Government assistance to promote socially responsible consumption and finance systems within the member States of the Council of Europe
James Harrison, Legal specialist in Human Rights at the European University Institute of Florence
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This paper will provide a presentation of government assistance for socially responsible consumption and finance systems as found in the Member States of the Council of Europe.
Section 1 will introduce the paper by providing definitions of the key terms – socially responsible consumption and finance – and explaining the nature of the data collected by the Council of Europe.
Section 2 will explain how this data will be presented, the criteria for inclusion and exclusion of data in this paper, and make some comments about the value of government assistance in general.
Section 3 will note some of the limitations in undertaking a comparative analysis of different systems in Member States at the current time and the need for a permanent observatory of good practice.
Finally section 4 will explain the methodology which will be utilised to examine the data and will present five different types of governmental assistance for socially responsible consumption and finance systems, including a description of each type of assistance, examples of good practice in Member States, and conclusions and recommendations for governments who may wish to utilise these forms of support.
The Council of Europe is launching a common European Platform for ‘socially responsible consumption and finance systems’ in Europe. The Council of Europe has identified two particular types of initiatives - socially responsible consumerism and socially responsible finance – as important mechanisms through which private individuals can significantly enhance social cohesion, sustainable development and social and sustainable entrepreneurship, leading to support for the most vulnerable and disadvantaged individuals and communities.
1.1 Socially Responsible Consumption
Socially responsible consumption involves consumers seeking products and services that meet certain social and environmental standards. They will not buy products only on the grounds of cost and efficiency but include within their purchasing decisions wider social and environmental concerns. Responsible consumers purchase a wide range of products from different producers who have in common that they all produce products that conform to certain social and/or environmental criteria. These could be products made with recycled materials, or organic farmers producing agricultural produce according to specified environmental and ecological standards. Socially responsible products also include those that are produced according to accredited social as well as environmental standards, for example those categorised as ‘fair trade’ products. Fair trade organisations buy products from developing countries, produced according to specified labour and environmental standards and guarantee a minimum price for those products. Thus they create social benefits in terms of environmental sustainability, better working conditions, and a living wage for workers1.
It would be virtually impossible to provide any overall figures for socially responsible consumption in Europe, given the diversity of different activities this covers. But, as an example, to take only fair trade, there are now 1.5 million producers benefiting from fair trade programmes in over 60 countries in Africa, Latin America and Asia. Sales of fair trade products are now at approximately 500 million euros per year (increasing around 20% yearly). 3,000 organisations in 20 European countries are now involved in promoting and developing fair trade as their main business. In Europe, fair trade businesses employ around 2,200 people, while there are over 100,000 volunteers who give their time for free2.
1.2 Socially responsible Finance
The second category of initiatives considered by the Council of Europe is that of socially responsible finance. Socially responsible finance initiatives create the link between socially responsible savers and investors on the one hand, and social responsible entrepreneurs on the other, by investing savers’ money into appropriate projects. Thus, socially responsible finance initiatives create and manage a range of investments that are not simply concerned with maximising profits, but rather are interested in the wider social and environmental value and benefits that investments can bring: Investments might include micro-credits for disadvantaged and excluded people in local communities, funding to assist southern fair trade producers, investments in renewable energy projects, or money for training and education of disadvantaged persons. A large part of the rationale for these investments is the social impact that they have, often in situations where investments would not be made at all if it was left to mainstream investment policy.
Socially responsible finance initiatives are also concerned with making money systems more personal and socially oriented processes: Open communication and transparency concerning the use of money contribute to the motivation of savers and investors and to social cohesion as a whole. At the same time, socially responsible finance institutions are able to carefully monitor the value (social and financial) of their investments: They have developed specific screening and social evaluation methods for their lending and investment activities while being able to limit losses on loan and investment portfolios.
To give an idea of the size of socially responsible finance in Europe, over 45 small development banks and other financial institutions (members of INAISE3 and FEBEA4), most of them created in the last 20 years, provide loans and risk capital to about 20,000 enterprises and initiatives in the social, environmental and culture sectors. A larger number of microfinance institutions in the third world are supported by them in terms of capital and transfer of know how, which provides a mechanism for micro-lending to more than 1 million small entrepreneurs in Asia, Africa and Latin America. Savings from about 600,000 depositors and investors in 30 countries are currently invested in European social enterprises and initiatives. The total funds entrusted to these specialised financial institutions has risen to 6.5 billion euros in 2003 (average annual growth rate of 20%)5.
1.3 Data collected by the Council of Europe
The Council of Europe has sought to collect information from all Member States concerning the assistance they provide to support private citizens’ groups involved in socially responsible consumption and finance initiatives. Questionnaires have been sent to all Member States, and this has been followed by extensive correspondence to try to find all relevant examples of government assistance. Inevitably, at this stage, there will be examples of good practice that have been missed. But the data that has been collected shows that socially responsible consumerism and finance initiatives have until recently, for the most part operated within the economy without any special advantages from government. However, there are increasing recent tendencies among Member States to provide assistance for the sectors in question.
Governmental support can come in a variety of different forms, and the Council of Europe’s tables of results entitled “Economy solidarity supporting regulations in the Member States of the Council of Europe and the European Union”6 present the various legislative initiatives that have been taken by individual governments, as well as the European Union, to promote the sectors. This data shows that there are a great range of legislative, quasi-legislative and financial mechanisms that are already employed by governments to support and promote the initiatives in question.
1.4 The value of government assistance
The costs and benefits of government assistance must always be evaluated in order to ensure that the overall results are beneficial for all stakeholders. Members of the Council of Europe’s working group on socially responsible finance and consumption were generally very positive about how a range of different types of government assistance could provide important benefits (many of these are analysed below). However, it should be recognised that there are potential downsides as well. Government assistance can be misdirected, or even damaging to existing socially responsible consumption and finance initiatives and at the very least may well lead to initiatives having less control of the decision-making processes. It is therefore vital that governments and socially responsible consumption and finance initiatives consider and discuss how assistance can best be provided and how proposals are likely to affect their relationship.
It should also be noted that diverse forms of socially responsible consumerism and finance have grown impressively with little government assistance, and there are many ways in which participants in the three sectors can take action to achieve greater expansion for themselves. Governmental support should be seen as only one, albeit important, mechanism by which this sector of the economy can be further enhanced and expanded.
Finally, it is recognised that socially responsible consumption and finance initiatives in countries around Europe are at various different stages of development and have widely varying degrees of entrenchment and growth within individual countries. It is inappropriate and unrealistic to recommend that the same government assistance be put in place in every country in Europe simultaneously: The process is likely to be incremental and diverse. But although the situation in each country is unique, there are sufficient similarities between the needs of socially responsible finance and consumption initiatives that lessons that can be learned from one country to another, and then applied taking account of the regional, national and local differences.
In view of this the analysis below considers a range of governmental assistance; including both assistance that would be appropriate for countries where the sectors under consideration are currently unrecognized by governments and small in scale, as well as that which is appropriate for countries with more developed and firmly entrenched sectors which already receive a degree of recognition and support from their governments.
2. THE NATURE OF THE DATA ANALYSED
This analysis focuses specifically on legislative and other governmental assistance that supports socially responsible consumerism and finance initiatives by private citizens and groups. The Council of Europe’s platform is primarily aimed at assisting enterprises and other organisations which utilise systems of trade and investment to achieve social, ethical and environmental goals, as well as responsible consumers and investors seeking those same goals. Assistance that is targeted at these actors will therefore be the focus of the current presentation.
This means that a number of other types of government action which promote valuable social and environmental goals will not be included: In particular, it is outside the scope of this paper to consider more general government policies concerning environmental sustainability, poverty reduction etc. Such policies will only be considered when they directly relate to promotion of the sectors that form the focus of this project (see section 4.1 below). Second, consideration will only be given to those forms of initiative that are governmental in origin. Initiatives that originate from other sectors will not be considered, as they could essentially be classified as voluntary, and do not concern the relationship between governments and citizens. Third, this presentation will concentrate on governmental legal initiatives that are actually in place, or, where they are of particular interest, planned governmental legal initiatives. The analysis will generally not consider campaigns that NGOs and others are undertaking to attempt to persuade governments to adopt measures or attempts to enact legislative measures that were not successful.
This presentation will also not consider two types of related initiatives that have already been thoroughly analysed elsewhere. First, it will not consider government measures to promote the policies of mainstream companies who have made limited social or environmental commitments in the context of their core business concerns (often referred to as ‘corporate social responsibility’ (CSR) programmes). Rather, the concern in this paper is with enterprises who undertake some form of responsible consumption and finance activity, and this itself is a core concern of (part of) their business. Finally, a number of the legislative initiatives that are listed in the Council of Europe data relate to one specific issue – the regulation of pensions funds, and in particular reporting requirements with regard to social and environmental issues. Much has already been written on this issue, adoption of pensions regulations is becoming more and more widespread, and it is suggested that the Council of Europe’s Platform would create more benefit by highlighting some of the less well known initiatives listed below.
3. THE LIMITATIONS OF THIS PRESENTATION AND THE NEED FOR FUTURE OBSERVATION AND ANALYSIS
In the areas that have been selected for analysis, it should be noted that government support is a relatively recent phenomenon. As will be seen from the examples presented below, many of the support measures that are analysed have had a short lifespan, and so conclusions drawn concerning the benefits they bring and their transferability to other countries are, inevitably somewhat provisional at this stage. In addition, while it has been possible to find a substantial amount of information about some forms of government assistance, others are mentioned only briefly. This is not an indication of their respective merits, rather it reflects the relative lack of analysis of many of the forms of government assistance under consideration. This points to the need for some form of permanent observatory which could more completely catalogue and analyse the various initiatives under consideration as they progress over time: Europe should be seen as a laboratory, and we need to assess the different ‘experiments’ that have already been undertaken, and understand the extent to which individual forms of government assistance have been successful in leading to growth in the sector, and the factors that will also make them successful elsewhere. The current presentation has a more limited remit, but it is hoped it will be useful in demonstrating the different types of government support that have been adopted, by providing an initial examination of the key aspects of the measures taken, and some conclusions on their potential benefits.
4. METHODOLOGY FOR THE PRESENTATION
Due to their widely diverse nature, the different forms of government assistance have been presented in five different categories7 (sections 4.1-4.4 below):
· Overall government strategy papers, resolutions and declarations which contain reference to ethical finance, fair trade and responsible consumerism
· Public awareness raising measures
· Financial support – tax incentives
· The creation of a legal status for organizations that promote socially responsible consumption and finance systems
· Government procurement
There is a sixth category of government assistance that would be dealt with here – government involvement in environmental or social labeling systems for products – but this is a complex area being dealt with separately in another paper.
In each category, there is a description of the type of initiative under consideration, several of the most advanced forms of government regulations are presented, and finally conclusions are made and recommendations given for how other governments who wish to promote socially responsible consumption and finance initiatives could utilise these mechanisms. All of these different types of government measures relate to socially responsible consumption and finance initiatives of private citizens. However, in different countries around Europe, these initiatives have often been given different labels (for instance what is in this paper termed ‘socially responsible finance’ includes ethical finance, solidarity finance, social finance etc. as it is described in various different countries across Europe). The terms socially responsible consumption and finance should therefore be seen as very widely inclusive of all forms of social, ethical and environmental projects which conform to the definitions provided in the introduction to the paper.
4.1 Overall government strategy papers, resolutions and declarations which contain reference to ethical finance, fair trade and responsible consumerism
Most governments write environmental and/or social strategy papers which set out their plans for poverty reduction, social cohesion, environmental sustainability and a range of other important social goals. Recognition within these documents of the importance of groups of private actors who undertake socially responsible consumerism and finance is in itself a significant step in that it demonstrates, in principle, governments’ support for the sectors. It may reflect a prior commitment to supporting such groups, but, as can be seen from the examples presented below it can also pave the way for more concrete support through more specific legislative measures. It may also lead to governmental commitments to further research into the type of governmental support that might be appropriate. In particular, reference to socially responsible consumerism and finance in these general strategic documents could be viewed as important starting points for countries who have not, as yet, undertaken any legislative commitments to promote the social solidarity economy.
4.1.2 Examples of good practice
i. Strategy Papers
Austria’s Strategy for Sustainable Development, adopted in April 2002 recognises the important principle that citizens and government need to work together to achieve the goals of sustainable development. It further recognises that socially responsible consumption and finance initiatives are an important mechanism for achieving that goal, and highlights a number of government measures that are being taken to support these initiatives8.
The Austrian strategy recognises the need for a relationship between private enterprises and government that reflects their ecological and social impact, and the need for legal and policy frameworks that are responsive to this9. It further acknowledges the importance of increasing the market share of sustainable products and services10. Having presented the Austrian government’s recognition, in principle, of the importance of citizens undertaking socially responsible consumption and finance initiatives, the Strategy presents a ‘first steps’ guide to achieving its sustainable development goals11. In this guide it recognises both the importance of ethical and ecological investments, and the need for responsible consumption including promoting organic farming and fair trade initiatives.
‘Project Ethical-Ecological Investments’ aims to support and expand the market for ethical and ecological investments in Austria through public relations and information work12 (see section on promotion for details below). ‘Action Programme Organic Farming’ explains the plan to increase “organically managed farming surfaces” by 50% in the following five years13. Finally ‘Project Initiative Trans Fair’ aims to promote the sale of fair trade products with information campaigns including advertising, sales promotion measures and regional action weeks over the following three years with the aim of boosting the market share of such products14.
The Belgian National Plan for Sustainable Development (2000-2004) discusses promotion of socially responsible production and consumption, as well as considering how to promote ethical investment funds.
The Belgian Plan acknowledges that the promotion of goods produced in a socially responsible manner should be emphasized as a positive development, and is preferable to taking action to place sanctions on countries that do not meet labour and environmental standards. The Plan goes on to set out a number of ways in which this commitment to responsible consumption is enforced by concrete policy measures. It sets targets of a 4% market share for both organic products and products which are labeled as coming from socially responsible production. Similar targets are set for public procurement. It also sets a target of having 10 products bearing the Ecological label made in, or imported into Belgium by 2004. The Plan also highlights the proposal to implement a social label for goods produced in Belgium and the rest of the world according to the core labour standards of the ILO15.
The Belgian plan also notes the importance of research in order to ascertain how best the government can increase sales in fairly traded produce.16 Thus, it is stated that there will be a study of possible ways to develop and promote fair trade, which has since been produced17. This study highlighted the beneficial effects that fairly traded goods have on producers and the steps which the government could take to aid further expansion. Particularly emphasized in the study is the role that governments could play in promoting fairly traded products to consumers, as well as assistance with setting up appropriate financing arrangements and help in improving the quality and range of products available. The Belgian Plan also contains proposals for a working group to be set up to look at the ‘green’ reform of taxation, and included within this mandate is to study how the tax system could be used to encourage ethical investment funds18.
The German Program of action 2015 (concerning poverty reduction) encourages and supports responsible consumption, and in particular fair trade as well as socially responsible finance initiatives19. It recognises the important role that private sector organisations can play in enhancing environmental and social standards, for instance by establishing social and environmental labels20. It therefore seeks to establish a programme to promote voluntary ecological and social quality labels in close co-operation with enterprises and labeling initiatives21. With regard to socially responsible finance initiatives, the report states that the German government considers the concept of “ethical investment” to be a “good way of giving greater attention to concerns related to poverty reduction and social development”.
Subsequent to the Program of Action, the German government produced an implementation plan which provided concrete steps by which the stated objectives could be achieved22. In particular, it recognised the important role that the government can play in promoting public knowledge of the sectors. It provides substantial financial support for public information campaigns on fair trade23, and the promotion of new product ranges of fair trade goods24, as well as other measures including fair trade codes of conduct25, and help to African farmers in low income countries with the production of fair trade goods26.
ii. Resolutions and Declarations
As well as references in overall strategy papers, responsible consumption and ethical finance initiatives can also be highlighted by what we might term ‘Resolutions’ or ‘Declarations’, passed by national Parliaments, that recognise the sectors and often call upon governments to take specific steps to promote them. In Italy, much attention has recently been paid at the political level to socially responsible consumption and finance initiatives. On 11 March 2003, the Italian Senate adopted a resolution recognising the importance of fair trade initiatives27, and calling upon the government to take measures (including public awareness raising and education programmes) to increase the growth of the sector. Also in 2003, parliament adopted a resolution which demands the commitment of the government to support the growth of ethical finance as an important mechanism for reducing social and economic exclusion, to encourage the actions of ethical finance initiatives and to help raise awareness among the public of how ethical finance is an important mechanism for fighting poverty. It calls upon the government to support the ethical finance sector by a law which would give tax advantages to the sector28. At the EU level, there have been a number of resolutions from the European Parliament in support of fair trade, which has culminated in the Sustainable Trade Action Plan which contains a number of objectives which specifically relate to standards of “sustainable trade”, “fair trade” or “ethical trade” etc., and how non-governmental initiatives that help achieve those goals might be supported29.
Government resolutions which focus particularly on socially responsible consumption and/or finance can also play a similar role as strategy papers. Although they do not link the sectors to overall strategies on poverty, environmental sustainability etc. they do raise the profile of the sectors, formalise them and what they stand for, and often include demands for concrete steps that can then be lobbied for. The stand-alone nature of such resolutions can also be seen as an advantage, compared with inclusion of these issues in strategy papers, in that it can be more of a clear focal point for future action.
4.1.3 Conclusion and Recommendations
It is difficult to be certain whether government commitment in strategy papers to socially responsible consumption and finance initiatives represent pre-existing commitment to the sectors, or the strategy papers themselves are the catalyst for action. However, reference to responsible consumerism and ethical finance initiatives in government strategy papers and declarations can have an impact on the sectors. The recommendations made below highlight both the key reasons for including such initiatives in strategy papers and the key points that should be made:
· Recognition: Strategy papers, resolutions and declarations are all important official documents where it can be officially recognised that socially responsible consumerism and finance initiatives are important tools in tackling ethical, social and environmental issues.
· Definition: Reference to socially responsible consumption and finance initiatives provides the starting point for an officially accepted definition for their activities, which is important in sectors that have, for the most part developed free from governmental support and are therefore very much self-defined.
· Implementation: Government strategy papers should include specific policy measures to implement their goals, and, in the case of responsible consumption and finance initiatives, this will include concrete steps to promote the sectors.
· Progress Reports: Strategy papers should require that governments report on progress achieved after a certain number of years, which thus keeps the sectors and their progress on the political agenda.
· Responsibility: Strategy papers should put the onus on specific ministries to meet the objectives that are set (as in all the strategy papers mentioned above), thus providing a focal point for the relationship between government and responsible consumption and finance initiatives.
· Research: Where governments are unsure of either the way the sectors should be defined or supported, further studies should be mandated in the strategy papers so that governments better understand the needs of the sectors, and the way in which governments can best support their activities (as in the case of Belgium mentioned above).
The products of socially responsible consumption initiatives are often not as well known to consumers as brands from larger producers who have far greater financial muscle to promote their products. Similarly, socially responsible finance initiatives may be unable to promote themselves to potential investors in the same way that major financial institutions can. This may mean that consumers are unable to take up opportunities for socially responsible consumption or investments because of a lack of knowledge about the existence and characteristics of relevant initiatives. Public awareness-raising is therefore an activity that governments can undertake, in a variety of different forms in order to inform consumers and investors of the social and ethical possibilities for consumption and investment.
4.2.2 Examples of Good Practice
As can be seen from the government strategy papers which were analysed in section 4.1, many governments are beginning to recognise the importance of assistance in the promotion of responsibly produced products and ethical investments. The Austrian, Belgian and German strategy papers all recognise that promoting public knowledge of these initiatives is a vital mechanism for encouraging long term sustainable growth in the sectors.
At the EU level, the European Union has recognised the importance of promotion and information campaigns in supporting responsible consumerism. It has provided funding for a number of public awareness raising campaigns for a range of responsibly produced goods30.
At the national level, of particular interest is the implementation plan for the German Plan of Action 2015 which recognised that: “Trends in neighbouring European countries indicate that there is still considerable potential for raising the market share of Fair Trade in Germany. In those countries, information campaigns in support of Fair Trade have been a key factor in increasing market shares.”31 As a result the German government has provided considerable financial support for public information campaigns, both recognising the importance of promoting the Fair Trade brand itself32, and the need to raise public awareness of new products33. The German government also recognises the importance of increasing public knowledge of other ‘sustainable goods’ and so has undertaken an initiative which promotes sustainable consumption practices among the general public34.
The German analysis of successful European Fair Trade campaigns is certainly backed up by further examination of the effects of public knowledge on consumption of fair trade products. Research at the EU level suggests that many more consumers would buy fair trade goods if they were able to find them35. In particular, this is borne out by the example of Switzerland, which has some of the highest levels of public awareness of fair trade products in Europe36, as well as consistently the highest levels of market shares of such products37. Substantial financial support from the Swiss federal government for public awareness-raising (as well as support from major retailing outlets) has been an important reason for this high level public awareness and market share for fair trade products.
Another example of how public awareness-raising has been utilised to promote other forms of responsible consumption comes from the Netherlands. In 2003 and 2004 a global organic food campaign was organized by the Dutch Ministry of Agriculture in collaboration with producers, supermarkets, banks and consumer organisations in order to raise consumer awareness for organic food and to considerably increase sales and production38.
Alternative methods for raising public awareness of responsible consumption and ethical finance initiatives can be found in France. First, the French government has created special preferential rates for advertising through the media, so that fair trade organizations are able to obtain a reduced rate for advertising on French television and radio39. A second mechanism applies particularly to socially responsible investments. In France there is also an obligation for pension funds managers to propose to their customers (i.e. enterprises who are preparing pension funds schemes for their employees) the possibility of investing in a fund of solidarity enterprises (including social enterprises which are described in section 4.4 below). Such an obligation has the effect of promoting awareness of the businesses.
Although there is a lack of other data concerning government assistance for public awareness-raising of socially responsible finance at the national level, at the local level, a number of Councils take measures to promote ethical investments and responsible consumerism. For instance, the Council of Munich has published a manual40 which sets out for the public the full range of ethical and ecological investment opportunities available in Munich.
4.2.3 Conclusions and Recommendations
Particularly in the area of responsible consumerism, raising public awareness is seen as an important mechanism increasing market share of products, and long term sustainability. This is especially true when new types of goods are entering the market, and so they are unknown to consumers and product promotion is likely to have the greatest influence. A similar logic should therefore apply in countries where such initiatives are themselves a new phenomenon. There is more limited evidence with regard to public awareness raising of socially responsible finance, but it is suggested that the dynamics are likely to be similar (see introduction to this section), and so public awareness raising is important for the same reasons.
For governments wishing to undertake public awareness raising initiatives, there are a number of issues to consider:
· The most appropriate form of awareness raising to utilise: This could mean the government conducting its own awareness raising campaigns, or funding socially responsible consumption or finance groups to run their campaigns, providing special rates for organisations so that they can run advertising campaigns through the mainstream media (as in France) or creating legal obligations to publicise certain types of socially responsible products or investments (also in France).
· The activities that should be used to promote awareness among the public: For instance, this could be through commercial advertising, alternative campaign methods, special promotion days, educational programmes etc.
· The amount of money to be spent in order to have a significant impact on public awareness: It would be advisable to examine the campaigns already undertaken (e.g. Switzerland) as well as research carried out (e.g. in Germany) to examine how best the money can be spent to maximise public awareness, and the amount needed to achieve a positive impact, as well as the activities undertaken.
Another mechanism through which governments can also look to support socially responsible consumption and finance is through providing financial support for the sector. It is argued that the lesser rates of return on investments for socially responsible finance initiatives or the greater costs involved in the purchase of fair trade coffee etc. is a problem in attracting greater numbers of customers. The socially responsible nature of the products, and the small size of the producers mean that their products are often more expensive than their non-ethical counterparts. Specifically considered in this paper are tax incentives to investors and consumers. With such tax incentives, socially responsible consumption and finance initiatives should be able to attract more customers to their products/investments rather than relying only on the ethical and social benefit of those products/investments to attract customers and investors.
4.3.2 Examples of Good Practice
In the Netherlands, under the Green Investment Directive, there has been a tax advantage scheme in operation for green investments since 1995. It promotes access to finance for environmentally sound or worthwhile projects, for example wind and solar energy, organic farming, environmental projects and sustainable building projects. A KPMG report on the scheme explains how it works:
“Investing in the Green Funds Scheme means that individual investors lend their own ‘cheap’ money to the banks, at a lower interest rate, which is then compensated by a tax incentive (environmental tax credit). The ‘green banks’ can then offer cheaper loans to environmental projects. This encourages the implementation of innovative environmental projects that are less profitable but, in this way, can still receive funding.”
A ‘Green statement’ for each environmental project which is to receive investment must be acquired by the investment funds from the Minister of Housing, Spatial Planning and Environment, thus ensuring that the government certifies the green credentials of each project41. Investors receive a tax reduction which will lead to an extra 2.5% return on their investments. By the end of 2002 over 140,000 private investors and savers had invested EUR 3.1 milliards in the scheme, an increase of 18% over the previous year42.
The KPMG study goes on to explain the positive impact the scheme has had:
“Per euro, the direct environmental benefits are particularly high for a scheme that was only set up as a supporting measure for market introduction of innovative technologies. Every euro that the government invests via the Green Funds Scheme provides 40 euros from the private sector for investment in green projects. This is then used to achieve environmental objectives. The government has thus ensured a faster market introduction of new products and techniques such as wind energy and heating/cooling storage. Other activities, such as organic farming, have been intensified.”
“The Green Funds Scheme contributes to social awareness of both the general public and the business community. The government also encourages banks to contribute to the achievement of national environmental objectives. Under this scheme they become partners, together with the government, in encouraging the private sector to become sustainable consumers and the business community to become sustainable manufacturers. The large numbers of investors, savers and companies that are actively involved in the Green Funds Scheme clearly shows that it is a successful form of public-private collaboration. In financial, technological and social terms, the scheme is clearly profitable.”
An OECD report43 on the effects of the green investment funds on organic farming also noted its benefits – primarily how the market could generate a tremendous amount of money for environmental projects that could never be generated by the government or by the project owners, and at moderate expense to the government. This form of tax incentive was recommended to other policy makers, with the caveat that considerable effort needed to be invested in developing an appropriate scheme and convincing participants of its effectiveness before it was commenced44.
The tax free exemption regulation on green investments now has its social-ethical equivalent in the Netherlands45, which has recently been approved by the European Commission46.
This provision supports investments in developing countries based on specified development criteria. Investments assist microfinance institutions providing micro-loans of 25,000 EUR maximum each, for cooperatives and fair trade projects. Investment funds are certified based on a project approval by the Minister for development cooperation. The fiscal advantage is the same as the one given to investors in "green funds" (2,5% tax benefit on the return on investment).
While the Netherlands certainly has the most advanced form of ethical investment support, there are other countries which also provide for tax relief in certain types of ethical investments. The Belgium government has authorised the creation of a fund47, which provides soft loans and guarantees to companies from the ‘social economy’ sector in order to finance long term investments48. 70% of the money in the fund must go to activities that benefit the social and sustainable economy (l’économie sociale et durable). The other 30% goes to investments that conform to the obligations of Ethibel49. The fund is limited to a maximum of 75 million euros. Investors who invest in the fund must keep their investments in the fund for a minimum period of five years, and receive a 5% tax relief on their investments (1% per year)50.
This government initiative has been questioned by some finance institutions for its unfair competition and lack of transparency. Unlike the Dutch system, where any investment fund that meets the eligibility criteria can obtain the tax benefits on offer, in Belgium it is only the government controlled fund that can attract investors with the tax breaks. This means that the government fund is competing with private social and environmental funds, while being able to offer greater financial incentives to potential investors. It is argued that, while the Belgian system might be appropriate for a risk capital fund, which generally struggles to attract private investors because of the high risk involved, it can actually stifle private initiatives trying to create more investment in other social and environmental projects.
In France there is also a system whereby investors can obtain tax advantages by investing in legally prescribed social enterprises (as described in section 4.4)51. In the UK, there is the Community Investment Tax Relief Scheme52 which encourages investment in disadvantaged communities by giving tax relief, equivalent to 5% of their investment per year, to investors who invest for at least 5 years in businesses in less advantaged areas. Investments are managed through Community Development Finance Institutions (CDFIs), who provide loans to enterprises in deprived areas, primarily those that would not otherwise receive mainstream financial investment. The CDFIs need to be accredited by the Small Business Service (SBS), a government agency, which monitors whether CDFIs are properly carrying out their mandate. CDFIs must report on an annual basis to the SBS and amongst other criteria, are required to invest most of their money in enterprises that would otherwise struggle to obtain finance53.
Tax relief relating to responsible consumption is less widespread than for ethical finance initiatives. However, there are several examples. In the Netherlands, organic farmers and producers of organic products who obtain at least 70 percent of their turnover selling organic products are entitled to deduct up to 10,227 Euro from their income taxes. Proposed laws in other countries show how tax advantages for responsible consumption may spread further across Europe. The Draft Agro-Ecological Programme in Bulgaria has proposed financial advantages for agriculture producers in order to encourage them to keep applying agricultural practices aiming at the preservation of the environment: Through financial incentives it encourages the use of agricultural land that is compatible with the protection and improvement of the environment, the landscape and its features, natural resources - soil and genetic diversity, and the protection of endangered and rare species of wild flora and fauna54. An Italian legal proposal would provide extensive support for the fair trade sector including, among other advantages, the creation of special funds to support fair trade initiatives, and special tax reductions for fair trade products55.
4.3.3 Conclusions and Recommendations
The use of tax incentives is a measure that has been very successful in the Netherlands in achieving a large amount of investment in important environmental projects. The new socio-ethical tax-regulation in the Netherlands, as well as the UK, and French tax incentive schemes also demonstrate that there is increasing government recognition that tax incentives are a potentially important mechanism for encouraging private socially responsible investment in a range of socially beneficial schemes and projects.
It is too soon to analyse the success of the various social and ethical funds outlined above, since they are all very recent phenomenon. However, the decade of experience with the Dutch green investment scheme does allow some tentative conclusions to be drawn about some of the important factors in creating effective and productive tax incentive provisions for a range of other social and environmental causes. These can be summarised as followed56:
· Simplicity: The Dutch green investment scheme was simple to enact, and is easy to understand, both in terms of the funds and the projects they support. In particular the criteria concerning the eligibility of projects are clear, strict and, for the most part exhaustive. Managers of green funds generally know whether a certificate will be granted and therefore generally only start certification procedures for viable projects, thereby speeding up procedures and increasing certainty of outcomes57.
· Certification requirements: Because all projects must be certified by the relevant Minister, the Dutch government can ensure that the projects which are the subject of the investment are providing real environmental benefit. Expert certification procedures are vital for ensuring that money is invested in socially/environmentally beneficial projects. It is important that project criteria are not simply relaxed to fit the amount of money from investors that is available as this will lead to decreased project quality and appropriateness.
· Maturity of sector: There had been green funds operational in the Netherlands for quite some time before the government introduced the tax relief scheme, so that the government could be confident that the fund was run effectively and was providing substantial environmental benefits.
· Transparency: Investment funds will need to have transparency mechanisms (e.g. reporting requirements) to ensure that their activities are open to scrutiny by investors as well as the wider general public.
· Cost-benefit analysis: This will involve consideration of all of the above factors. Future tax incentive schemes need to consider the costs and benefits of the financial support offered. This will require an analysis of whether the tax incentive effectively targets the issue in question, and whether the system is designed in such a way as to maximise beneficial social and environmental impact at a reasonable cost to the government in lost tax revenue. The Dutch green investment scheme is a good example of a low cost (to government)/high output (sustainable investments) measure.
4.4 The creation of a legal status for organizations that promote socially responsible consumption and finance systems
The inclusion of organisations that are promoting socially responsible consumption and finance systems within a legal categorisation, separate from mainstream companies is one way in which governments can promote such organisations. A legal category for enterprises that pursue such socially valuable aims, allows them to be differentiated from other companies that do not primarily pursue such social goals. On the other hand, it does not constrain such ‘social enterprises’ to act as charitable institutions, and therefore different regulations can be applied with regard to, for example distribution of profits, sources of investment and reporting procedures that are more suitable for small and developing enterprises.
While there are a number of other types of organisations that could be individually considered under this heading – Associations, Trusts etc., these are entities that have long histories in many countries across Europe, and their legal structures have been greatly analysed. The current analysis focuses upon novel forms of what we might term the ‘social enterprise’ model, which recognises that companies that pursue socially beneficial aims can be differentiated from traditional mainstream companies, and that there can be a number of potential advantages that accrue as a result. In addition, some of the particular regulatory issues facing enterprises involved in socially responsible finance will be addressed.
4.4.2 Examples of Good Practice
Examples of government assistance are presented below for two different types of ‘social enterprise’ model. In the first category are enterprises that are deemed ‘social’ because the enterprises themselves are structured in a socially constructive way, for instance in terms of employing disadvantaged persons or limiting directors’ salaries. The second category includes government proposals for a categorisation of companies as social enterprises because their overall aims and goals are seen to be socially beneficial.
So, under the first category, in France the government has created legal status for ‘social enterprises’58. Social enterprises are defined as undertakings that are not quoted on the stock exchange, where the enterprise employs at least 1/3 disabled persons, persons receiving the state minimum income or long term unemployed or the enterprise is a co-operative, friendly society, association or company whose directors are elected by the employee members or partners and whose wages which are subject to statutory limits. The ‘social enterprise’ label is important in itself as it is a label that allows customers, clients etc. of the business to know that it is operating in a way that is helping prevent social exclusion and working according to socially responsible principles. But, there are also further advantages that can be gained by creating such legal categories, in that governments are then able to direct other forms of support and assistance at the businesses in question. So, in France, Shareholders of social enterprises benefit from a tax credit of 25% on their investments59. Further, companies having this legal status can be chosen by pension funds investors in order to satisfy the legal obligation of proposing "Solidarity funds" in Employee Savings Plans60 (also see section 4.3 for financial incentives aspect of this). In Bulgaria, special tax incentives are also offered to enterprises which employ particular categories of persons considered vulnerable or disadvantaged in that they have difficulties in finding employment: These include unemployed persons whose work-ability is defined as in a state of ‘permanent deterioration’, mothers of children under the age of 3, certain categories of ex-prisoners and women over the age of 50 and men over the age of 5561.
In the second category of social enterprises, there are those enterprises whose overall aims and goals are seen to be socially beneficial. There has been a recent law which creates legal status for such ‘social enterprises’ (‘impresa sociale’) in Italy62. To qualify as a social enterprise, the enterprise must be undertaking activities of particular social importance, and must not distribute profits to those involved in the enterprise63. Those that qualify as social enterprises can then be awarded fiscal advantages64. The law mandates the government to put into place, within one year from it being passed, more detailed regulations specifying the way in which this system will operate65.
Proposals for ‘Community Interest Companies’ (CICs) are currently being finalised by the Department of Trade and Industry in the United Kingdom66. CICs are designed for social enterprises who want to use their profits and assets for the public good67. The proposed legislation should be enacted in 2005 and will include:
· a community interest test designed to ensure that CICs are providing benefit to the community
· Yearly community interest reports, describing the benefits brought to the community by each CIC
· A cap on the profits that can be made by CICs
· The setting up of an independent regulator to administer the system68
In setting up this new type of enterprise model, the government envisages a number of benefits accruing to those who decide to use it. The label ‘Community Interest Company’ will enable customers, investors and other stakeholders of the business in question to know that this is an enterprise being run for the sake of the community. CICs will allow enterprises to put a lock on their assets and profits to ensure they are used for the community interest. Although the government does not envisage providing any particular tax or other financial incentives to CICs, it does plan to structure CICs so they have access to the broadest range of finance possible, including from government initiatives such the Phoenix Fund and Community Development Financial Institutions (see section on financial incentives above for details)69.
4.4.3 Particular issues facing socially responsible finance organisations
It is impossible here to discuss in full the particular issues relating to the setting up of enterprises involved in ethical finance. But it is important briefly to set out some of the concerns. The particular cause for concern among ethical finance initiatives is that legal regulation of the financial sector in many countries is set up primarily for the mainstream banking sector, often with insufficient regard to the particular needs of those involved in ethical forms of finance. The range of issues faced requires more detailed analysis than is possible in this short paper70, particularly because of the wide range of institutions involved in ethical finance – banks, co-operatives, NGOs, funds, associations etc. These institutions have different powers, ranges of activities and levels of finance, and as a result require different regulatory frameworks71. However, governments across Europe should consider whether inappropriate regulatory systems are unnecessarily preventing new socially responsible finance initiatives from starting up, for instance because of legal provisions relating to minimum capital requirements or supervision requirements72. Evidence of regulatory issues being an impediment to such initiatives was found in a number of countries, both in Eastern and Western Europe73. Governments should be aware of these concerns in the context of the negotiations currently taking place concerning the supervisory regulations governing the capital adequacy of internationally active banks – commonly known as ‘Basel II’74. Within these regulations space should be left open for the creation of new socially responsible financial initiatives, and governments should apply the exceptions to these regulations wherever possible to promote socially responsible finance.
4.4.4 Conclusion and Recommendations
The creation of new legal forms for ‘social enterprises’ is a very new phenomenon. Analysis of the extent to which these new legal structures have enhanced socially beneficial forms of the economy, and in particular socially responsible consumption and finance systems, therefore lacks the benefits of much experience of how it will function. However, some important points can be made about the potential impact of these legal structures:
· Status – The ‘social enterprise’ (or equivalent) label will enable customers, investors and other stakeholders of the business in question to know that this is an enterprise being run according to a set of socially responsible standards. This could positively affect the business in a number of ways, for example increasing trust in local communities, as well as within public authorities who may be otherwise skeptical of the motives of private sector businesses, when, for example, bidding for procurement contracts.
· Financial advantages: Governments can create special fiscal advantages for the newly created type of social enterprises. Even where additional funding, or tax incentives are not put in place, access to (or even priority for) existing forms of finance, including from government initiatives.
· Benefit: Two different rationales for describing an enterprise as social were set out above – primarily because of their internal organisational structures (e.g. France, Bulgaria) or because their overall aims and goals are considered socially beneficial (Italy, UK). This is not to say that the two sets of criteria cannot be combined. But governments who take up this kind of legal initiative will need to think carefully about the type of social benefit that they envisage the enterprises in question providing. (For instance, another difference is that the UK provisions clearly envisage that the benefit of CICs will be to the locality in which they are based, thereby making it difficult to see how fair trade enterprises could fit within this definition).
· Regulation: Governments will also need to give careful consideration to the way in which they develop ‘social benefit’ (or equivalent) tests, and to the body who decides on which enterprises are recognised as such. Much of the success of the schemes will depend on the design of these parts of the system.
Since governments spend around 15% of total national GDP on procurement, their procurement decisions have the potential to be very valuable to socially responsible consumption initiatives. Governments can also act as an example to the wider community on the importance of social and environmental factors in decision-making. There are a number of regulatory measures where governments can take action to enhance the public procurement of products produced according to social and environmental criteria, both at the national and local level.
There has, historically, been reluctance in a number of countries to include social and environmental criteria in government decision making on procurement. In public tender procedures, and in many European countries, as well as at the EU level, there have been concerns that the criteria for decision-making must always be of an economic nature. However, at the EU level, a new Directive on public procurement75 confirms the case law of the European Court of Justice76 in stating that procurement decisions of the public authorities of Member States can be made having regard to objective environmental and social criteria. A number of European governments have legislated to include social and environmental factors within the permitted criteria used by public authorities to reach decisions on public procurement and this tendency should be becoming more prevalent throughout Europe.
4.5.2 Examples of Good Practice
There are a great number of government departments, local governments and other public authorities who have incorporated a wide range of environmental and social issues within their procurement decision-making77. In this analysis, consideration is given to how national governments can best encourage public authorities to include environmental and social criteria within their procurement decision making processes, in particular through three different policy mechanisms discussed below. The first is by legislating positively for the possibility of including (or even the obligation to include) social and environmental criteria within procurement decision making. The second is to provide more detailed information to public authorities on how they should go about including environmental and social criteria in their decision making processes. The third is to set targets for the amount of certain types of socially or environmentally beneficial products to be procured by public authorities.
With regard to legislation, the strongest and most advanced form of legislation concerning procurement of environmentally sound goods can be found in Denmark. The combination of a 1992 Environmental Protection Act and a 1994 national Action Plan for a Green Public Procurement Policy stresses that both public and private sectors should strive for greener production and consumption. All public authorities and national institutions are under an obligation "to the extent possible to use goods or products containing recycled or recyclable materials, or otherwise for environmental reasons to be preferred to other goods or products for the same applications"78. The fact that public authorities are under an ‘obligation’ to pursue a green procurement policy, means that the policy is far stronger than anywhere else in Europe (see below). The Danish government has furthermore introduced a number of circulars to state institutions, voluntary agreements with counties’ and municipalities’ organisations and sectoral plans (e.g. Energy 2000) which targets concrete goals for energy consumption, the expansion of alternative energy sources and the reduction of carbon dioxide emissions. The extent to which the Danish approach has been successful relative to other European countries can be seen from EU research on green public procurement, which consistently places Denmark at the top end of the rankings in countries surveyed in terms of the amount of green procurement undertaken79.
Denmark is alone in placing such a strong obligation on public authorities to favour environmentally friendly products and services in the procurement process. However, there are a number of other countries that have introduced legislation stating the legality of public authorities taking into account both environmental as well as a variety of social concerns when tendering for public procurement. In Austria, as well as ecological concerns, the employment of women, of persons in education, of long time unemployed, of handicapped, of older workers or other socio political aspects can be taken into account when taking procurement decisions80. The new Polish law on public procurement states that environmental, as well as certain social criteria may be taken into account by public authorities in deciding upon tender applications81. Unlike the legislation concerning environmental decision-making in procurement, there has not be any real analysis of the extent to which legislation explicitly permitting social criteria to be included in decision-making on procurement has effected the amount of public authority take-up. Clearly however, explicit government authorisation of social and ethical criteria being utilised in procurement decision making can only enhance the extent to which public authorities utilise such criteria.
A number of governments provide further help to public authorities by providing detailed information on how social and environmental criteria may be taken into account in public procurement. The Belgian government has a website82 for the benefit of public authorities, which provides information on a range of products commonly procured by public authorities, and describes the important social and environmental criteria to be taken into account in the procurement process. It also advises them on how to formulate tenders. The German government also provides information to public authorities to guide their public procurement decision-making. It provides public authorities with a handbook on green public procurement and a website to promote sustainable procurement83. The extensive guidance provided by the Danish government has been described above. Such government guidance is important in that it enables local authorities and other public authorities to know the extent to which they can then address social and environmental concerns in tendering for contacts, and how criteria can be formulated that meet their legal commitments. The importance of this type of information and guidance can be seen in the environmental context, where over 60% of those authorities who carried out little or no green procurement, indicate that lack of environmental knowledge and how to develop environmental criteria are the biggest obstacle to them84.
A further way in which governments can address social and environmental concerns through public procurement is to set targets for the amount of public procurement that will meet social and environmental criteria. Thus, the Belgian Federal Plan for Sustainable Development 2000- 2004 sets targets for the government of 4% of all food purchases by public administrators should be products labeled as coming from socially responsible production, and 4% should be products from organic farming.
Three particular mechanisms have been presented that governments can use to support all public authorities in taking decisions on public procurement with due regard for social and environmental criteria. All of them can be useful in stimulating the take up of socially and environmentally responsible procurement in different ways:
· Legislation: The example of Denmark in particular shows that the stronger the obligation to consider environmental factors, the more likely it appears will be the take-up of that type of procurement. Despite the lack of comparative analysis with regard to social issues in procurement processes, it does seem apparent that governments who explicitly legislate to legalise specified social criteria within the procurement process are sending a clear message to public authorities that the government is supporting social conditionality within procurement processes. Governments need to consider, however, the precise nature of the social or environmental goals they are trying to achieve through the procurement process, and adapt their legislation appropriately.
· Information: The second measure that government can take is to provide more detailed information to public authorities on how they should go about including environmental and social criteria in their decision making processes, and ensuring that this is done in a legal manner. Such information should include extensive information about the social and environmental factors that can be considered during public procurement decision making, how they can be included in the tendering process, and how these factors should be weighed up in deciding upon tender bids. Evidence with regard to environmental procurement processes shows that lack of such information is the most important reason for public authorities not including more environmental conditionality in their procurement processes.
· Target setting: The third measure highlighted is to set targets for the amount of certain types of socially or environmentally beneficial products to be procured by public authorities. The setting of targets is an encouragement to governments to monitor their actual progress in achieving more socially and environmentally responsible procurement. This is a useful adjunct to the adoption of legal frameworks and the provision of information, since it creates a yardstick by which governments can then judge the extent to which those policy measures have led to real progress in terms of take-up among public authorities.