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April 7, 2015

Impact Metrics for Real

By Uli Grabenwarter

A possible operational framework for impact metrics for the anticipated regime of a Société d’Impact Sociétal, provided in an advisory assignment by the UK consulting firm Bates Wells Braithwaite

It still remains to be seen how ambitious the draft bill on the status of the Société d’Impact Sociétal (SIS) to be introduced by the Luxembourg government will be. The proposal worked out by European Impact Investing Luxembourg (EIIL) over the last couple of years (see the working group page) has indeed been ambitious, suggesting a framework in which the pursuit of societal impact and financial return co-exist at par in economic decision making processes.

The magnitude of change this legislative innovation can bring to social enterprise and to the social impact investment space depends on a number of features which will also determine the role Luxembourg can play in all this: for example, whether holders of impact shares can fund their contribution to a capital increase with profits accumulated in special reserves (réserve d’impact), or whether the SIS status can be used by companies operating outside Luxembourg.

Whatever the core characteristics of the final draft bill will be, the introduction of the Société d’Impact Sociétal will open a new era in economic decision-making. For the first time it will allow for social enterprises to diversify their funding sources into the for-profit investment space. It will inextricably link the generation of financial return for investors to the achievement of tangible social and/or environmental impact results by the social enterprise.

This step in the legal framework for social enterprises has major implications on the role impact metrics play in their life. If impact metrics have initially been a filter to confine social sector organisations and later have evolved into reporting tools to satisfy requirements for transparency and accountability, the status of the SIS will take the concept of linking impact metrics to economic consequences one step further.

So far the concept of economic cash flows has been tested with social impact bonds which remunerate social sector organisations and their investors as a function of the social impact the social sector organisation achieves compared to predefined impact targets.

With the law on the SIS the entire corporate life of a social enterprise will be governed by the tandem of social and financial objectives, making these two dimensions mutually dependent on each other: unless purely philanthropic, investors will not back social enterprises without a tangible return perspective, which they are ready to subject to measure against specified social impact thresholds. Equally, the tax treatment of a SIS will depend on its social impact performance, as will the continuity of its status as a SIS.

Reason enough for EIIL to address the question of how impact metrics shall work in practice. As a contribution to the debate on the operational framework governing the corporate life of a SIS, EIIL has mandated the UK consulting firm Bates Wells Braithwaite with an assignment to work out, in interaction with the working group on impact metrics of the EIIL, an eligibility framework for the SIS status, the setting of impact objectives and their regular monitoring.

The report resulting from this assignment, which has also been submitted to the Luxembourg Ministry of Labour, Employment and the Social Economy, is now accessible below this article.

It contains valuable suggestions for the definition of the SIS status and a practicable and meaningful approach to setting impact metrics, which undoubtedly will enrich the debate on how to fill the Luxembourg SIS with life.

If social services delivery has historically almost entirely been based on grant funding and public sector transfers, the way forward will have to increasingly involve the private sector with market-based revenue models for the sake of preserving the European welfare state concept. May the SIS bring about a new era for social enterprises as a complement to the current landscape of social sector organisations and diversify their funding sources for engaging in social purpose business models.

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