Brussels looks set to flesh out the existing EU regulation for European Social Entrepreneurship Funds (EuSEFs), which lays down broad principles as to how funds should be governed.

The regulation, which cleared the Brussels machinery in April 2013, emphasises the need for a single set of rules across the EU. Various national rules are currently in place but uniformity, the regulation states, “should ensure the confidence of investors that wish to invest in such funds”.  

A Commission impact assessment of 2011 noted that investors are increasingly seeking “social returns”.

Now entering the legislative pipeline is work to tighten up on the broad-spectrum measures set out in the regulation. This will involve arriving at implemention measures at a second stage of the rules, and input from an expert group will be required. The group will then advise the Commission, probably in 2015, and could propose precise criteria for measuring social impact.

At a recent conference in Brussels on socially responsible investing (SRI), Tilman Lueder, head of the Commission’s asset management unit, warned conference delegates to be on their guard against ‘greenwash’ – insubstantial claims by asset managers to be socially responsible.

He referred to a claim to virtue by a drinks company. It had, he said, set out its claim on the basis that it had taken to washing out the remains of the sugary carbonated drink in its bottles in a way that reduces the use of wash water.

There is no doubt, the expert group is likely to take into account UK’s Cabinet Office definition of social impact bonds for which the desired outcome should be clear and measurable, the quality of outcomes can be improved, and there is a desire to catalyse the market for innovative financing.

Lueder noted that European institutional buy-side demand for green bonds is “relatively underdeveloped”. At present, institutional investors, such as pension fund managers, account for only 19% of total funding.

“They need to be much more engaged”, Lueder commented. As for any negative issues, these could be addressed in the new Green Bond Principles proposed by 13 international banks earlier this year, and to be revised later this year.  

Indeed, a prime reason for the conference was to boost institutional markets in the EU for the vaccine bonds programme, which is being run by the International Finance Facility for Immunisation. Vaccine bonds raise money to immunise children in third-world countries against preventable disease.

Lueder believes such investments offer acceptable returns for not unattractive levels of risks and could suit if there is a desire for measurable social impact. But he also warned against buying into three-letter ‘acronym’ funds. Funds should make it clear what they are investing in.

George Richardson, head of capital markets at the World Bank, points to its Green Bond initiative, which supports projects to combat climate change. Here, investors see underpinning from AAA ratings for instruments that support the financing of solar and wind installations, upgrading power generation plants, waste management involving capturing methane, energy efficient bundling, and so on.

Richardson says that if there were a demand for bonds denominated in euros, the fixed rate yield would be approximately 1.8% for 10-year instruments and approximately 2.4% for 20-year ones.