Latvian Answers to Public Consultation on
The Social Business Initiative:
Promoting Social Investment Funds
There have been attempts to organize social business enterprises in Latvia, those however were not very successful and the programme organized by the State Employment Agency (the Latvian public employment service) was closed several years ago. Instead the focus is more on wage subsidies as a tool for integrating people in the least favorable situation into the labour market. It has to do both with the characteristics of the Latvian economy and labour market that has a high degree of flexibility and the need to ensure efficient utilization of the available resources (avoiding that such initiatives end up with huge dead-weight loss effects or even constitute unfair competition to normal enterprises that operate in the same field but do it for profit). Non-profits like different NGO's instead perform socially or environmentally useful tasks and have some additional advantages when using state financed wage subsidy schemes.
Latvia would appreciate if there was a clear definition of "social business" giving details on what is understood by social impact and explaining the notion of delivery of financial returns in such circumstances.
2.1.Defining social business
Do you agree that the main features of social businesses are as outlined above?
Please consider this from the perspective of ensuring effective private investment flows to these businesses, and include any further detail on how to determine the features. If you disagree, please outline the features that you think are important.
To what extent do you think this initiative should focus solely on those social businesses that do not distribute profits to their investors? (Note that, in contrast with pure philanthropic investments, investors would still be able to redeem their investment, or might be offered small returns through portfolio diversification).
Or shall it also focus on those which distribute profits to their investors (e.g. at least to a limited extent)? If so, how might social businesses be distinguished from other businesses?
Please consider the impact this may have in respect of attracting investors to such businesses.
For a social business the primary corporate objective should be the achievement of social, ethical or environmental outcomes. It has to be stated here, however, that sometimes normal business firms have exactly the same objectives - especially if acting in the white or green economy, therefore we disagree that all the necessary features of social business are outlined in the proposal. A more detailed definition of a social business is necessary (including for establishing the criteria for profit distribution in order to be considered a social business). Lack of ability to distinguish social business from other types of businesses might lead to unfair competition and dead weight effects when providing incentives for support.
2.2.The funding challenge
What are the main difficulties social businesses face, in your experience, in getting access to finance? (Please provide any data or evidence you have to show the scale and relative importance of the difficulties you identify).
Do different kinds of social businesses face different barriers? (Please include details about how these differences might impact on the access of these social businesses to finance, including over their lifecycle where appropriate.)
To what extent do you think barriers to access to finance are limiting the growth of social businesses across the EU? (Please provide any data or evidence you have to illustrate the scale and nature of these limitations).
Do you agree that there is a need to tackle any such barriers at the EU level?
Social business is not very common in Latvia therefore there is no statistics available. Nevertheless currently all firms - more or less profit orientated - face the same difficulties regarding access to financing.
2.3.The role of investment funds
If you operate a social investment fund, or are aware of the (national) legislative requirements that apply currently in practice, could you please provide broad detail on these requirements.
How do you think funding through investment funds might effectively compliment other sources of funding, e.g. philanthropic funding? Are there any challenges here?
Do you think that the UCITS framework is sufficient for funding social business without change?
Do you think a bespoke fund framework tailored to the needs of social business might be better suited to channel funds toward social businesses? (If you think the UCITS framework is not suited, please outline the features of the UCITS framework that you think are mostly responsible for this).
Any type of financial instruments if targeted specifically to social enterprises would facilitate the creation of such, but it could lead to a situation where normal business enterprises are being transformed to social enterprises only to get access to such a financing.
2.4.The role of investors
Do you believe that social investment funds should be open to retail investors? Please give reasons for your answer.
What features of a social investment fund do you think are most important for retail/professional investors?
What specific pre-contractual information do you think would need to be provided to retail investors?
Should the framework encompass funds that explicitly forego greater financial returns for the benefit of the social impact of their investment, or that expose investors to greater risks, or both?
According to our previous experience with social enterprises, most businesses and investors are interested in profit therefore work for it rather than for social goals.
What do you think would be the appropriate time frame for redemption of units in a social investment fund, e.g. monthly? Please give reasons for your answer.
Do you think there are other options for balancing the liquidity that small retail clients might be seeking with a focus on a long-term time horizon? (For instance, requirements on holding certain levels of liquid assets, lock in periods, etc.)
Do you think that social investment funds should be subject to diversification rules?
To what extent do you think investors might expect a fund focused on social businesses to only invest in social businesses?
Should social investment funds be required to invest into different types or numbers of social business? (How many separate businesses might be required?).
Should there also be diversification across asset classes different from social business?(What limits might be appropriate? For instance, 40% social businesses, 60% highly liquid transferable securities).
Diversification could be supported. However, as it is likely that some support (like tax-exemptions/reductions) will be needed, 40-60% limits could create problems.
3.3. Types of assents and strategies
What types of assets should a social investment fund be able to invest in? Please give examples.
Should the funds be limited to certain kinds of strategies (for instance, aimed at maximising their attractiveness for retail investors)? If so, which?
What rules or limits might be necessary to prevent firms using a new framework to circumvent restrictions in other frameworks (e.g. UCITS)?
Considering the nature of social business (little or no return) it might result in the need for social investment funds to invest in other assets that are risky but with high return.
Do you agree that it would be impractical for social investment funds to have frequent valuations of assets? Please give reasons for your answer.
If so, for the purposes of investor protection what frequency might be appropriate? Please give examples.
Do you think that any non-social business assets that might be permitted should be subject to different valuation requirements? Might different kinds of assets require different approaches?
3.4.2. Social assessment and reporting
How do you think 'social returns' might be best addressed and measured?
How might this build on other existing work, for instance on non-financial company reporting, social accounting, socially responsible investing, etc.?
What information do you think needs to be disclosed to investors, and how might this best be presented?
If you have experience in this area please provide examples, data, and as much detail as possible. Please consider that prospective investors might need different information compared with already existing investors.
Social returns can be measured with simple statistical indicators (like people with disabilities employed in the enterprise) or other more complex ones used to measure the outcome of the work of social business. However, there has to be a common understanding and measurement framework established before promotion and support begins.
3.5. Investor participation
Do you agree that investor participation will contribute to the success of these funds? Please give reasons for your answer.
If so, please outline how this might work in practice, and whether this can or should be required as part of the social investment fund framework itself.
3.6. Risk management
Which particular features of social investments might require specific risk management requirements?
When considering this question, please also consider issues of non-financial outcomes and risks.
Social investment, if not made for the sake of profit, will require specific risk management.
What should be the duties of a depositary (e.g. tracking the funds' assets, reconciling units or shares issued with subscription proceeds received)? Please give reasons for your answer.
Please take into account the specific kinds of assets that might be held by a social investment fund.
3.8. Remuneration and cost structures
How might the sustainability and profitability of a social investment fund regime be ensured?
Are there any particular factors in your experience that might determine the commercial success of the fund?
In your view, what kinds of incentive structures might be appropriate or inappropriate for the managers of the funds (e.g. performance fees versus flat management fees)?
4.1.Improving transparency and clarity
What steps do you think should be taken to improve transparency for investors in relation to funds targeting social businesses?
What steps do you think should be taken to improve transparency for fund managers about the social businesses which they target?
Please consider how to balance burdens on social businesses against effectiveness in ensuring their 'investment readiness'.
There is a need to define and systemize the definition of social business.
4.2. Improving transparency through common criteria
How do you think common criteria for defining, labelling and rating social funds and social businesses might be most effectively established?
Who should establish them and develop them over time?
How might they be verified, to ensure they are appropriately used in practice?
Please set out views on the pros and cons of different approaches.
We see the need to establish such criteria on the EU level. The same applies to ensuring proper application.
4.3.A common EU label?
Do you think a strong new EU label (e.g. supported by a common logo) would help social investment funds succeed? Please give reasons for your answer.
How might the appropriate use of such a brand be ensured in practice, and potential for confusion with other brands or labels diminished?
Social investment funds might find a common EU label advantageous. The main issue however remains the same - the definition of social business and the delivery of financial returns.
4.4. Ensuring effective integration with social business and distributors
What steps do you think might be taken at the European level to facilitate better intermediation between funds and social businesses? Are there particular responsibilities that you think fund managers should take on?
Do you think there are any possible actions at the European level that might ensure effective distribution of social investment funds?
A definition and common understanding and proper use of the term "social business" might prove to be necessary.
4.5.Use of other incentives, including tax
How might tax incentives be made useful? Please provide data on any existing such incentives you are aware of.
Are there any other measures you think might be possible to maximise investor's access to social investment funds, or the attractiveness of these for investors?
Latvian answer:Apart from corporate income tax and personal income tax reliefs for donations made to social institutions Latvia does not provide for additional tax incentives for the investment in social funds. Given the fiscal consolidation measures in Latvia, it is unlikely that such tax incentives could be implemented in the near future. Moreover, any proposals on tax incentives to facilitate such investment should appropriately address the risk of tax avoidance by transforming for-profit business firms into social business firms. In this respect it is worth mentioning that introduction of investment diversification ratios such as 40/60% provides a scope for tax planning opportunities