EU Member States have established legislation addressing or defining social enterprises. For instance, in France, the Social and Solidarity Economy Law was amended to change the legal form of a Solidarity-based Enterprise to a Solidarity-based Enterprise with a Social Purpose (ESUS). This law identified the particular features of solidarity-based (social) enterprises, and thus ensured that only organisations that focus on the creation of social impact are viewed as solidarity-based enterprises. To obtain the status of ESUS, the enterprise must prioritise social impact and satisfy the requirements for salary limits (GSG n.d.). Several EU countries have also developed Social Enterprise marks and labelling schemes e.g. The Finnish Social Enterprise Mark (FSEM), the 'Social Economy Enterprise' certificate in Poland, the Social Enterprise Mark in the UK, 'It Works'stamp in Germany.

Regulations and tax incentives.

Targeted public regulations might encourage institutional investors to fund SIIs. Among the best practice examples is the French government's pension regulation on 90/10 solidarity investment funds, which must invest at least 5% – and up to 10% – of their funding into solidarity-based enterprises (Global Steering Group (GSG), 2018).

For-profit companies must offer their employees the option of allocating part (up to 10 percent) of their pension savings to a solidarity-based employee savings fund. Employees who choose to use part of their pension funds to fund social enterprises receive a tax exemption on their investment. These donations and investments that individuals may decide to make via a bank or a mutual insurance company become part of the '90/10 funds'that use 5-10% of their assets to invest into solidarity-based enterprises, solidarity-based financial funders or microfinance funds. The rest of the capital is channelled into conventional investments.


FINANCE: Granting financial resources. The rationale behind the provision of public finance is relatively straightforward – the budget is used to provide demand side entities with funding that they often struggle to access (Maduro et al. 2018, p. 27). Thus, in this case, a government's financial support works as a supply side instrument (OECD 2019).

I. We rarely apply SII logic in the distribution of public budget

II. EU financial instruments have especially high potential to facilitate SII market.

III. Public institutions have the power to increase SII's attractiveness by introducing and supporting innovative financial instruments. Governments' contributions into the financial schemes decrease the risk of low or no financial returns and decrease transaction costs for private investors.

SIBs are public-private partnership instruments. They have emerged as a particularly interesting and relatively popular tool. In the context of SIBs public sector authorities pay for better social outcomes delivered by social enterprises and uses the savings to pay those private investors who funded the initiative in the first place.

Private investors are much more likely to fund social organisations by participating in SIBs because they are guaranteed that their initial investment and interests will be returned to them using the public savings.


Koto-SIB (Social Impact Bond) is a programme implemented in Finland. It offers support

and training for immigrants, helping them to find employment more quickly and easily.

The public sector (ministry of Economy and Employment) pays for positive social outcomes (e.g. employed or trained immigrants) created by a social initiative, and uses the public savings to pay the (private) investors who funded the initiative.

Size of the fund: €14,2 million (it is the largest SIB project in Europe measured by the size of the




INFORM: Providing and sharing information. First of all, it includes measures for the increased visibility and awareness to make SII more widely known and attractive. Secondly, this category includes all measures that help to keep stakeholders informed and educated about various aspects of SII.

A. This may include communication campaigns, consultations, research and publications or similar activities.

B. Competence Centre for Impact Measurement (Italy) is a centre that fosters impact evaluation culture and practices. The main activities of the Competence Centre are:

• Promotion of measurement practice and culture through seminars and meetings or workshops. They also have a high-level university course taught at the University of Turin.

• The centre also provide support, advice and guidance for the organisations along with their measurement processes


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