Individual Briefing Paper
“The Impact Investing: a tool to mobilize Italian capitals in order to pursue a positive social impact”

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Social Entrepreneurship Individual Assignment

Table of Contents

Introduction ................................................................................. 3

1. The Problem ........................................................................... 3
1.1. Who Would Benefit And How? ............................................................. 4
1.2. The Threats .......................................................................................... 4
1.3. The Solution ......................................................................................... 5
1.4. Social Responsibility to Offset Lower Financial Returns......................... 5

2. The Topic: the Impact Investing ............................................... 6

3. Benchmarking ......................................................................... 6

4. Conclusions ............................................................................ 7

Sources ......................................................................................... 8

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Social Entrepreneurship Individual Assignment

Introduction
The social offer is largely garrisoned by the State and, it involves sanitary sector, education, and services to the person and in general the welfare. Because of the problems that European States are facing, and Italy even more than the rest of the others, the national debates are focusing on the formalities of dealing with public budgets issues summed with the concurring steady growth of social needs (for instance for: kindergartens, health and elderly). The prevailing proposals concern about private integration, no-profit, business welfare and above all insurances, actually in variegated and often pretty confused ways. Last but not least there is the third sector, made by civil society, which refers to the arena of non-coerced collective actions around shared interests, purposes and values. The boundaries between state, civil society, and market are often complex, blurred and negotiated but the main goal should be to generate afterwards an overall positive social impact. To be honest, none of those actors mentioned before can replace the State, first of all because of their limited scope; secondly because they can’t afford financing services that Government would eventually cut from its expense bill. The reason of that is pretty simple: none of these has the dimensions to put itself as an alternative source of resources to the State. Furthermore, giving that public expense slightly but inexorably decreases, the only possible substitutive is the direct, out of pocket, expense of the (wealthy) citizens that would privately buy those services, or replace them resorting to the support of their own family. Insurance companies, instead, are just able to better organize this private expenditure.
Therefore, there is not a third payer that can replace the State in this kind of services, and in fact, what’s needed in order to answer to the actual issues, it is to recur to massive doses of social innovation, intended as the elaboration of new models aiming at improving effectiveness and efficiency of social services offers, both public and private, minimizing social expenses charged on citizens and at the same time maximizing the quality of the impact to the whole community. This paper will attempt to research the best way to get out from this kind of issues as much positive externalities as possible.

1. The Problem
Innovation, and more specifically social innovation, is tied up to the theme of the new technologies and start-ups and viewed as a tool to promote it. Actual debates about the economic growth in
Europe, indeed, concern the development of new tools to help social innovations exploiting. The recent Italian law decree for the development (into force since 2012) has finally put start-ups in the very top of the agenda, also foreseeing fiscal incentives. However, despite several efforts, unfortunately we cannot have a lot of expectations from start-ups industry, in particular high-tech ones, because of the lack, all over Europe and not only in Italy, of an effective venture capital market that constitutes, so far, the essential fuel for this sector. While in USA social venturists as well as venture capitalists are very active, in Italy too little attention is given to social innovation, which contrarily is arousing into the other communitarian countries more and more interest and that recently the EU has promoted with its “Social Business Initiative”.
In particular, the just mentioned strategy by European Union aims to set up all those measures useful to fight poverty and social exclusions, and meanwhile, through SBI, the Brussels based organism wants to strengthen growth, employment and competitiveness, creating simultaneously a more inclusive society.
Referring to this initiative, it comes to light that social enterprises and, more generally, all the actors involved in the social environment have a fundamental role to play. Going deeply into their tasks, they should apply business strategies to tackle important social goals such as ameliorate society or protecting the environment. Moreover, they have to play closer to their own communities, promoting

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Social Entrepreneurship Individual Assignment

social cohesion and helping in the reduction of economic and social disparities among regions and countries of the Union. The EU's new social-entrepreneurship initiative, mentioned in the SBI paper, substantially aims to support the creation and development of new social enterprises or at the very least facilitating them to obtain funding. In fact, developing a "highly competitive social market economy" is one of the EU's primary objectives. In order to be successful in this, there will be necessary new laws and new regulatory frameworks to help these enterprises – which are often very small and active only at local level – to realise their potential to generate growth, create more jobs and reap the benefits of the European market.

1.1.1. Who Would Benefit And How?
The European regulator’s intention is that both common citizens and social enterprises would benefit from the proposed measures. So, while on one side, in order to have a greater support in the initial phase of the development of their ideas, social entrepreneurs would be better informed, enjoying easier access to existing aid mechanisms (which nowadays often go unnoticed) and benefitting from new types of financing. On the other side of the coin, the ten millions of Europeans who have suffered the bad consequences of the last financial crisis will benefit from the creation of new jobs in the social-economy sector, which is already expanding pretty rapidly by itself and which development will be hopefully even more speeded up by the recent adopted measures.
As stated in the “Citizens' summary - EU initiative to promote social entrepreneurship” document, this is the “first step towards implementing measures to create an environment conducive to social entrepreneurship in Europe, thereby enabling the sector to create even more growth and employment”. The social services offer, furthermore, has not suffered the process of innovation through many decades and, therefore, there is a gap to fill with very important improvements in order to give an effective answer to present difficulties. The confirmation that the road taken by EU is the correct one, comes from the recent study of the OCSE titled "Is the European Welfare State Really
More Expensive?” which also looks at the methodological aspects of measuring the net social expenditure, and presents information on how relevant estimates were derived. Accounting the effect of the private tax system and social expenditure, leads us to find out a greater similarity with social expenditure-to-GDP ratios across E-19 countries and the reassessment of the magnitude of welfare states. Nevertheless, the quoted OCSE study shows that, in developed countries, the incidence on the GDP of the total social expense (the sum of the public and private expense) is very similar so far.
However, what really makes the difference; it is the internal composition of these costs, for instance, while in the Anglo-Saxon countries we can see a smaller incidence of those, on the other hand, North
European countries show a much bigger drain. To conclude, the total cost of social expense for the citizens is the same in all the countries, but the quality and the coverage of the received services it is not equal.

1.1.2. The Threats
Unfortunately, as already mentioned, in the EU paper, it is only possible to notice the different incidence of the public expense, but actually, we should focus on private one. At this stage it’s clear that, the attention must be set on distributive models, on their effectiveness and efficiency and on the support to the innovation needed to improve both. The true obstacle to the adoption of social innovation models, indeed, is in the refractoriness to the change of the system in force in most of
Southern European Countries. At this point, it comes to my mind the great difficulties met from
Cameron and Obama in the reform of their national sanitary systems: those issues, in fact, taught us that public systems are hard to reform "from upstairs" due to the resistance operated by manifold

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Social Entrepreneurship Individual Assignment

interests and affairs, but also by the citizens themselves. However, the actual private (profit and not profit) operators in the social sector struggle to act as innovating corporate bodies. Such actors, in fact, primarily operate outsourcing in guaranteed markets and according to models nearly equal to public ones. Obviously they do so because by outsourcing they are often more efficient despite the fact they don't innovate at all and don’t even think to. This assumption must be changed, and what is needed to be forced is the mind-set of social operators, trying to maximize positive externalities produced by their businesses. After all, what should be taken into account in such an investment is the SROI (Social Return On Investment) calculated as the sum of both tangible and intangible value generated for the community on the sum of resources needed to get that outcome (time, capital).

1.1.3. The Solution
Here the role of social start-ups is clearly set with the objective to promote new models to fill the gaps left empty from both Market and State and to find new and more effective solutions that also allow to involve public sector and to promote a great improvement of the whole European Welfare. Although, only taking into account successful examples it’s possible to force all the resistances that nowadays we face and, in this sense, the role of the social start-ups can be important to develop social innovations passing from a public/private relationship of subsidiarity, to a true partnership.
A movement of opinion is slowly arising to promote this change: the Impact Investing. Exactly as venture capitalism, that has so well promoted the technological start-up in the second half of last century, the Impact Investing has an ambitious objective: to leverage on the enormous private wealth, today mostly available in the advanced countries, to activate new forms of investment that promote, not only financially but also operationally, the social start-ups even accepting initial lower financial returns in exchange of the important social impact that eventually turns into positive externality and furthermore economic value for the whole society. Indeed, the world is plenty of private financial resources, competences and entrepreneurship: the moment that all these should be canalized toward the social innovation has come. A big portion of developed countries’ future will mainly depend on it.

1.1.4. Social Responsibility to Offset Lower Financial Returns
The most recent crisis underlined that the elevated financial returns of the past had been inflated by the "drug effect” of real estate financial leveraging and speculative bubbles. Therefore, investing part of the private wealth to develop, also joint with the public sector, solutions of collective interest it is not only an action of solidarity, but also an operation of self-interest. In particular, it’s important on one hand, to act without the illusion of a high financial return, on the other hand, to favour a change of vision in order to preserve, above all the other interests, and the economic and social conditions that are at the base of the private wealth itself so far. However, Italian problems need both public and private guts. While public one passes through a depth afterthought of the same providing structure and a serious support of legislations that promote social businesses, private one asks for a strong
Social Responsibility of the Wealth that also owes to be invested in the progress of the society in which we live and from which this wealth has been initially drawn.

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Social Entrepreneurship Individual Assignment

2. The Topic: the Impact Investing
On one side, there are the "fundamentalists" of the no-profit that believe that social activities can be developed only under this "hat". This is a common and diffused conviction, but it is not founded upon a suitable analysis of this sector. In fact no-profits and particularly the social cooperatives are primarily a form of outsourcing of the public sector that is still the principal investor together with, even if in a very limited measure, philanthropy. Therefore No-profit has primarily competences toward both
“serious” and niche social needs; the industry knows very well how to carry out this activity but in general it lacks of managerial and entrepreneurial competences. On the other side, a symmetrical position is professed as much peremptory by the for-profit world and, it’s quite spread the belief that this world must not deal with social needs and when it eventually does, it must practise this activity with a purely commercial approach. Clearly against what should lead to the Impact Investing phenomenon, the latter vision strongly sustain that is utopian that investors can accept a sacrifice of their financial returns to pursue a social impact objective. Honestly, social demands panorama is well more complex and diversified by now, so it’s crucial to make a brief analysis of it. Actually, it does exist a band of needs that we could define "intermediary", in comparison to which a big part of population doesn't find a proper answer. For instance: access to the house, access to some sociosanitary services, access to the credit, creation of economic and social poverty knapsacks in some zones of the Country. All these needs cannot (and in some cases they should not) be covered by the
State, but they are not even covered by the Market, that usually doesn't hold these activities because of a not convenient Beta. However, these services and solutions cannot be provided for free and therefore, market models that could make them easily accessible to whom has been initially excluded are grossly needed. After all, this is the essence of the impact investing: to bring the capital and the entrepreneurship where they miss, to fill this "hole" in the offer and, moreover, to collaborate with the public sector to make it more effective through the social innovation. Consequently, It is not important if these initiatives are for-profit or no-profit, but how much strength have the proposed models and the effectiveness of the related solutions. Moreover, it’s known that funding a social business would costs less than half then a normal business, because people are much more committed. So, the debate in progress that is dividing the social world on the possibility to distribute profits of these initiatives, states on a false problem. In fact, laws do not promote innovation, however it should be implemented by the wish of social and economic actors and their ability to set up effective models.
Furthermore, giving that generally these initiatives don't have a strong competitive protection, if these projects want to fulfil social needs they won't certainly be able to generate elevated profits. So the limitation of financial returns is within the model structures themselves. The main issue we face, indeed, is to promote these initiatives and to catalyse the necessary components needed to achieve the best results possible, such as: competences, entrepreneurship and, of course, capitals. The latters constitute an essential element: as already happened in venture capitalism at the end of last century, they are the fuel that can turn on the engine of this new industry, and as we already said, they are one of the few abundant resources in all the developed countries.

3. Benchmarking
Some cases of success promoted by investor pioneers are strongly needed in order to mobilize the resources chain and, to inspire much more people in such activities. For instance, one recent example of great success is the Italian pioneer Luciano Balbo, according to whom impact investing can also help improving the public sector through its positive externalities. His book "The Reality of

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Social Entrepreneurship Individual Assignment

Impact Investing – Stories from the field“ tells Balbo's story and the stories of other ten investors and their related social businesses. Luciano Balbo’s Impact Investing fund is called Oltre Venture – literally translated: venture beyond. It wants to initiate Italian innovations that mainly help Italy's weary lower middle-class. Indeed, among others, Oltre Venture invests in houses for the elderly, medical centres and microcredits. These experimented solutions have a low risk and therefore they can offer an attractive Beta for new venturists that will invest next to the initial pioneers.
The scepticism by part of the for-profit world, already mentioned before, doesn't keep in mind that (as it also underlined in a recent study by Bain) the era of the elevated return is over; furthermore there is an excess of capitals that gives place to speculative bubbles that create good returns for some but meanwhile diffused losses for others, creating a zero sum game. In fact, giving all these effects, social business could be even more appealing and profitable thanks to the higher commitment and lower costs that it naturally generates. Nevertheless, Italy truly needs investments which aim is promoting all those new initiatives that are potentially able to produce a long period shared value. So we could rely only on this unique resource (private wealth) in order to fund each necessary social innovation. Also because philanthropy remains only a niche tool for some more serious social needs; so rare that cannot even be considered as one of the possible solutions. The aim beyond impact investing, in conclusion, is using private capitals as a "mobilization tool" for the whole society, undertaking all competences and entrepreneurship skills, in order to:
• Beat social needs ghosts, breaking the rigid profit/no profit scheme;
• Promote effective solutions and, at the same time breaking the cultural separateness of these two worlds and melding both know-hows together;
• Reunify individuals’ personal interest with the community’s one through activities that fairly distribute advantages among three stakeholders: capital, workers and consumers.
• Generate a long-term value made by both high social impact and elevated financial returns.

4. Conclusions
Notwithstanding that the liquid wealth in the hands of privates is around twice the GDP in every country, philanthropy is largely inferior to 1%. In this vision, the public-private partnership has to play a crucial role. Even though our administrations are devoid of any financial resources to invest into social needs, they hold a big patrimony that could constitute an extraordinary lever to use instead. Private capitals would create social impact while making out good returns. Of course, this road appears difficult and it could generate scepticism. However, as these last years have shown, any other way appears ineffective. The problem is clear and solutions are urgently needed. Macroeconomics, teaches that in every crisis that a State has to face, it could leverage only on the abundant resources: in this case private wealth and entrepreneurship. Referring to this statement, we must uphold that we are plenty of not exploited private wealth, potentially effective but poorly managed. In the last fifty years, furthermore, within all the economic sectors, Italians have already shown great innovating potentialities. The moment in which we should apply the same mixture of success to the social needs area has come so far. In conclusion, the contribution of resources could start from the real estate endowment, passing for normative and administrative tools, going up to the constitution of a fund, in which would invest jointly public and privates, destined to sustain the experimentation of subjects and innovative solutions. It would be impossible to eliminate all the negative externalities but for sure, thanks to these efforts, the positive social impact would be so strong to change significantly people’s lives. 7

Social Entrepreneurship Individual Assignment

Sources o www.ec.europa.eu/internal_market/publications/docs/sbi-brochure/sbi-brochure-web_en.pdf

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Lester M. Salamon, Holding the Center: America’s Non profit Sector at a Crossroads – 1997.

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Citizens' summary – “EU initiative to promote social entrepreneurship” – 2014.

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Is the European Welfare State Really More Expensive? - Indicators on Social Spending, 19802012

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“A Manual to the OECD Social Expenditure Database” – SOCX, 2013

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Council Directive 2000/78/EC of 27 November 2000 establishing a general framework for equal treatment in employment and occupation (OJ L 303, 2 December 2000, p. 16–22)

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