IFISE is the short title of the ‘Innovative Financial Instruments in support of the Social Economy’, a fi-compass Multi-region assistance (MRA) project. The project brought together four regions in Spain and Italy, Andalucia, Lombardy, Piedmont and Valencia to explore the potential of financial instruments under ESI Funds to enhance social impact activities.
Under the project, the IFISE team worked on the feasibility for specific financial instruments under ESF and ERDF regional Operational Programmes taking into account respective regional conditions. Three of the partners, Piedmont, Andalucía and Valencia, focused on the feasibility of a Social Impact Fund (SIF), while Lombardy has elaborated on the Social Impact Bond (SIB) approach.
Assessing the market gaps for Social Impact Funds
A SIF is a financial instrument with an investment strategy to support businesses and other enterprises engaged in the social sector. The market analysis performed at national/regional levels for SIFs showed that the impact investment market in Spain is at a very early stage whereas the Italian market, although lagging behind other European countries, has entered an early growth stage.
Key market failures identified in all IFISE regions included risk aversion and information asymmetries amongst the traditional financing market which mean that social start-ups cannot bridge from the very initial phase of their life-cycle to market readiness.
The study also showed that even established social enterprises struggle to get finance from impact-driven investors, as they often do not use appropriate standards for impact measurement.
Policy recommendations deriving from such analysis focus on the importance of supporting the seed capital phase with long maturity terms and providing additional support (capacity building) to social businesses in their growth stages, while crowding in private money as well. Impact measurement is another key requirement. The achievement of pre-set impact objectives should be directly linked to the financing conditions of the final recipients and to the remuneration of the fund manager.
Exploring Social Impact Bonds
A SIB is a form of a contract under which a social enterprise is engaged to perform a service in the social sector on a ‘payment by results’ basis. The analysis of the feasibility of SIBs performed in Lombardy has shown favourable initial pre-conditions, thanks to the established presence of impact investors, foundations and social innovation initiatives. However, relevant systemic gaps still exist, such as the lack of diffused impact measurement practices and limited awareness of the SIB potential.
For these reasons, the IFISE operational proposal suggests to adopt a systemic approach that embraces on three main areas:
- capacity building aiming to improve the 'investment readiness' of the whole environment;
- an outcome-contracting pilot initiative; and
- set-up of a pre-financing instrument to reduce the risk for social investors and provide initial capital.
Going forward – next steps
As part of the feasibility work, model SIFs were developed for the Spanish and Italian regions. A series of capacity building activities was undertaken, which enabled the development of a replicable training scheme that is available for other managing authorities to use. These and other deliverables can be found on the MRA-IFISE page.
In the meantime, the IFISE partners are discussing further with their regional policy makers the possibility to bring forward proposals for financial instruments to support the social economy either within the current or next ESIF regional operational programmes. In the concluding phase of the 2014-2020 programming period, IFISE partners expect to carry out some preparatory actions that will pave the way for a progressive and incremental implementation of each instrument throughout the programming period 2021-2027.