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European Social Investment Bank

What is the problem? Why do we need this?

Across Europe, the third sector plays a crucial role in providing services and promoting social cohesion.

Organisations are exploring opportunities to expand across borders. There is a complementary need to create a friendly environment (legal and financial) to encourage such a trend and develop a European social market and public good.

However, the sector's ability to play that role is hampered by its access to capital:

  • Not enough capital is available.
  • Capital is supplied in the wrong forms
  • Market transparency in social finance markets if comparatively low

This problem is particularly acute during the global economic crisis.

The problem stems from the way actors in the marketplace work:

  • On the capital demand side, third sector organisations are not ‘investment-ready'
  • On the supply side, investors don't have enough capital and don't supply it in the right forms

The point of this European Bank for Social Investments (EBSI) would be to develop this marketplace by both developing the demand and supply sides.

Simultaneously, the EBSI would address the crisis of legitimacy that European institutions are facing. It would help restore the balance of the investment/financial markets and re-linking finance with society. 

How do we address this problem?

A ESBI would support the growth and development of the European social investment marketplace, making more investment capital available to the sector and ensuring that that capital is invested more strategically.

Crucially, this would be money that is recycled: rather than taking the form of one-off grants, it would be invested, generate returns (equity investments) or be paid back (loans), and invested again.

Of the three basic approaches available to capitalizing the vehicle, each would have different merits depending on a preference for equity or loans.  

The vehicle would:

  • build up research and expertise across the EU on the social investment market, identifying gaps and potential ways for those gaps to be filled (whether that be investment in new places or the creation of new financial instruments);
  • capitalise and support existing national intermediaries (e.g. Future Builders and Credit Coop), and fill gaps in the supply side;
  • support existing and new intermediaries to raise private capital;
  • develop the demand side, providing or commissioning advice and support to individual third sector organisations to help them articulate their investment cases and be ‘investment-ready';
  • improve the relationships between organisations on the demand side (individual TSOs) and on the supply side (existing national social investment intermediaries or sources of private capital, such as Future Builders and Credit Coop);
  • have the scale to be able to contribute capital to investment deals itself.

It needs to be able to attract the best of the financial and social sectors, and to have credibility in the eyes of existing national social finance intermediaries, governments and the commercial financial sector.

To have the credibility in the eyes of the various stakeholders outlined above, and to fulfil its functions, the vehicle would need to be well capitalised. It should have an initial capital endowment of XYZ million, with an annual revenue stream of XYZ million for the first X years of its existence.

There are three broad options (scenarios) for how we capitalise the ESIB:

  1. Private capital. A variety of investors, e.g. national social investors such as Future Builders and Credit Coop, would invest into a European Fund. In this case it will be a private fund not a bank, and with a total capital around 20 - 25m €. This would have the advantage of making the fund completely independent of short-term political considerations, but would also likely mean that loans made by the bank would be on less favourable terms. Whilst the resultant EU bank would be able to leverage more private investment than existing national intermediaries, it would not bring the considerable capital into the system that the public sector could. The structure would be flexible but the loans expensive to repay the investors (see CoopEst case-study)
  2. Public capital. The Commission could capitalise the European SIB. This would have the advantage of giving the Bank credibility and bring significant extra capital into the social investment marketplace. It would have the disadvantage of resulting in additional bureaucracy and greater weight being given to political considerations. the process would be longer, structure more bureaucratic but cheap loans would be provided. Existing European Banks (eg EBRD - European Bank for Reconstruction and Development and CEB - Council of Europe Development Bank) might oppose to the project.
  3. A mix of private and public capital. A combination of options 1 and 2, this would see the ESIB capitalised partly by EU Commission funding and partly by a consortium of existing investors such as Future Builders and Credit Coop (see Caisse de refinancement de l'Habitat case-study) 

Where have we got to in addressing this problem? Where next?

  • FutureBuilders and Credit Coop have discussed the idea of a ESIB. UK government is currently looking at setting up a British equivalent (a Commission on Unclaimed Assets identified the problem; a taskforce reporting to the Secretary of State gave it extra impetus; Government committed to drawing up proposals in Budget 2009; Government expected to consult on form of bank over summer 2009. There is growing momentum for the idea, particularly in the UK and growing interest in innovation in funding the sector across Europe.
  • We now need to conduct a detailed feasibility study as to how this could work on a European level. The Centre for Social Investment at Heidelberg University (in collaboration with the Centre for European Economic Research in Mannheim) have offered to conduct the feasibility study, exploring the various options (scenarios) for how a [bank/social finance vehicle] would have to look like. The study must be ready early in 2010 to be presented to the new European Commissioners their first day at work if option 2 or 3 results to be the best one. On the back of the feasibility study we would be in a position to attract funders to capitalise the bank in the appropriate way.
  • Here we are seeking funding for the feasibility study.
  • Credit Coop and FEBEA have been involved in several similar initiatives (eg CoopEst, SEFEA, SICAV, Caisse de refinancement de l'Habitat) and within the latter a project similar to ESIB has been explored without any outcome. The feasibility study can capitalize on these initiatives.
  • The capital market across Europe is different (eg. France and the UK). These differences have to be identified in the feasibility study and suggest limiting the first phase of the project to a representative sample of Member States (France, Germany, Hungary, Italy, Poland, Spain, and the UK).
  • A fourth solution might be the establishment of a fund for social investment within an existing European fincial institution. At the moment the European Bank for Investment and Council of Europe Development Bank could be viable options.