Countries are a long way from creating the right conditions for social entrepreneurs to thrive, according to a new report by Catalyst 2030, a movement of social entrepreneurs focused on finding approaches to attain the UN’s Sustainable Development Goals by 2030.
There has been increasing attention paid to social entrepreneurship and impact investing, as a potential solution to problems including climate change. Firms including London-based Aviva Investors, Fort Worth, Texas-based TPG and Toronto, Canada-based Brookfield Asset Management have announced that they will seek to invest either in companies and ventures that aim to make the world better, or at least, meet minimum standards for not making the world worse.
Those existing companies are unlikely to make enough progress; rather, new companies will need to be created that, from the start, embody different incentives, says the report.
“We cannot rely on the goodwill of business interests at large to reform economic systems to promote sustainable growth,” according to the report. “Social enterprises therefore have a vital role to play in bridging this gap.”
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In a sign that social entrepreneurship – long seen as a relatively insignificant part of the business world – is getting some new respect, the report details some innovative ideas that are rising to the surface to support the sector. The report includes a tool that allows people to dig into the specific laws and regulations that touch on ESG or impact investing or social entrepreneurship, allowing people to compare, say, the environment for Delaware, U.S.-based companies with a mission-driven approach versus the environment for such entities in Israel.
Some of the ideas floating in the report would significantly change the financial prospects for social enterprises, which often have a harder time raising funding and thus, finding market traction in the short term.
Array of Possible Tax Benefits
Social enterprises could receive tax benefits, according to the report, such as reducing or eliminating tax on social enterprises, providing tax credits, making contributions to social enterprises tax deductible, or lowering tax on returns. This step would also require a reporting process to ensure enterprises are following the guidelines, according to the report.
But many of the legal structures in countries around the globe were created during the era of shareholder-driven capitalism. Those legal structures now may be holding back social ventures, which combine profit-seeking and mission-driven behavior.
Currently in many jurisdictions, laws and guidelines for social enterprises don’t exist. Or, in some cases, laws hinder the creation of mission-driven businesses. One key example are regulations and laws around the fiduciary standard, which can require officers of a company or advisors in a fiduciary relationship to investors to act only in the interest of equity shareholders.
Non-profit legal entities, meanwhile, may be constrained in other ways, such as by not being permitted to take investment dollars.
The report is based on survey information from affiliate firms of Lex Mundi, a Houston, Texas- based professional services network. Its nonprofit arm Lex Mundi Pro Bono Foundation worked with Catalyst 2030, which is housed in the Netherlands-based One Family Foundation, and Morrison and Foerster LLP, a New York City-based law firm focused on social enterprises, to write the report.
The groups outline six suggestions for countries and jurisdictions to think about in order to catalyze social-impact business and investing:
- Define “social enterprise.” Most jurisdictions do not.
- Enable fiduciaries to consider stakeholders other than business owners. Without the clarity, entrepreneurs can be limited to non-profit forms or a for-profit form that relies on shareholder returns instead of impact.
- Provide tax benefits to social enterprises and impact investors.
- Make it easier to invest in social enterprises. Regulators should focus on removing and reducing legal obstacles to fundraising.
- Guard against corruption and greenwashing. Leaders should require businesses to file reports or obtain a certification.
- Be flexible. Not all social enterprises should be treated the same and policies should be flexible enough to allow room for different structures.
Many investors believe that focusing on ESG negatively affects returns, according to the report. So policy makers and leaders should educate funders on the benefits of including these factors in decisions.
