Social enterprise leverages banks as allies and embraces diverse financing methods
The social economy sector in Italy is undergoing a significant transformation, driven in part by the Third Sector Reform. This evolution is highlighted in the findings of the XII Edition of the Observatory on Finance and Third Sector, carried out by Aiccon (with the support of Intesa Sanpaolo).
Italian businesses and social cooperatives are demanding stronger and more tailored support from banks, impact finance, and hybrid financial instruments. The key challenges and demands include limited access to risk capital, complex taxation and fiscal environments, a need for hybrid financial tools, fragmented financial architecture, regulatory barriers, and challenges in collaboration and capacity building.
One of the major issues is the limited risk capital and bank support. Milan's banking system is described as "traditional" and struggles to provide risk capital comparable to more dynamic ecosystems, hindering the growth and funding rounds of innovative firms, especially in sectors like biotech.
Taxation and fiscal constraints also pose a significant challenge. Although social cooperatives in Italy benefit from a tax exemption on corporate tax (IRES) on retained profits, social enterprises do not enjoy similar fiscal advantages and remain subject to corporate tax, VAT, regional production taxes (IRAP), and social security costs.
The need for hybrid financial instruments is another critical issue. Social cooperatives often blend revenue models including philanthropy and earned income, requiring hybrid financial tools that can support their mixed economic and social goals. However, Italian social co-ops demonstrate an entrepreneurial mentality but lack fully developed hybrid financing mechanisms to scale.
Italy’s financial market fragmentation and regulatory patchwork add compliance costs and reduce efficiency in cross-border commerce and finance. This fragmentation also contributes to a disparity in access to institutional investors and fintech innovations necessary for hybrid and impact finance growth.
Collaboration between financial actors like venture climate and environmental funds (VCEFs), multilateral development banks (MDBs), and national development banks faces inefficiencies and high transaction costs. These barriers also affect the private sector uptake of impact finance tools that could benefit Italian social enterprises.
Despite these challenges, the social economy sector plays a significant role in responding to growing social needs, providing more than half of all jobs in the sector. There are 16,750 social enterprises (including social cooperatives) in Italy, representing 4.4% of the entire third sector.
Looking ahead, banks are asked to play a role not only as an investment partner but also as a stimulus and accompaniment in generating impact and innovation. There is a strong emphasis on the need to develop hybrid financial tools that combine different components such as equity, grants, and debt.
The survey shows a growing awareness and decreasing use of impact finance tools such as subsidized loans, social and social bonds, and social venture capital. However, the main reason for satisfaction of social enterprises and social cooperatives with banks in 2022 is the presence of dedicated and trained personnel.
The trend towards short to medium-term investments at the expense of long-term investments is noted. Investments in the third sector are underdimensioned and in a phase of contraction, partly due to the macroeconomic scenario.
Giusi Biaggi, president of the Consorzio Cgm, invites banks to maintain a measurement and a gaze on the third sector that goes beyond the more traditional canons of balance sheets. She emphasizes the need for banks to stand alongside businesses and social cooperatives to grow more, investing together in capacity building.
In conclusion, Italian businesses and social cooperatives are calling for more innovative banking support and impact finance solutions to overcome fiscal challenges, enhance risk capital access, adopt hybrid funding models, and navigate regulatory complexities. There is also a critical need to improve collaboration between financial institutions to scale funding effectively and reduce transaction costs for social economy actors.
The findings suggest that Italian businesses and social cooperatives are in need of innovative banking support and impact finance solutions, particularly in regards to limited access to risk capital and the necessity for hybrid financial instruments. Additionally, there is a call for improved collaboration between financial institutions to scale funding effectively and reduce transaction costs for third sector actors.
