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European Impact Investing Luxembourg: Social Impact Measurement in the framework of a Société d’Impact Sociétal

Project Lead: Jim Clifford OBE FCA FRSA, BWB Impact E-mail: j.clifford@bwbllp.com Tel: +44 (0) 7860 386081 Supporting co-Authors: Dr Lisa Hehenberger Luke Fletcher Anna-Marie Harling BWB Impact, a division of Bates Wells & Brathwaite London LLP

100 Queen Street Place London EC4

www.BWBImpact.com www.BWBllp.com Tel: +44 (0) 207 551 7777

14th February 2015

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Contents Page

1. Executive Summary and Recommendations

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2. Background

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3. Approach

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4. Eligibility Criteria

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5. Comparables from the EC and other sources

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6. Analysis of appropriate Social Impact Measurement approaches Introduction Stage 1: Identify objectives Stage 2: Identify stakeholders Stage 3: Set relevant measurement Stage 4: Measure, validate, value Stage 5: Report, learn and improve

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7. Analysis of approaches to other eligibility criteria

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8. Regulatory Approach

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9. Regulatory Timeline

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Appendix A - Extracts from EuSEF Regulations 71 Appendix B - Sample Disclosure Questions on Application 73 Appendix C - Social Impact Measurement 75 Appendix D - Guidance from GECES on Proportionality 104 Appendix E - European Mapping Study – Lesson for the SIS 107 Appendix F - B Corp Comparison 112 Appendix G - Suggested Form of Audit Report 113 Appendix H - Notes on potentially applicable audit standards 114 Appendix I - CVs of Authors 116 ADDENDUM – Sample application form to the Regulator for admission as an SIS

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1. Executive Summary and Recommendations Background

1.1. Impact investing is the focusing of investible resources on achieving impacts – changes, or outcomes – generally of a social nature. It uses financial and other capital to achieve improvement in the situations and wellbeing of individuals, families, and communities.

1.2. The European Impact Investing Luxembourg initiative (EIIL) was launched in 2010, bringing together the work of a number of major actors under ADA’s secretariat. The aim of the initiative is to contribute to the development of the impact investing sector, to facilitate initiatives within this area in Luxembourg, and to promote Luxembourg’s capacity to support a coordinated approach to impact finance. Impact finance was recognised in the work of various organisations, but latterly the International Social Impact Investment Taskforce established by the G8, and in which the European Commission participated. In the Taskforce’s summary it stated: “Recognising there is no ‘one size fits all’ approach, policy makers need to consider their own context and the policy opportunities that suit their particular environment, their policy priorities and the existing nature of social service provision.”

A In recommendation 7 it also called for profit-with

purpose organisations to be able to lock in mission in a way that allows for investors to be recompensed, and the organisation to remain focused on its social mission, whilst providing appropriate tax structures and other incentives to encourage the effective use of resources.

1.3. This global policy call has coincided with a Europe-wide development of social investment, partly through the activities of members of the European Venture Philanthropy Association and others in the Luxembourg NGO and Investment communities, and partly in connection with the European Commission’s Social Business Initiative.

B

1.4. A key part for each State in creating the legislative and economic infrastructures necessary for

development of impact investing and social business within its economy is the creation of corporate and tax structures that support them. EIIL has therefore developed the proposals for a new form of corporate structure: the Société d’Impact Sociétal (SIS). This allows capital from social sources (impact investors), and not requiring a financial return to sit alongside capital from more conventional investors which do require, and earn a return. The profits that would otherwise be paid out on the social capital are retained, free of tax, to enable the delivery of social impacts to be enhanced.

1.5. The SIS can have one of the legal forms as provided for in the 1915 Law on commercial companies. It will

be granted a specific status of “Société d’impact sociétal” if its articles meet pre-defined eligibility criteria such as:

Defining clear impact objectives (social, environmental, etc.) to be achieved by its activities

Pursuing these objectives by way of a socially responsible management

Defining adapted key performance indicators, as well as the measurement tools to follow up on these indicators.

A http://socialimpactinvestment.org/report-findings.php B http://www.eubusiness.com/topics/social/social-business

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1.6. The Impact Measurement working group of the EIIL is engaged in expert working groups at EU level (notably the GECES Sub-group

C) and are entertaining a proactive exchange on social impact metrics and

their practical application to maintain Luxembourg’s initiatives in the impact investing space in tune with the most recent market development.

Focus of the report and its methodology

1.7. The EIIL has commissioned a review by UK-based BWB Impact, the specialist impact advisory firm formed

by Jim Clifford OBE, the chair of the GECES Sub-group on Impact Measurement, supported by Bates Wells Braithwaite, who developed the UK’s CIC legislation and regulatory models, and led the legal side of the mapping of Social Enterprise forms for the European Commission, and Dr Lisa Hehenberger and Anna-Marie Harling, who developed the EVPA guide to impact investing.

1.8. The purpose of their work was to develop the eligibility criteria for the SIS, and the models by which the

social impact of the organisations can be measured. Those eligibility criteria should embrace

The setting of appropriate social objectives

The measurement and evidencing of their delivery

The ongoing conduct of the SIS as a socially responsible business.

1.9. The work took as a base point for social impact measurement the report of the GECES sub-group, which summarises a year-long, multi-party working group finding common central ground for Social Impact Measurement in the EU, with particular regard to the EuSEF

D and EaSI

E legislation. It drew upon a wide

range of existing experience from the advisory team and EIIL representatives. These included first-hand experience of the work of the GECES sub-group, which developed the EU-wide Social Impact Measurement standards which were passed in June 2014, and which formed a key underpinning to the work of the (G8) Social Impact Investment Taskforce’s Impact Measurement workstream. They also included first-hand experience of that G8 workstream. BWB Impact and Bates Wells Braithwaite both advise investors and investees (Social Businesses and Enterprises), and EVPA represents investors in evaluating and managing social investment portfolios. They all brought experience of impact investing and impact measurement in multiple jurisdictions, as well as sound knowledge of academic work in the field from those still actively involved in it. Finally they brought experience of developing and running social investment opportunities and investments in several jurisdictions, as well as acting for financial markets and other regulators in the UK and elsewhere, and developing regulatory regimes for them. From this base of experience, and the input of EIIL representatives and the examination of key background documents, the advisory team:

Established eligibility criteria for the SIS

Reviewed the underlying data from EVPA’s research into over 1,000 methodologies of impact measurement, and the work and findings of the GECES and other groups, drawing out those methodologies that are most likely to deliver workable solutions to the needs for social impact measurement in the SIS. For those selected, they performed and evaluation of best fit, so to develop a range of suitable approaches, structured into each of the five stages of measurement in the GECES report.

Reviewed regulatory experience elsewhere, and the focus and requirements of the SIS legislation, its legal, economic and social context and developed solutions to the “socially responsible business” and wider requirements not met simply by the social impact measurement work.

Drew these together in a report for discussion and agreement with the EIIL team.

C http://ec.europa.eu/internal_market/social_business/expert-group/social_impact/index_en.htm D http://ec.europa.eu/finance/investment/social_investment_funds/index_en.htm E http://ec.europa.eu/social/main.jsp?catId=1084&langID=en

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1.10. The outputs of this work establish an operating structure for both the SIS and its regulation. They also indicate where further work is needed once the legislative, operating and regulatory structures are agreed in order to develop the infrastructure necessary to enable the SIS to come to life.

Establishing practical eligibility criteria for the SIS

1.11. Based upon the SIS outline and purpose, the Eligibility Criteria need to comprise the following Tests:

1. A SocialF

Objectives Test: Is the SIS sufficiently focused on delivering appropriate social objectives?

Has it identified a social objective with a clear intent to achieve it ? is it underpinned by:

a logical theory of changeG…

under which it is likely…

on the balance of probabilities..

to deliver…

positive change (outcomesH)…

in line with the stated objectives

2. A Social Activities Test:

Is it going about its activities in such as a way as to achieve those social objectives?

The SIS should: 1. plan activities it can reasonably expect will

deliver social impacts in line with its objectives

2. develop a business plan that is sustainable under all reasonably foreseeable circumstances

3. secure that it is adequately resourced for its activities

3. A Social Impact

Measurement Test:

Is it actually achieving social impacts?

The SIS should:

1. Focus on the delivery of social impact 2. Achieve delivery of social impact 3. Not create negative effects as a by-

product 4. Measure its achievements of that

F Social is defined by GECES as “Relating to individuals and communities, and the interaction between them; contrasted with economic and

environmental” G Theory of Change is defined by GECES as “The means (or causal chain) by which activities achieve outcomes, and use resources (inputs) in

doing that, taking into account variables in the service delivery and the freedom of service-users to choose. It forms both a plan as to how the

outcome is to be achieved, and an explanation of how it has occurred (explained after the event).” H Outcomes are defined by GECES as “Social effect (change), both long-term and short-term achieved for the target population as a result of

the activity undertaken with a view to social change taking into account both positive and negative changes”

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4. A Social Responsibility Test:

In the way that it conducts itself, is it socially responsible?

There are three broad themes considered here: 1. The SIS should do no harm. It cannot be

seen to achieve social impact at the expense of environmental or social damage elsewhere

2. It should take a democratic approach to its governance, appropriately holding itself accountable to stakeholders

3. It should, in the broader sense, conduct itself in an ethical way. This is related both to the overall tests of appropriate social objective, and the first test of ‘do no harm’, but gives the Regulator the ability to apply a judgmental over-ride where there is a technical compliance with these other rules, but another aspect of the SIS is unacceptable.

1.12. The first three focus upon what the SIS does, and the fourth on how it conducts itself internally and in

overall positioning within a wider social economy. The first three are thus underpinned by the planning, measurement and reporting of social impact, and the fourth by other measurement and reporting approaches.

1.13. In setting detailed criteria, it is clear from the outline legislation there are several aspects that must be

taken into account. These are as follows:

The SIS will need to qualify at its inception, and demonstrate compliance at regular intervals throughout its existence (annually would fit most easily with normal financial and corporate reporting cycles)

Any criteria set must be relevant to demonstrating the overall intended profile of an SIS, but must also be measurable, without which they become impossible to enforce

The principle of proportionality must apply as outlined in the GECES reportI : that is the measurement

and the associated regulatory tests must be necessary and relevant

There are five broad types of test (all of which appear in International audit and assurance practice) that can be applied to the eligibility criteria: o Of intention: is [it] deliberate ?

J

o Is there a reasonable prospect of [it] happening ?K

o Is it true: did [it] happen ?L

o Is it a fair reflection of what happened ?M

o Boundaries: can we be certain [it] did not happen ?N

I Clifford, J., Hehenberger, L., and M.Fantini. (June 2014). Proposed Approaches to Social Impact Measurement in European Commission

legislation and in practice relating to EuSEFs and EaSI. http://ec.europa.eu/internal_market/social_business/expert-

group/social_impact/index_en.htm J E.g. Charitable purpose tests under UK law; Co-operative tests under French and Italian law (see App D) K E.g. Assessment of contingent liabilities in IFRS L E.g. Annual financial reports on trading profits under IFRS testing whether transactions happened M E.g As above [IFRS], but considering whether the nature of the transaction – it’s true substance – is objectively treated and disclosed N E.g. Application of funds for non-specified or unauthorised purposes such as trust funds in charities and family trusts

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1.14. These features and tests will appear at various stages through the next sections, and form the foundation for developing a solution that is capable of being regulated.

Measuring Social Impact 1.15. The measurement of social impact, as described in the GECES report, spans the identification of impact

objectives, and planning for how those can be delivered, and for whom they are an advantage, as well as monitoring and measuring the actual achievement of impacts for beneficiaries and others, and reporting upon these. It uses a five-step process, which is shown in the diagram at Fig. 1 as follows:

1. Identify objectives 2. Identify stakeholders 3. Set relevant measurement 4. Measure, validate and value 5. Report, learn and improve

1.16. Our recommendation is that the eligibility

criterion related to social impact measurement focuses on the appropriate implementation of this five stage process. What follows is an analysis of each step and the practical methodologies and tools to fulfil each of them. Each step is illustrated by an expansion of the diagram at Fig 1 to show the options considered and the recommended approach from these.

1.17. Stage 1 involves a series of practical questionnaire-based steps to identifying the social issue to be solved and deciding how it is to be addressed, moving to identifying the resources needed to do that. It shows how the activities of the Enterprise can be developed to achieve outcomes for relevant beneficiaries, and examines that causative link.

1.18. Stage 2 (identify stakeholders) can be delivered by any of three methodologies: a general questionnaire-

based approach, tailored to the specific circumstances of the SIS concerned, use of stage 1 of the SROI methodology, or a process based on identifying accountabilities, and those to whom that accountability is owed.

1.19. Stage 3 requires the development of a selection of measures most appropriate to illustrating the social

impacts being delivered. The measurement must be driven from the reality of service delivery, with the outcomes being delivered tending to fall in the majority of cases within a standard list for that type of intervention. GECES refers to these as frameworks, puts indicators against them (that do not have to be monetary values, and anticipates that they will fit in the majority of situations (perhaps 80%). Where there is a better measure available, the SIS should use that as long as it is not disproportionately costly to measure, but should explain in the public report why it has departed from the standards. The frameworks and indicators should come from established databases including IRIS and the Global Value Exchange until such time as the European Commission develops GECES-approved frameworks.

1.20. Stage 4 has three subsections: for measuring, validating (checking that the data gathered is right) and

valuing. It tackles the practicalities of measurement. An organised system of data gathering can be based on and validated through interviews, competitive analysis or desk-top research.

Fig 1: 5-step process from GECES

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The actual process of valuing can be fulfilled

by a range of alternatives, reflecting the diversity of likely organisations and work undertaken: story-telling, perceived value impact, cost benefit analysis and SROI stand out, and embrace both qualitative and quantitative.

1.21. Finally Stage 5 (reporting) does not advocate

pre-determined formats, but specified disclosures, the presentation of which are to be designed by the SIS and its advisors to convey information meaningfully and helpfully to its audience. The disclosure standards are those in the GECES. The overall picture of methods appropriate to social impact measurement under the SIS proposals is as shown in Fig.2, with the selected ones being the segments standing out.

Fig 2: Recommended approaches for all five stages

Measuring other criteria 1.22. The other eligibility criteria focus primarily on the SIS being a socially responsible business. As outlined

above, these cover:

The social objectives test, and

The social responsibility test, itself divided into three aspects: o Do no harm o Democratic governance processes, and o Ethical conduct

1.23. The social objectives, in addition to testing their achievability under the social impact section, will also be challenged: “would a reasonable person consider that the stated objective of the applicant is a primary objective of general interest?” Or, to put it another way: “would a reasonable person consider that the stated objective of the applicant involves the creation of a positive social impact for the benefit of the public?” The test will be different from ordinary commercial objectives: hence simply promoting economic growth, job creation, or delivering quality goods and services will not be enough, unless they are achieved with the purpose of delivering social impact. The test goes still further in excluding certain specified activities and gains, specified in the legislation or perhaps more flexibly in policy guidance where they entail overt harm, or are inherently not designed to deliver public good. A list of these should be published and updated regularly.

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1.24. Turning to social responsibility this requires different approaches to establishing compliance with each of

the three sub-headings:

Do no harm requires A clear, and published, process from each SIS to show it identifies the potential for harm and its effect, assess whether it can be avoided, measures its extent, and adjusts its activities and focus based on that ongoing evaluation and review.

Democratic governance requires A clearly expressed and regularly communicated:

recognition of those to whom the SIS is accountable, and the nature of the underlying relationship

information communicated with transparency that is relevant to those accountabilities

explanation as to how the stakeholders concerned may influence the SIS’ focus and policy, and how they can find out how such feedback has been addressed.

Ethical conduct requires A judgment by the Regulator, reflecting what the reasonable man or woman might think is unethical behaviour, focus, or activity. This acts as a complement to the “do no harm” and social impact headings, but provides a value-based catch-all to allow the Regulator to decide that a particular SIS is bringing itself or the sector into disrepute, and so put a stop to it.

The Regulatory Regime

1.25. The approach of the Regulator needs to meet the following criteria in a way that balances all of them:

Effectiveness in its approval and registration role

Effectiveness in its monitoring of regular reporting

Public confidence and profile: in itself and the SIS brand

Independence of thought and action

Setting self-certification and audit requirements that enhance the quality of reporting and the

accountability of the SIS and its agents for that

Appropriate direct use of outside consultants

1.26. In fitting a workable and proportionate regulatory function to this the option of taking upon itself significant review and verification functions is considered neither necessary nor the best use of resources. Rather the regime is built upon three pillars:

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A clear and comprehensive disclosure regime, such that the SIS will report in public sufficient

information to acknowledge its accountability, and give transparently the information needed for

effective scrutiny by the general public and stakeholders in particular

An audit function applicable to all which picks up and independently verifies key aspects of the

information being put into the public domain

A Regulatory function that tests whether appropriate disclosures have been made, gives sanction

to register new SIS and deregisters those that have ceased to meet the criteria, and responds by

investigating concerns raised by its own reviews and by public complaints. It should support this by

the issue of guidance to SIS, their stakeholders, and the general public, and should promote these

and the profile of SISs so that the public and stakeholders are aware of the information and how to

engage with the sector

1.27. Conceptually, then, the Regulator is considering whether the SIS’ performance, constitution and disclosure fits within specified boundaries. It does so on registration, and annually. The principal criteria it is testing at each of the two points are as follows:

Criteria

Test required

Init

ial E

valu

ati

on

Social objectives Are the objectives:

Social

Underpinned by a logical theory of change

Not one of an excluded class Have KPIs been set following an appropriate process of stakeholder engagement and involvement?

Sustainable and properly resourced business

Is the business:

Built to a financially sustainable model

Appropriately resourced based on a statement by the SIS identifying all material resource requirements ad confirming it can meet these within 12 months of application.

Positive change or outcomes

Are the outcomes, net of negative outcomes, positive overall?

Processes for impact measurement

Have systems for impact measurement been established that meet the five-step process outlined?

Processes for doing no harm

Have systems been established that address the four-point test for identifying and managing potential harm outlined in 7.20 of the main report ?

No ethical over-ride Are the activities planned or the outcomes positive and negative targeted and risked such as to be, in the view of the reasonable man or woman:

Unacceptable?

Likely to bring the SIS into disrepute?

Likely to bring the SIS sector into disrepute?

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Criteria

Test required

An

nu

al E

valu

ati

on

Social objectives adhered-to

Are the originally targeted social objectives, or some that would be considered similar by the reasonable man or woman still being targeted, and expected to be achieved?

Positive change or outcomes

Is positive (i.e. not net negative) social change being achieved, in either:

The average of the last three years, ending with the current reported year

The average of the next three years, starting with the current reported year

Processes for doing no harm

These are still in place, operating, and appropriate to the needs of the SIS and its stakeholders

Going concern The SIS is likely to continue in operational existence, and is properly resourced, for at least the next twelve months from the later of the balance sheet date and the issue of the audit certificate on the accounts and social impact statements

Meeting reporting requirements

All matters due to be disclosed have been disclosed.

No ethical breach Are the activities planned or the outcomes positive and negative targeted and risked such as to be, in the view of the reasonable man or woman:

Unacceptable

Likely to bring the SIS into disrepute

Likely to bring the SIS sector into disrepute 1.28 The Regulatory sanctions relating to these matters would be as follows:

For each area: a refusal to register (with explanation of the reasons for the refusal) but with the applicant’s having the right to rectify the matters and re-apply. It may be appropriate to place a limit on the number of re-applications, perhaps to three times in a 12 month period.

In the annual tests: cessation of tax advantage from the date of issue of a notice of non-compliance, unless rectified within 30 days, or the regulator otherwise agrees that proposals made for rectification are realistic, in which a further 12 months will be allowed before the test is applied again.

In the case of failure of the ethical breach test the regulator may remove the SIS’s status, which will mean that the SIS will be liquidated as if by Court Order at a date set by the regulator, but not exceeding 3 months from the date of the regulator’s notice of ethical breach.

In the case of a change in social objectives (where the regulator considers that social objectives have changed and gives notice of this in the SIS) the SIS must re-apply for registration and meet all requirements as per a new application. If it does not, its beneficial tax status will cease as from the date of the notice.

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If beneficial tax status ceases for future profits, the profit shares relating to impact shares (both past retained profits and future profits earned) remain asset-locked: the SIS is prohibited from distributing them.

It is explicitly the case that, whilst the Regulator should concern itself with SIS’s that create negative or zero social change over an extended period, it is up to the stakeholders (principally impact and for-profit investors) to decide upon setting and varying KPIs, and the action to be taken in the event of failing to achieve them. To fail to do so would be to risk over-regulating, and stifling innovation.

1.29. The development of the necessary capability within the Regulator and within the wider reporting and

assurance environment requires:

The Regulator to develop o Expertise in evaluating compliance with the new regime, notably in the field of impact

measurement and the related systems, which will be less familiar in such an environment than the more general financial regulatory and review criteria

o Credibility amongst potential SISs, professionals and advisers, and the general public, both as an informed, supportive and pragmatic Regulator, and on behalf of the SIS sector and the value that it brings

o Approval boards, appeal boards, and the systems to support their operation o Its view on appropriate disclosure, criteria for approval and dis-approval, and supporting

guidance notes for SISs and their advisers o Relevant forms, web-based access points and the rest of the documentary and data

infrastructures to make the systems work

The wider community to develop: o The audit relationships (between auditors and measurement professionals) to enable the audit

functions to be met o The audit approaches necessary to deliver the assurance regime required o An understanding of how and when to use SIS form

Small SIS – Reduced Compliance Requirements 1.30 It is very important that the regulatory and compliance regimes should not become a dis-incentive for

smaller SISs to register. These therefore need to be an exemption from audit requirements for SISs that fall beneath either of the following thresholds:

a) Size: below any two of the following [suggested lists, subject to consultation, gauged based on numbers of organisations that are exempt as a result, and the typical levels of resources and capacity within these]:

i. Turnover less than €250,000 (€100,000 seems too low, and €500,000 too high) ii. Balance sheet assets of €2,000,000 iii. Employees (defined as fulltime paid equivalents) of 25

b) For-profit holdings: than 10% of the shares are for profit – that is, at least 90% of the issued share capital is in impact shares.

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Next steps 1.31. Following this review paper and its recommendations there are three key stages that need to follow:

The further development of this guidance into worked examples of application for SIS status, annual disclosures and other review work by the Regulator using pilot studies with six to ten typical SISs. Whilst the report contains worked examples for the impact measurement, and there are others in a similar vein in the GECES report, it has not been possible in the time fully to illustrate the findings by way of case studies.

Consultation on the initial proposed structure and approaches in three stages: o On these initial proposals o On the more detailed guidance notes, policies and formats to be developed o On the Regulator’s constitution and proposed accountabilities and internal structures and

procedures.

The internal capabilities and supporting networks to enable the Regulator, audit community and others to function and fulfil their roles to enable the operating environment for the new SIS bodies to be formed and administered.

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2. Background 2.1. Impact investing is the focusing of investible resources on achieving impacts – changes, or outcomes –

generally of a social nature. It uses financial and other capital to achieve improvement in the situations and wellbeing of individuals, families, and communities.

2.2. The European Impact Investing Luxembourg initiative (EIIL) was launched in 2010, bringing together the

work of a number of major actors under ADA’s secretariat. The aim of the initiative is to contribute to the development of the impact investing sector, to facilitate initiatives within this area in Luxembourg, and to promote Luxembourg’s capacity to support a coordinated approach to impact finance. Impact finance was recognised in the work of various organisations, but latterly the International Social Impact Investment Taskforce established by the G8, and in which the European Commission participated. In the Taskforce’s summary it stated: “Recognising there is no ‘one size fits all’ approach, policy makers need to consider their own context and the policy opportunities that suit their particular environment, their policy priorities and the existing nature of social service provision.”

O In recommendation 7 it also called for profit-with

purpose organisations to be able to lock in mission in a way that allows for investors to be recompensed, and the organisation to remain focused on its social mission, whilst providing appropriate tax structures and other incentives to encourage the effective use of resources.

2.3 This global policy call has coincided with a Europe-wide development of social investment, partly through

the activities of members of the European Venture Philanthropy Association and others in the Luxembourg Ngo and Investment communities, and partly in connection with the European Commission’s Social Business Initiative.

P

2.4. A key part for each State in creating the legislative and economic infrastructures necessary for

development of impact investing and social business within its economy is the creation of corporate and tax structures that support them. EIIL has therefore developed the proposals for a new form of corporate structure: the Société d’Impact Sociétal (SIS). This allows capital from social sources (impact investors), and not requiring a financial return to sit alongside capital from more conventional investors which do require, and earn a return. The profits that would otherwise be paid out on the social capital are retained, free of tax, to enable the delivery of social impacts to be enhanced.

2.5. The SIS can have one of the legal forms as provided for in the 1915 Law on commercial companies. It will

be granted a specific status of “Société d’Impact Sociétal” if its articles meet pre-defined eligibility criteria such as:

Defining clear impact objectives (social, environmental, etc.) to be achieved by its activities

Pursuing these objectives by way of a socially responsible management

Defining adapted key performance indicators, as well as the measurement tools to follow up on these

indicators.

2.6. The Impact Measurement working group of the EIIL is engaged in expert working groups at EU level (notably the GECES Sub-group

Q) and are entertaining a proactive exchange on social impact metrics and

their practical application to maintain Luxembourg’s initiatives in the impact investing space in tune with the most recent market development.

O http://socialimpactinvestment.org/report-findings.php P http://www.eubusiness.com/topics/social/social-business Q http://ec.europa.eu/internal_market/social_business/expert-group/social_impact/index_en.htm

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2.7. Whilst a draft law has been developed and has entered the governmental legislative consultation process, if the concept is to become a reality, there is now a need to develop the details around the eligibility criteria. This incudes not just what they might be in order to secure that the SIS format is only used for appropriate companies and situations, but also how they will be measured and reported-upon, and how they will be adjudicated-upon by the Regulator.

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* = key EIIL input

Stages

Input from GECES LC cap

strict input

Direct input EIIL

Investor input

Soc Ent input

G8 input

Formulate Thesis

Eligibility criteria; develop theses

Test Challenge

Impact Measurement

Other Criteria Policy Context

Workstreams Lisa Hehenberger Analysis of

Methods

Luke Fletcher Eligibility Criteria*

Jim Clifford Policy and Context*

3 or 4 likely methodologies and why they might fit

Compare - process - methods - tools - indicators - other relevant

Financial

Conduct of business

Qualitative

Governance Other

Drivers

Flexibility

Foundations for paper

Formulating the solution

Jim Clifford

scrutiny tests and processes*

Implementation of programme

Risk Analysis*

Reporting Report Policy paper

Lawyers and other advisors

WORKFLOWS

INITIAL PLANNING*

3. Approach Focus of the report and its methodology 3.1. The EIIL has commissioned a review by UK-based BWB Impact, the specialist impact advisory firm formed

by Jim Clifford OBE, the chair of the GECES Sub-group on Impact Measurement. They were supported by Bates Wells Braithwaite, who developed the UK’s CIC legislation and regulatory models, and led the legal side of the mapping of Social Enterprise forms for the European Commission, and Dr Lisa Hehenberger and Anna-Marie Harling, who developed the EVPA guide to impact investing. The authors’ CVs, showing further details of the relevant experience they were able to bring to the project, are shown at Appendix H.

3.2. The purpose of their work was to develop the eligibility criteria for the SIS, and the models by which the social impact of the organisations can be measured. Those eligibility criteria should embrace

The setting of appropriate social objectives

The measurement and evidencing of their delivery

The ongoing conduct of the SIS as a socially responsible business.

The overall approach is shown in the work flow diagram at Fig.3.

3.3. The work took as a base point for

social impact measurement the report of the GECES sub-group, which summarises a year-long, multi-party working group finding common central ground for Social Impact Measurement in the EU, with particular regard to the EuSEF

R and EaSI

S legislation.

Fig. 3 Work Flow for the report

R See Appendix A S See work in the GECES 3rd meeting on PSCI, the former name for the EaSI, at http://ec.europa.eu/internal_market/social_business/expert-

group/index_en.htm , and in the GECES sub-group report at http://ec.europa.eu/internal_market/social_business/docs/expert-

group/social_impact/140605-sub-group-report_en.pdf

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3.4. Developing an initial understanding of the context, and drawing upon a wide range of existing experience from the advisory team and EIIL representatives, it then worked in three workstreams to enable it to report within the necessarily tight timescales for this work. These were Social Impact Measurement methods, eligibility criteria in general and socially responsible business in particular, and policy context and overall structure and roles. From this base of experience, and the input of EIIL representatives and the examination of key background documents, the advisory team:

Established eligibility criteria for the SIS

Reviewed the underlying data from EVPA’s research into over 1,000 methodologies of impact measurement, and the work and findings of the GECES and other groups, drawing out those methodologies that are most likely to deliver workable solutions to the needs for social impact measurement in the SIS. For those selected, they performed and evaluation of best fit, so to develop a range of suitable approaches, structured into each of the five stages of measurement in the GECES report.

Reviewed regulatory experience across Europe and elsewhere, and the focus and requirements of the SIS legislation, its legal, economic and social context and developed solutions to the “socially responsible business” and wider requirements not met simply by the social impact measurement work.

Drew these together in a report for discussion and agreement with the EIIL team. Drafts for discussion were submitted on 31

st December and 21

st January, and feedback has been reflected in this final copy.

3.5. The outputs of this work establish an operating structure for both the SIS and its regulation. They also indicate where further work is needed once the legislative, operating and regulatory structures are agreed in order to develop the infrastructure necessary to enable the SIS to come to life.

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4. Eligibility Criteria 4.1. The Eligibility Criteria have been developed with input from the EIIL team. They reflect the conceptual

development of the SIS as an impact investment solution, and the draft bill to be presented to the Luxembourg Government.

4.2. We see the Eligibility Criteria comprising the following Tests:

1. A Social Objectives Test: Is the SIS sufficiently focused on delivering social objectives?

2. A Social Activities Test: Is it going about its activities in such as a way as to achieve those social objectives?

3. A Social Impact Measurement

Test:

Is it actually going to achieve social impacts?

4. A Social Responsibility Test: In the way that it conducts itself, is it socially responsible?

4.3. The first three focus upon what the SIS does, and the fourth on how it conducts itself internally and in overall positioning within a wider social economy.

4.4. In setting detailed criteria, we can see from the outline legislation there are several aspects that must be

taken into account. These are as follows:

The SIS will need to qualify at its inception, and demonstrate compliance at regular intervals throughout its existence (annually would fit most easily with normal financial and corporate reporting cycles)

Any criteria set must be relevant to demonstrating the overall intended profile of an SIS, but must also be measurable, without which they become impossible to enforce

The principle of proportionality must apply as outlined in the GECES reportT : that is the measurement

and the associated regulatory tests must be necessary and relevant in the decisions that are based upon them

There are five broad types of test (all of which appear in International audit and assurance practice) that can be applied to the eligibility criteria: o Of intention: is [it] deliberate?

U

o Is there a reasonable prospect of [it] happening?V

o Is it true: did [it] happen?W

o Is it a fair reflection of what happened?

X

o Boundaries: can we be certain [it] did not happen?Y

4.5 These features and tests will appear at various stages through the next sections, and form the foundation for developing a solution that is capable of being regulated.

4.6. With this backdrop, we articulate what we propose as the key elements of the four eligibility tests below in

the rest of this section. In sections [6 and 7] we explain how the measurement of each can work and give the foundations for the auditor to report upon, and the regulator to test, each.

T Ibid pp32-33 U E.g. Charitable purpose tests under UK law; Co-operative tests under French and Italian law (see App D) V E.g. Assessment of contingent liabilities in IFRS W E.g. Annual financial reports on trading profits under IFRS testing whether transactions happened X E.g. As above [IFRS], but considering whether the nature of the transaction – it’s true substance – is objectively treated and disclosed Y E.g. Application of funds for non-specified or unauthorised purposes such as trust funds in charities and family trusts

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4.7. Test 1: Social Objectives Test

‘A primary objective of general interest’ – Article 2(1) of the Bill

The Bill sets out a requirement that an SIS must have ‘a primary objective of general interest’ (“a Social Objective”). Looking at the elements within this we find:

“primary” meaning leading, or key (and hence of [equal or] greater priority than making profits for shareholders)

“a” it does not have to be the only primary objective, but must be one of them

objective There must be a purpose: an intent to achieve it. This, in turn, demands six elements:

a logical theory of changeZ

under which it is likely

on the balance of probabilities

to deliver

positive change (outcomes)

in line with the stated objectives

Any change to the social objective should require advance clearance by the Regulator if SIS status is to be maintained. In the preamble, the Bill also identifies a number of objectives which would be considered as objectives of general interest, such as the following:

To protect the environment where coupled with a negative impact relating to society (a societal repercussion, such as fighting pollution, recycling and renewable energy)

To advance health

To provide access to accommodation

To provide education or training

To help older or younger people or those with a disability

To relieve unemployment

To manage addiction or dependency

Hence the SIS should set and explain measurable social objectives together with a logical theory of change that can deliver those.

Z Theory of Change is defined by GECES as “The means (or causal chain) by which activities achieve outcomes, and use resources (inputs) in doing that, taking into account variables in the service delivery and the freedom of service-users to choose. It forms both a plan as to how the outcome is to be achieved, and an explanation of how it has occurred (explained after the event).”

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4.8. Test 2: A Social Activities Test

Art 2 reads in translation (our translation) as follows:

1. All commercial societies given a legal personality under the law modified on the 10 August 1915 with

regard to commercial companies can be recognised as an SIS as long as their primary objective is of

general interest and comprises of a positive social impact of the social, cultural or environmental type.

2. The constitution of an SIS must:

(a) clearly define the primary objective of general interest to which the SIS’s activities relating to its social purpose are dedicated to;

(b) pursue this objective in a socially responsible manner: - by providing goods or services to those who are vulnerable, marginalised, disadvantaged or

excluded or - by employing a method of production of goods or provision of services which helps realise the

principal objective of the society;

To paraphrase, the SIS must seek to deliver….

‘A positive social impact on society, culture or the environment:

By providing goods or services to vulnerable people; or

By using a method of production of goods or the provision of services which helps realise the principal objective of the society’ – Art 2 of the Bill

Hence the SIS should:

plan activities it can reasonably expect will deliver social impacts in line with its objectives

develop a business plan that is sustainable under all reasonably foreseeable circumstances

secure that it is adequately resourced for its activities

It should demonstrate this at registration as an SIS, and at annual intervals (effectively a form of going concern test similar to that used by financial auditors).

The Regulator will need to assess the proposed activities of each applicant for SIS status to see whether the proposed activities are consistent with the stated objective of the applicant.

An applicant should be required to submit a business plan to the Regulator or, in the absence of a business plan, a form of declaration about the activities it will carry out. Ideally, there would be some form of adverse consequence, possibly civil or even criminal consequences for the making of deliberate misrepresentations to the Regulator about proposed activities.

Theory of Change

4.9. There may be cases where the proposed activities are not consistent with the stated objective. In such a

case, the Regulator may decide that the objective is not – when interpreted in light of the proposed activities – genuinely social and/or that the activities are not genuinely social.

To ensure that the activities are consistent with the stated objective, we recommend that the Regulator requires applicants to submit a ‘theory of change’ demonstrating how the activities will, if implemented, lead

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on the ‘balance of probabilities’ to the achievement of the objective. The concept of a ‘theory of change’ is an established concept, defined in GECES, which requires the applicant to show that the activities are likely to lead to the intended positive social impact.

A Trading Requirement

4.10. Clearly, an applicant will need to be providing goods or services and so must be operating within the

market economy. The Regulator may therefore wish to include some form of trading requirement that the business plan or declaration shows that at least a certain % of the income of the SIS will come through trading activities or that there is a good prospect a minimum income requirement being met within a certain period of its registration as an SIS. If the SIS is in receipt of income from Payment-by-results contracts, these would qualify as earned income in this context even if structured by way of grant or subsidy.

Ongoing Regulation

4.11. The Regulator should be notified of any material change in the nature of the activities carried out by the

SIS or of any material change in the business plan of the SIS, together with an updated version of the theory of change of the SIS, if any. It should be possible to ensure that sensitive commercial information need not be submitted; otherwise some form of assurance will need to be provided that such information will remain confidential.

4.12. Test 3: A Social Impact Test

‘By looking at the social KPIs, the SIS is able to verify in an effective and reliable way the achievement of the objective’ – Art 2(2)(c) of the Bill

The SIS should:

Focus on the delivery of social impact

Achieve delivery of social impact

Not create negative effects as a by-product

Measure the outcomes it is achieving

GECES Approach 4.13. The approach in the GECES is driven by stakeholders and their needs and interests. This aligns well with

the stated intentions of the SIS legislation, in which two sets of investors, social and non-social, get together to agree the objectives (social needs) to be met, the outcomes and impacts to be delivered by the SIS’ activities, and how those will be measured.

Positive Social Impact

4.14. We do not recommend the adoption of any requirement for a ‘minimum level of impact’ – which is a

problematic concept in impact measurement – beyond a simple requirement for the SIS to demonstrate on the balance of probabilities that it will bring about a net positive social impact. The SIS should be able to demonstrate that the KPIs will lead to net positive social impact according to its theory of change. In practice, it will be for the impact shareholders, as the guardians of the Social Objective of the SIS, to ensure that the KPIs are sufficiently testing to put the achievement of the Social Objective before the distribution of profits.

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Process for Negotiating KPIs 4.15. We understand that the intention is for impact shareholders and for profit shareholders to agree KPIs at the

annual general meeting of the SIS and at any other general meetings called for the purpose of agreeing KPIs. However, we anticipate that, in practice, it will take time for KPIs to be defined, negotiated and agreed and it is unlikely to be possible to do this at an AGM. We therefore anticipate that KPIs will need to be negotiated by representatives of the impact shareholders and for profit shareholders who are appointed in advance of the AGM.

4.16. As the process for negotiating and agreeing KPIs is not set out in the Bill, we anticipate that the Regulator

will need to set out the process for negotiating and agreeing KPIs in Guidance. We would recommend that the Regulator sets out an indicative timetable for SIS to agree KPIs which allows sufficient time in advance of the AGM for the possibility of extended negotiations and, if necessary, for a second general meeting of shareholders to be called. Hopefully, such extended negotiations will rare but such negotiations may still take place.

4.17. As it may not always be clear to the shareholders or management of an SIS whether proposed KPIs are

likely to be acceptable to the Regulator, we recommend that the Regulator adopts some form of ‘advance assurance’ process, which allows SIS shareholders to confirm with the Regulator in advance of an AGM that the proposed KPIs are likely to be acceptable. Whilst it should also be possible for an SIS to proceed to agree the KPIs at an AGM and to submit the KPIs to the Regulator following the AGM, an advance assurance process is likely to be highly desirable for many as a way of ensuring that there is no need to call a subsequent AGM in the event that the Regulator deems the agreed KPIs to be unacceptable.

Identities of Shareholders

4.18. The Regulator will wish to know the identities of the impact shareholders and the for profit shareholders

and whether there are any connections or arrangements between the two share classes. Whilst there may be little expectation that the SIS form will be abused, it may be that, if anyone does attempt to abuse the form, it is by controlling all or part of the impact shareholder class and the for profit shareholder class in a given SIS. The ability to control both classes would, for example, lead to the ability to ‘game’ the setting of the KPIs. If this kind of abuse is considered a reasonable risk, the Regulator might wish to set out rules on the degree of connectedness, if any, which is permitted between the two share classes.

Deadlock in Negotiating KPIs

4.19. It has been suggested that failure on the part of for profit shareholders and impact shareholders to agree

KPIs would lead to the deregistration and winding-up of the SIS. We recommend that the Regulator sets out in Guidance how the possibility of deadlock might be minimised through the use of time-limited and escalated negotiation and mediation procedures. These procedures could be supplemented with the use of conciliation or arbitration procedures, in which an independent third party imposes a solution in a situation in which the two classes are otherwise unable to agree a way forward.

4.20. In addition, it would be possible for the constitution of each SIS to contain mandatory provisions in relation

to the escalation process to be followed where the two classes of shareholders are unable to reach agreement. Either such provisions could be prescribed in a mandatory form and set out in Guidance or each SIS constitution could be required to contain escalated negotiation and mediation procedures reflecting certain fundamental principles.

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Failure to Meet KPIs and Winding-Up 4.21. It has also been suggested that failure on the part of the SIS to meet the KPIs for three years in succession

would lead to the winding-up of the SIS. As a Regulatory function, this is not appropriate as it leads the Regulator into a quasi-directorial role. The Regulator should focus on whether this SIS is genuinely there to deliver positive social outcomes. As an alternative, it would be possible to provide the impact shareholders with the power to wind-up the SIS where the SIS has failed to meet the KPIs for three years, as opposed to making winding-up mandatory. The objective here is to enable the impact shareholders to terminate activities if the social objectives are or become unachievable, but still encouraging SISs to take risks and be innovative.

4.22. This approach would have the advantage of providing the final say to the impact shareholders, who

become the guardians of the Social Objective of the SIS in such a situation, and avoiding an outcome which may be unfavourable to the impact shareholders.

Ongoing Regulation

4.23. The SIS should be required to notify the Regulator of the material agreed KPIs (probably the key three to

six of them) following each AGM or other general meeting called for the purpose of agreeing KPIs. There should be a power on the part of the Regulator to determine that the KPIs do not reflect the fundamental requirements of the Social Impact Test set out in Guidance and to require revised KPIs.

4.24. Test 4: Social Responsibility Test

‘Must pursue its activities in a socially responsible manner’ – Art 2(2)(b) of the Bill

There are three key aspects to this, which address the question not of what social impacts the SIS creates by its activity, but of how it does that: how it conducts itself as part of the wider economy. It is required not only to deliver value in line with its objectives, but to live its values in order :

to enhance its own reputation and that of its sector

to enhance the “SIS” badge

to influence others to achieve wider societal change.

The standards against which it is judged in these contexts are certainly those of the public authorities and Regulator, but more importantly are those of the wider public, since it is ultimately their judgment that will make this SIS and the sector in general survive and thrive. This then leads us to note that the tests may be matters of fact, but also must be passed as matters of opinion: it is whether the general public believe them (now and in the future) to have been passed that is key.

There are three broad themes considered here: 1. The SIS should do no harm. It cannot be seen to achieve social impact at the expense of

environmental or social damage elsewhere 2. It should take a democratic approach to its governance, appropriately holding itself

accountable to stakeholders 3. It should, in the broader sense, conduct itself in an ethical way. This is related both to the

overall tests of appropriate social objective, and the first test of ‘do no harm’, but gives the Regulator the ability to apply a judgmental over-ride where there is a technical compliance with these other rules, but another aspect of the SIS is unacceptable.

Each is considered in section 8 below in more detail.

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5. Comparables from the EC and other sources

5.1. The development of the SIS legislation and infrastructure needs to be specific to the needs of the Luxembourg community and State. However it also needs to build on experiences elsewhere in Europe and the World, so as to respond to lessons learnt elsewhere. We have had access to and taken account of the following sources in developing this report:

European Commission Mapping study for Social Enterprise corporate and regulatory structures

European and Global experience of impact measurement through the work of:

o EVPA – including the underlying analysis of over 1,000 impact measurement methodologies

undertaken for producing the EVPA guide

o GECES Sub-group on Social Impact Measurement, including the underlying inputs from various

EU Member State representatives.

o Social Impact Measurement Workstream of the Global (G8) Social Impact Investment Taskforce

Approaches to regulatory compliance (with successes and failures) from social, and financial, sectors,

particularly in the UK (FCA, Stock Exchange, Government, Charity Commission, CIC Regulator and

others), but also in other European jurisdictions, and including special compliance investigations.

The experience of the EIIL boards and advisory groups.

5.2. The learning from the European Mapping study is shown in detail at Appendix D. The learning from the

other areas has been included in the sections on social impact and on other eligibility criteria (sections 6

and 7), and have influenced the development of the regulatory solutions in section 8.

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6. Analysis of appropriate Social Impact Measurement approaches In this section we consider alternative approaches to measuring social impact, which forms the backbone of one of the key areas of eligibility criteria for the SIS. We consider specifically:

How the SIS can, and can be seen to, set the objectives that are relevant to stakeholders

How it can measure the delivery of these, and

How the SIS can report that delivery of outcomes in the interests of public accountability.

The detailed analysis of methods underpinning the chosen approaches in this section is shown in appendix C.

Introduction 6.1. The field of social impact measurement has made significant strides forward in recent years, with important

contributions from associations such as the European Venture Philanthropy Association (EVPA) and their "Practical Guide to Measuring & Managing Impact" (EVPA Guide) as well as European and international initiatives such as the recommendations from the GECES Sub-group on Impact Measurement (GECES) – the European Commission’s Expert Group on Social Business - and the Impact Measurement Working Group of the Taskforce on Social Impact Investment set up by the G8 (G8).

6.2. The EVPA Guide is based on a meta-analysis of almost 1000 different approaches as included in

resources such as the TRASI databaseAA

curated by the US-based Foundation Center. From these 1000 approaches, EVPA, informed by the convening of an expert group of twenty-seven venture philanthropy and social investment practitioners, consultants, academics and representatives of other organizations involved in impact measurement, selected the most commonly used approaches and then further distilled these approaches into a five step process. The GECES debated the EVPA approach, alongside many others (including story-telling, action research-based approaches, the French micro-finance solutions, co-operative models in France, Italy and elsewhere, as well as methods which can be used with monetisation such as Social Return on Investment (SROI), social accounting and balanced scorecards), to develop an agreed cross-border, multi-view approach, relevant for the EuSEF regulation. The G8 also built on this work and encompassed even broader viewpoints. We are therefore confident that the views contained herein, reflect best practice globally as it currently stands today.

6.3. What these recommendations have in common is a focus on the process of impact measurement as a way

of setting standards rather than the top down application of specific indicators. However, none of these approaches provides more than a general or high-level guidance on what must be done successfully to implement the process. In the context of the SIS, the field needs to move forward again, more explicitly to define what can be considered best practice in social impact measurement, in order to be accepted as one of the eligibility criteria for the SIS badge.

6.4. As defined by the GECES Sub-group on Impact Measurement, for a social enterprise the social impact is,

"The social effect (change), both long-term and short-term achieved for its target population as a result of the activity undertaken – taking into account both positive and negative changes, and adjusting for alternative attribution, deadweight, displacement and drop-off." As part of the eligibility criteria to be considered an SIS, a social enterprise must measure its social impact.

AA http://trasi.foundationcenter.org/

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6.5. Given the significant prior work that underlines the work of the GECES, the analysis presented here takes the 5-step process outlined in the GECES (and using the definition of impact in the GECES report as a starting point) and focuses on:

i. What we mean in each step by providing a general explanation of the step.

ii. What are the different ways of practically implementing each step i.e. identifying the key tools and

methodologies that could be applied. In thinking about this we have concluded that not all steps will

have 2-3 clear methodologies (e.g. Step 1, Step 2 and Step 5 will have just one or two that have

emerged as “best practice” in the sector) but Step 4 for example could have many more. In

particular, we see a need to expand Step 4 to include more guidance on data collection (as we

identified this area as underdeveloped in the EVPA guide and in the GECES report, and further

emphasised in the G8 work).

iii. Assessing the approaches according to the pre-agreed criteria (defined below).

iv. Providing a pragmatic recommendation for the approaches that should form part of the legislation or

the policy recommendations attached to the legislation. In practice there is not one particular

approach that is supreme to all others, so the recommendations draw from several different

approaches. The pragmatic recommendation will be illustrated by an example or several examples

as relevant.

6.6 In considering the criteria to be used to assess the methodologies, it is important to balance the constraints faced by social enterprises such as resource intensity, timeframe and complexity with those required by a regulator such as reliability, comparability and universality. Equal weighting is given to each criterion in the analysis and each of the approaches identified as relevant for each step will be assessed according to the criteria. In summary the criteria is as follows:

i. Resource intensity (links to proportionality, which must be expressly addressed)

ii. Timeframe (links to proportionality)

iii. Complexity (links to proportionality)

iv. Reliability – generalizability of a particular approach to a broader population

v. Comparability – of results/processes

vi. Universality – possibility to apply consistently

It is unlikely that every criterion is relevant for every step e.g. (a) to (c) will be most relevant when assessing step 4, but these will form the core of the assessment of the relevant approach.

By going through this process, the objective is to arrive at pragmatic recommendations for the required measurement process that will form part of the test criteria. This analysis will take the GECES and EVPA work to a more practical level, effectively moving from guidance to practical recommendations.

The final output of the social impact work-stream are two to four alternative practical methodologies that will deliver what’s required in that step; in other words, if the SIS uses the recommended methodologies it will be deemed compliant with the eligibility criteria in terms of social impact measurement. There will be an opt out for using another methodology for that step if it fulfils the key criteria and the SIS explains why they are better than the “standards.”

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Overview of the 5 step process 6.7. The findings of the GECES report highlight a rigorous process as the best practice in social impact

measurement. Comparability of measurement is achieved through the comparable and consistent process used for measurement, and the consistent reporting of the measurement produced.

That process involves five stages as shown in Fig 4:

1. Identify objectives

2. Identify stakeholders

3. Set relevant measurement

4. Measure, validate and value

5. Report, learn and improve

6.8. Our recommendation is that the eligibility criterion related to social impact measurement together with that relating to social objective, and to some extent that relating to activity (social aspects) focus on the appropriate implementation of this five stage process. What follows is an analysis of each step and the practical methodologies and tools to fulfil each of them. Each step is illustrated by an expansion of the diagram at Fig 4 to show the options considered and the recommended approach from these.

Stage 1: Identify objectives 6.9. It is fundamental to begin by setting the objectives of what the social enterprise is trying to achieve. This

may appear an intuitively simple task but in practice there is often confusion. 6.10. In all the methodologies considered identifying and setting objectives begins with some aspect of the

theory of change. A theory of change shows an organization's path from needs to activities to outcomes to impact. It describes the change you want to make and the steps involved in making that change happen. Theories of change also depict the assumptions that lie behind your reasoning, and where possible, these assumptions are backed up by evidence

BB.

6.11. The logic model is a commonly used methodology, especially with some of the larger social sector

organizations such as the Kellogg Foundation and LGT Venture Philanthropy, while there is also a "lighter" approach which draws out some of the key questions to guide a social enterprise into arriving at their objectives.

BB Kail, A., Lumley, Tris. (April 2012). Theory of Change: the beginning of making a difference. New Philanthropy Capital

Fig 4: 5 step process from GECES

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Here we assess three approaches all drawing from the theory of change:

1. Logic model

2. Minimum questions to be answered

3. Theory of Value Creation (ToVC) CC

Recommended approach for Stage 1 6.12. In line with the recommendations of the GECES, and established best practice, we believe a clearly

defined theory of change is fundamental to good impact measurement. It shows and explains the causative link between the activities being undertaken and their targeted outcomes and impact. The rationale behind this causation must always be understood and explained. It should always be underpinned with proportionate evidence as to why it is believed that those outcomes arise from that activity.

6.13. Therefore, in the context of the SIS, we would recommend that each social enterprise answer the minimum

questions outlined in detail in Appendix C, but complemented by a clear explanation of causation i.e. how the proposed activities bring about the desired outcomes. These questions will be sufficient to provide a clear overview of the theory of change of a SIS, and can be used by small and young as well as larger or more established social enterprises.

6.14. Please note that the added question on causal links as compared to the Minimum question approach will

be hypothetical for early stage organisations testing new ground, but as evidence from the own intervention, and from other research builds up, the causal link will become more robust (or will be refuted). Thus, the theory of change of any social enterprise should be fully analysed and then reassessed as the social enterprise gains new and deeper experience.

Following this recommendation would mean that setting objectives would include at least the following practical steps: 1. What is the social problem or issue

that the social enterprise is trying to

solve?

With the response including

information about the nature and

magnitude of the problem or

opportunity; which populations are

affected; whether the issue is

changing or evolving and in what

way it is changing or evolving. The

aim of this question is to understand

the base case and therefore, at a

later stage, allow the social

enterprise to see whether there has

been any change from the base

case.

CC Social Impact Measurement Worksteam of the Social Impact Investment taskforce – www.socialimpactinvestment.org

Fig 5: Recommended approach to Stage 1

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2. What resources or inputs, as per the impact value chain, does the social enterprise have and need to

undertake its activities?

This should include the time, talent, technology, equipment, information and other assets available to

conduct the activities. Ideally it should also consider whether a mismatch exists between the activities

and the resources available to execute those activities.

3. What activities is the social enterprise undertaking to solve the social problem or issue?

The response should include a description of exactly what the social enterprise is doing to try to effect

a change. It should include a set of specific steps, strategies or actions arranged in a logical sequence

demonstrating how each activity relates to another.

4. What are the expected outcomes?

This should include what the social enterprise must achieve in order to be considered successful and

will form the basis of the milestones against which the social enterprise will be measured.

5. What are the key factors in the cause-and-effect relationship?

Think about and describe how the inputs link to the intervention and then link to the desired outcomes.

Briefly describe the basis for the logic model (theory or prior research, or both) along with aspects of

the model, if any, which have been confirmed (or refuted) by previous research. As the intervention is

tested by the social enterprise or otherwise, more evidence will be collected to either “prove” or refute

the theory of change, so that the social enterprise may alter its course based on the learnings and

change course as necessary.

Example 1

6.15 We take as a second example a for-profit organization that is aiming to build and scale viable sanitation infrastructure in Kenyan slums, beginning with Nairobi

DD.

Social problem or issue: 2.6 billion people do not have access to adequate sanitation and this number

is not decreasing despite billions of dollars of aid. The resulting disease and water pollution cause 1.7

million deaths and a loss of $84 billion in worker productivity each year. In Kenya’s slums, 8 million

people lack access to adequate sanitation causing disease and death.

Activities: the model involves 4 parts: (i) building a network of low-cost sanitation centres in slums; (ii)

distributing them through franchising to local entrepreneurs; (iii) collecting the waste produced; (iv)

processing the waste into electricity and fertiliser.

Resources or inputs: equipment (sanitation centres, vehicles for collection, digesters to convert faeces

to fertiliser and to generate electricity); staff (qualified personnel on the ground in Kenya to supervise

building of sanitation centres and selection of franchisees, employees to collect waste products and

transport to digesters, operators of digesters to produce electricity and fertiliser); partners

(implementation partners for education about sanitation, technical partners in the design of toilets,

digesters / composters, microfinance organisations to support franchisee purchases); funding (grants

and investments from foundations and social investors).

DD Source: Sanergy website – Saner.gy as used in the EVPA Guide

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Expected outcomes: positive expected outcomes at a local level include increased access to sanitation

facilities for slum dwellers, increased employment levels among slum dwellers, improved health for

toilet users and overall slum; increased income for toilet operators; improved environmental situation

(less waste in open waterways). At a national level, positive outcomes could include a decrease in the

number of power shortages, a decrease in carbon emissions, a decreased reliance on imported

fertilisers and a decrease in the use of chemical fertilisers leading to positive environmental effects.

Potential negative outcomes could be displacement with respect to existing operators of toilets in the

slum; zero job creation through people leaving one organisation to work with this one; reductions in

sales and hence livelihoods of existing producers of fertiliser.

Cause-and-effect relationship: (i) building low-cost sanitation centres in slums will reduce the level of

hygiene in the populations affected, reducing related diseases, (ii) the franchise system will enable

local entrepreneurs to build small businesses and reduce unemployment, (iii) collecting the waste will

reduce environmental pollution, and (iv) processing the waste into fertiliser and electricity may

decrease the number of power shortages, decrease carbon emissions, decrease the reliance on

imported fertilisers and decrease the use of chemical fertilisers leading to positive environmental

effects.

Example 2 6.16 The second example, which follows through each of the five stages, is from StepChange Debt Charity

EE, a

UK-based charity which provides counselling, advice and support services for individuals and families with problem debt that they are unable to pay. Looking at each of the five practical steps:-

Social problem or issue: an estimated 2.9m people in the UK have debt they cannot manage. Not only is

the debt frequently lost, but the emotional and stress-inducing effects may lead to family break-ups, illness

and escalating financial problems.

Activities: StepChange Debt Charity provides advice on how to resolve the financial issues, but also,

through on-line, telephone, and occasionally face-to-face counselling, they support the individual in coming

to terms with the emotional effects.

Resources or inputs: StepChange Debt Charity is funded by grant for UK banks to the extent of some

€35m per annum.

Expected outcomes: Positive outcomes include improved debt recovery and lower recover costs, sustained

employment, fewer relationship breakdowns, improved health, and reduced repetition of the cycle of

problem debt.

Cause-and-effect relationship:

i) the counsellor (debt advisor), even in briefer communications, develops a relationship with a

temporary position of authority, enabling them to 'give permission' for the debtor to seek waiver of

its debt

ii) from that they can suggest, and facilitate, lifestyle changes of wider impact

iii) the ongoing relationship of debt settlement keeps other aspects of behaviour change on track

EE http://www.stepchange.org/

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Stage 2: Identify stakeholders 6.17. Stakeholders are an important element of any impact measurement. The involvement of stakeholders is

also a key part of methodologies such as SROI, whose principles include involving stakeholders and valuing the things that matter to those stakeholders.

EVPA defines a stakeholder as "Any party affecting and/or affected by the activities of the organization."

FF

GECES is more concise using, "who gains and who gives what and how". It is important to understand stakeholders' level of engagement with, control over, and contribution to achieving the desired objectives and the outcomes and impacts that come with them.

In terms of selecting stakeholders, three approaches can be assessed:

1. Asking specific questions to assess who are the most important stakeholders, following the

EVPA approach

2. Working through the relevant part of the SROI methodologyGG

(which may be applied with or

without monetisation, using other measures, and hence with or without the ratio)

3. Stakeholder mapping and selection based on the concept of accountability

Recommended pragmatic approach for Stage 2 6.18. The GECES recommends that social enterprises engage with stakeholders to test and challenge their

understanding and that such an engagement is not just at the planning stage, but throughout the whole measurement process. We would therefore recommend embracing the concept of accountability and prescribing that social enterprises are accountable for material but only positive outcomes on main beneficiary groups and analysing these for sub-groups (Level 3). However to get to this level of analysis the questions suggested by EVPA (in line with SROI stage 1) must be posed to identify the many different stakeholders. Accountability in this sense then acts as a filter to guide the rest of the analysis.

6.19. Following this recommendation would mean that analysing stakeholders defined as who gains and who

gives what and how, would include at least the following practical steps:

1. Begin by putting together a long list of all those who might affect or be affected by the activities of the organization, whether the change in outcome is positive or negative, intentional or unintentional.

2. Prioritize those a social enterprise will focus on by asking: a. How material are the benefits and inputs provided by the identified stakeholders?

b. How relevant is the stakeholder group to the primary mission of the social enterprise?

3. Taking into account the concept of proportionality, it is recommended that the social enterprise is

accountable for material but only positive outcomes on main beneficiary groups, and that at least

those stakeholder groups are included in the analysis.

6.20. As advised by the GECES, whilst the identification of stakeholders is implicit in the second stage of the process, stakeholders should be involved to some degree in all stages of impact measurement. This involvement must follow the guidance on proportionality further discussed below. Subject to that, it is expected to involve:

FF EVPA Guide GG SROI Guide. Stage 1: Establishing scope and identifying stakeholders

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Identifying stakeholders.

Understanding the nature of their interest and confirming that with them, either prior to investment, or at another suitable date.

Agreeing the Framework and/or Indicator suitable to those needs and notifying them (individually or as a class) of how measurement will be provided. This can be by information on a website, by live presentation or written notification, or by other suitable means.

Providing a suitable means for stakeholders to raise queries or comments, and advise them of how to

do it.

Summarising, and if necessary revising, at least annually, or at shorter intervals suitable to stakeholder need: o who are the key stakeholders or key classes of stakeholders; o the measurement produced for them (which does not need to be repeated if common to several

groups); o how that has been communicated to them ; o feedback received from them;

o any planned changes to measurement in future.

Example 1

6.21. Taking the same social enterprise as before in Example 1, the first step is to list their stakeholders. The stakeholders are the toilet users, the toilet operators, the waste collectors, the broader slum dwellers, the employees of the social enterprise, other health & sanitation organisations working on educational initiatives, microfinance organizations, the government, existing fertiliser producers, existing power companies, farmers and investors. The social enterprise would rank the importance of these stakeholders, according to how material the benefits and inputs provided by the stakeholders are, and how relevant the stakeholder group is to the primary mission, as follows: toilet users, toilet operators, broader slum dwellers, waste collectors, their employees, farmers, existing fertiliser producers, existing power companies, government. Following the concept of proportionality given the resources and time that the social enterprise has available, the early-stage nature of the social enterprise and the view that these stakeholders are most relevant for the social enterprise to decide if it is achieving its mission; they decide to focus the analysis on the first three stakeholders: toilet users, toilet operators and broader slum dwellers.

Fig 6: Recommended approach to Stage 2

33

The expectations of these stakeholders can be considered as follows:

Toilet users: pay an amount of money to use a clean toilet, they therefore expect the toilet to be clean

and may expect to have fewer health problems.

Toilet operators: earn income from the toilets and pay the franchise fee. They expect to have a steady

stream of customers for their toilets and the necessary franchisor support from the social enterprise in

case of any problems with the toilet.

Broader slum dwellers: if the installation of toilets results in less human waste in the slums then all

slum dwellers may have fewer health problems. However it is unlikely that slum dwellers will

necessarily have this expectation.

Example 2 6.22 Taking StepChange Debt Charity, as in Stage 1 the principal stakeholders and their interests are as follows

Principle Stakeholder Nature of Interest

Framework and Indicator

Beneficiary/debtor Understanding how StepChange can help and level of success

Outcomes in terms of debt settlement, keeping families together, maintaining employment, housing. Indicators are financial for debt settlement, but numbers of successes and stories of degree of success for others.

Bank/other creditors Recovery of debt or a proportion getting debtor's financial situation organised (regular repayments). Changing behaviour to avoid a repeat

Value recovered. Savings in alternative recovery processes avoided. Incidence and level (value) of repeating problems.

Public Agencies (various)

Avoiding public benefits for worklessness, homelessness, health problems

Costs saved and the stories that underpin them.

StepChange staff What works, how, and how can we make it more effective?

Understanding stories of typical debtors, and the causative link to the counselling. How often is it effective?

Stage 3: Set relevant measurement 6.23. As defined by GECES, in this stage, the social enterprise should, from the logic model established in Stage

1 and the identified outcomes, develop a series of measures that fairly and helpfully reflect what is being achieved and establish how they should be presented simply and clearly to meet stakeholders' needs. The selected measures then need to be agreed with the previously identified stakeholders. The GECES report and the EVPA guide strongly advise against jumping ahead to Stage 3 and starting to define indicators without having clearly understood the objectives and the theory of change. Stage 3 builds on the previous two stages and makes the measurement more concrete and quantifiable.

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6.24. It is vital that, before setting indicators, the relevant outcomes as informed by the social enterprise's mission are selected. The EVPA guide identifies a number of questions that can help when selecting those outcomes to which indicators will be assigned which are used in our recommended approach.

6.25. It is in Stage 3 that indicators should be selected to "demonstrate progress towards or away from specified

outcomes." (EVPA Guide). In the context of the SIS, three alternative approaches are considered. They are not necessarily mutually exclusive but should provide a good sample of the progress being made in this area and provide the basis for the pragmatic approach required for the SIS.

1. Selecting appropriate indicators from those found in the IRIS

HH catalogue.

2. Selecting appropriate indicators from those found on the Global Value ExchangeII.

3. Using of the measurement frameworks recommended by the GECES but yet to be developed at a

European-wide level.

Recommended pragmatic approach for Stage 3

6.26. We recommend that the social enterprise starts by clearly selecting the outcomes that it wishes to measure with indicators. Building on the Theory of Change defined in Stage 1, and corroborated through stakeholder involvement in Stage 2, the following questions (as in the EVPA guide) are useful to further refine those outcomes:

Which outcomes are most

important to achieve (this will depend on the prioritisation assigned to the stakeholders)? Which are most closely related to the core business of the organisation?

Are the outcomes material? Is the change or benefit something that makes a real difference for the key stakeholders?

Which outcomes are most useful? Which will provide the best information for management decision-making, reporting or other purpose of impact measurement?

Which outcomes are most feasible? Which are most likely achievable with the resources available? Which are likely achievable within the designated evaluation period? It is important to reiterate that this question relates to achievability of the outcomes and not the feasibility of their measurement.

This exercise should produce a number of concrete outcomes that the social enterprise can use to measure its progress towards the overarching impact objectives. We would recommend that the social enterprise selects two or three indicators for each particular outcome, and that if possible, indicators are

HH https://iris.thegiin.org/metrics II http://www.globalvaluexchange.org

Fig 7: Recommended approach to Stage 3

35

chosen that have been used successfully for impact measurement purposes in the past. In other words, by using the "wisdom of the crowds" found in databases such as IRIS and the Global Value Exchange a social enterprise can be more confident that they are selecting the appropriate indicator for that outcome. The social enterprise should therefore always include the source of the particular indicator. This has the secondary effect of lowering the burden on the social enterprise, as they can learn from others. It is clear that not all indicators will be covered and if that is the case, then the social enterprise should create their own indicator, but include a justification as to why they have felt it necessary to do so, following the recommendation of the GECES report.

6.27. Once a Europe-wide framework has been developed and tested, then recommending that SIS also uses

such a framework would be a logical step forward. In the meantime, the four factors highlighted in the EVPA Guide as constituting a good indicator could be useful guidance accompanying the regulation. We would not recommend, however, that these factors are enshrined in such regulation, but rather used as technical guidance.

Indicators should generally be aligned with the purpose of the organisation. Although if a potential

unintended outcome has been identified, relevant indicators for this outcome may by definition not be aligned with the purpose of the organisation.

Indicators should be SMART: specific, measurable, achievable, relevant, time-bound. Indicators should be clearly defined so that they can be reliably measured, and ideally, comparable

with those used by others so that performance can be better benchmarked and understood in a broader context.

Indicators i.e. more than one should be used, with a preference for two to three. For example if a social enterprise's objective is to increase women’s empowerment and one outcome is that they take better care of their health, then an appropriate indicator could be the number of times they visit their doctor in a certain period. However whether this number goes up or down, it is very difficult to draw a conclusion as to whether they are taking better care of their health. At least one other indicator is required and a conclusion can only be drawn about whether the outcome is achieved by seeing if they all point in the same direction.

Example 1

6.28. Taking our previous example of the social enterprise working on sanitation we can perform the analysis required in Stage 3. The table below shows the social enterprise's theory of change and highlights the various outputs, outcomes and impacts.

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Impact value chain (source: EVPA)

6.29. The social enterprise wants to ensure it is operating as planned as well as measure its outcomes. For that reason indicators are set at both the output and the outcome level. To support the development of the sector, the social enterprise uses indicators from the IRIS taxonomy where possible.

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Setting output indicators

6.30. Despite being important for monitoring the operations of the social enterprise, the output indicators do not necessarily tell us whether the social enterprise is making progress towards its outcomes. To do that we firstly need to select the outcomes that are relevant for the analysis.

6.31. We mentioned in Stage 3 that the stakeholders of focus were the toilet users, toilet operators and slum

dwellers. With this filter we should therefore focus on the following outcomes arranged according to the themes of material and physical wellbeing.

Improved physical well-being: Increased access to sanitation facilities for slum dwellers

Improved health for toilet users and overall slum

Improved environmental situation in the slum (less waste in waterways)

Improved material well-being:

Improved material well-being: Increased employment levels among slum dwellers

Increased income for toilet operators

6.32. Given the technical equipment needed to test the level of sewage in the slum waterways and employing the concept of proportionality, the social enterprise decides to focus on the remaining four outcomes. With each of these the social enterprise thinks of the two to three issues that evidence the situation is sub-optimal at present in order to select appropriate indicators.

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6.33. For increased access to sanitation facilities, two appropriate outcome indicators can be found among the output indicators detailed above: Number of toilet units installed by the social enterprise during the reporting period.

Number of individuals that were clients in the reporting period.

6.34. However an important indicator to add to these two would be to understand how the sanitation situation has evolved generally: Increase (versus the beginning of the social enterprise’s operations) in the number of toilet type

(including latrines etc.) units installed (by the social enterprise or by any other organisation) during the

reporting period.

6.35. For the improved health of the toilet users and slum dwellers, the users may have to be surveyed so as to collect data on the following indicators: Number of days a toilet user has not been able to be up and about during the reporting period due to

some stomach related illness (deliberately left broad to include the possibility of diarrhoea, intestinal

worms etc.).

Number of outbreaks of typhoid or cholera in the slum area served by the toilets during the reporting

period.

Average Number of days a slum dweller has not been able to be up and about during the reporting

period due to some stomach related illness.

6.36. For the increased employment levels among slum dwellers, it is important to track the following indicators:

Proportion of community with some form of regular income through full time and part time work as at

the end of the reporting period.

Number of employees (toilet operators, waste collectors etc.) of the social enterprise, including fulltime

and part-time (but not temporary), as at the end of the reporting period that reside in the community

where the toilets are situated.

6.37. For the increased income of the toilet operators, another of the output indicators can be used as well as two indicators that point towards increased wealth: Total earnings generated by the micro-entrepreneurs from selling the social enterprise’s products /

services.

Proportion of toilet operators with all their children attending school.

Proportion of toilet operators with their house’s outer walls made from strong materials (e.g. iron,

aluminium, tile, concrete, bricks, stone, wood).

6.38. Of the eleven outcome indicators selected, three are also used as output indicators and one other (social enterprise employees from the slum) should be relatively easy for the social enterprise to report. However the remaining seven, which are required to show the progress (or not) towards the target outcomes, require further investment of time and resources (e.g. information gathering via surveys) on the part of the social enterprise. Given the social enterprise is claiming these outcomes they should be willing to spend the time necessary to collect the data. However in very early stage entrepreneurs it is important to decide, based on the concept of proportionality, when this level of analysis should begin.

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Example 2 6.39 For StepChange Debt Charity a similar process is followed, although the particular support services and

their effects do not have ready comparators elsewhere in the market. Similar organisations exist but may not yet have published measurements. It therefore develops specific indicators in consultation with key stakeholders.

The measurement here is a mixture of outputs (terms "informed outputs" since they are derived from a detailed understanding of how they flow through to outcome indicators. The outputs give a view of the levels of engagement with the services, and the outcomes cover the effectiveness and effects of that engagement.

The indicators used (some of these are actually used by StepChange Debt Charity and some are illustrative) are principally:-

Aspect or Effect being measured

Indicator used

Engagement with the services Numbers of debtors that complete a first call Numbers of debtors that sign up to debt management plan or other solution

Debt management plans or other settlements successful

Number of plans completing Number settled early Number failing (categorised reasons) Debts repaid related to debts and arrears at the outset

Employment saved Numbers in paid employment 3, 6 and 12 months later, matched against those in paid employment before, and those of that group acknowledging at the outset that their jobs were at risk

Housing stabilised Numbers with significant rent or property debt arrears staying in their home

Reducing state benefits for worklessness

Numbers in paid employment (as above) as a proportion of those - on benefits at the outset - acknowledging risk of worklessness

Relationships stabilised Those in relationships at the outset who are still in the same relationship 12 months later, and at the end of a debt management plan

Not repeating the cycle This is harder to measure, because ideally it means tracking clients over an extended period post-settlement. A similar route is to ask all new clients whether they have used StepChange before and whether it was successful, but this is not a perfect answer since it does not pick-up those that repeat but don’t come back for help, and anyway the debtor may be unwilling to admit they have been before. Matching to earlier (retained) debtor records may help.

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Stage 4: Measure, validate, value 6.40. As described by the GECES, this stage requires (i) measuring whether the targeted outcomes are actually

achieved in practice, (ii) validating whether they are apparent to the stakeholder intended to benefit, and (iii) assessing whether they are valuable to that stakeholder.

Value is the net gain to the stakeholder: that is the gains achieved, net of costs or sacrifices made to

achieve them. The underpinning evidence for defining value needs to be relevant to the measurement, transparent to the stakeholders interested in it, and proportionate (in terms of cost, accuracy, detail balance) to the use to which it is put. This is a continuous process to be undertaken over the life of the delivery of the intervention, and needs to be set into the normal operations of the social enterprise. The drive for measurement must not be allowed to overshadow the point that it is essential that it emerges from the story of the activity and the outcomes achieved i.e. the lives changed by it.

JJ

6.41. Before we go into more detail about the various approaches that are possible to measure, validate and

value social impact we must address the concept of proportionality especially as the range and depth of approaches and methodologies varies the most in this stage.

The GECES Report

KK includes very clear guidance on proportionality stating that it is fundamental to good

measurement that it balances:

the needs of stakeholders; with

the obligation not to waste resources on measurement which does not matter.

Further explanation of the importance of proportionality in social impact measurement, and how it can be approached, is laid out in Appendix C.

6.42. Taking into account the over-riding importance of proportionality, this stage in fact includes three separate

areas: i. Measuring: in other words collecting data according to the defined indicators

ii. Validating: verifying the data collected by engaging with stakeholders and understanding how they

are/were affected by the intervention

iii. Valuing: understanding if the outcome is/was important to the stakeholders

The results of these three steps allow the social enterprise to refine the target outcomes and associated indicators, creating a positive feedback loop in the impact measurement process and providing the basis for Stage 5 (report, learn and improve). Each of the three steps has several possible approaches as explained in more detail in Appendix C.

Recommended pragmatic approach for Stage 4

6.43. More than in any other stage, Stage 4 must be guided by a strong level of proportionality. We recommend following the advice in the GECES Report

LL to make sure that the measurement balances:

JJ Clifford, J., Hehenberger, L., and M. Fantini. (June 2014). Proposed Approaches to Social Impact Measurement in European Commission

legislation and in practice relating to: EuSEFs and EaSI. Pg. 22 KK IBID pg. 32-33 LL IBID pg. 32-33, summarised in Appendix C

41

the needs of stakeholders;

with the obligation not to

waste resources on

measurement which does not

matter.

The needs of the stakeholders can only be assessed through continued engagement. Stage 4 engages stakeholders as sources of data collection, by verifying that the impact actually happened and by assessing whether the impact was valued by them.

6.44. Stage 4 embodies three sub-sections, each of great importance and requiring separate recommendations.

(i) Measuring includes collecting data according to the indicators defined in Stage 4. Using the SIF principles (for the Luxemburg Specialized Investment Fund) as guidance, but taking into account the need for proportionality, we would provide the following recommendation for social enterprises to collect data:

1. Identify data sources for all measures, as well as the type of data to be collected along with how

they will be collected. Descriptions should cover data for program participants. Where possible,

data should also include control or comparison group members.

2. Establish a baseline status for program participants, at the beginning of the intervention, and where

possible, comparable data for control or comparison group members. Baseline data are important

for assessing change in participants over time.

3. Indicate who will collect all data used in the evaluation (internal or external people), and the

capacity and availability of staff members in relation to the data collection process.

4. Describe how data will be collected, for example through administrative records such as academic

records, program systems, such as scorecards maintained by staff, or through instruments

specifically created for the purpose, e.g. surveys. It is likely that some combination of efforts will be

required to capture of the data the measures warrant.

(ii) Validating should include verifying that the data collected accurately represents the change achieved, or in other words, that the impact claimed actually happened and was real to the intended stakeholders. It can be seen as an additional way for the social enterprise to build proof for its theory of change or the causal links in its logic model. At least one of the following methods should be used to validate or verify the impact:

Fig 8: Recommended approach to Stage 4(i)

42

1. Desk research: looking at

external research reports,

databases, government

statistics etc. to confirm the

trends the social enterprise

has dictated through the

outcome indicators.

2. Competitive analysis:

comparing the data of the

social enterprise with the

data of other comparable

social enterprises operating

in similar geographies on

similar issues.

3. Interviews / focus groups:

ask stakeholders through

personal interviews or focus

groups about the results of

the intervention.

Different types of social enterprises may be guided to choose a different type of approach. Desk research is intuitively attractive as it tends to be less resource intensive, but external information about a new and innovative approach may be difficult to find. Competitive analysis provides a high degree of comparability but only if there is a pool of relatively similar social enterprises that openly shares data. Both desk research and competitive analysis should be easier to perform as the sector grows and data is shared (which should be promoted within the SIS arena). Interviews and focus groups can follow a relatively “light” approach of engaging and checking with key stakeholders as to how they perceive the impact of the intervention. It is recommended that social enterprises perform such an analysis at least in a light way. Developing focus groups and making such an analysis more professional would normally require external consultants which would provide a more neutral assessment, but also require higher costs. (iii) Valuing is an assessment of whether the outcome is/was important to the stakeholders. This analysis

is often omitted by social enterprises who believe that it refers to monetising. However, monetising is just one method of valuing. We recommend that valuing includes, where possible, a combination of at least one qualitative and one quantitative method. For example, storytelling will increase the understanding of how an intervention affects a particular beneficiary, and when complemented with a qualitative approach such as cost savings methodology, the story will be put in perspective and compared to the investment made. Furthermore, a qualitative analysis alone may fall into the trap of making assumptions that are too far removed from the reality of the person on the ground being affected, so that it becomes a “garbage in – garbage out” analysis. Qualitative methods include mainly storytelling, client satisfaction surveys, and participatory impact assessment (i.e. focus groups). Quantitative methods include perceived value assessments, cost savings or cost reallocation methodologies (for example a calculation of social return on investment).

Fig 9: Recommended approach to Stage 4(ii)

43

Example 1

6.45. Referring back to our first case example, the social enterprise continually collects data for the validating process by using desk research combined with competitive analysis. For example it tracks government data on disease outbreaks in and around Nairobi as well as keeps an “ear to the ground” on the activities and results of any similar companies working in a similar setting (although not necessarily the same country).

6.46. The social enterprise is only

superficially valuing the outcomes of its activities by focusing on collecting great stories from the slums of franchisees and community views. This is because they do not have sufficient resources to support the more data driven technique that they consider most appropriate (perceived value). Given their early stage nature they feel the time is better spent on refining the business model and consolidating sales. Additionally collecting data for the required outcome indicators already takes up a significant amount of time and in line with the concept of proportionality they decide not to go further.

6.47 Valuing outcomes may mean to value by monetising or may indicate using other forms of measure. The approaches of methodologies that embrace monetisation may be of use in evaluating using non-monetary measures.

Fig 10: Recommended approach to Stage 4(iii)

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Example 2 6.48 For StepChange again data collection is continuous; an enhancement of what is already done in terms of

client numbers and financial details for the purposes of administering the settlements. In many cases the values naturally fall out of the operational functions: examples are in the employment

statistics (needed for debt and case management), and the level so borrowing and repayment (needed for effectiveness of the intervention of debt recovery).

The regular gathering of data is firmly set in the story-telling process, gathering data which illustrates the

stories based on one of five main client and story types (eg couple aged 30-50 with children). There are aspects of perceived value assessment applied in gauging the effect of the intervention on

behaviours (eg periodic questionnaires on stress levels, health issues, and engagement relationships). The financial data is gathered and valued in ways recognised in cost-benefit analysis and SROI.

Stage 5: Report, learn and improve

6.49. As defined by the GECES, as the products and services are delivered and the measurements of their

effectiveness emerge, so these results are reported regularly and meaningfully to internal and external audiences. This enables each stakeholder, and most importantly those most directly concerned with service delivery, to learn and to revisit, refocus and improve the services. The reporting needs to be appropriate to the audience, and needs to be presented in such a way as both to be transparent and useful, and to encourage the future behaviours most useful to making the service effective in delivering desired outcomes. Transparency is one of the three characteristics of impact measurement that would allow it to withstand public scrutiny, as stated in the GECES report. The reporting should be alive to the point that it may demonstrate that the targeted outcomes, as well as the means by which they are achieved, are not appropriate and need changing.

In terms of reporting three approaches can be considered as relevant for the SIS:

1. Recommendation on inclusion items in reporting, without prescribing a particular format

2. Adoption of the Social Reporting StandardMM

, already used by many social enterprises in Germany

3. Development of a series of alternative reporting layouts, with indicative guidelines on headings

and sub-headings and how to bring about integrated reporting on social impact and financials

Recommended pragmatic approach for Stage 5

6.50. Even though an indicative model/template or examples of best practice could be useful to provide to the social enterprise, we do not recommend that such additional guidance should be enshrined in a very detailed or specific way within the regulation. Similarly the Social Reporting Standard, although useful as a reference tool and a place for social enterprises to begin, it would not be our recommendation to include it in a prescriptive way in the regulation. Given the social enterprise sector is still at a nascent stage and shows different levels of maturity across Europe, any regulation should not be too detailed or specific to provide sufficient room for the evolution of the sector. Until such a time that reporting formats have been developed at the European level, social enterprises should include in their reports the information recommended by the GECES. The reporting needs to be appropriate to the audience, and needs to be presented in such a way as both to be transparent and useful, and to encourage the future behaviours

MM www.social-reporting-standard.de/eu

45

most useful to making the service effective in delivering desired outcomes. This reporting needs to stay close to the process, therefore reporting clearly on how the social enterprise has conducted the impact measurement (including all stages), and bringing out the most important and useful points to the stakeholder receiving the information. Specifically, all reporting of measurement should include appropriate and proportionate evidence supporting each material point, and specifically:

a clearly explained

account of the effects of the intervention (outcomes, and identified beneficiaries, also explaining , at least in qualitative terms, deadweight, development and drop-off).

an explanation as to how that happened: what activity achieved those outcomes and their impacts, and the Social Enterprise’s logic model (theory of change, or hypothesis) as to why the activity caused or contributed to the outcome.

an identification of any third parties having a role in the effective delivery of those outcomes and impacts, explaining how they contributed (alternative attribution).

an identification of those stakeholders whose interests are being measured, and the nature of the gain to them, categorising them appropriately.

a well-explained, proportionate, selection of indicators for the identified impacts for those stakeholders, identifying how the indicator relates both to the impact, and the needs and interests of the stakeholders, and how these have been agreed with those stakeholders.

an explanation of social and financial risk (the risk that social and financial outcomes are not delivered)

quantified, where helpful and proportionate, with an evaluation of likelihood and impact, and with a sensitivity analysis showing the effect on targeted outcomes, impact, and financial results if the risks arise.

6.51 Reports should be published on an annual basis, in line with the financial reporting schedule, and completed in the quarter following the end of the social enterprise's financial year.

6.52. In terms of learning and improving this must be explicitly addressed and defined in the various operating

documents of the social enterprise and reported accordingly. For example discussion of impact measurement results should be included in all board meetings, with discussions and decisions recorded in

Fig 11: Recommended approach to Stage 5

46

the board minutes. In fact, a recent report by the European Microfinance NetworkNN

showed that the level of formalization of the social mission within an organization varies significantly, with the most common being a strategic/business plan formalization (in 63% of cases), through by-laws and status (in 37% of cases) and internal policies (in 20% of cases). We recommend that the discussion of social impact must be enshrined into management and board meetings, with minutes reflecting the discussions and decisions taken.

6.53. We should never lose track of the ultimate objective of the social impact measurement – to enable the

social enterprise to work towards achieving greater impact in a more effective way. A survey of 1000 SPOs in the UK by New Philanthropy Capital

OO showed that more than half put meeting funders’ requirements as

a key driver for impact measurement versus only 5% saying that the main driver was improving services. However the main benefit that SPOs said they found when they did measure their impact was not increased funding but improved services! This result and other evidence demonstrate that by integrating impact measurement into the management systems and mind-sets of social enterprise, the sector can produce greater and more impactful work.

Example 1

6.54. The example of the social enterprise in Africa is at a very early stage so is beginning to collect data and report on such data through the use of spreadsheets. One angle to be explored is to request that their investors work with them to create a template for reporting that the other investors are also happy to receive. This can therefore reduce the burden on the social enterprise.

A large variety of impact reports from different organizations can also be accessed at the Social Impact

Analysts Association website: http://www.siaassociation.org/formats/impact-reports/. The GECES Report also includes additional case study material in pages 56 onwards to illustrate how various European organizations are currently approaching and reporting on impact.

Example 2 6.55 StepChange Debt Charity reported their outcomes, and the stories of typical clients that underpin them, on

their website.PP

This shows both the policy briefing paper which was used for outreach and policy influence, and the full research report which looked at the specifics.

Disclosures in annual reports would cover the information outlined earlier in this case study example,

together with summaries of the results of the evaluations. It would show achievement of outcomes against targets set by the organisation, and comment on how this is to inform strategy for the next year.

Typical disclosure headings in our annual report for StepChange could be (with the level of disclosure

being proportionate to the needs of the stakeholders, public and Regulator):

The Social Issue How StepChange's actions address that Stakeholders and their interest in outcomes Selections of frameworks and indicators (including explanation of why they were selected, and

why they are different from those used elsewhere) Key targeted outcomes and how they were agreed with stakeholders

NN Marie Anna Bénard. (October 2014). European microfinance and social performance: where do we stand? Pg. 9 OO

Ní Ógáin, E., Lumley ,T., D.Pritchard. (October 2013) “Making an Impact: Impact measurement among charities and social enterprises in the UK” New Philanthropy Capital PP http://www.stepchange.org/Medicacentre/researchandreports/socialcostofdebt.aspx

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Key indicators compared to target, with explanations, and 2 years' comparatives Explanation of social risk, and risk management Plans for next two years, with targeted outcomes

Audit Reports and Small Company Reporting 6.56 The annual audit for SISs is discussed in more detail in section 8 of this report. In outline it covers:

financial statements, in accordance with appropriate financial auditing standards;

outcomes achieved in the last three years

outcomes targeted to be achieved in the next two years

whether disclosures are complaint with standards

For smaller entities, or those that, to a material degree are invested in as impact shares with negligible profit shares, the audit requirements falls away. The reporting requirement still stands in that

explanations in accordance with these standards, and GECES, must be made, essentially covering what outcomes are being targeted and whether and how they are being achieved

the level of detail to be given within that is as agreed between the impact investors, the profit investors and the SIS, based upon the principle of proportionality (see Appendix C): essentially what needs to be known.

The Regulator will review by sample whether each of the disclosure headings is being addressed. It will not concern itself with the detailed disclosure (6.49) within each, except to consider whether positive outcomes are being achieved, or whether ethical breach has occurred (see section 8 below).

6.57. In conclusion we

recommend a substantially GECES-based, and hence GECES-compliant approach. This is to be done bringing in elements of various alternative approaches, either in a blended solution, or as alternatives as shown in the summary diagram at Fig 9. Taking those five stages of the GECES process, itself a composite solution from a review of best practice across Europe and beyond, we have the following:

Fig 12: Recommended approaches All five Stages

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Using Stage 1 Identify objectives and theory of change EVPA minimum questions, adapted Stage 2 Identify stakeholders and map targeted

outcomes against them SROI or EVPA questions (similar) set into an accountability framework

Stage 3 Set relevant measurement from an understanding of targeted outcomes

Use outcomes framework and indicators from Global Value Exchange, switching to GECES frameworks once they have emerged.

Stage 4a Measuring: gathering the relevant data 4-stage process: identify data sources; establish baseline; allocate responsibilities; establish how to gather and store data.

Stage 4b Validating: does the data fairly represent the outcomes

Any of: desk research; competitive analysis; interview focus groups

Stage 4c Valuing At least one qualitative and one quantitative method from: Storytelling; perceived value assessment; cost-benefit analysis; SROI (monetised or non-monetised)

Stage 5 Reporting format Don’t prescribe a format; cover (disclose) the six elements in section 6.49

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7. Analysis of approaches to other eligibility criteria

7.1. The other eligibility criteria focus primarily on the SIS being a socially responsible business. As outlined in section 4 above, these cover:

The social objectives test, and

The social responsibility test, itself divided into three aspects:

o Do no harm

o Democratic governance processes, and

o Ethical conduct

Each will be examined in turn and solutions for measurement and regulation suggested. Test 1: Social Objectives test Firstly we consider two alternative approaches with regard to this, which develops the ‘focus on delivering

social objectives’ covered in section 6 into ‘we are focusing on the right objectives’. Option 1 – Accepted Categories with a Catch-all Category 7.2. One option is for the Regulator to set out categories of Social Objectives which are acceptable in principle

to the Regulator, such as the categories of Social Objectives articulated in the Bill and set out above (although this could be extended) together with a ‘catch-all category’.

7.3. A purely static list of categories of Social Objectives would be highly undesirable, as it would be likely to

exclude a whole range of Social Objectives and to result over time in a much narrower interpretation of social enterprise than that of the EuSEF Regulation.

7.4. It would be possible for the Regulator to add to its categories of accepted Social Objectives over time in

Guidance, as more SIS are registered and as the range of categories of Social Objectives which have been recognised and accepted by the Regulator increases.

7.5. However, we would not expect that an applicant for SIS status could simply state a form of Social Objective

which falls within one of the accepted categories and in so doing satisfy the Test. Instead, we would expect some form of ‘rebuttable presumption’ to apply, as it will be a question of fact as to whether a stated objective is genuinely a Social Objective in the case of a given SIS and it may be that a stated objective does not prove satisfactory when examined in practice. In this sense, the Social Objectives Test is linked to the Social Activities Test.

7.6. In any event, there will be a need for a ‘catch-all category’ which allows for the range of Social Objectives

to be expanded over time as new applicants come forward and to allow for innovation and to reflect changing social and economic circumstances. There are two obvious ways in which this catch-all category might be expanded:

1. By analogy to one or more of the accepted categories 2. By reference to an overarching test with an element of reasonableness

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The more conservative approach is to require a new stated social objective which falls outside the accepted categories to demonstrate that it is analogous to one of the accepted categories. This might mean that highly innovative stated social objectives fail to be recognised immediately and so the development of new permissible Social Objectives could be delayed.

The more liberal approach is to adopt an overarching test, with an element of reasonableness, which applies to the catch-all category of Social Objectives, as described below

Option 2 – An Overarching Reasonableness Test

7.7. An alternative option is to develop a reasonableness test which applies to new Social Objectives and which

is capable of being applied to new facts and circumstances over time. 7.8. One version of such a test would be to ask: “would a reasonable person consider that the stated objective

of the applicant is a primary objective of general interest?” Or, to put it another way: “would a reasonable person consider that the stated objective of the applicant involves the creation of a positive social impact for the benefit of the public?”

7.9. The advantage of a reasonableness test is that it is capable of being applied flexibly by the Regulator,

whether as an overarching test or to a final catch-all category. It also has the advantage of having regard to what reasonable people are likely to think and so it requires reference to public opinion and changing economic and social circumstances.

7.10. The disadvantage of a reasonableness test, if it is a stand-alone test, is that it does not provide the

Regulator or applicants with very detailed guidance about what is or is not acceptable. This could be remedied by giving examples in Guidance of what is likely to be acceptable.

Excluded Objectives

7.11. We recommend that the Regulator sets out in Guidance forms of objectives which will not qualify as Social

Objectives or which are automatically disqualified. 7.12. There is a requirement for a Social Objective to be of ‘general interest’. One way of interpreting this

requirement is to say that the public or a section of the public must be capable of benefitting from the objective. Another way of interpreting this requirement is to say that the objective must not be solely for the benefit of a restricted class of persons.

7.13. The general interest requirement could also be seen as excluding ‘political purposes’, which are likely to be

controversial or to divide opinion and not be seen as being of general interest. This can be a hard line to draw but it would certainly exclude objectives stated in party political terms. It could also exclude objectives to change national or international law or policy, although this is not always easy to interpret, especially where there are generally agreed international conventions and national laws which fall short of international standards.

7.14. It will be important to distinguish Social Objectives from ordinary commercial objectives and so we would

expect the SIS to require an objective which is more than simply promoting:

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economic growth;

job creation;

good quality goods and services;

innovation; or

any other ordinary commercial objective. 7.15. Two objectives which will require detailed consideration by the Regulator are objectives which related to

the ‘reduction of harm’ and ‘promoting sustainability’. These are two objectives which are capable of being social objectives but which are also capable of being ordinary commercial objectives. Whether an objective is genuinely a Social Objective may therefore be a question of fact and degree. A commercial company which manifestly puts waste reduction and sustainability at the heart of everything it does and which takes a leadership position with a view to changing industry practice should be able to qualify. A commercial company which wishes to reduce its waste and increase its sustainability with a view to enhancing its reputation and improving its profitability should not be able to qualify.

7.16. We would expect the Guidance issued by the Regulator to expand upon the excluded objectives and to

provide applicants with a sense of how borderline issues will be interpreted. For example, the general interest requirement could be said to include elements of inclusivity, accessibility or affordability which might be factors in the Regulator’s analysis. If the objective is one that is relevant only to small group of people, such as the children of the wealthy, the Regulator might conclude that the objective is not sufficiently inclusive.

Ongoing Regulation

7.17. Clearly, as the Social Objective is central to the identity of any legal form with SIS status, the Regulator will

need to give advance approval to any change to a Social Objective. Test 4 Socially Responsible Business 7.18. Turning then to the second aspect of other eligibility criteria, we can look at the three elements within it in

turn.

Do No Harm 7.19. The essence of this test is that the SIS should be aware of the areas in which it might cause harm by its

activities or actions, and should avoid these, or at least minimise the risk. This is a test both on registration, and something to be tested by ongoing monitoring and reporting.

7.20. We set out in Appendix B a series of example questions and example declarations which the Regulator

should consider including in the application form for an SIS. For all applicants, in addition to answering these core questions, they should put in place a process, and should report at least annually on it, comprising four key steps:

1. Consider and identify the potential for harm, and its effect – the applicant should be required to

consider and identify the effects of its activities and the nature of the detriment or harm caused. 2. Assess whether it is a necessary, or unavoidable, by-product of the main, positive activity, or whether

there are alternative approaches that could reduce the effect – the applicant should be able to demonstrate that the detriment or harm is a necessary by-product of the way it operates.

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3. Measure extent of detriment or harm – the applicant should be required to demonstrate to the Regulator that it has measured the extent of the detriment or harm.

4. Regularly re-review and consider alternatives – the applicant should be able to show that it regularly

reconsiders alternative modes of operation and that if there are less harmful, but realistic, alternatives, it has pursued them.

7.21. An example would be the life sciences sector, where life sciences companies are often seeking to solve

health problems in society but are required to undertake animal testing by law. In such circumstances, a life sciences company should be able to demonstrate that it has identified and measured the harm caused and should be able to demonstrate that the harm is necessary and that, in the circumstances, there are no other practical alternatives available.

Democratic Governance Processes

7.22. The SIS status has stakeholder consultation built into its fabric, as it requires the majority of the board to be

appointed by the impact shareholders and it requires a majority of the impact and for profit shareholders to agree major decisions

QQ, such as the agreement of Social KPIs.

7.23. However, in addition to these features, each applicant should be subject to the following democratic

governance process requirements, in keeping with the current concept of a social enterprise as understood as part of the European Commission’s Social Business Initiative:

1. Accountability – an applicant should be able to articulate who the wider stakeholders of the SIS will be

beyond its shareholders and how it will manage the business of the SIS in a way which manages these stakeholder relationships in a sustainable way.

2. Transparency – an applicant should be able to demonstrate how it will communicate relevant

information about the SIS and its activities to the stakeholders it identifies. 3. Involvement – an applicant should be able to demonstrate how it will both encourage and respond to

feedback from its stakeholders over time when carrying out its activities. 7.24. Applicants should therefore be required to submit a “stakeholder involvement plan” covering these different

elements as part of its submission for SIS status, alongside its business plan and as part of the Social Responsibility Test. A requirement of this kind would align the concept of an SIS closely with the prevailing European concept of a social enterprise.

It should be clear that the plan should cover both internal and external stakeholders.

7.25. This should exhibit the following elements:

Identifying stakeholders (which may be the same as those in the social impact planning, or may be a wider list looking at those interested in the wider presence and activities of the SIS);

Clarifying the nature of their interest, and hence the nature of the SIS’ accountability to them;

QQ (Art 12, Draft Bill)

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Planning how that accountability will be addressed by information provision, specifying key categories of information and the frequency and means by which it will all be supplied. There is a general presumption that annual information will be sufficient (as it is for private sector shareholders) for all but the most heavily involved (perhaps service user sand majority investors)

Setting appropriate channels of communication to enable the relevant stakeholders to give feedback and to know the SIS’ response.

Ethical Conduct 7.26. An applicant for SIS status should be able to demonstrate that the SIS has a commitment to act ethically in

all its internal and external relationships. Where the SIS is able to demonstrate that it already complies with a pre-existing ethical code, such as for example by achieving a certain points score on a B Impact Assessment, there should be a rebuttable presumption that the SIS meets the requirement for demonstrating such an ethical commitment.

7.27. The Regulator should perhaps set out in Guidance whether there are certain forms of activities which are

by nature incompatible with SIS status, such as the production of arms, tobacco and pornography, in any form. It is likely that any such activities carried out by an SIS would risk bringing the SIS status into disrepute and undermining the reputation of other SIS.

7.28. There are three broad approaches that could be used here:

Requiring the SIS to establish a process by which it establishes and assures its ongoing adherence to

ethical standards appropriate to its activities and field of operation

Having standards set by the Regulator, and requiring the SIS to make statements to the effect that it

has adhered to them in each year

Operating a judgmental over-ride, such that the Regulator can step in and remove an SIS authorisation

if it is acting in a way that the reasonable man or woman would consider unethical

7.29. An SIS should also be subject to ongoing review that it is “conducting its activities in a manner which is consistent with the expectations a reasonable person would have of an SIS”. This means that an SIS is likely to be held to a higher standard than an ordinary commercial company. An example might be an SIS garment manufacturer which purchases supplies made in developing countries but which fails to ensure that workers within its supply chain have basic employment rights and working conditions, even though it is acting in a legally compliant way in an industry where working conditions are often poor.

7.30. In such a case, it would be open to the Regulator to determine that an SIS was not operating in a manner

consistent with the expectations a reasonable person would have of an SIS and to notify the SIS that it must remedy the management of worker conditions in its supply chain. An SIS would have a reasonable period of time in which to supply the Regulator with a satisfactory remedial plan. In the absence of such a plan or in the event of inadequate progress against the plan, it would be open to the Regulator to choose to deregister the SIS. Here there would be a question of degree. If the element of exploitation is significant, it might breach the ethical requirement.

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Commitment to the Principles of the SIS

7.31. In the interests of minimising the scope for “gaming” of the SIS form and to encourage the development of

a values-based SIS movement, we would recommend introducing some form of requirement for a commitment to the principles on which the SIS form is based within the constitution of the SIS, as a way of avoiding a “minimum compliance” approach to the form.

7.32. We would recommend that all directors, managers and shareholders in an SIS be asked to make this

commitment and to accept a duty to affirm and uphold such principles. The principles of the Social Responsibility Test would be at the heart of any such commitment.

7.33. EIIL may wish to see the “Declaration of Interdependence” required of B Corps as one example of how a

movement may be formed around a commitment to certain principles (see Appendix E).

Ongoing Regulation 7.34. The different elements of the Social Responsibility Test will apply on an ongoing basis. Where there are

complaints about the conduct of an SIS and the Regulator chooses to investigate, the Regulator will need to consider whether the SIS is complying with the Test.

7.35. Where an SIS is failing to comply with one or more elements of the Social Responsibility Test, we

recommend that the Regulator be given the power to issue a warning to the SIS requiring the failure to be remedied within a set period of time determined by the Regulator. The Regulator should also have the power to call the senior managers or board of the SIS to appear before the Regulator to provide an account for any such failure and to agree a remedial plan. If the SIS does not remedy the failure within the set period, the Regulator should have the power to remove the SIS from the register and to order its winding-up.

7.36. We recommend that, in addition to its other powers, the Regulator should be given a power to deregister

and order the winding-up of an SIS where by virtue of its conduct its continuance as an SIS would be to risk the reputation of the public in the SIS as a legal status. A fallback power of this kind would give the Regulator the ability to consider a wide range of issues which might call for the deregistration of an SIS and to protect the reputation of the status. It should be possible for the Regulator to exercise this power in extremis without issuing any form of remedial notice, where the actions of the SIS are so egregious as to warrant removal.

Model Constitutions and Mandatory Clauses

7.37. We recommend that the Regulator be required to publish model constitutions for different forms of SIS to

support applicants and to facilitate the take up of the SIS status. It might be, advantageous for the Regulator, for example, to create one or more model constitutions for each legal form in Luxembourg which is capable of applying for SIS status. The availability of model constitutions should help advisers understand how to ‘interpret’ the new SIS status in the different legal and regulatory contexts of the various underlying legal forms.

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7.38. We would also recommend that the Regulator have the power to require certain mandatory constitutional clauses to be recorded in the constitutions of the underlying legal forms. Such mandatory clauses might include clauses of the following kind:

A requirement for the Social Objective to be set out formally in the constitution

A commitment on internal stakeholders to advance and uphold the Social Objective

Provisions setting out how Social KPIs are to be negotiated, including the process for the negotiation of KPIs and the spirit in which such negotiations ought to be held

A requirement for certain principles of the Social Responsibility Test to be set out formally in the constitution, such as: o A commitment to reduce any detriment or harm created by the SIS o A commitment to manage all stakeholder relationships sustainably o A commitment to ethical conduct in all internal and external relationships

Provisions prohibiting any arrangements outside the constitution which might undermine the requirements of the Eligibility Criteria or Tests or SIS principles

Provisions managing conflicts of interest between impact and for profit shareholders

Any other provisions which the Regulator from time to time required Interaction with B Corp Status

7.39. Qualification as a B Corp (see Appendix E) may give automatic qualification for several of these eligibility tests. Some further work is needed to clarify this, with the benefit of direct conversations with B Lab, but in principle we suggest that B Corp Status should work for the following elements:-

Test 4 Social Responsibility

o Do No Harm

o Democratic processes

It does not, it appears, give sufficient coverage, or sufficient disclosure to meet the requirements of Tests 1 to 3. Nor should it be allowed to undermine the Regulator’s right and duty to act under Test 4 (ethical conduct) even though it does involve some monitoring of this, and a B Corp disqualification should put the Regulator on notice to investigate whether SIS disqualification should also follow.

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8. Regulatory Approach 8.1. The approach of the Regulator needs to meet the following criteria in a way that balances all of them:

Effectiveness in its approval and registration role

Effectiveness in its monitoring of regular reporting

Public confidence and profile: in itself and the SIS brand

Independence of thought and action

Setting self-certification and audit requirements that enhance the quality of reporting and the

accountability of the SIS and its agents for that

Appropriate direct use of outside consultants

8.2. In fitting a workable and proportionate regulatory function to this the option of taking upon itself significant review and verification functions is considered by us neither necessary nor the best use of resources. Rather the regime is built upon three pillars:

A clear and comprehensive disclosure regime, such that the SIS will report in public sufficient

information to acknowledge its accountability, and give transparently the information needed for

effective scrutiny by the general public and stakeholders in particular

An audit function applicable to all which picks up and independently verifies key aspects of the

information being put into the public domain

A Regulatory function that tests whether appropriate disclosures have been made, gives sanction to

register new SIS and deregisters those that have ceased to meet the criteria, and responds by

investigating concerns raised by its own reviews and by public complaints. It should support this by the

issue of guidance to SIS, their stakeholders, and the general public, and should promote these and the

profile of SISs so that the public and stakeholders are aware of the information and how to engage with

the sector.

8.3. Conceptually, then, the Regulator is considering whether the SIS’ performance, constitution and disclosure fits within specified boundaries. It does so on registration, and annually. The principal criteria it is testing at each of the two points are as follows:

Criteria Test required Relying upon

Initia

l E

va

luation

Sustainable and properly resourced business

Is the business:

Built to a financially sustainable model

Appropriately resourced

Statements of intent and operational scope from the SIS, supplemented by answers to clarifying questions from the Regulator if required (at Regulator’s discretion)

Positive change or outcomes

Are the outcomes, net of negative outcomes, positive overall ?

Social business plan from the SIS outlining what outcomes will be achieved, and how, a “harm” or negative impact analysis, and a (social) risk analysis covering the risks of not achieving targeted impacts, and the risks of unintended impacts, and how these will be monitored, managed and mitigated

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Criteria Test required Relying upon

Initia

l E

va

luation

Processes for impact measurement

Have systems for impact measurement been established that meet the five-step process outlined ?

Statements of intent and operational scope from the SIS, supplemented by answers to clarifying questions from the Regulator if required (at Regulator’s discretion)

Processes for doing no harm

Have systems been established that address the four-point test for identifying and managing potential harm outlined in 7.20?

(As above) risk monitoring plan from the SIS outlining a “harm” or negative impact analysis, and a (social) risk analysis covering the risks of not achieving targeted impacts, and the risks of unintended impacts, and how these will be monitored, managed and mitigated

No ethical over-ride Are the activities planned or the outcomes positive and negative targeted and the risks encountered such as to be, in the view of the reasonable man or woman:

Unacceptable ?

Likely to bring the SIS into disrepute ?

Likely to bring the SIS sector into disrepute ?

Statements of intent and operational scope from the SIS, supplemented by answers to clarifying questions from the Regulator if required (at Regulator’s discretion). Regulator’s judgement (with Board decision and appeal process)

Ann

ua

l E

va

lua

tio

n

Social objectives adhered-to

Are the originally targeted social objectives, or some that would be considered similar by the reasonable man or woman still being targeted, and expected to be achieved ?

Annual report, detailing targeted outcomes, beneficiary groups and effects on stakeholders

Positive change or outcomes

Is positive (i.e. not net negative) social change being achieved, in either:

The average of the last three years, ending with the current reported year

The average of the next three years, starting with the current reported year

Annual report of:

Outcomes achieved in the last three years

Outcomes targeted to be achieved over the next two years Audit certification of the reporting as being “true and fair” and in accordance with disclosure standards

Processes for doing no harm

These are still in place, operating, and appropriate to the needs of the SIS and its stakeholders

Statement in the annual (public report with disclosure of what is in place and how it works, in addition to the formal statements from the directors

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Criteria Test required Relying upon

Going concern The SIS is likely to continue in operational existence, and is properly resourced, for at least the next twelve months from the later of the balance sheet date and the issue of the audit certificate on the accounts and social impact statements

Statement by the directors of the SIS, reported-upon by exception by the auditors in the same was as for financial reporting

Meeting reporting requirements

All matters due to be disclosed have been focusing around the 6 key disclosures in GECES [ref] and the further disclosures under the SIS code outlined above

Auditor’s certificate on the annual accounts and social impact statement.

No ethical breach Are the activities planned or the outcomes positive and negative targeted and the risks encountered such as to be, in the view of the reasonable man or woman:

Unacceptable

Likely to bring the SIS into disrepute

Likely to bring the SIS sector into disrepute

Statements of intent and operational scope from the SIS in the annual report, supplemented by answers to clarifying questions from the Regulator if required (at Regulator’s discretion). Regulator’s opinion.

8.4 The Regulatory sanctions relating to these matters would be as follows:

For each area: a refusal to register (with explanation of the reasons for the refusal) but with the applicant’s having the right to rectify the matters and re-apply. It may be appropriate to place a limit on the number of re-applications, perhaps to three times in a 12 month period.

In the annual tests: cessation of tax advantage from the date of issue of a notice of non-compliance, unless rectified within 30 days, or the regulator otherwise agrees that proposals made for rectification are realistic, in which a further 12 months will be allowed before the test is applied again.

In the case of failure of the ethical breach test the regulator may remove the SIS’s status, which will mean that the SIS will be liquated as if by Court Order at a date set by the regulator, but not exceeding 3 months from the date of the regulator’s notice of ethical breach.

In the case of a change in social objectives (where the regulator considers that social objectives have changed and gives notice of this in the SIS, the SIS must re-apply for registration and meet all requirements as per a new application. If it does note, its beneficial tax status will cease as from the date of the notice.

If beneficial tax status ceases for future profits, the profit shares relating to impact shares (both past retained profits and future profits earned) remain asset-locked: the SIS is prohibited from distributing them.

It is explicitly the case that, whilst the Regulator should concern itself with SIS’s that create negative or zero social change over an extended period, it is up to the stakeholders (principally impact and for-profit

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investors) to decide upon setting and varying KPIs, and the action to be taken in the event of failing to achieve them.

8.5. The SIS may be exempted from any of the above disclosures if, and to the extent, it would be damaging to

its commercial interests or the delivery of its social impact to put that part of the information into the public domain. If this exemption is used, then the auditors should confirm in their report that it is reasonably used, and that the reasons are disclosed.

Small SIS – Reduced Compliance Requirements It is very important that the regulatory and compliance regimes should not become a dis-incentive for smaller SISs to register. These therefore need to be an exemption form audit requirements for SISs that fall beneath either of the following threshold:

a) Size: below any two of the following [suggested lists, subject to consultation]:

i. Turnover less than €250,000 (€100,000 seems too low, and €500,000 to high)

ii. Balance sheet assets of €2000,000

iii. Employees (defined as fulltime paid equivalents) of 25

b) For-profit holdings: than 10% of the shares are for profit – that is, at least 90% of the

issued share capital is in impact shares.

Abuse of the SIS System 8.6 In all Regulatory regimes for corporate firms giving tax exemptions or public status (e.g. CIC and Charities

regimes in the UK, Non-profit regime in Luxembourg, Co-operative regimes in France and Italy), appropriate procedures and controls must be in place to prevent abuse of the system. The core of the risk of above here is that the SIS is used to shelter the profits and operations of otherwise normal commercial operative. Each of the prime risk we have considered together with how it is addressed in system design and why that is likely to be effective as shown in the table below:

Risk Addressed by What that is likely to be effective

1. Commercial companies

register as SIS to shelter profits used for reinvestment (so not intended to be distributed as dividends in the foreseeable future)

(i) SIS status requires a compelling prime objective of a social purpose

(ii) Profits retained in the shelter of the Impact Shares reserves are permanently locked and may never be distributed to profit shareholders.

It is at the core of the legislative structure for SISs

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Risk Addressed by What that is likely to be effective 2. Commercial (profit)

investors put in part of their investment as impact Shares, and so many control the social objectives

(i) Regulator’s review on registration to ascertain social “prime objective”

(ii) Annual monitoring that “prime objective” still applies with a sanction of withdrawal of tax shelter if not

This is probably not a concern since the appropriate (Impact) proportion of profits will be locked in the Impact arena, and the organisation is still subject to Regulatory control as regards having “a prime objective” of social impact. Any SIS disclosing that Impact and Profit Shares are (substantially) commonly controlled by for-profit organisations should be more regularly monitored by the Regulator than the sample testing of SISs generally used.

3. With a Commercial

operation controlling the Impact share as well as the profit shares, it may be able to reduce profits by paying management and other charges, so effectively bypassing the Impact Share profit lock.

(i) Management and other charges to connected parties are required to be disclosed in annual financial statements

(ii) Regulator has power to make further enquiry, in this case of the appropriateness of such charges, considering whether they are sheltering material distributions to profit shareholders, and can impose sanctions, including removal of SIS status if the profit draining is so inappropriate as to constitute ethical breach

In practice there may not be an inappropriate tax exemption here since the profits will not be exempt if not made and retained against Impact Shares. The risk is really one of the SIS being used for normal commercial purposes, but it is still subject to the overall social “prime objective” test

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Risk Addressed by What that is likely to be effective 4. An SIS badge may be

attained by a company with very few Impact Shares, so gaining the advantages of profit without locking up profits

(i) Regulator tests for a prime social objective

(ii) An SIS is only registerable and able to retain that registration if at least [33%] of tis total shares are Impact shares

Share percentages of 10% (too low) to 50% (too high to encourage material social investment) have been considered. By comparison, the UK’s CIC, which has a maximum profit distribution of 35% having recently removed other restrictions. This however, is only a share-based distribution list, so with debt-based distribution of profit, and an allowance for not all profits being distributed for reasons of financial sustainability, arguably this represents thesis equivalent of a sub 50% Impact share portion.

The Role of the Regulator in providing Guidance

Guidance and Operational Protocols

8.7. We anticipate that it will be necessary for the consultation committee (the “Regulator”) to elaborate upon the general eligibility criteria articulated in the draft Bill for the Société d'Impact Sociétal .

8.8. It would be possible to do so through the development of:

guidance for applicants for SIS status (“Guidance”);

a series of tests which set out a more detailed understanding of what each Eligibility Criterion requires

on the part of an applicant (“Tests”); and

operational protocols for the Regulator which serve to guide the staff of the Regulator in relation to

interpretation of the Guidance and the Tests (“Operational Protocols”).

This paper focuses primarily on the articulation of the Tests for the Eligibility Criteria. However, we expect that a number of the regulatory principles set out in this paper in relation to the application of the Eligibility Criteria by the Regulator will also find their way into the Guidance and/or Operational Protocols of the Regulator. Development of Guidance and Operational Protocols

8.9. As the SIS is a new social enterprise

RR legal status, it is not possible to know with certainty what kinds of

issues the Regulator is likely to encounter in the first few months or years of operation. As a result, it is important that the Regulator has sufficient discretion and power to be able to decide when an applicant is

RR References to “social enterprise” in this paper are to enterprises which are “qualifying portfolio undertakings” for the purposes of the

European Social Entrepreneurship Funds Regulation. Please see Appendix A for a summary of the definition of qualifying portfolio undertaking,

together with a summary of the definition of “social enterprise” used by the European Commission for the purposes of its Social Business

Initiative.

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not suitable to be an SIS, in a wide range of circumstances, so as to limit the possibility of abuse of the SIS and to protect its reputation.

8.10. For the same reasons, it is also important that the Regulator is able to move relatively quickly to develop

and iterate the Guidance, Tests and Operational Protocols over time, as necessary. 8.11. Our understanding of the Bill is that individual decisions in relation to eligibility for or removal of SIS status

will be made by the Minister of Employment and the Third Sector, on the recommendation of the Regulator. However, we expect that the Regulator will be making its recommendations on the basis of the Guidance, Tests and Operational Protocols.

Regulatory Processes

8.12. We anticipate that the regulatory principles proposed in this paper will be of relevance to the following decision-making processes on the part of the Regulator:

1. Decisions to admit and register SIS

2. Review and appeal of decisions to refuse admission

3. Review and monitoring of SIS, including

a. Reviewing SIS annual and other reports

b. Considering applications for consent from the Regulator

c. Reviewing notifications made to the Regulator

d. Considering complaints to the Regulator

e. Investigations by the Regulator

4. Decisions to deregister SIS

8.13. This paper focuses on the role of the SIS in deciding whether or not to admit an applicant to SIS status, on the basis of compliance with the Eligibility Criteria, as set out in the Tests.

8.14. However, we anticipate that the principles set out in this paper will also help to articulate the Guidance and

Operational Protocols surrounding the ongoing role of the Regulator. We have therefore set out, in relation to each Test, how we see it being relevant on an ongoing basis.

The Role of Independent Auditors

General Reporting Regime

8.15. We understand that the independent auditors who will be auditing legal forms with SIS status and reporting to the Regulator will be authorised to acts as auditors under the general audit system in operation in Luxembourg. The Bill does not specify what other skills, experience or qualifications, if any, SIS auditors will otherwise need to have to be able to audit SISs.

Training and Competence

8.16. The professional obligations of independent auditors in Luxembourg (in common with the approaches in a number of other jurisdictions) mean that auditors are not able to opine on matters with which they are unfamiliar or lack expertise. As a result, there will be a need for auditors either to receive training and to develop competences in social impact measurement and reporting, or to be prepared to buy this in. The Regulator and EIIL can support this process in one of two ways:

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Establishing and agreeing with the relevant professional bodies a certification and supporting training

framework for those to be qualified

Establishing a form of audit reporting on social impact that allows independent (and appropriately

regulated) auditors to report:

o on their own (and so by their professional obligations not to report on something in which

they do not have the relevant skill, securing their own competence to do so), or

o by the disclosed use of a subcontractor which does have relevant expertise, with the

auditor responsible for ensuring that that party is appropriately experienced, or

o jointly to sign the audit report, with the joint signatory taking specific responsibility for the

social impact aspects, again with the auditor responsible for ensuring that that party is

appropriately experienced .

8.17. We recommend that the imposition of an additional training and certification process should not be followed,

and that the second route (through the form of reporting) should be followed. This is because there is an effective mechanism for auditors to assess their own competence, the landscape of auditors is sufficiently diverse that different auditors will be competent or seek outside support in different fields of operation, making a single certification of limited effectiveness, and to insist on the auditors becoming competent in-house, and not allowing them to engage with existing outside experts will be inefficient, resulting in them re-learning what is already known. However, to have a clear and understandable method of communicating with the public how the competence issue has been addressed is in the interests of transparency and accountability.

Nature of Assurance

8.19. At the most basic level, there are two forms of audit assurance:

Assurance that the social impact report of the SIS is correct

Assurance that the social impact report of the SIS has been properly prepared

8.20. The level of work and verification needed to say that a social impact report is correct is likely to involve significant additional time and cost and so is unlikely to be appropriate for an SIS. This would also be a higher level of assurance than that expected with financial accounts.

8.21. We recommend therefore that the form of assurance expected with respect to the social impact reporting of

an SIS is that the report has been properly prepared in accordance with the appropriate social impact reporting principles. It will be for the Regulator to establish the appropriate social impact reporting principles, which in section 6 we lay out how these can be established in line with GECES. The annual report covers the following areas, with the types of opinion indicated:

financial statements as for financial auditing standards (true and fair view plus disclosures reported by exception);

going concern as for financial auditing standards; a presumption of going concern, a disclose or the directors; assumptions, and the reasons for these, and a true and fair report by exception as for general financial audit;

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outcomes achieved for the last three years

“appropriately compiled using methodologies complaint with the requirements of the SIS standards” “based upon relevant supporting evidence such as to give a true and fair view” (which allows for materiality/proportionality disclosures reported upon if one of the six headings (para 6.49) is omitted.

Outcomes targeted to be achieved in the next two years

Based on the same theory of change, outcomes framework and indicators used in prior years or changed to more appropriate ones with a true and fair disclose of the reason for the change. Appropriate disclosure of the six headings (para 6.49) as they affect the future confirmation that the Impact shareholders have agreed the outcomes targets for the next two years

A suggested form of wording for the assurance report is shown at Appendix G.

8.22 In addition to the GECES standards, it is useful to consider whether published auditing standards provide guidance that is of use. The general assurance standards

SS and the accountability standard

TT are of some

relevance, and the proposals laid out here accord with relevant aspects of those. This is explained in more detail in Appendix H.

Special Reporting Regime

8.23. The Regulator should also consider what obligations, if any, should be placed upon auditors to provide special reports to the Regulator in relation to the impact elements of SIS.

8.24. For example, in many regulatory regimes for social sector organisations, there are obligations for auditors

and others performing similar independent assessment roles to report on incidents or issues of possible concern to the Regulator. As the Bill does not contemplate any such special reporting regime, we assume that it is outside the scope of this paper and so we do not comment on the possibility in detail. However, there may be certain events, such as where the auditor is able to see that a SIS may have ceased to meet the Tests or where the conduct of an SIS may bring the reputation of the SIS status generally into disrepute or where the auditor encounters accounting or other irregularities which the Regulator would wish to know.

SS ISAE3000 TT AA1000 series

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9. Regulatory Timeline 9.1. The development of the necessary capability within the Regulator and within the wider reporting and

assurance environment requires:

The Regulator to develop

o Expertise in evaluating compliance with the new regime, notably in the field of impact

measurement and the related systems, which will be less familiar in such an environment than the

more general financial regulatory and review criteria

o Credibility amongst potential SISs, professionals and advisers, and the general public, both as an

informed, supportive and pragmatic Regulator, and on behalf of the SIS sector and the value that it

brings

o Approval boards, appeal boards, and the systems to support their operation

o Its view on appropriate disclosure, criteria for approval and dis-approval, and supporting guidance

notes for SISs and their advisers

o Relevant forms, web-based access points and the rest of the documentary and data infrastructures

to make the systems work

The wider community to develop:

o The audit relationships (between auditors and measurement professionals) to enable the audit

functions to be met

o The audit approaches necessary to deliver the assurance regime required, taking into account

existing standards (see 8.22 above)

o An understanding of the meaning and value of the SIS

9.2. Specifically looking at the Regulator, the following key capabilities must be developed to underpin the operation of the systems:

Key

capability/function

How Dependencies

1. Initial evaluation of application*:

Registration function

Ongoing evaluation (certain aspects)

a. Objective/scope Internal expertise by hiring in, supported by external experts to build and monitor initial stages; recruiting board suitably experienced to review; establish internal guidance and policies to enable both executive and review functions to operate; establish internal QC and referrals processes; establish powers to make enquiry and require responses

b. Business Plan c. Objective –

deliverable outcome

d. DNH and Governance processes

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Key capability/function

How Dependencies

2. Ongoing evaluation capability

Annual reviews (noting that these may come less than twelve months after commencement if some SISs declare short initial accounting periods)

Disqualification processes (which rely on some of the same data, including a view as to whether the SIS will qualify at the next annual review)

a. Pure filing compliance

b. Audit and disclosure compliance reviews and queries on filing

Monitoring systems including definitions of what constitutes compliance; recording of work and functions; internal QC review and appeals process and board

c. Challenges for non-compliance

Establish what level of evidence is needed for a challenge; systems for validating that and authorising the challenge; appeals and escalation processes; determine the consequences, and when they will be applied; determine the scope of rectifying action that an SIS can take, and the timescales within which it can so rectify

3. PR/ profiling, so public understand and embrace not only the SIS badge, but also their scrutiny role*

4. Guidance: a. For application* Internal and external expertise,

supported by relevant consultation Registration function

b. For annual filing Internal and external expertise Annual filing

Also supporting SISs in establishing relevant record keeping at the outset

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Key capability/function

How Dependencies

c. For requirements of auditors*

Based on independent outside advice, and relying on the agreed scope of regulatory regime, agree formats for reporting and the scope of assurance required; determine any necessary protocols for use of non-independent auditor experts in social impact and other aspects; discuss with professional bodies to establish that the chosen approach is workable; write and publish guidance notes

Annual filing (with appropriate earlier preparation time, so effectively quite soon after registration) Registration (if some certification of the initial application is required)

5. Application forms and formats *

Internal expertise by hiring in, supported by external experts to build; pilot testing with typical SIS eligible entities

Registration Disqualifications and appeals (which will include penalties for mis-declaration on application)

6. Review and disqualification processes *

Internal expertise by hiring in, supported by external experts to build and monitor initial stages; recruiting board suitably experienced to review; establish internal guidance and policies to enable both executive and review functions to operate; establish powers to make enquiry and require responses

Registrations, since this includes terms of, and appeals from, refusal to register

7. Systems and approaches for Regulator reporting about its own functions and to meet its own accountability

Internal expertise by hiring in, supported by external experts to build and monitor initial stages; recruiting board suitably experienced to review; establish internal guidance and policies to enable both executive and review functions to operate; suitable consultation with sector, and policy makers to establish engagement with key stakeholders

From inception

9.3. With regard to the review and investigation processes at 6 in the above table, these may be addressed

differently depending upon where they sit in a matrix of internal and external origination, and internal and external fulfilment. All will require powers of enquiry (to be able reasonably to demand information) with penalties for non-compliance. How these can be addressed is examined further in the following table:

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Delivered by resources: Internal

External

Init

iate

d:

Internally

Largely procedural or regular minor enquiry around compliance with disclosure, or drift away from original objectives; arising from review of published documents and SIS’ filings. Could consider block external contracting out for some of this

This should be focused upon more detailed enquiries about specific areas of concern to the Regulator about particular organisations. The Regulator should be able to require that the SIS pays for the investigation by an outside independent appointed by the SIS but with a duty of care to the Regulator (and approved by them), with the SIS paying for it. There needs to be a right of appeal by the SIS on the grounds that the work is unnecessary or disproportionate to the risk of issue of concern.

Externally (by public

or stakeholder complaint)

Requires an established and confidential reporting portal, together with appropriate assurances about safeguarding the identity of informants, whilst protecting SIS’ interests against malicious reporting; Selection criteria and protocols for follow-up, and for feedback to informants or wider publication of results of reviews; perhaps needs powers to order compliance, or is it sufficient that liquidation can be ordered ? The liquidation threat is unlikely to be carried through in cases of relatively minor non-compliance, so additional sanctions (fines, together with the means to enforce them, public sensure, or orders to disclose) are also likely to be needed

This, again, should be focused upon more detailed enquiries about specific areas of concern to the Regulator about particular organisations. The Regulator should be able to require that the SIS pays for the investigation by an outside independent appointed by the SIS but with a duty of care to the Regulator (and approved by them), with the SIS paying for it. There needs to be a right of appeal by the SIS on the grounds that the work is unnecessary or disproportionate to the risk of issue of concern.

9.4. As regards timescales, the areas marked [*] in the table at 9.2 need to be in place before the first SISs

make application to be registered. These should be piloted with a sample of existing corporate social enterprises expected to be typical of those likely to seek registration. This function will need to be properly resourced, and is probably a three to four month project, covering perhaps six to ten typical corporates. It will involve producing:

The applications documents and plans they would need

Restated last three years’ accounts and annual statements in the new format

Checklists and questions to be raised by the Regulator

9.5. It has not been possible, in the time and budget allocated at this stage of the development to complete this piloting of the disclosure and application formats.

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9.6. In addition, in order the better to get sectoral buy-in, a consultation and response cycle should be built into the development process. This should run as follows:

Stage Notes Timing (which months, from agreement of scope of

legislation)

1. Initial scope of the regime and its reporting requirements

Based around the contents of this report 1-3

2. Response to initial consultation

Requires completion of the consultation

3-4

3. Detailed application and disclosure requirements for SISs

Based on the operating policies, guidance notes and application forms, together with the results of the pilot studies

4-5

4. Response to the consultation on detailed application and disclosure requirements

Requires completion of the consultation

6

5. Regulator reporting requirements and accountabilities

Based on accountabilities as outlined in this report, developed following further discussion with legislators and other influencers, with appropriate professional advice, then put out to key stakeholder consultation rather than a wider public consultation

3-5

6. Response to consultation on regulator reporting

6

9.7. In conclusion we recommend a three stage building of the Regulatory regime and the Regulators’ capacity,

interspersed with appropriate consultations at each stage. This will both inform the development, and engage with the sector and the Professionals expected to suggest that.

Much of that regulatory capacity and function must be in place before the first applications are processed.

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Appendix A: Extracts from EuSEF Regulations 1. European Social Entrepreneurship Funds (EuSEF)

The EuSEF Regulation may be viewed on the following link:

http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2013:115:0018:0038:EN:PDF

A qualifying portfolio undertaking is defined Article 3(1)(d) as an undertaking that: a) At the time of an investment by the qualifying social entrepreneurship fund is not admitted to trading on

a regulated market or on a multilateral trading facility (MTF) as defined in point (14) and point (15) of Article 4(1) of Directive 2004/39/EC;

b) Has the achievement of measurable, positive social impacts as its primary objective in accordance with

its articles of association, statutes or any other rules or instruments of incorporation establishing the business, where the undertaking:

provides services or goods to vulnerable or marginalised, disadvantaged or excluded persons,

employs a method of production of goods or services that embodies its social objective, or

provides financial support exclusively to social undertakings as defined in the first two indents; c) Uses its profits primarily to achieve its primary social objective in accordance with its articles of

association, statutes or any other rules or instruments of incorporation establishing the business and with the predefined procedures and rules therein, which determine the circumstances in which profits are distributed to shareholders and owners to ensure that any such distribution of profits does not undermine its primary objective;

d) Is managed in an accountable and transparent way, in particular by involving workers, customers and stakeholders affected by its business activities;

e) Is established within the territory of a Member State, or in a third country provided that the third country:

— is not listed as a Non-Cooperative Country and Territory by the Financial Action Task Force on Anti-Money Laundering and Terrorist Financing;

— has signed an agreement with the home Member State of the manager of a qualifying social

entrepreneurship fund and with each other Member State in which the units or shares of the qualifying social entrepreneurship fund are intended to be marketed to ensure that the third country fully complies with the standards laid down in Article 26 of the OECD Model Tax Convention on Income and on Capital and ensures an effective exchange of information in tax matters, including any multilateral tax agreements;

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2. The Social Business Initiative of the European Commission

The Communication of the European Commission on the Social Business Initiative may be viewed on the following link:

http://ec.europa.eu/internal_market/social_business/docs/COM2011_682_en.pdf

The following are key extracts in relation to the definition of a social business:

“In its approach to this varied sector, the Commission does not seek to provide a standard definition which would apply to everyone and lead to a regulatory straitjacket. It offers a description based on principles shared by the majority of the Member States, while respecting their diversity of political, economic and social choices and the capacityfor innovation of social entrepreneurs. This is why the Commission will only adopt a more specific definition, as required, if regulatory measures or incentives require the scope of application to be precisely set out, with the representatives of the sector being closely involved in the process.”

“A social enterprise is an operator in the social economy whose main objective is to have a social impact rather than make a profit for their owners or shareholders. It operates by providing goods and services for the market in an entrepreneurial and innovative fashion and uses its profits primarily to achieve social objectives. It is managed in an open and responsible manner and, in particular, involve employees, consumers and stakeholders affected by its commercial activities.”

The Commission uses the term 'social enterprise' to cover the following types of business:

those for which the social or societal objective of the common good is the reason for the commercial activity, often in the form of a high level of social innovation,

those where profits are mainly reinvested with a view to achieving this social objective,

and where the method of organisation or ownership system reflects their mission,

using democratic or participatory principles or focusing on social justice

Thus: • businesses providing social services and/or goods and services to vulnerable persons (access to

housing, health care, assistance for elderly or disabled persons, inclusion of vulnerable groups, child care, access to employment and training, dependency management, etc.); and/or

• businesses with a method of production of goods or services with a social objective (social and professional integration via access to employment for people disadvantaged in particular by insufficient qualifications or social or professional problems leading to exclusion and marginalisation) but whose activity may be outside the realm of the provision of social goods or services.

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Appendix B: Sample Disclosure Questions on Application Example Disclosure Questions for Applicants Are your goods or services available to the public at large? Or are your goods or services only available to a restricted category or categories of person? Are your goods or services affordable for people on low incomes? Tell us how you will make decisions to price your goods or services and what factors you will take into account. Advise if you have identified any risks of possible detriment or harm that might result from your organisation's activities, goods or services. If so, tell us why this detriment or harm is necessary in the circumstances and what you are doing to minimise the detriment or harm. Provide a copy of your remuneration policy for officers and employees. Disclose any connections, relationships or arrangements between any of your impact shareholders and your for profit shareholders. Advise how your organisation will be different to an ordinary commercial company providing similar goods or services. Advise if there is any reason why the activities, goods or services of your organisation might attract controversy or debate or might require careful reputational management. Advise if there is any reason why the directors, employees or shareholders in the SIS might be considered by the SIS Regulator or third parties to be unsuitable to act in such a capacity. Advise if your organisation works with children or vulnerable adults, and what measures it will take to protect them. Provide as much information as possible to enable the SIS Regulator to make an informed decision about whether your organisation is eligible to become an SIS.

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Example Declarations for Applicants We, the undersigned, declare that the organisation in respect of which this application is made will carry out its business responsibly with a view to the achievement of its social objective and the creation of positive social impact, in accordance with this application. We, the undersigned, declare that all the information provided with this application is true and accurate to the best of our knowledge and belief. We, the undersigned, declare that the organisation in respect of which this application is made will not be: - a political party; - a political campaigning organisation; or - a subsidiary or otherwise closely related to a political party or political campaigning organisation. Note: These are examples and are not intended to be a complete list. This will be developed during the regulatory development and consultation stage.

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Appendix C: Social Impact Measurement

EIIL – Société d’Impact Sociétal ("SIS") - Social Impact Measurement

Introduction The field of social impact measurement has made significant strides forward in recent years, with important contributions from associations such as the European Venture Philanthropy Association (EVPA) and their "Practical Guide to Measuring & Managing Impact" (EVPA Guide) as well as European and international initiatives such as the recommendations from the GECES Sub-group on Impact Measurement (GECES) – the European Commission’s Expert Group on Social Business - and the Impact Measurement Working Group of the Taskforce on Social Impact Investment set up by the G8 (G8). The EVPA Guide is based on a meta-analysis of almost 1000 different approaches as included in resources such as the TRASI database

UU curated by the US-based Foundation Center. From these 1000 approaches, EVPA,

informed by the convening of an expert group of twenty-seven venture philanthropy and social investment practitioners, consultants, academics and representatives of other organizations involved in impact measurement, selected the most commonly used approaches and then further distilled these approaches into a five step process. The GECES debated the EVPA approach, alongside many others (including story-telling, action research-based approaches, the French micro-finance solutions, co-operative models in France, Italy and elsewhere, as well as methods which can be sued with monetisation such as Social Return on Investment (SROI), social accounting and balanced scorecards), to develop an agreed cross-border, multi-view approach, relevant for the EuSEF regulation. The G8 also built on this work and encompassed even broader viewpoints. We are therefore confident that the views contained herein, reflect best practice globally as it currently stands today. What these recommendations have in common are a focus on the process of impact measurement as a way of setting standards rather than the top down application of specific indicators. However, none of these approaches provides more than a general or high-level guidance on what must be done to successfully implement the process. In the context of the SIS, the field needs to move forward again, to more explicitly define what can be considered best practice in social impact measurement, in order to be accepted as one of the eligibility criteria of the SIS. As defined by the GECES Sub-group on Impact Measurement (GECES) for a social enterprise the social impact is: "The social effect (change), both long-term and short-term achieved for its target population as a result of the activity undertaken – taking into account both positive and negative changes, and adjusting for alternative attribution, deadweight, displacement and drop-off." As part of the eligibility criteria to be considered an SIS, a social enterprise must measure its social impact. Given the significant prior work that underlines the work of the GECES, the analysis presented here takes the 5-step process outlined in the GECES (and using the definition of impact in the GECES report as a starting point) and focuses on:

i What we mean in each step by providing a general explanation of the step. ii What are the different ways of practically implementing each step i.e. identifying the key tools and

methodologies that could be applied. In thinking about this we have concluded that not all steps will have 2-3 clear methodologies (e.g. Step 1, Step 2 and Step 5 will have just one or two that have emerged as “best practice” in the sector) but Step 4 for example could have many more. In particular, we see a need to expand Step 4 to include more guidance on data collection (as we identified this area as underdeveloped in the EVPA guide and in the GECES report, and further emphasised in the G8 work).

UU http://trasi.foundationcenter.org/

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iii Assessing the approaches according to the pre-agreed criteria (defined below). iv Providing a pragmatic recommendation for the approaches that should form part of the legislation or the

policy recommendations attached to the legislation. In practice there is not one particular approach that is supreme to all others, so the recommendations draw from several different approaches. The pragmatic recommendation will be illustrated by an example or several examples as relevant.

In considering the criteria to be used to assess the methodologies, it is important to balance the constraints faced by social enterprises such as resource intensity, timeframe and complexity with those required by a regulator such as reliability, comparability and universality. Equal weighting is given to each criterion in the analysis and each of the approaches identified as relevant for each step will be assessed according to the criteria. In summary the criteria is as follows:

i. Resource intensity (links to proportionality, which must be expressly addressed)

ii. Timeframe (links to proportionality)

iii. Complexity (links to proportionality)

iv. Reliability – generalizability of a particular approach to a broader population

v. Comparability – of results/processes

vi. Universality – possibility to apply consistently

It is unlikely that every criterion is relevant for every step e.g. (a) to (c) will be most relevant when assessing step 4, but these will form the core of the assessment of the relevant approach. By going through this process, the objective is to arrive at pragmatic recommendations for the required measurement process that will form part of the test criteria. This analysis will take the GECES and EVPA work to a more practical level, effectively moving from guidance to practical recommendations. The final output of the social impact work-stream are two to four alternative practical methodologies that will deliver what’s required in that step; in other words, if the SIS uses the recommended methodologies it will be deemed compliant with the eligibility criteria in terms of social impact measurement. There will be an opt out for using another methodology for that step if it fulfils the key criteria and the SIS explains why they are better than the “standards”.

Overview of the 5 step process The findings of the GECES report highlight a rigorous process as the best practice in social impact measurement. Comparability of measurement is achieved through the comparable and consistent process used for measurement, and the consistent reporting of the measurement produced. That process involves five stages: 1 Identify objectives 2 Identify stakeholders 3 Set relevant measurement 4 Measure, validate and value 5 Report, learn and improve Our recommendation is that the eligibility criterion related to social impact measurement focuses on the appropriate implementation of this five stage process. What follows is an analysis of each step and the practical methodologies and tools to fulfil each of them.

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Stage 1: Identify objectives It is fundamental to begin by setting the objectives of what the social enterprise is trying to achieve. This may appear an intuitively simple task but in practice there is often confusion. In all the methodologies considered identifying and setting objectives begins with some aspect of the theory of change. A theory of change shows an organization's path from needs to activities to outcomes to impact. It describes the change you want to make and the steps involved in making that change happen. Theories of change also depict the assumptions that lie behind your reasoning, and where possible, these assumptions are backed up by evidence

VV.

The logic model is a commonly used methodology, especially with some of the larger social sector organizations such as the Kellogg Foundation and LGT Venture Philanthropy, while there is also a "lighter" approach which draws out some of the key questions to guide a social enterprise into arriving at their objectives. Here we assess three approaches all drawing from the theory of change:

1 Logic model 2 Minimum questions to be answered 3 Theory of Value Creation (ToVC)

WW

1. Logic model Logic models are grounded in a theory of change and use words and graphics to describe the sequence of activities thought to bring about change and how these activities are linked to the results the program is expected to achieve. The Social Innovation Fund (SIF)

XX (pg. 8) in the US is prescriptive as to what it expects its grantees to

deliver, mandating that all social enterprises include an overview of their program theory and a logic model that can then guide the social impact measurement and provides any reader with a better understanding of how a program is expected to achieve its targeted outcomes and impacts. As defined by EVPA, GECES and also SIF, the process includes sequentially thinking through and aligning the following areas: Inputs/resources: what resources (human, financial, organizational and community) are used in delivery of the intervention Activity: what is being done with those resources by the social enterprise (the intervention) Output: how that activity touches the intended beneficiaries Outcome: the change arising in the lives of beneficiaries and others Impact: the extent to which that change arises from the intervention The Kellogg Foundation's 2004 Logic Model Development Guide provides more advice and practical examples for constructing a logic model. The specific guidance issued by the SIF (pg. 8-9) with respect to program theory and the logic model is also relevant in the context of the SIS:

VV Kail, A., Lumley, Tris. (April 2012). Theory of Change: the beginning of making a difference. New Philanthropy Capital WW Social Impact Measurement Workstream of the Social Impact Investment Taskforce at www.socialimpactinvesmtent.org XX Corporation for National & Community Service (2014). Evaluation Plan Guidance: a Step-by-Step Guide to Designing a Rigorous Evaluation.

Washington D.C.

nationalservice.gov/SIF

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1. Briefly describe the basis for the logic model (theory or prior research, or both) along with aspects of the

model, if any, which have been confirmed (or refuted) by previous research.

2. Ensure alignment among the logic model elements. Focus on the key factors in the cause-and-effect

relationship. Think about and describe how the inputs link to the intervention and then link to the desired

outcomes.

3. Detail the elements of the inputs and articulate the paths through which the services provided affect

individual outcomes (e.g. employment, health, education). Make sure that the activities directly lead to the

explanation of outputs (e.g. increased student attendance) and outcomes (e.g. improved reading scores)

that would be necessary to achieve the program's impact (e.g. college readiness).

4. Emphasize the outcomes that the proposed evaluation will measure.

5. Include only information that is directly related to the theory of change. Keep the logic model simple to

minimize attention to things that cannot be controlled.

2. Minimum questions to be answered It is possible to extract the commonalities of the various tools that use the theory of change and logic model, such as social return on investment (SROI) and the balanced scorecard to come up with a recommended list of four questions that at a minimum a social enterprise should answer. This approach is embraced in the EVPA Guide:

1. What is the social problem or issue that the social enterprise is trying to solve?

With the response including information about the nature and magnitude of the problem or opportunity;

which populations are affected; whether the issue is changing or evolving and in what way it is changing or

evolving. The aim of this question is to understand the base case and therefore, at a later stage, allow the

social enterprise to see whether there has been any change from the base case.

2. What activities is the social enterprise undertaking to solve the social problem or issue?

The response should include a description of exactly what the social enterprise is doing to try to effect a

change. It should include a set of specific steps, strategies or actions arranged in a logical sequence

demonstrating how each activity relates to another.

3. What resources or inputs, as per the impact value chain, does the social enterprise have and need to

undertake its activities?

This should include the time, talent, technology, equipment, information and other assets available to

conduct the activities. Ideally it should also consider whether a mismatch exists between the activities and

the resources available to execute those activities.

4. What are the expected outcomes?

This should include what the social enterprise must achieve in order to be considered successful and will

form the basis of the milestones against which the social enterprise will be measured.

These questions are in line with the logic model but do not specifically ask that causal links between inputs, outputs, outcomes and impacts be established.

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3. Theory of Value Creation The G8 makes reference to the Theory of Value Creation (ToVC) as what investors should establish as they set goals for their investments. The ToVC has evolved out of thinking from Michael Porter and Mark Kramer on Shared Value, and Jed Emerson on Blended Value. Literature surrounding ToVC is not sufficiently prescriptive as a methodology to warrant further consideration in the context of the SIS eligibility criteria. It should also be noted that the G8 initiative was considering impact measurement from the point of view of an impact investor rather than the social enterprise itself. It should therefore be considered as a subset of the Logic Model. Analysis of the three approaches In each of the five steps we analyse the various approaches according to six criteria giving a score out of three ticks (). For each criterion, a high number of ticks should be considered positive and a low number of ticks negative:

Resource intensity: given complaints from social enterprises about dedicating large amounts of resources

to social impact measurement we consider low resource intensity positive i.e. we provide three ticks; and

high resource intensity negative i.e. we provide one tick

Time frame: if an approach requires significant time to show useful results this would be negative i.e. few

ticks and if results are seen in a shorter time period then this would be positive i.e. more ticks

Complexity: again the less complex the better so a greater number of ticks. The opposite being shown

through less ticks

Reliability: we see greater reliability as positive so assign more ticks

Comparability: again a higher level of comparability is positive to more ticks are assigned with greater

comparability

Universality: the ability of an approach to be used by many different social enterprises in different areas is a

positive point in our view hence is demonstrated by a greater number of ticks.

Criteria Minimum Questions Logic Model ToVC

Resource intensity n/a

Timeframe n/a

Complexity n/a

Reliability n/a

Comparability n/a

Universality n/a

Summary n/a

In the context of comparing the minimum questions to be answered with the logic model, the above table should be interpreted as follows. EVPA four questions are less resource intensive and less complex than the logic model, although both operate within the same timeframes. In terms of universality, both score equally well. However the logic model scores better on reliability and comparability.

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Recommended pragmatic approach for Stage 1 In line with the recommendations of the GECES, and established best practice, we believe a clearly defined theory of change is fundamental to good impact measurement. It shows and explains the causative link between the activities being undertaken and their targeted outcomes and impact. The rationale behind this causation must always be understood and explained. It should always be underpinned with proportionate evidence as to why it is believed that those outcomes arise from that activity. Therefore, in the context of the SIS, we would recommend that each social enterprise answer the minimum questions outlined above, but complemented by a clear explanation of causation i.e. how the proposed activities bring about the desired outcomes. These questions will be sufficient to provide a clear overview of the theory of change of a SIS, and can be used by small and young as well as larger or more established social enterprises. Please note that the added question on causal links as compared to the Minimum question approach will be hypothetical for early stage organisations testing new ground, but as evidence from the own intervention, and from other research builds up, the causal link will become more robust (or will be refuted). Thus, the theory of change of any social enterprise should be fully analysed and then reassessed as the social enterprise gains new and deeper experience. Following this recommendation would mean that setting objectives would include at least the following practical steps:

1. What is the social problem or issue that the social enterprise is trying to solve?

With the response including information about the nature and magnitude of the problem or opportunity;

which populations are affected; whether the issue is changing or evolving and in what way it is changing or

evolving. The aim of this question is to understand the base case and therefore, at a later stage, allow the

social enterprise to see whether there has been any change from the base case.

2. What resources or inputs, as per the impact value chain, does the social enterprise have and need to

undertake its activities?

This should include the time, talent, technology, equipment, information and other assets available to

conduct the activities. Ideally it should also consider whether a mismatch exists between the activities and

the resources available to execute those activities.

3. What activities is the social enterprise undertaking to solve the social problem or issue?

The response should include a description of exactly what the social enterprise is doing to try to effect a

change. It should include a set of specific steps, strategies or actions arranged in a logical sequence

demonstrating how each activity relates to another.

4. What are the expected outcomes?

This should include what the social enterprise must achieve in order to be considered successful and will

form the basis of the milestones against which the social enterprise will be measured.

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5. What are the key factors in the cause-and-effect relationship?

Think about and describe how the inputs link to the intervention and then link to the desired outcomes.

Briefly describe the basis for the logic model (theory or prior research, or both) along with aspects of the

model, if any, which have been confirmed (or refuted) by previous research. As the intervention is tested by

the social enterprise or otherwise, more evidence will be collected to either “prove” or refute the theory of

change, so that the social enterprise may alter its course based on the learnings and change course as

necessary.

Example We take the example of a for-profit organization that is aiming to build and scale viable sanitation infrastructure in Kenyan slums, beginning with Nairobi

YY.

Social problem or issue: 2.6 billion people do not have access to adequate sanitation and this number is

not decreasing despite billions of dollars of aid. The resulting disease and water pollution cause 1.7 million

deaths and a loss of $84 billion in worker productivity each year. In Kenya’s slums, 8 million people lack

access to adequate sanitation causing disease and death.

Activities: the model involves 4 parts: (i) building a network of low-cost sanitation centres in slums; (ii)

distributing them through franchising to local entrepreneurs; (iii) collecting the waste produced; (iv)

processing the waste into electricity and fertiliser.

Resources or inputs: equipment (sanitation centres, vehicles for collection, digesters to convert faeces to

fertiliser and to generate electricity); staff (qualified personnel on the ground in Kenya to supervise building

of sanitation centres and selection of franchisees, employees to collect waste products and transport to

digesters, operators of digesters to produce electricity and fertiliser); partners (implementation partners for

education about sanitation, technical partners in the design of toilets, digesters / composters, microfinance

organisations to support franchisee purchases); funding (grants and investments from foundations and

social investors).

Expected outcomes: positive expected outcomes at a local level include increased access to sanitation

facilities for slum dwellers, increased employment levels among slum dwellers, improved health for toilet

users and overall slum; increased income for toilet operators; improved environmental situation (less waste

in open waterways). At a national level, positive outcomes could include a decrease in the number of

power shortages, a decrease in carbon emissions, a decreased reliance on imported fertilisers and a

decrease in the use of chemical fertilisers leading to positive environmental effects. Potential negative

outcomes could be displacement with respect to existing operators of toilets in the slum; zero job creation

through people leaving one organisation to work with this one; reductions in sales and hence livelihoods of

existing producers of fertiliser.

Cause-and-effect relationship: (i) building low-cost sanitation centres in slums will reduce the level of

hygiene in the populations affected, reducing related diseases, (ii) the franchise system will enable local

entrepreneurs to build small businesses and reduce unemployment, (iii) collecting the waste will reduce

environmental pollution, and (iv) processing the waste into fertiliser and electricity may decrease the

number of power shortages, decrease carbon emissions, decrease the reliance on imported fertilisers and

decrease the use of chemical fertilisers leading to positive environmental effects.

YY Source: Sanergy website – Saner.gy as used in the EVPA Guide

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Stage 2: Identify stakeholders Stakeholders are an important element of any impact measurement. The involvement of stakeholders is also a key part of methodologies such as SROI, whose principles include involving stakeholders and valuing the things that matter to those stakeholders. EVPA defines a stakeholder as "Any party effecting and/or affected by the activities of the organization."

ZZ GECES

is more concise using, "who gains and who gives what and how". It is important to understand stakeholders' level of engagement with, control over, and contribution to achieving the desired objectives and the outcomes and impacts that come with them. In terms of selecting stakeholders, three approaches can be assessed:

1. Asking specific questions to assess who are the most important stakeholders

2. Working through the relevant part of the SROI methodologyAAA

(which may be applied here with or without

monetisation and the ratio)

3. Stakeholder mapping and selection based on the concept of accountability

EVPA specific questions

Once a list of stakeholders has been put together, the EVPA Guide suggests prioritizing those a social enterprise will focus on is vital. This can be achieved by asking:

1. How material are the benefits and inputs provided by the identified stakeholders?

2. How relevant is the stakeholder group to the primary mission of the social enterprise?

There are however risks inherent in asking just these questions. For example how it is possible to decide which stakeholders experience material outcomes in advance and how by focusing on stakeholders relevant to the primary mission, as certain stakeholder groups who experience large positive or negative outcomes might be missed. Two points address these concerns. Firstly that impact measurement entails a learning process, so each time the social enterprise has certain results; the list of stakeholders can and should be reassessed. Secondly, the concept of accountability takes a different approach to assessing those stakeholders that should be included in the impact measurement process. SROI Stage 1 Part 1.2 of Stage 1 of the SROI methodology provides a helpful guide and approach to identifying stakeholders. It suggests that a social enterprise begin by listing all those who might affect or be affected by the activities of the organization, whether the change in outcome is positive or negative, intentional or unintentional. Given that list can soon become unwieldy the next step is to decide whether a stakeholder is relevant and this requires thinking about what the outcomes may be for him or her i.e. which stakeholders are experiencing significant change as a result of the social enterprise's activities. SROI highlights the importance of taking into account unintended outcomes as well as the intended ones, noting that these may be positive or negative.

ZZ EVPA Guide AAA SROI Guide. Stage 1: Establishing scope and identifying stakeholders

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Mapping stakeholders with respect to accountability Mapping stakeholders with respect to accountability consists in defining upfront the level of accountability (from one to six, with six being the highest) that a social enterprise is deemed to have on its stakeholders

BBB. Level 1 for

example means that the social enterprise is accountable for the intended outcomes on the main beneficiaries; while level 6 means the social enterprise is accountable for material outcomes on all stakeholders (whether positive or negative).

Stakeholder mapping and selection based on the concept of accountability

It is evident that focusing solely on level 1 will bring a quicker estimation of social impact. However there is a higher risk that the impact is misstated and that the social enterprise could be having an overall negative social impact. Level 6 is certainly a slower and more resource intensive way of considering the social impact of the social enterprise. However there is less risk that impact is misstated as social impact on all potential stakeholders is considered. An aspect to be considered in the context of the SIS is whether we would want to pre-define the level of accountability. In terms of pragmatism and to ensure universality and comparability, a low level of accountability would be preferable. Level 3, where a social enterprise is accountable for material but only positive outcomes on main beneficiary groups and analysing these for sub-groups could be a minimum level to be suggested.

BBB Pages 42-43 of the EVPA Guide provide more details on this approach

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Analysis of the approaches

Criteria EVPA Specific Questions

SROI Stage 1 Mapping according to accountability (Level 3)

Resource intensity

Timeframe

Complexity

Reliability

Comparability

Universality

Summary

In the context of comparing the EVPA specific questions with the relevant part of SROI Stage 1 and the mapping according to accountability, the above table should be interpreted as follows. The EVPA specific questions are as resource intensive and operate in a similar time frame as the relevant part of SROI Stage 1 and the mapping according to accountability, however both the EVPA specific questions and part of SROI Stage 1 are less complex. In terms of reliability and comparability, the mapping scores higher, however the EVPA specific questions and parts of SROI Stage 1 score better in terms of universality. Recommended pragmatic approach for Stage 2 The GECES recommends that social enterprises engage with stakeholders to test and challenge their understanding and that such an engagement is not just at the planning stage, but throughout the whole measurement process. We would therefore recommend embracing the concept of accountability and prescribing that social enterprises are accountable for material but only positive outcomes on main beneficiary groups and analysing these for sub-groups (Level 3). However to get to this level of analysis the questions suggested by EVPA (in line with SROI stage 1) must be posed to identify the many different stakeholders. Accountability in this sense then acts as a filter to guide the rest of the analysis. Following this recommendation would mean that analysing stakeholders defined as who gains and who gives what and how, would include at least the following practical steps:

1. Begin by putting together a long list of all those who might affect or be affected by the activities of the

organization, whether the change in outcome is positive or negative, intentional or unintentional.

2. Prioritize those a social enterprise will focus on by asking:

a. How material are the benefits and inputs provided by the identified stakeholders?

b. How relevant is the stakeholder group to the primary mission of the social enterprise?

3. Taking into account the concept of proportionality, it is recommended that the social enterprise is

accountable for material but only positive outcomes on main beneficiary groups, and that at least those

stakeholder groups are included in the analysis.

As advised by the GECES, whilst the identification of stakeholders is implicit in the second stage of the process,

stakeholders should be involved to some degree in all stages of impact measurement. This involvement must

follow the guidance on proportionality further discussed below. Subject to that, it is expected to involve:

Identifying stakeholders.

Understanding the nature of their interest and confirming that with them, either prior to investment, or at

another suitable date.

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Agreeing the Framework and/or Indicator suitable to those needs and notifying them (individually or as a

class) of how measurement will be provided. This can be by information on a website, by live presentation

or written notification, or by other suitable means.

Providing a suitable means for stakeholders to raise queries or comments, and advise them of how to do it.

Summarising, and if necessary revising, at least annually, or at shorter intervals suitable to stakeholder

need:

o who are the key stakeholders or key classes of stakeholders;

o the measurement produced for them (which does not need to be repeated if common to several

groups);

o how that has been communicated to them ;

o feedback received from them;

o any planned changes to measurement in future.

Example

Taking the same social enterprise as before, the first step is to list heir stakeholders. The stakeholders are the toilet users, the toilet operators, the waste collectors, the broader slum dwellers, the employees of the social enterprise, other health & sanitation organisations working on educational initiatives, microfinance organizations, the government, existing fertiliser producers, existing power companies, farmers and investors. The social enterprise would rank the importance of these stakeholders, according to how material the benefits and inputs provided by the stakeholders are, and how relevant the stakeholder group is to the primary mission, as follows: toilet users, toilet operators, broader slum dwellers, waste collectors, their employees, farmers, existing fertiliser producers, existing power companies, government. Following the concept of proportionality given the resources and time that the social enterprise has available, the early-stage nature of the social enterprise and the view that these stakeholders are most relevant for the social enterprise to decide if it is achieving its mission; they decide to focus the analysis on the first three stakeholders: toilet users, toilet operators and broader slum dwellers. The expectations of these stakeholders can be considered as follows:

Toilet users: pay an amount of money to use a clean toilet, they therefore expect the toilet to be clean and

may expect to have fewer health problems.

Toilet operators: earn income from the toilets and pay the franchise fee. They expect to have a steady

stream of customers for their toilets and the necessary franchisor support from the social enterprise in case

of any problems with the toilet.

Broader slum dwellers: if the installation of toilets results in less human waste in the slums then all slum

dwellers may have fewer health problems. However it is unlikely that slum dwellers will necessarily have

this expectation.

Stage 3: Set relevant measurement As defined by GECES, in this stage, the social enterprise should, from the logic model set forth in Stage 1 and the identified outcomes, develop a series of measures that fairly and helpfully reflect what is being achieved and establish how they should be presented simply and clearly to meet stakeholders' needs. The selected measures then need to be agreed with the previously identified stakeholders. The GECES report and the EVPA guide strongly advises against jumping ahead to Stage 3 and starting to define indicators without having clearly understood the objectives and the theory of change. Stage 3 builds on the previous two stages and makes the measurement more concrete and quantifiable.

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It is vital that before setting indicators the relevant outcomes as informed by the social enterprise's mission are selected. The EVPA guide identifies a number of questions that can help when selecting those outcomes to which indicators will be assigned:

Which outcomes are most important to achieve (this will depend on the prioritisation assigned to the

stakeholders)? Which are most closely related to the core business of the organisation?

Are the outcomes material? Is the change or benefit something that makes a real difference for the key

stakeholders?

Which outcomes are most useful? Which will provide the best information for management decision-

making, reporting or other purpose of impact measurement?

Which outcomes are most feasible? Which are most likely achievable with the resources available? Which

are likely achievable within the designated evaluation period? It is important to reiterate that this question

relates to achievability of the outcomes and not the feasibility of their measurement.

It is in Stage 3 that indicators should be selected to "demonstrate progress towards or away from specified outcomes." (EVPA Guide). In the context of the SIS, three alternative approaches are considered. They are not necessarily mutually exclusive but should provide a good sample of the progress being made in this area and provide the basis for the pragmatic approach required for the SIS.

4. Selecting appropriate indicators from those found in the IRISCCC

catalogue.

5. Selecting appropriate indicators from those found on the Global Value ExchangeDDD

.

6. Usage of the measurement frameworks recommended by the GECES but yet to be developed at a

European-wide level.

IRIS Indicators IRIS is a catalog of generally-accepted performance metrics that leading impact investors use to measure the

social, environmental, and financial performance of their investments. IRIS metrics align with a number of 3rd

party

standards, and proprietary metric sets. These metric sets represent a range of industries and are endorsed by leaders in each respective field.

EEE

IRIS provides a common taxonomy for each indicator and provides selected indicators for various products and service sectors including but not limited to agriculture, education, energy, environment, microfinance, health and water. There is significant support in the sector to embrace IRIS indicators given it can reduce the burden on social enterprises in creating their own indicators if they can choose a tried and tested one from a database. However, two criticisms are often laid against IRIS. Firstly, the IRIS database does not cover all sectors or all possible indicators, so in situations where no relevant indicator exists, social enterprises would still be expected to define the most relevant indicator for their selected outcomes. Secondly, in general these indicators are focused on measuring outputs rather than outcomes. This in itself is not necessarily a signal for a less than optimal impact measurement process and the work of the GECES does make reference to the validity of using "informed outputs"

FFF as milestone measures, provided they are derived from a clear understanding of how activities create

outputs and hence outcomes and impacts. This is possible if there are points on the route to the outcome at which it becomes reasonably certain that the outcome will be achieved. CCC https://iris.thegiin.org/metrics DDD http://www.globalvaluexchange.org EEE https://iris.thegiin.org/metrics FFF Clifford, J., Hehenberger, L., and M.Fantini. (June 2014). Proposed Approaches to Social Impact Measurement in European Commission

legislation and in practice relating to: EuSEFs and EaSI. Pg. 21

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Global Value Exchange The Global Value Exchange is an open source database of Values, Outcomes, Indicators and Stakeholders. It provides a free platform for information to be shared enabling greater consistency and transparency in measuring social & environmental values.

GGG

According to its website, it is unique given all four sections (values, outcomes, indicators and stakeholders) are interconnected, enabling the user to see the links between entries. For example, which outcomes are related to which stakeholders and which indicators are related to which outcomes or what value can be associated to that outcome. It is also managed as an open source resource, allowing greater interactivity and sharing of how users have implemented particular approaches. In terms of defining a particular approach in the context of the SIS, the Global Value Exchange should be seen more as a useful resource, rather than a prescribed methodology. However it could certainly help ease the burden on social enterprises should it function in the manner described. Measurement framework The GECES recommends the development and consolidation of measurement frameworks to form one that gives a suitable set of headings and sub-headings form a preferred set for Europe-wide measurements. Any measurement would be expected to fit within this framework or to include an explanation of why an alternative heading fits better to the intervention and outcomes concerned in that particular case. At present, such a Europe-wide framework does not exist. Big Society Capital, the UK government's social investment initiative, has spearheaded a project to agree with leading social investors the outcomes for various target sectors in the UK.

HHH It is too early to tell how successfully this framework is being implemented in the UK.

Nevertheless, should such a Europe-wide framework be developed, our advice would be for SIS to consider adopting it too, so as to ensure consistent approaches to impact measurement. Analysis of the three approaches

Criteria IRIS Global Value Exchange Measurement Framework

Resource intensity

Timeframe

Complexity

Reliability

Comparability

Universality

Summary

The IRIS taxonomy and the Global Value Exchange are very complementary. Given the open source nature of the Global Value Exchange it may prove a more useful resource for social enterprises as it is therefore continually updated. The link between indicators that have worked for particular outcomes also suggests a greater applicability to the many different outcome areas focused on by social enterprises so again supports slightly higher scores. Although not currently available, the measurement framework scores higher than or at least as high as the IRIS taxonomy and Global Value Exchange on all criteria except universality. Should such a framework be developed it

GGG http://www.globalvaluexchange.org/about/ HHH Hornsby, A.; Blumberg, G. (2013). The Good Investor: A Book of Best Impact Practice. Investing for Good

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will be necessary to ensure a credible opt out for those areas of intervention that do not fit within such a framework, in order not to discourage social enterprises from taking more innovative approaches that may not fit neatly into any established framework. Recommended pragmatic approach for Stage 3 We recommend that the social enterprise starts by clearly selecting the outcomes that it wishes to measure with indicators. Building on the Theory of Change defined in Stage 1, and corroborated through stakeholder involvement in Stage 2, the following questions (as in the EVPA guide) are useful to further refine those outcomes:

Which outcomes are most important to achieve (this will depend on the prioritisation assigned to the

stakeholders)? Which are most closely related to the core business of the organisation?

Are the outcomes material? Is the change or benefit something that makes a real difference for the key

stakeholders?

Which outcomes are most useful? Which will provide the best information for management decision-

making, reporting or other purpose of impact measurement?

Which outcomes are most feasible? Which are most likely achievable with the resources available? Which

are likely achievable within the designated evaluation period? It is important to reiterate that this question

relates to achievability of the outcomes and not the feasibility of their measurement.

This exercise should produce a number of concrete outcomes that the social enterprise can use to measure its progress towards the overarching impact objectives. We would recommend that the social enterprise selects two or three indicators for each particular outcome, and that if possible, indicators are chosen that have been used successfully for impact measurement purposes in the past. In other words, by using the "wisdom of the crowds" found in databases such as IRIS and the Global Value Exchange a social enterprise can be more confident that they are selecting the appropriate indicator for that outcome. The social enterprise should therefore always include the source of the particular indicator. This has the secondary effect of lowering the burden on the social enterprise, as they can learn from others. It is clear that not all indicators will be covered and if that is the case, then the social enterprise should create their own indicator, but include a justification as to why they have felt it necessary to do so, following the recommendation of the GECES report. Once a Europe-wide framework has been developed and tested, then recommending that SIS also use such a framework would be a logical step forward. In the meantime, the four factors highlighted in the EVPA Guide as constituting a good indicator could be useful guidance accompanying the regulation. Although we would not recommend that these factors are enshrined in such regulation, but rather used as technical guidance.

Indicators should generally be aligned with the purpose of the organisation. Although if a potential

unintended outcome has been identified, relevant indicators for this outcome may by definition not be

aligned with the purpose of the organisation.

Indicators should be SMART: specific, measurable, achievable, relevant, time-bound.

Indicators should be clearly defined so that they can be reliably measured, and ideally, comparable with

those used by others so that performance can be better benchmarked and understood in a broader

context.

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Indicators i.e. more than one should be used, with a preference for two to three. For example if a social

enterprise's objective is to increase women’s empowerment and one outcome is that they take better care

of their health, then an appropriate indicator could be the number of times they visit their doctor in a certain

period. However whether this number goes up or down, it is very difficult to draw a conclusion as to

whether they are taking better care of their health. At least one other indicator is required and a conclusion

can only be drawn about whether the outcome is achieved by seeing if they all point in the same direction.

Example Taking our previous example of the social enterprise working on sanitation we can perform the analysis required in Stage 3. The table below shows the social enterprise's theory of change and highlights the various outputs, outcomes and impacts.

Impact value chain (source: EVPA)

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The social enterprise wants to ensure it is operating as planned as well as measure its outcomes. For that reason indicators are set at both the output and the outcome level. To support the development of the sector, the social enterprise uses indicators from the IRIS taxonomy where possible.

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Setting output indicators

Despite being important for monitoring the operations of the social enterprise, the output indicators do not necessarily tell us whether the social enterprise is making progress towards its outcomes. To do that we firstly need to select the outcomes that are relevant for the analysis. We mentioned in Stage 3 that the stakeholders of focus were the toilet users, toilet operators and slum dwellers. With this filter we should therefore focus on the following outcomes arranged according to the themes of material and physical wellbeing. Improved physical well-being:

Increased access to sanitation facilities for slum dwellers

Improved health for toilet users and overall slum

Improved environmental situation in the slum (less waste in waterways)

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Improved material well-being: Increased employment levels among slum dwellers

Increased income for toilet operators

Given the technical equipment needed to test the level of sewage in the slum waterways and employing the concept of proportionality, the social enterprise decides to focus on the remaining four outcomes. With each of these the social enterprise thinks of the two to three issues that evidence the situation is sub-optimal at present in order to select appropriate indicators. For increased access to sanitation facilities, two appropriate outcome indicators can be found among the output indicators detailed above:

Number of toilet units installed by the social enterprise during the reporting period.

Number of individuals that were clients in the reporting period.

However an important indicator to add to these two would be to understand how the sanitation situation has evolved generally:

Increase (versus the beginning of the social enterprise’s operations) in the number of toilet type (including

latrines etc.) units installed (by the social enterprise or by any other organisation) during the reporting

period.

For the improved health of the toilet users and slum dwellers, the users may have to be surveyed so as to collect data on the following indicators:

Number of days a toilet user has not been able to be up and about during the reporting period due to some

stomach related illness (deliberately left broad to include the possibility of diarrhoea, intestinal worms etc.).

Number of outbreaks of typhoid or cholera in the slum area served by the toilets during the reporting

period.

Average Number of days a slum dweller has not been able to be up and about during the reporting period

due to some stomach related illness.

For the increased employment levels among slum dwellers, it is important to track the following indicators:

Proportion of community with some form of regular income through full time and part time work as at the

end of the reporting period.

Number of employees (toilet operators, waste collectors etc.) of the social enterprise, including fulltime and

part-time (but not temporary), as at the end of the reporting period that reside in the community where the

toilets are situated.

For the increased income of the toilet operators, another of the output indicators can be used as well as two indicators that point towards increased wealth:

Total earnings generated by the micro-entrepreneurs from selling the social enterprise’s products /

services.

Proportion of toilet operators with all their children attending school.

Proportion of toilet operators with their house’s outer walls made from strong materials (e.g. iron,

aluminium, tile, concrete, bricks, stone, wood).

Of the eleven outcome indicators selected, three are also used as output indicators and one other (social enterprise employees from the slum) should be relatively easy for the social enterprise to report. However the remaining seven, which are required to show the progress (or not) towards the target outcomes, require further investment of time and resources (e.g. information gathering via surveys) on the part of the social enterprise.

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Given the social enterprise is claiming these outcomes they should be willing to spend the time necessary to collect the data. However in very early stage entrepreneurs it is important to decide, based on the concept of proportionality, when this level of analysis should begin.

Stage 4: Measure, validate, value As described by the GECES, this stage requires(i) measuring whether the targeted outcomes are actually achieved in practice, (ii) validating whether they are apparent to the stakeholder intended to benefit, and (iii) assessing whether they are valuable to that stakeholder. Value is the net gain to the stakeholder: that is the gains achieved, net of costs or sacrifices made to achieve them. The underpinning evidence for defining value needs to be relevant to the measurement, transparent to the stakeholders interested in it, and proportionate (in terms of cost, accuracy, detail balance) to the use to which it is put. This is a continuous process to be undertaken over the life of the delivery of the intervention, and needs to be set into the normal operations of the social enterprise. The drive for measurement must not be allowed to overshadow the point that it is essential that it emerges from the story of the activity and the outcomes achieved i.e. the lives changed by it.

III

Before we go into more detail about the various approaches that are possible to measure, validate and value social impact we must address the concept of proportionality especially as the range and depth of approaches and methodologies varies the most in this stage. The GECES Report includes clear guidance on proportionality

JJJ stating that it is fundamental to good

measurement in that it balances:

The needs of stakeholders; with

The obligation not to waste resources on measurement which does not matter.

This is reproduced in Appendix D. It is essential that these represent over-arching principles in the measurement of social impact within the SIS, and the following sections proceed on that assumption. Stage 4 – Measuring, Validating and Valuing In fact includes three separate areas:

i. Measuring: in other words collecting data according to the defined indicators

ii. Validating: verifying the data collected by engaging with stakeholders and understanding how they

are/were affected by the intervention

iii. Valuing: understanding if the outcome is/was important to the stakeholders

The results of these three steps allow the social enterprise to refine the target outcomes and associated indicators, creating a positive feedback loop in the impact measurement process and providing the basis for Stage 5 (report, learn and improve).

III Clifford J, Hehenberger L, and M Fantini. (June 2014). Proposed Approaches to Social Impact Measurement in European Commission

legislation and in practice relating to: EuSEFs and EaSI. Pg. 22 JJJ IBID pp.32-33

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(i) Measuring The SIF is very prescriptive on the design elements of an impact evaluation, particularly with respect to study measures, sampling and data collection. More information on these aspects can be found in pages 12 to 26 of their report. We would not suggest that the SIS legislation be so prescriptive. However certain principles for data collection are highlighted by the SIF, which could feed into a recommended practice for the SIS:

1. Identify data sources for all measures, as well as the type of data to be collected along with how they will

be collected. Descriptions should cover data for program participants as well as control or comparison

group members.

2. Establish a baseline status for program participants and control or comparison group members. Baseline

data are important for assessing change in participants over time. Describe when the collection of baseline

data will occur. Also, discuss whether the baseline measures being used are comparable for both program

participants and control or comparison group members.

3. Data may be collected by the people internal or external to the social enterprise. Indicate who will collect all

data used in the evaluation. Note the role of staff members in relation to the data collection process. If

administrative data will be used, specify the source(s) and availability of the data, and the evaluation

team’s experience working with that type of information.

4. Describe the way in which data are to be collected. Specify if data will be collected through administrative

records, program systems, or through instruments specifically created for the purpose. For example, will

participants complete surveys, will staff maintain records that will be used, or will administrative data such

as academic transcripts be used? It is likely that some combination of efforts will be required to capture of

the data the measures warrant.

5. The way in which data are collected may not be identical for both program participants and control or

comparison group members, but ideally the same data will be collected across both groups. Indicate any

differences in data collection between the two groups, including sources, means of data collection, and

who will collect the data.

6. Finally, include a timeline outlining the data to be collected at various points (for example, what data are

collected prior to program participation, during, and after). Indicate expected sample sizes at various points

in time in the data collection process.

In order to be relevant for the SIS, it is vital to take into account the concept of proportionality when applying the above recommendations. (ii) Validating As mentioned above we understand the "validating" step as focused on verifying the data collected accurately represents the change achieved and is done by engaging with stakeholders and understanding how they are/were affected by the intervention. When assessing different approaches, three main ones stand out:

1. Desk research: looking at external research reports, databases, government statistics etc. to confirm the

trends the social enterprise has dictated through the outcome indicators.

2. Competitive analysis: comparing the data of the social enterprise with the data of other comparable social

enterprises operating in similar geographies on similar issues.

3. Interviews / focus groups: ask stakeholders through personal interviews or focus groups about the results

of the intervention.

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Analysis of the three approaches

Criteria Desk research Competitive analysis Interviews / focus groups

Resource intensity

Timeframe

Complexity

Reliability

Comparability

Universality

Summary

In the context of comparing Desk research with competitive analysis with interviews/focus groups, the above table should be interpreted as follows. Desk research is less resource intensive than competitive analysis, which in turn is less resource intensive than interviews/focus groups. Desk research scores better with regards to timeframe and complexity versus both competitive analysis and interviews/focus groups. However interviews/focus groups scored better in terms of reliability and universality, although all approaches were of the same level in terms of comparability. (iii) Valuing It is clear that there are numerous methods and techniques to measure the value created by a particular intervention. As identified by the EVPA Guide they generally fall in to two categories:

- Qualitative: including storytelling, client satisfaction surveys, participatory impact assessment (i.e. focus

groups)

- Quantitative (including monetization): including perceived value assessments, cost savings or cost

reallocation methodologies (for example a calculation of social return on investment)

Storytelling Although storytelling may be considered an approach that underpins all the other approaches, in this context we understand it as being the personal anecdote of how an intervention affects a particular beneficiary or group of beneficiaries. Almost all organisations use storytelling in one way or another. These stories can be found in annual reports, project reports, and magazines, etc. In fact storytelling is a structured approach which describes the outcomes of an intervention / investment from the point of view of a stakeholder. Through structured interviews, stakeholders are asked about their experiences with the organisation. Every interview is executed with the same framework of questions. Finally a picture (story) will emerge about the change that the particular stakeholder experienced. A number of frameworks are available on the internet to help create a structured interview and hence effective story. Website: http://www.eldrbarry.net/roos/eest.htm The reason why storytelling is popular is that numbers do not always tell a story, and it is often easier to communicate the value of an outcome through a story. The downside of storytelling is that it is generally unclear how many people are having or have had, that particular experience i.e. the story may not be representative. We recommend the use of storytelling as one component of valuing; not as the only way of valuing. Client satisfaction survey This is an often-used method to measure the level of satisfaction among one’s (target) stakeholders. On the internet you will find a large numbers of alternatives for this type of research, including online questionnaires, interviews, focus groups, etc. Often this will be done by an outside organisation.

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Using client (or customer) satisfaction research can deliver important information on the value of the product or service to the stakeholders. However do note that “satisfaction” does not always imply the issue at stake is (very) important to the specific stakeholder. You should therefore include questions focused on value, for example: how important is the change for the beneficiary? Many organisations ask the question, “How many interviews or how much feedback is required? 40%? 80%?” In general it really depends on availability of resources. In reality the representativeness of the research population is much more important than just the number of interviews. It is better to have 20% coverage of a good representative group, than 50% of a non-representative group. Participatory impact assessment (focus groups) This method is popular in developing countries with target groups that cannot read or write as it makes it possible to rank preferences among stakeholders through the use of pictures. Participants are shown a number of pictures (or in some cases they first make these pictures themselves) of products that are relevant and significant to them. A new item (the offer from the social enterprise) is inserted. Participants receive small stones as “money” and can rank their preferences by paying more or less stones to the different products. Perceived value / revealed preference

KKK

These techniques infer prices from related market-traded goods so that people are “revealing” their preferences every time they make a trade. These methods use “money” in the research, so there is a risk that the answers of the respondents may be biased: either they give strategic answers (lower value when they are afraid their willingness to pay will lead to a higher real price); or, if they can’t afford the service anyway, they may give unrealistically high answers. A specific form of the revealed preferences method is the ValueGame

LLL. In the ValueGame participants rank the

service/activity/impact against relevant products with a known value. The ranking gives information about the rating of the service and can be compared to the (money) value of the surrounding products. Cost savings methods Stated preference methods use real financial data to assess the value of the outcome by using information about prevented costs, spending, and changes in financial income. These methods give a good indication of the volume of value created, and are popular in cost / benefit analysis. Originating from the infrastructural and environmental sectors, these methods are increasingly finding their way into social sectors, particularly given the increasing interest in structures such as social impact bonds. Social Return on Investment (SROI) As defined by the SROI Network

MMM, SROI is an account of value creation and the account requires a mix of

information including qualitative, quantitative and financial. In the same way as quoting a financial return on

KKK

Useful references in order to find out more about this technique are:

Mitchell, R. and R. Carson (2005). Using surveys to value public goods; the contingent valuation method. Washington USA.

Champ, P., Koyle, K. and Brown, T. (2003). A Primer on nonmarket valuation. Dordrecht (NL): Kluwer.

LLL www.valuegame.org MMM http://www.thesroinetwork.org/what-is-sroi

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investment without any other information, the SROI ratio, by itself, has little meaning. The range of judgement that is permissible within an SROI analysis means that comparisons of SROI ratios alone are not recommended. Comparison of forecast and actual ratios provide the starting point for an understanding the reasons for the difference which will also need to draw on other types of information. Analysis of approaches

Criteria Storytelling Client satisfaction

surveys

Participatory impact

assessment

Perceived value

assessment

Cost-saving method

SROI

Resource intensity

Timeframe

Complexity

Reliability

Comparability

Universality

Summary

In the context of comparing the six approaches the table should be interpreted as follows. Using stories to show the value of impact is less resource intensive, requires lower timeframes and is less complex than the other methods, with all requiring a certain level of investment from the social enterprise. In terms of reliability, there are arguments (some highlighted within the explanation of the approaches) that speak for and against the approach. Given the use of some form of monetization in the SROI, cost-saving and perceived value approaches, these are more comparable than the other three approaches. However this also limits their universality, particularly in the case of SROI and the cost-saving method, whereas storytelling can be used by all social enterprises. Recommended pragmatic approach for Stage 4 More than in any other stage, Stage 3 must be guided by a strong level of proportionality. We recommend to follow the advice in the GECES Report

NNN to make sure that the measurement balances:

the needs of stakeholders; with

the obligation not to waste resources on measurement which does not matter.

The needs of the stakeholders can only be assessed through continued engagement. Stage 3 engages stakeholders as sources of data collection, by verifying that the impact actually happened and by assessing whether the impact was valued by them. Stage 4 embodies three sub-sections, each of great importance and requiring separate recommendations. (i) Measuring includes collecting data according to the indicators defined in Stage 4. Using the SIF principles as guidance, but taking into account the need for proportionality, we would provide the following recommendation for social enterprises to collect data:

1. Identify data sources for all measures, as well as the type of data to be collected along with how they will

be collected. Descriptions should cover data for program participants. Where possible, data should also

include control or comparison group members.

NNN IBID pg. 32-33

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2. Establish a baseline status for program participants, at the beginning of the intervention, and where

possible, comparable data for control or comparison group members. Baseline data are important for

assessing change in participants over time.

3. Indicate who will collect all data used in the evaluation (internal or external people), and the capacity and

availability of staff members in relation to the data collection process.

4. Describe how data will be collected, for example through administrative records such as academic records,

program systems, such as scorecards maintained by staff, or through instruments specifically created for

the purpose, e.g. surveys. It is likely that some combination of efforts will be required to capture of the data

the measures warrant.

(ii) Validating should include verifying that the data collected accurately represents the change achieved, or in other words, that the impact claimed actually happened and was real to the intended stakeholders. It can be seen as an additional way for the social enterprise to build proof for its theory of change or the causal links in its logic model. At least one of the following methods should be used to validate or verify the impact:

1. Desk research: looking at external research reports, databases, government statistics etc. to confirm the

trends the social enterprise has dictated through the outcome indicators.

2. Competitive analysis: comparing the data of the social enterprise with the data of other comparable social

enterprises operating in similar geographies on similar issues.

3. Interviews / focus groups: ask stakeholders through personal interviews or focus groups about the results

of the intervention.

Different types of social enterprises may be guided to choose a different type of approach. Desk research is intuitively attractive as it tends to be less resource intensive, but external information about a new and innovative approach may be difficult to find. Competitive analysis provides a high degree of comparability but only if there is a pool of relatively similar social enterprises that openly shares data. Both desk research and competitive analysis should be easier to perform as the sector grows and data is shared (which should be promoted within the SIS arena). Interviews and focus groups can follow a relative “light” approach of engaging and checking with key stakeholders how they perceive the impact of the intervention. It is recommended that social enterprises perform such an analysis at least in a light way. Developing focus groups and making such an analysis more professional would normally require external consultants which would provide a more neutral assessment, but also require higher costs. (iii) Valuing is an assessment of whether the outcome is/was important to the stakeholders. This analysis is often omitted by social enterprises who believe that it refers to monetising. However, monetising is just one method of valuing. We recommend that valuing includes, where possible, a combination of at least one qualitative and one quantitative method. For example, storytelling will increase the understanding of how an intervention affects a particular beneficiary, and when complemented with a qualitative approach such as cost savings methodology, the story will be put in perspective and compared to the investment made. Furthermore, a qualitative analysis alone may fall into the trap of making assumptions that are too far removed from the reality of the person on the ground being affected, so that it becomes a “garbage in – garbage out” analysis. Qualitative methods include mainly storytelling, client satisfaction surveys, and participatory impact assessment (i.e. focus groups). Quantitative methods include perceived value assessments, cost savings or cost reallocation methodologies (for example a calculation of social return on investment). Example Referring back to our case example, the social enterprise continually collects data for the validating process by using desk research combined with competitive analysis. For example it tracks government data on disease

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outbreaks in and around Nairobi as well as keeps an “ear to the ground” on the activities and results of any similar companies working in a similar setting (although not necessarily the same country). The social enterprise is only superficially valuing the outcomes of its activities by focusing on collecting great stories from the slums of franchisees and community views. This is because they do not have sufficient resources to support the more data driven technique that they consider most appropriate (perceived value). Given their early stage nature they feel the time is better spent on refining the business model and consolidating sales. Additionally collecting data for the required outcome indicators already takes up a significant amount of time and in line with the concept of proportionality they decide not to go further. Valuing outcomes may mean to value by monetising or may indicate using other forms of measure. The approaches of methodologies that embrace monetisation may be of use in evaluating using non-monetary measures.

Stage 5: Report, learn and improve As defined by the GECES, as the products and services are delivered and the measurements of their effectiveness emerge, so these results are reported regularly and meaningfully to internal and external audiences. This enables each stakeholder, and most importantly those most directly concerned with service delivery, to learn and to revisit, refocus and improve the services. The reporting needs to be appropriate to the audience, and needs to be presented in such a way as both to be transparent and useful, and to encourage the future behaviours most useful to making the service effective in delivering desired outcomes. Transparency is one of the three characteristics of impact measurement that would allow it to withstand public scrutiny, as stated in the GECES report. The reporting should be alive to the point that it may demonstrate that the targeted outcomes, as well as the means by which they are achieved, are not appropriate and need changing. In terms of reporting three approaches can be considered as relevant for the SIS:

1. Recommendation on inclusion items in reporting, without prescribing a particular format

2. Adoption of the Social Reporting Standard, already used by many social enterprises in Germany

3. Development of a series of alternative reporting layouts, with indicative guidelines on headings and sub-

headings and how to bring about integrated reporting on social impact and financials.

Recommendation on inclusion items The GECES report recommends that all reporting of measurement should include appropriate and proportionate evidence supporting each material point, and specifically:

a clearly explained account of the effects of the intervention (outcomes, and identified beneficiaries,

also explaining , at least in qualitative terms, deadweight, development and drop-off).

an explanation as to how that happened: what activity achieved those outcomes and their impacts, and

the Social Enterprise’s logic model (theory of change, or hypothesis) as to why the activity caused or

contributed to the outcome.

an identification of any third parties having a role in the effective delivery of those outcomes and

impacts, explaining how they contributed (alternative attribution).

an identification of those stakeholders whose interests are being measured, and the nature of the gain

to them, categorising them appropriately.

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a well-explained, proportionate, selection of indicators for the identified impacts for those stakeholders,

identifying how the indicator relates both to the impact, and the needs and interests of the

stakeholders, and how these have been agreed with those stakeholders.

an explanation of social and financial risk (the risk that social and financial outcomes are not delivered)

quantified, where helpful and proportionate, with an evaluation of likelihood and impact, and with a

sensitivity analysis showing the effect on targeted outcomes, impact, and financial results if the risks

arise.

Outcomes and impacts must always be described together with how they arise from the activities of the social enterprise. Where possible, and where proportionate (that is when it can be done without cost that is excessive compared to the benefit of having the measurement) both outcomes and impacts will be quantified. Even where aspects of the outcome and impact are not going to be quantified, the reported measurement should identify all outcomes and impacts that are relevant to the audience (remembering proportionality), and explain why they are not being quantified. Social Reporting Standard

OOO

As described in the EVPA Guide, the Social Reporting Standard (SRS) is a German initiative to deal with multiple reporting requirements on social enterprises. Apart from providing guidelines on reporting it provides the following framework for impact-orientated reporting by social enterprises:

1. Problem to be solved

2. Scale of the problem

3. Contribution of the organization to a solution and expected impact

4. Actual social impact: resources used (inputs), work performed (outputs), impact (including outcomes)

5. Plan and outlook

6. Organization

7. Finances

The SRS recommends that the social enterprise completes the report every year, by the end of the first quarter of the financial year following the reporting period. In this way it is published in parallel with the social enterprises annual financial statements. Series of reporting formats The GECES recommends that as a follow up to its recommendations reporting formats should be developed around the standards they propose. These formats should include:

A series of alternative layouts (built around existing examples of good practice) giving a choice of

presentational formats for the main disclosures.

A series of guiding headings for the supporting explanations for the main disclosures.

Indicative guidance on integrated reporting, where the social enterprise chooses to do this.

At this stage, no such selection of formats exists. However once developed and tested in would be appropriate to consider whether these formats provide an appropriate approach to enshrine into the SIS approach to impact measurement.

OOO www.social-reporting-standard.de

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Analysis of approaches

Criteria Recommendation on inclusion items

Social Reporting Standard

Prescribed reporting formats

Resource intensity

Timeframe

Complexity

Reliability

Comparability

Universality

Summary

In the context of comparing a recommendation on inclusion items with the social reporting standard and other prescribed reporting formats, the above table should be interpreted as follows. A recommendation on inclusion items is less resource intensive compared to the social reporting standard and other prescribed reporting formats. Whereas all approaches score equally well in terms of timeframes and complexity, the social reporting standard and the prescribed reporting formats score better in terms of reliability and comparability. However the recommendation on inclusion items scores more highly with respect to universality. Recommended pragmatic approach for Stage 5 Even though an indicative model/template or examples of best practice could be useful to provide to the social enterprise, we do not recommend that such additional guidance should be enshrined in a very detailed or specific way within the regulation. Similarly the Social Reporting Standard, although useful as a reference tool and a place for social enterprises to begin, it would not be our recommendation to include it in a prescriptive way in the regulation. Given the social enterprise sector is still at a nascent stage and shows different levels of maturity across Europe, any regulation should not be too detailed or specific to provide sufficient room for the evolution of the sector. Until such a time that reporting formats have been developed at the European level, social enterprises should include in their reports the information recommended by the GECES. The reporting needs to be appropriate to the audience, and needs to be presented in such a way as both to be transparent and useful, and to encourage the future behaviours most useful to making the service effective in delivering desired outcomes. This reporting needs to stay close to the process, therefore reporting clearly on how the social enterprise has conducted the impact measurement (including all stages), and bringing out the most important and useful points to the stakeholder receiving the information. Specifically, all reporting of measurement should include appropriate and proportionate evidence supporting each material point, and specifically:

a clearly explained account of the effects of the intervention (outcomes, and identified beneficiaries,

also explaining , at least in qualitative terms, deadweight, development and drop-off).

an explanation as to how that happened: what activity achieved those outcomes and their impacts, and

the Social Enterprise’s logic model (theory of change, or hypothesis) as to why the activity caused or

contributed to the outcome.

an identification of any third parties having a role in the effective delivery of those outcomes and

impacts, explaining how they contributed (alternative attribution).

an identification of those stakeholders whose interests are being measured, and the nature of the gain

to them, categorising them appropriately.

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a well-explained, proportionate, selection of indicators for the identified impacts for those stakeholders,

identifying how the indicator relates both to the impact, and the needs and interests of the

stakeholders, and how these have been agreed with those stakeholders.

an explanation of social and financial risk (the risk that social and financial outcomes are not delivered)

quantified, where helpful and proportionate, with an evaluation of likelihood and impact, and with a

sensitivity analysis showing the effect on targeted outcomes, impact, and financial results if the risks

arise.

Reports should be published on an annual basis, in line with the financial reporting schedule, and completed in the quarter following the end of the social enterprise's financial year. In terms of learning and improving this must be explicitly addressed and defined in the various operating documents of the social enterprise and reported accordingly. For example discussion of impact measurement results should be included in all board meetings, with discussions and decisions recorded in the board minutes. In fact, a recent report by the European Microfinance Network

PPP showed that the level of formalization of the social

mission within an organization varies significantly, with the most common being a strategic/business plan formalization (in 63% of cases), through by-laws and status (in 37% of cases) and internal policies (in 20% of cases). We recommend that the discussion of social impact must be enshrined into management and board meetings, with minutes reflecting the discussions and decisions taken. We should never lose track of the ultimate objective of the social impact measurement – to enable the social enterprise to work towards achieving greater impact in a more effective way. A survey of 1000 SPOs in the UK by New Philanthropy Capital

QQQ showed that more than half put meeting funders’ requirements as a key driver for

impact measurement versus only 5% saying that the main driver was improving services. However the main benefit that SPOs said they found when they did measure their impact was not increased funding but improved services! This result and other evidence demonstrate that by integrating impact measurement into the management systems and mind-sets of social enterprise, the sector can produce greater and more impactful work.

PPP Marie Anna Bénard. (October 2014). European microfinance and social performance: where do we stand? Pg. 9 QQQ

Ní Ógáin, E., Lumley T., and D. Pritchard. (October 2013) “Making an Impact: Impact measurement among charities and social enterprises in the UK” New Philanthropy Capital

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Example The example of the social enterprise is at a very early stage so is beginning to collect data and report on such data through the use of spreadsheets. One angle to be explored is to request that their investors work with them to create a template for reporting that the other investors are also happy to receive. This can therefore reduce the burden on the social enterprise. A large variety of impact reports from different organizations can also be accessed at the Social Impact Analysts Association website: http://www.siaassociation.org/formats/impact-reports/. The GECES Report also includes additional case study material in pages 56 onwards to illustrate how various European organizations are currently approaching and reporting on impact.

Conclusions

In conclusion we recommend a substantially GECES-based, and hence GECES-compliant approach. This is to be done bringing in elements of various alternative approaches, either in a blended solution, or as alternatives as shown in the summary diagram at Fig 9. Taking those five stages of the GECES process, itself a composite solution from a review of best practice across Europe and beyond, we have the following:

Fig 13. Recommended approach to all five stages

Using Stage 1 Identify objectives and theory of

change EVPA minimum questions, adapted

Stage 2 Identify stakeholders and map targeted outcomes against them

SROI or EVPA questions (similar) set into an accountability framework

Stage 3 Set relevant measurement from an understanding of targeted outcomes

Use outcomes framework and indicators from Global Value Exchange, switching to GECES frameworks once they have emerged.

Stage 4a Measuring: gathering the relevant data

4-stage process: identify data sources; establish baseline; allocate responsibilities; establish how to gather and store data.

Stage 4b Validating: does the data fairly represent the outcomes

Any of: desk research; competitive analysis; interview focus groups

Stage 4c Valuing At least one qualitative and one quantitative method from: Storytelling; perceived value assessment; cost-benefit analysis; SROI (monetised or non-monetised)

Stage 5 Reporting format Don’t prescribe a format; cover (disclose) the six elements in section 6.49

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Appendix D: Guidance from GECES on Proportionality The GECES Report

RRR includes clear guidance on proportionality stating that it is fundamental to good

measurement that it balances does not matter. This is reproduced in full in Appendix D. It is essential that these represent over-arching principles in the measurement of social impact within the SIS, and the following sections proceed on that assumption. The GECES Report

SSS includes very clear guidance on proportionality stating that it is fundamental to good

measurement that it balances:

the needs of stakeholders; with

the obligation not to waste resources on measurement which does not matter.

Whilst it is certainly the case that social impact reporting need not use financial indicators, it is nevertheless a gathering and communicating of measurement information which the reader-stakeholder is intended to use in its decision-making. Consequently there may be some useful parallels drawn from proportionality in financial reporting under IFRS, or “materiality” as it is more usually known in that context. Two definitions are helpful, although other explanations of the same concept appear in IFRS:

Omissions or misstatements of items are material if they could, individually or collectively, influence the

economic decisions that users make on the basis of the financial statements. Materiality depends on the

size and nature of the omission or misstatement judged in the surrounding circumstances. The size or

nature of the item, or a combination of both, could be the determining factor. (IAS 1.7, IAS 8.5)

Information is material if omitting it or misstating it could influence decisions that users make on the basis

of financial information about a specific reporting entity. In other words, materiality is an entity-specific

aspect of relevance based on the nature or magnitude, or both, of the items to which the information

relates in the context of an individual entity's financial report. Consequently, the Board cannot specify a

uniform quantitative threshold for materiality or predetermine what could be material in a particular situation

(QC11, Conceptual Framework for Financial Reporting, Sept 2010).

Some concern has been expressed by commentators at this comparison to IFRS. They are concerned that it might encourage the development of a prescriptive and codified response to the need for consistency and comparability in impact measurement. This could be unhelpful if it loses the nuance of the qualitative in the desire to quantify. This prescriptive approach is not what the GECES report supports. The reference to IFRS is purely to assist in understanding the important issue of proportionality by reference to another arena in which it is important. There are some useful parallels drawn from proportionality in financial reporting under IFRS, or “materiality” as it is more usually known in that context. Drawing from the concept of materiality in financial reporting, measurement matters if it significantly affects the views and actions of stakeholders to the extent that they would act differently if they knew. This general principle applies to the external stakeholder receiving information about the social impact targeted or achieved. It also applies to the SE itself since it will make decisions based on what social impact it is achieving through its work. In both senses the SE must consider whether to measure a particular aspect of its work, the measurement Framework and Indicators to be used, and the level of detail required. It should consult appropriately with relevant stakeholders before making that decision. The level of that consultation is itself subject to the SE’s judgment on proportionality. The SE needs to consider:

RRR IBID pg. 32-33 SSS IBID pg. 32-33

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what needs to be measured, based on what is likely to be changed as a result of measuring it;

what needs to be measured, based on whether it relates to a relevant outcome to a stakeholder whose

interests and engagement matter;

how closely the performance of the measure relates to the performance of the outcome;

whether it can be measured with reasonable certainty, and how much certainty is reasonable in relation to

the action to be taken as a result;

the relevant timescales for measurement, and for the sustained interest of the stakeholders.

This judgment is one for the SE, in conjunction with its stakeholders. It is difficult to give benchmarks for when measuring at all, or adding a further layer of detail to that measurement, will be material. If benchmarks are given, they will tend to become fixed cut-off points. Either measurement will only be done if it meets the criteria, or measurement will be insisted-upon with no real benefit if the criteria are met. Both are wrong results, the first tending to deny stakeholders important information, and the second being wasteful of scarce resources. With this general warning (not to let these become fixed rules, rather than guiding principles), a simple two-stage process can be set out to help SEs and their funders to decide whether:

it matters to measure a particular outcome or impact

it matters to take that measurement to a greater level of detail.

This two-stage thought process is as follows (and shown in the flow diagram below).

If the SE, Funder or Investor knows this, would it change either or both of:

Its invest/don’t invest decision the amount of that investment by more than 10%,

Its delivery or operational process: the way in which its activity is delivered

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If the answer to either of these is “yes”, then two further questions are asked: Is the cost of measurement less than 5% of the funded costs of the intervention, or

If the Funder or Investor needs the measurement for its own reporting purposes, has it funded the costs of

obtaining it without reducing funding for the intervention?

If any of the answers to either of these is also “yes”, then the measurement probably matters and should be undertaken unless the SE and principal stakeholders agree to the contrary. Related to proportionality is the level of accuracy, or detail, achieved in the measurement, as against the time needed to produce it. This relates to when it is useful for stakeholders, so measuring a particular aspect may be dis-proportionate because it takes so long to measure it that the decisions that are based on it (e.g. further investment) may have had to be taken already. This is particularly relevant given that annual investment reporting may be running significantly ahead of the measuring of longer term outcomes relevant to the social impact being targeted and delivered. The point at 4.16 about the use of informed outputs to give relevant shorter term indicators for longer term impacts is one likely solution.

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Appendix E: European Mapping Study – Lesson for the SIS Introduction In April 2013, the European Commission launched a social enterprise mapping study as a follow-up to its 2011 Communication on the Social Business Initiative (SBI). The first-of-its-kind study maps social enterprise activity and eco-systems in 29 countries using a common definition and approach. The study also maps the national policy and legal framework for social enterprise in each country. The study reveals that social enterprises adopt a variety of legal forms and statuses:

(i) existing legal forms – such as associations, foundations, cooperatives, share companies; (ii) social enterprise legal forms – which are exclusively designed for social enterprises through the

tailoring or adaptation of existing legal forms; and (iii) social enterprise legal statuses – which can be obtained by a number of different legal forms, which

comply with a number of prescribed criteria.

Sixteen European countries have some form of legislation that recognises and regulates social enterprise activity. However, in most jurisdictions, the vast majority of social enterprises tend to use and adapt legal forms which are not specifically designed for social enterprises. One of the principal findings of the mapping study is therefore that the lack of legal recognition of social enterprise in many countries makes it difficult for Governments to design and target specialist support or fiscal incentives for social enterprises, inhibiting the development of social enterprise. Social Enterprise Legal Statuses and Legal Forms The following jurisdictions have a social enterprise legal status which applies to different legal forms:

Social purpose company in Belgium

Social enterprise legal status in Italy

The following are examples of legal forms exclusively designed for social enterprises:

Societe cooperative d’interest collectif in France

Social co-operatives in Italy

Community interest companies in the UK

There are social enterprise laws in Finland, Lithuania and Slovakia but these laws focus narrowly on work integration social enterprises and so are not particularly relevant to the design of the SIS. There are also laws in relation to social co-operatives or the social economy in a number of jurisdictions but these laws do not generally relate to the concept of a social enterprise, including in the following: Croatia, Czech Republic, Germany, Greece, Hungary, Poland, Portugal and Spain. A number of jurisdictions, such as Latvia, Malta, Poland and the Czech Republic are developing some form of social enterprise status. Denmark has just introduced a new social enterprise status. There are very few countries that have nationally recognised systems or common methodologies for measuring and reporting social impact which are mandatory for social enterprises to use. One exception is Italy where social reporting is mandatory for social enterprises ex lege.

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Some of the closest and most developed – and therefore useful – comparators to the SIS are:

the social enterprise ex lege legal status in Italy;

the social purpose company in Belgium;

the community interest company in the UKTTT

; and

the société cooperative d’interest collectif in France.

These statuses and forms involve tests which to a greater or lesser degree and with differing degrees of formality or rigour reflect aspects of the regulatory tests we are proposing for the SIS. Social Enterprises Ex Lege In principle, any form of private organisation, whether for profit or otherwise, may be a social enterprise ex lege under Italian law. To qualify, a form of Social Objectives Test and Social Activities Test must be passed:

• Social Objectives Test – the organisation must have purposes of general interest; • Social Activities Test – the organisation must permanently and primarily conduct an organised

economic activity oriented to the pursuit of the purposes of general interest.

In addition, the social enterprise ex lege can operate only within certain listed sectors of activity:

• social assistance • health care • social-healthcare assistance • education, instruction and training • environmental conservation • cultural heritage appreciation • social tourism • university and post-university education • research and distribution of cultural services • after-school training, oriented to prevention of school desertion and to educational and training success • services oriented to social enterprises ex lege, offered by organizations composed at least for 70% by

organizations which conduct a social enterprise ex lege.

Independent of the sector of activity, the status can also be obtained by organisations which conduct entrepreneurial activity oriented to job inclusion of disadvantaged or disabled workers. Arguably, there is a form of Social Impact Test, as the activities must be of “social utility”. There is no separate form of Socially Responsible Business Test. However, it is mandatory to include workers and beneficiaries in governance. Inclusion means any mechanism, included information, consultation or participation, through which workers and beneficiaries are able to influence the management of the company, at least regarding working conditions and quality of goods or services. It is mandatory for all social enterprises ex lege in Italy – legal forms with social enterprise status – to submit a social report known as a ‘bilancio sociale’.

TTT The community interest company is usually referred to as a legal form but it may also be regarded as a legal status, as it comes in two

different legal forms, a share form and a not for profit form without shares.

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Social Purpose Company (SPC) In principle, any form of company or co-operative may become an SPC. It is subject to a form of Social Objectives Test and Social Impact Test:

a Social Objectives Test – an SPC must have a social purpose, being a higher, altruistic purpose, a social objective that the shareholders wish to realise and that is the decisive motive for the incorporation of the CSP and not the enrichment of its members. The Companies Code requires details of the social purpose to be set out in the CSP’s byelaws; and

a Social Impact Test – an SPC must show [its purpose and activities benefit the community].

The SPC does not have a separate Social Activities Test, as there are no formal restrictions on the activities a SPC is able to carry out, it being understood that a classical company can take on the status of an SPC. However, an SPC must, in practice, carry out its social purpose through its trading. The SPC is not subject to a separate Socially Impact Test or Socially Responsible Business test. However, it does have certain rules which reflect inclusive governance, such as a right for employees to have shares and a limit on any person having more than 10% of the voting rights in an SPC. In addition, in practice, as an SPC will have a social purpose, one would expect that it would act responsibly and would seek to create a positive social impact, even in the absence of specific tests. An SPC has to produce an annual report, which is not in a standard or prescribed format, on how it acted on the established social goals of the company in the year in question. Community Interest Company (CIC) A CIC comes in two principal forms:

as a share company, which can be public or private; and

as a not for profit entity without shares.

It is subject to a form of Social Objectives Test, Social Activities Test and Social Impact Test:

a Social Objectives Test – a CIC must have a purpose for the benefit of the community and its objects will often specify the community which is intended to benefit; and

a Social Activities Test – a CIC must show that its activities will benefit the community by submitting a ‘community interest statement’ on application to the CIC Regulator and the objects of a CIC in its Articles will often spell out the nature of the activities it will conduct. The test which the CIC Regulator applies is whether a “reasonable person” would consider that the activities of the CIC will be carried out for the benefit of the community.

A CIC will not satisfy the Social Activities Test if it carries on certain political activities, or if a reasonable person might consider that its activities are carried on only for the benefit of the members of a particular body or the employees of a particular employer. The CIC is not subject to a separate Social Impact Test. However, it might be argued that there is a form of impact test implied in the Social Objectives and Social Activities Tests applicable to the CIC.

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The CIC is not subject to a separate Socially Responsible Business test. The board members of a CIC generally have the same governance and decision-making responsibilities as the directors in any other company, but the directors of a CIC are under a stronger obligation to have regard to the wider community which the CIC serves than would be the case for an ordinary company. The CIC is required to report to the CIC Regulator each year on how it has carried out its purpose and delivered benefits to the community, which is part of its ongoing community interest requirement. Société Cooperative d’Interest Collectif (SCIC) An SCIC is a form of social enterprise cooperative. It is subject to a form of Social Objectives Test, Social Activities Test and Social Impact Test:

a Social Objectives Test – an SCIC must pursue both an efficient commercial purpose and social purpose which benefits the community; and

a Social Activities Test - an SCIC must show that its economic activities relate to its social purpose;

a Social Impact Test – an SCIC must show its purpose and activities benefit the community.

The SCIC is not subject to a separate Socially Responsible Business test. However, it is governed in a democratic fashion, as it operates on a one member, one vote principle. In addition, in practice, as an SCIC will have a social purpose and is a democratic co-operative, one would expect that it would act responsibly, even in the absence of a specific test. The SCIC is required to publish its environmental and social impact in its management report.

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Addendum to App E - The Operational Definition of Social Enterprise Used in the Mapping Study The Study did not develop a new definition of social enterprise; rather it ‘operationalised’ the existing and widely accepted notion of social enterprise as articulated in the European Commission’s SBI communication. The SBI definition incorporates the three key dimensions of a social enterprise that have been developed and refined over the last decade or so through a body of European academic and policy literature:

An entrepreneurial dimension, i.e. engagement in continuous economic activity, which distinguishes social enterprises from traditional non-profit organisations/ social economy entities (pursuing a social aim and generating some form of self-financing, but not necessarily engaged in regular trading activity);

A social dimension, i.e. a primary and explicit social purpose, which distinguishes social enterprises from mainstream (for-profit) enterprises; and,

A governance dimension, i.e. the existence of mechanisms to ‘lock in’ the social goals of the organisation. The governance dimension, thus, distinguishes social enterprises even more sharply from mainstream enterprises and traditional non-profit organisations/ social economy entities.

Each of the above dimensions were operationalised by developing a set of core criteria – reflecting the minimum a priori conditions that an organisation must meet in order to be categorised as a social enterprise under the EU definition. The following core criteria were established:

The organisation must engage in economic activity: this means that it must engage in a continuous activity of production and/or exchange of goods and/or services;

It must pursue an explicit and primary social aim: a social aim is one that benefits society;

It must have limits on distribution of profits and/or assets: the purpose of such limits is to prioritise the social aim over profit making;

It must be independent i.e. organisational autonomy from the State and other traditional for profit organisations; and,

It must have inclusive governance i.e. characterised by participatory and/ or democratic decision-making processes

The mapping study notes growing convergence towards the definition of social enterprise as "an autonomous organization that combines a social purpose with entrepreneurial activity".

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Appendix F: B Corp Comparison A Certified B Corp

UUU needs to carry out three steps.

Step 1: Meet Performance Requirement Meeting the performance requirement involves completing the B Impact Assessment and earning a minimum score of 80 out of 200 points. The assessment and the scoring is reviewed by B Labs. The performance test involves the following elements:

1. Assessing Impact – applicant companies assess how its performance compares against a number of best practice standards in relation to different forms of impact:

a. Questions are tailored to a company’s size, sector and geography; b. Questions are split into Governance, Workers, Community and Environment; c. The company is scored on a self-assessment scoring methodology;

2. Comparing Impact – the applicant’s score is compared with other companies; and 3. Improving Impact – the applicant is asked to create a plan to improve company practices.

The B Impact Assessment provides a judgment on how significant a company’s current impact is. Authors’ comment: It would therefore be possible to say that, for the purposes of the SIS, there should be a presumption in place that, in the absence of evidence to the contrary, a Certified B Corp should be considered a responsible business for the purposes of the Socially Responsible Business Test. The Social Impact evaluation element is less likely to be sufficient as it stands, since the “primary purpose” test of objectives and the fuller requirements around measurability and disclosure anticipated in the SIS will still need to be met. The ethical over-ride would still stand, as would the powers of the Regulator to investigate and sanction. Step 2: Meet Legal Requirement Certified B Corps are required to meet the following legal requirements:

1. Give legal protection to directors and officers to consider the interests of all stakeholders, not just shareholders, when making decisions

2. Create additional rights for shareholders to hold directors and officers accountable to consider these interests

3. Limit these expanded rights to shareholders exclusively

In some cases, this will require companies to take on benefit corporation status. In other cases, it may require companies to adopt certain amendments to the Articles or Bye-Laws of the company. This requirement is in some ways analogous to a Social Objective Test but is not as comprehensive. Step 3: Make it Official This involves signing the “B Corp Declaration of Interdependence” and an agreement with B Labs which essentially relates to the terms on which the franchise is standardised and enforced.

UUU http://www.bcorporation.net/

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Appendix G: Suggested Form of Audit Report

[following from the financial audit report; or as a separate report] We have examined the social impact statements prepared by the directors [of the SIS] in accordance with [the SIS legislation] for the year ended [xx-yy-zz], together with supporting evidence, information and explanations supplied by the Directors. We have no material matters for which we have been unable to obtain an explanation from the directors [or We have the following matters which, in our opinion, constitute reasonable enquires for the purpose of this opinion for which we have been unable to obtain an adequate explanation from the directors….] Our examination covers the social outcomes disclosed in the social impact statements as achieved [by the SIS] for the 3 years ended [ ] and the targeted outcomes and theory of change intended by the directors to enable them to be achieved for the 2 years ending [ ]. We have considered whether the social impact statements have been based upon appropriate third party or internally generated evidence of the outcomes achieved and are supported by relevant data gathered by the directors for this purpose. We have reviewed the assumptions used in compiling the social impact statements, and the process used in developing the underlying measurements and data to ascertain whether, to a material degree, they are consistent with prior years, and in accordance with the five-step process under [GECES 2014] In our opinion the social impact statements are appropriately compiled using the five step process required under [SIS Standards and] GECES 2014, and show a true and fair view of the outcomes arising during the three years ended [xx yy zz] and make the disclosures required by [SIS Standards and] GECES 2014. In our opinion they also fairly summaries and disclose the outcomes targeted by the directors for the two years ending [xx yy zz] which were agreed by the impact investors and the profit investors on [Date].

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Appendix H: Notes on potentially applicable auditing standards In terms of general and International audit standards covering this area, there are few that cover it fully, nor are specifically focused upon social impact audit. The closest two areas are the AccounAbility series

VVV on

sustainability and sustainable development (AA1000APS, AA1000SES, and AA1000AS 2008), and the IAASB publication International Standard on Assurance Engagements (ISAE 3000 - ED 2011)

WWW. Whilst not exact fits,

they do contain some useful guidance, much of it aligned to the proposals in this paper. AA1000, predominantly focused on accountability and stakeholder engagement, nevertheless recognises the same key concepts as GECES: inclusivity (stakeholder engagement in KPI setting), materiality (proportionality) and responsiveness (involvement). In AA1000APS it anticipates broadly the same principles on which GECES is based:

The strategy for delivering accountability is based on an understanding of the stakeholders

It requires the organisation to establish goals and standards in conjunction with them

It then requires it to report transparently against them.

It anticipates two types of assurance engagement:

Type 1: looking at the reliability and functionality of systems and processes and whether they are being

followed in such a way that the published data that emanates from them is likely to be sound

Type 2: looking at the reliability of the information disclosed.

It accepts two levels of assurance:

High, requiring externally-sourced supporting evidence, and

Moderate, requiring internally-sourced evidence, supplemented by confirmations by management.

The scope of the assurance report is helpful. It requires:

A clear addressee (as with reports to shareholders, in financial audits),

An outlining of responsibilities of the assurance provider and others

A reference to the standards against which the audit is being undertaken

The scope of the work, and whether it is a type 1 or a type 2 programme

The disclosures

The methodologies

The opinion

The limitations of it.

In a rather similar way ISAE3000, which is, in effect, an overarching standard sitting over all types of assurance work, anticipates two types of assurance:

The attestation type: like financial audit in which a set of statements by a principal is subjected to a series

of standardised procedures of validation, and a standardised report is produced

The direct type: in which the assurance provider undertakes their own original measurement in order to

validate the conclusions drawn by the principal. This is more like the social research rigour that underpins

the better examples of social impact measurement.

VVV http://www.accountability.org/standards/index.html WWW http://www.ifac.org/publications-resources/isae-3000-revised-assurance-engagements-other-audits-or-reviews-historical-fi

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It sees the point of assurance as obtaining evidence to enhance confidence of stakeholders in the reported matters, which is consistent with GECES.

XXX Again the standard provides a pre-set list of contents for a report.

YYY

We can conclude that the assurance standards anticipated for the SIS are a mixture of attestation and direct, or in the case of social impact measurement could be delivered as either, depending upon what the stakeholders require, and the capacity within the measured organisation. The standard suggests an approach more akin to AA1000 Type 1 assurance, and not the Type 2. However care must be taken to ensure that what is done remains proportionate. The report format suggested in this report is substantially similar to the approach taken by AA1000, and whilst it omits some of the more intricate elements required by ISAE3000, it includes its core elements. Overall it would benefit from assurance standards being written to fit, and this is largely anticipated as following during the developments to come during the piloting and consultation periods.

XXX Ibid para. 8. YYY Ibid para.60.

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Appendix I: CVs of Authors Jim Clifford OBE FCA CF MCSI FRSA (Project Lead) Partner and Director of BWB Advisory and BWB Impact j.clifford@bwbllp.com

Jim is a chartered accountant, chartered tax practitioner, and holds qualifications in corporate finance, insolvency, and Third Sector financial management. He heads the Advisory and Impact teams at BWB and helps Social Sector and private Sector organisations to create, analyse, enhance and realise value through acquisitions, disposals, mergers and other structural, and transactional approaches as well as through outcomes-based planning, strategy and evaluations. He is the author of over sixty social impact studies (not-for-profit and private sectors), as well as other research assignments, and has developed and managed corporate transactions in the UK and abroad in both private and not-for-profit arenas. He has acted on multiple occasions for the UK regulators (Financial Conduct Authority; Dept of Trade & Industry; Education Funding Agency; DEFRA; BIS; Stock Exchange; Law Society and others) in setting standards, reviewing compliance with them, and investigating breaches. Jim is a leading developer of social investment prospects, with over twelve projects currently in train. His innovative work in social investment was recognised in 2013 with an OBE, having recently designed and developed the first charity-led social impact bond IAAM – ‘It’s all About Me’, which he now also Chairs. IAAM is a UK-wide social enterprise finding and training therapeutic adoptive parents for harder-to-place children. Jim has acted for investments and investment funds in the social sector, and also a range of general investment funds from £50m to over £600m, in the UK, Europe and in other countries. These include regular valuations and model advisory and assurance work with a major European Fund based in Italy and France. Jim had a career of over 30 years, latterly acting as Head of Valuations, of Not-for-Profit Advisory, and Social Impact Services, at leading UK business advisors Baker Tilly and continues to partner with Baker Tilly on some major projects. Jim blends his professional work in the UK and Europe with academic research and lecturing, and selected outside appointments. Jim has worked for over thirty years in the not-for-profit and publicly funded arenas, as advisor, and in charity management. This has spanned restructuring and strategic work across education, social care, sports and leisure, and health, from NGOs, and NDPBs (Quangos) to independent charities, local infrastructure bodies and foundations. Larger past projects included the restructuring of Thamesmead Town to form Gallions Housing Association and two other bodies, the four-way merger to create the Leeds City FE college, and the formation of the Quality Improvement Agency and others out of the Learning and Skills Development Agency, and the strategic work on impact to create LSIS out of the QIA. Jim is frequently called-upon for advisory groups for Central Government and National bodies around Social Impact and Social Finance, as well as on restructuring of NDPBs. Jim has served since November 2012 as Technical Chair of the sub-group formed by the Groupe d'experts de la Commission sur l'entrepreneuriat social (GECES). This group of 19 experts from the field of social impact measurement has developed proposals for a standard approach to measurement of social impact primarily for the purposes of emerging legislation for EaSI grant and investment support programmes and European Social Entrepreneurship Funds (EUSEFs) under the Social Business Initiative. This is also expected to give a lead to improving comparability of social impact measurement for social enterprises across Europe. The development of the proposals has involved group members in looking at good practice across the Member States, working to establish common ground and workable standards that will fit the smallest and largest of social enterprises. The emergent findings were tested with a wider group of specialists in the field drawn from across the Member States, before being finalised for presentation to the GECES.

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The proposals were presented in final draft to the GECES on 28th November, and the positive feedback from that, and the final comments from participants following the meeting have been embodied in a final version for publication. Guidance notes for social enterprises will be developed from the full policy paper. Jim also served on the Social Impact Measurement working group, and the UK Advisory Board and Impact Readiness sub-group of the G8 Social Impact Investment Taskforce. Jim is an honorary Visiting Fellow at Cass Business School and is working with Cass and St Andrew’s University on a standard protocol for corporate finance deals within the charity sector. He was awarded the fellowship following the completion of his MSc in Charity Accounting and Financial Management. He also writes and presents the modules on social impact evaluation and social finance models on Cass Business School’s five specialist charities and NGOs MSc programmes. Amongst other appointments, Jim is a non-executive director with the independent charity, the Centre for Public Scrutiny (CfPS) which promotes the value of scrutiny and accountability in modern and effective government and supports non-executives in their scrutiny role. He is working with CfPS to develop scrutiny protocols to embrace outcomes and impact evaluation across the UK Public Sector.

Dr Lisa Hehenberger Research and Policy Director, European Venture Philanthropy Association lhehenberger@evpa.eu.com

Lisa is the Research and Policy Director of the European Venture Philanthropy Association, the European

membership association for high engagement grant making and social investment. Lisa runs EVPA's Knowledge

Centre that conducts and publishes research, organises workshops, participates in practitioner and academic

conferences, and collects and disseminates data and knowledge. She also coordinates EVPA’s policy initiatives,

facilitating the dual transfer of knowledge between policy makers and practitioners.

Lisa is a recognised expert on issues related to venture philanthropy, social impact investment and impact

measurement. Her work on impact measurement includes EVPA’s Practical Guide to Measuring and Managing

Impact (together with Anna-Marie Harling and Peter Scholten). That research effort provided key input to the

European Standard on Social Impact Measurement that was adopted in June 2014 by the European Commission.

Lisa is a member of the European Commission’s Expert Group on Social Business (GECES) and its sub-group on

social impact measurement. Lisa is also a member of the French National Advisory Board and the Impact

Measurement Working Group of the Social Impact Investment Task Force established by the G8. She also

contributed to the OECD’s policy brief on impact measurement.

In terms of academic positions, Lisa is a Research fellow at the Centre for Globalization and Strategy at IESE

Business School, and a member of the Scientific Board of SDA Bocconi School of Management’s Impact Investing

Lab. Lisa has a PhD in Management from IESE Business School, focusing on the evolution of venture

philanthropy and social investment in Europe. She has published in top academic and practitioner journals such as

the Academy of Management Journal and the Stanford Social Innovation Review. She has a Master's degree in

Business and Economics from Stockholm School of Economics and HEC (CEMS).

Previously she worked in investment banking at UBS and GB Investment Banking in London, Madrid and

Barcelona. Lisa is a Swedish national, based in Barcelona, and speaks five languages.

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Luke Fletcher Partner, Bates Wells Braithwaite l.fletcher@bwbllp.com

LLB – Law with American Law

Diploma in Legal Practice

Solicitor of the Supreme Court of England and Wales

Luke is a partner at the law firm Bates Wells Braithwaite and advises charities, social enterprises and other clients

on a wide range of corporate and financial transactions and commercial and regulatory issues. He led the legal

aspects of the work for the GECES on the mapping of social enterprise across the EU.

As well as advising on the full range of activities carried out by charities and social enterprises, areas of focus

include designing innovative legal and constitutional structures and acting for clients operating in or engaging with

the emerging social investment market. Recent work has included advising on the interpretation of the concept of

“third sector organisations” which are eligible to receive social investment from Big Society Capital and on the

definition of eligibility criteria for social impact businesses which are able to list securities on the Social Stock

Exchange.

Following the lead of former senior partner at BWB, Stephen Lloyd, who was responsible for developing the

concept and legislation for the CIC (the UK’s form equivalent to the SIS now contemplated by Luxembourg), Luke

was actively involved in the updating of the governance and structure of the CIC currently being brought into law in

the UK.

Clients vary from national and local public bodies, major global corporates, international NGOs and household

name charities to think tanks, campaigning organisations, ambitious social start-ups, social investors and local

voluntary groups. Many clients need bespoke, tailored advice to help establish and deliver new structures,

partnerships and programmes.

Luke has worked on many of the most significant developments in the growing UK social investment market. He

has also been involved, through his secondments to the Cabinet Office and through various sector initiatives, in

helping to shape thinking, policy and practice in this new market in areas as diverse as corporate form, corporate

governance, social investment tax relief, charity trustee duties, co-mingling funds, financial promotion rules and the

adoption of social investment related amendments to the Financial Services Act 2012.

Anna-Marie Harling Director, Philanthropy & Values Based Investing Team, UBS anna-marie.harling@ubs.com Anna-Marie is a Director in the Philanthropy & Values Based Investing team at UBS, where her primary

responsibility is Project & Knowledge Management. She also serves in a pro bono capacity as the Director of

Social Impact at Beyond Capital Fund, an impact investing foundation, where she is responsible for designing and

implementing the Fund's impact measurement framework.

Prior to joining UBS in the beginning of 2014, Anna-Marie was Research Associate at the European Venture

Philanthropy Association. While at EVPA she developed, along with Lisa Hehenberger and Peter Scholten, EVPA's

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Practical Guide to Measuring & Managing Impact; a guide that has been used as the basis for future discussions

within the GECES (European Commission) and G8 Impact Investing Taskforce. Her expertise has also been called

upon to input into the OECD policy brief on impact measurement that will be published towards the end of 2014. In

addition to the Practical Guide, Anna-Marie co-authored reports surveying the venture philanthropy and social

investment sector in Europe and gave trainings on impact measurement both at EVPA's Training Academy and

independent conferences and events.

Anna-Marie's previous experience includes advising Promotora Social Mexico, a venture philanthropy foundation

based in Mexico City, on their strategy and impact measurement approach as well as working as a Research

Consultant with Prof. Heinrich Liechtenstein and Uli Grabenwarter on single family offices' approach to impact

investing.

Anna-Marie began her career working in investment banking at Credit Suisse in London and Zurich and holds an

MBA from IESE Business School and an MA (Hons) in Philosophy, Politics and Economics from Oxford University.

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Société d’Impact Sociétal [DRAFT] Application for Registration

A) Company Details 1. Name

2. Previous Names

3. Corporate Form under the 1915 Act

4. Registration Number

5. Date of Incorporation

6. Names and Addresses of Directors (please use the additional space provided on page 8 if needed)

Executive (Y/N)

Executive (Y/N)

Executive (Y/N)

Executive (Y/N)

7. Names and Addresses of Principal Shareholders7879

% Impact Shares % Private Shares

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List all holdings over 5% in either category grouping together all associated holdings 79 Where a material change is planned or expected within 6 months of submission of this form, then this shodul be explained in the space on page 8, or in a continuation sheet.

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B) Objectives 1. Objectives/Needs being met Indicate the cohort of individuals or communities being served, and explain the needs being addressed.

2. Theory of change Explain how the activities of the SIS meet the needs outlined in 1 above.

3. Outcomes being met Explain the outcomes intended to be achieved in meeting the outcomes; indicate how the SIS has researched the consequences of not intervening (the “counter-factual”)

4. Beneficiaries Explain how the activity is to be targeted to particular beneficiaries

5. Definition of relevant cohort How in practice the cohort of beneficiaries will be defined, and is there an intended or unintended benefit to others

6. Analysis of potential harm80 (negative impact analysis) How has this been done; what is the nature of the potential harm, under what circumstances will it happen, and how will the risk be managed.

80 This should cover social effects, but also environmental and economic.

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C) Activities 1. What the organisation does Should include a description of both trading and wider social activity, including supporting services provided to third parties

2. How it does it Should include a practical outline of how services are delivered or products made, indicating key resources used, and any third party reliances

3. Key aspects of the business model

a) Service or product

b) Market

c) People, Property, Process

d) Financial model and assumptions

4. Resources secured Should explain what resources (financial; people; premises/property; intellectual property; management and others) have been secured; how certain that is, and relating these back to the outline in section C2

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D) Impact Measurement 1. Confirmation that appropriate systems have been established Outline what systems are in place and how management have established that these are appropriate to need.

2. How are the five steps in GECES met?

a) Identify objectives

b) Identify stakeholders

c) Set relevant measurement

d) Measure, validate and value

e) Report

3. Have systems been established to monitor for harm? Confirmation, and a brief indication of the systems established, including management review

4. Have KPIs been agreed with stakeholders?

Yes/No81

Describe the process taken to achieve agreement

When was agreement achieved?

81

Delete as appropriate and insert an explanation, if “no”, as to when and how this will be done, and how management can be certain agreement will be forthcoming

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E) Social Responsibility 1. Democratic Governance Process

Describe the process, and relate it back to the meeting of best practice standards

How does company address:-

Accountability – the duty to recognise stakeholders and the obligation to keep them appropriately informed of and engaged with the SIS’ activities

Transparency – making appropriate information available to stakeholders to enable them to be kept informed

Involvement – making it clear how stakeholders can communicate views and concerns to the SIS, and how they can know that these are being responded-to

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2. Ethical Conduct Indicate any ethical conduct or ethical interpretation issues, including ethical issues relating to operating partners, in relation to the beneficiaries focussed-upon or the wider public, in the UK or overseas

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F) Other Matters 1. Is the company approved for B-Corp Status?

Yes/No/under application82 Date or approval

2. Outline the history, and timeline to development of the company

3. Any other matters which you consider are relevant to the Regulator’s consideration of this application?

82 Delete as applicable

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G) Signature and confirmations 1a. Signed by:

1b. Signature:

2. Role and Authority:

3. Date:

4. Date application approved by the Board:

5. Authorising statement on behalf of the Board

The contents of this application form are, to the best of the knowledge and belief of the Board, having made due and appropriate enquiry:

- true and fair

- complete in all material aspects The Board confirm that its intention is to pursue, as a primary objective, the achievement of the social impacts outlined in section B above, and to put in place the systems outlined in section D. The Board confirm that its intention is that the company conducts itself ethically, and in such a way as to uphold and enhance the public reputation and status of the SIS [badge and] brand.

Supporting documentation enclosed:-

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Additional space for supporting statements83

83 If there is insufficient space here, please use a continuation sheet, and indicate in this space how many such sheets are enclosed.