The Business Case for Social and Circular

Social enterprises can empower ordinary people to bring positive change to their communities and society, but what are the options  and where do you start? Chris MM Gordon outlines what’s involved, and the invaluable support accountants can provide If the COVID-19 pandemic has taught us anything, it is the importance to society of the power and resilience of ordinary people and local organisations providing community services.  Some of our busiest times at the Irish Social Enterprise Network were in the opening stages of the crisis when it seemed that for every private profit-making business that shut its doors, a social enterprise was opening theirs.  Communities formed groups to raise money for meals on wheels or to manufacture personal protective equipment for front-line workers. All of this was organic and determined—and because ordinary people felt empowered to make a difference. Throughout that time, more people became interested in setting up social enterprises, to better manage volunteers or oversee any money that is being raised and spent.  There was an increased drive from communities to form social enterprises, make them sustainable and retain goodwill—and they turned to their professional advisors to help them set up these new entities.  What is a social enterprise? A social enterprise is the original ‘business for good’. Social enterprises sell products and/or services for a profit, which is reinvested for a social and/or environmental cause. The National Social Enterprise Policy for Ireland 2019–2022 provides a more detailed definition:  A Social Enterprise is an enterprise whose objective is to achieve a social, societal, or environmental impact, rather than maximising profit for its owners or shareholders.  It pursues its objectives by trading on an ongoing basis through the provision of goods and/or services, and by reinvesting surpluses into achieving social objectives.  It is governed in a fully accountable and transparent manner and is independent of the public sector. If dissolved, it should transfer its assets to another organisation with a similar mission.” Social enterprises differentiate themselves in several ways. I find it useful to think of a social enterprises in terms of its ownership, funding and social impact. Ownership: Social enterprises are generally held by, or in trust for, the people they aim to serve. Social enterprises might be democratically owned, as in a co-operative where one person has one vote. More commonly, they might be structured as a company limited by guarantee, the idea being that no-one can sell the organisation for their personal gain. (Social Enterprises in Ireland: Legal Structures Guide, published by the Thomson Reuters Foundation and Mason Hayes & Curran, discusses the legal structures available for social enterprises in Ireland.) Funding: While social enterprises must generate income by selling products and/or services, it is common for them to receive grants or other public or philanthropic funding to supplement their income and allow them to function fully. Funding can come in many forms, but some funding streams are available to social enterprises only if they are set up as a specific type of company.  Social impact: There must be some measured social (and/or environmental) impact – for example, reducing homelessness – and the money raised or spent by the social enterprise needs to positively affect that impact.  ‘Work integration social enterprises’ are organisations that employ those that are furthest from the labour market. These could be people with physical disabilities or mild, moderate, or severe learning difficulties. Such social enterprises are providing employment and opportunities that may not otherwise be available. Setting up a social enterprise The best approach to setting up a social enterprise will depend on the context and a variety of other factors, including the nature of the problem the community or individual is trying to solve. For the professional advisor, the first step is to understand this, ask the right questions, and to listen. Community or individual?  Is the social enterprise being set up for and by a community or an individual? While it often takes a single individual to get things started, having the support and buy-in of a wider group of people shows there is a real need for the enterprise. It also increases the diversity of opinion and expertise needed to make a social enterprise successful. An issue seeking an enterprise? Someone wanting to set up a social enterprise may want to solve a specific problem that is close to them. They may have a sibling with a learning difficulty for whom they want to create a full-time job, for example. Their sibling loves making coffee, so they set up a café. This is an issue (finding employment for those distant from the labour market) that is looking for a business model to make it sustainable (a café). An enterprise seeking an issue?   The same could be true for someone with specific skills, such as a business-minded barista, who would like to do more than simply sell coffee. They are also looking for a social purpose to invest in and decide to employ people that are distant from the labour market—in this case, people with learning difficulties. This is an enterprise (a café) seeking an issue (employment for those distant from the labour market). Legal structure There is no specific legal structure required for social enterprises in Ireland. However, in my experience, people setting up a social enterprise for the first time often think that it must be a charity, without being aware of what that entails.  Gaining and maintaining charitable status can be onerous for a start-up and may not be necessary, or even relevant, in all cases. Some sources of funding may require charitable status, however. Knowing the sources and requirements of initial funding is important for choosing the right company type for a social enterprise. It may be tempting to advise a client to set up a social enterprise as a private company limited by shares and to spend its profits on whatever social cause they choose. This company type does not suit all circumstances, however.  Social enterprises come in a variety of forms. The use of each type of legal structure should be suitable, considered on its merits and aligned with the aims of the enterprise.  Again, the source of the entity’s funding and related requirements often determine the choice of structure. Here is an outline of the types of company set-up available to social enterprises: Company Limited by Guarantee (CLG)   This company type is the one most often chosen for social enterprises and comes close to company types in countries that have specific legal structures for social enterprises. CLG with Charitable Status   While charitable status (by application to the Charities Regulator) can apply to several types of legal structure, it most commonly applies to CLGs, subject to certain changes made to the constitution of the company, such as directors not being paid. There are advantages and disadvantages to having charitable status. Caution should be exercised as to whether it is necessary. Co-operative   A co-operative is an enterprise that is owned and controlled by its members and operates for the benefit of its members. A minimum of seven members are required to register a co-operative. The law governing co-operatives is currently being reviewed and updated. It is hoped that more co-operatives will appear as their benefits become more apparent. Private Company Limited by Shares (LTD)   Although this is the most common company type in Ireland, social enterprises tend not to be structured as private companies limited by shares. Designated Activity Company (DAC)  While the designated activity company structure has been applied to some social enterprises, it is more generally associated with financial institutions. There are relatively few DACs in Ireland that are considered social enterprises. The role of the accountant Working with social enterprises as they succeed in making a difference is inspiring. Accountants are in a unique position to advise individuals and communities from start-up, setting them on a path for sustainable impact.  Accountants can help social enterprises choose the first door they walk through. Picking the right door is the challenge.  People setting up a social enterprise often focus on the type of company that is being formed. Having taken time to listen to the client and understand the problem they are aiming to solve, the accountant can ensure that all of the available options (and the pros and cons of each) have been considered, the finance requirements planned for and aligned, and ownership and governance issues anticipated before a legal structure is chosen. Chris MM Gordon is Chief Executive of The Irish Social Enterprise Network Useful resources The Social Enterprise Toolkit is a resource for communities and individuals setting up a social enterprise in Ireland. It is available to download for free at socialenterprisetoolkit.ie The Irish Social Enterprise Network is the national body for social enterprise in Ireland. It provides information on the sector and useful pointers for people setting up a social enterprise online at socent.ie Social Enterprises in Ireland: Legal Structures Guide (Thomson Reuters Foundation and Mason Hayes & Curran, November 2020) is available to download at trust.org BuySocial.ie is a growing online directory of social enterprises operating in Ireland: buysocial.ie. The Charities Regulator provides guides to setting up a company with charity status: charitiesregulator.ie The Irish Co-operative Organisation Society (ICOS) provides information on setting up as a co-operative: icos.ie/starting-a-co-op/intro.

There was a strong focus on the reuse of materials and the elimination of waste in the Circular Economy, Waste Management (Amendment) and Minerals Development (Amendment) Bill 2022  which received Cabinet approval this week. The Bill places on a statutory footing the National Food Loss Prevention Roadmap and the Whole of Government Circular Economy Strategy which provides a national policy framework for Ireland’s transition to a circular economy.  It intends to underpin Ireland’s economic shift from a linear ‘take-make-waste’ model to a more sustainable, ‘circular’ pattern of production and consumption (more on the definitions of Circular Economy are available here). Commenting on the publication of Bill, Minister of State with responsibility for Communications and Circular Economy, Ossian Smyth TD, said: "This bill aims to stop the wasteful pattern of using valuable resources once and then just binning them. From discouraging the use of single-use items, to improving the process for allowing recycled materials onto the market, this legislation will support the development of sustainable products and business models across the economy." Key features of the Bill are described below. Tackling existing waste Businesses can expect the introduction of a mandatory segregating and an incentivised charging regime for commercial waste. It is currently possible for commercial premises to dispose of their waste through a single, unsegregated, bin. Commercial premises will now be forced to segregate waste, similar to what exists for the household market. The recycling bins will have lower charges than general waste bins. The Bill provides powers for the Minister to impose a levy for incineration or burial of materials that could, in some cases, be re-used or recycled. Based on the model of the existing landfill levy, this levy would be on waste recovery that takes place in Ireland, and also on waste exports from Ireland for recovery elsewhere in the EU and outside of the EU. Details of the levy, including the rate, will be set out in regulation after the Bill is passed and will be subject to public consultation. Tackling illegal dumping and littering – so-called ‘fly-tipping – is a key feature of the Bill, which provides for the GDPR-compliant use of a range of technologies, such as CCTV, for waste-enforcement purposes. Reducing future waste The Bill aims to make Ireland the first country in the world to eliminate the use of disposable coffee cups, by incentivising the use of reusable and recyclable alternatives and phasing out a range of wasteful single-use disposable packaging over time. Customer can expect a ban on the use of disposable coffee cups for sit-in cafés and restaurants over the coming months. This will be followed by the introduction of a charge on disposable takeaway cups, which will operate in the same way as the existing Plastic Bag Levy. The Bill will help streamline the national processes for decision-making in applications to the Environmental Protection Agency (EPA) on ‘End-of-Waste’ and ‘By-Product’ applications to recycle or reuse in other applications materials which might otherwise be treated as waste. This streamlining is to avoid delays which can be encountered by industry (for example, in the construction sector), and support the availability of recycled secondary raw materials in the Irish market. The Bill also provides for the redesignation of the existing Environment Fund as a Circular Economy Fund, which will remain ring-fenced to provide support for environmental and circular economy projects and introduces prohibitions on exploration for and extraction of coal, lignite and oil shale.   Background The EU is pursuing its ‘European Green Deal’, a set of policy initiatives by the European Commission with the overarching aim of making the European Union climate neutral in 2050. The circular economy is at the heart of this strategy and the EU’s industrial strategy. The transition to a circular economy will reduce pressure on natural resources and will create sustainable growth and jobs, as well as contributing to the development of a sustainable, low carbon, resource-efficient and competitive economy. In March 2020, the EU launched its new Circular Economy Action Plan (CEAP). This action plan announced initiatives along the entire life cycle of products, targeting how products are designed, promoting circular economy processes, encouraging sustainable consumption, and aiming to ensure that waste is prevented and the resources used are kept in the EU economy for as long as possible. At the national level, Ireland published its first Whole-of-Government Circular Economy Strategy in December 2021 to ensure policy coherence across the public sector and to outline the Government’s overall approach to the circular economy for stakeholders and the public.   Resources from Chartered Accountants Ireland You can find more information on the Circular Economy, as well as examples of Irish businesses operating in the circular economy, in the Chartered Accountants Ireland Sustainability Hub.

Tackling climate change will mean embracing economic models that prioritise the many, not just the elite few, writes Kate van der Merwe. In the pursuit of a holistic and inclusive economy that can serve current and future generations, we need to take a fresh look at our economic alternatives.  We are facing existential challenges: a climate crisis that we continue to escalate; a biodiversity crisis that is the sixth mass extinction; and significant inequities that the coronavirus pandemic has served to both highlight and exacerbate.  We must review how our economy works with a focus on real value and equity. In doing so, let’s scrutinise the underlying assumptions and realities, and consider alternative options, including the transformative innovations of social and circular economies. The current context Traditionally, economics is often framed as the study of how people make choices and allocate scarce resources over time, individually and collectively — for example, forsaking consumption now for later benefit (in finance, the choice to invest). Key concepts include ‘utility’ (the satisfaction from something) and ‘consumption.’  The relationship between both is represented by the ‘utility curve,’ which defines utility in direct and positive relation to consumption. Simplified, this means that the more we consume, the happier we are.  In finance theory, utility becomes defined in terms of monetary value. The concept of ‘consumption’ also defaults to a narrow definition of a one-time event. When supply meets demand in the market, for example, economic actors (businesses) are driven to mass-produce for one-off transactions, placing emphasis on short term profits.  When core concepts are so narrowly defined, the underlying utility or value is distorted. By focusing so narrowly on monetary value, we can become disconnected from the real value of the ‘thing’ money is buying and being valued upon. An investor following these limited definitions might, for example, invest in a high-yield mining company even if those yields are derived from destroying the health and wellbeing of their community, and feasibly worsening the investor’s overall utility, particularly in the long term.  If we assume that the fulfilment of our essential physiological needs has the highest incremental utility, then a theory assuming and supporting insatiable consumption — despite the consequences of that consumption threatening our essential physiological needs — appears contradictory.  As the COVID-19 pandemic has highlighted, inequity remains a significant challenge. In the current global economy, just one percent of the population holds 38 percent of wealth, while 50 percent holds just two percent.   During the pandemic, the world’s 10 richest men doubled their wealth. As the average worker faced job insecurity, CEO compensation rocketed. In the US, the CEO-to-worker compensation ratio reached 351:1 (in 1965 it was 21:1).  The pandemic has been a relatively mild precursor to the disruption that is building because of climate change – a threat that we have created, one that our current economic system perpetuates and that we have the power to stem. In facing this disruption, we will need economic models that prioritise the many, not just the elite few.  Alternative approaches Alternative models and ideas include circular, ecological, ‘donut,’ community, collaborative or sharing, social and solidarity economies. Loosely speaking, many focus on or draw inspiration from addressing social inequity and/or the environmental crises.  They look to democratise the economy, to better address systemic inequities, as well as incorporating realistic assessments of nature’s limits, so that we might begin to tackle our self-destructive environmental trajectory. Many of these ideas are not new. They are part of our history.  Their elegance is in their flexibility and compatibility with being layered and combined, an example being a social enterprise engaged in the circular economy. Given the breadth of this topic, this article briefly discusses two of the alternative models: social economy and circular economy. The social economy While the concept of the social economy is long-standing, its definition is evolving. Existing forms of social economy businesses include cooperatives, mutuals and social enterprises. Key features include a core organisational purpose of maximising societal and/or environmental impact, not profit, through the reinvestment of profits, and often incorporating democratic governance.  Existing forms of social economy businesses include cooperatives, mutuals and social enterprises. Within the EU, 2.8 million (10 percent) of all organisations are social economy enterprises, employing 13.6 million people.  While GDP is a problematic measure, the social economy contributes eight percent of the EU’s. One growing and exciting part of the social economy are those social start-ups that are applying innovative solutions to some of our biggest problems, like climate change, often tackling social and environmental issues simultaneously.  During the COVID-19 pandemic, the social economy gained visibility for its resilience and its value creation on a broader scorecard and structural supports are developing.  Last year, when announcing social enterprise funding, Minister for Rural and Community Development, Heather Humphreys, recognised social enterprises for “the invaluable role” they played throughout the pandemic, making “an important contribution in areas such as mental health, social inclusion and the circular economy.” In 2019, the Irish Government published the National Social Enterprise Policy for Ireland 2019–2022, which is also a core component of the State’s plans for rural and community development.  The EU is also scaling up support for the social economy, publishing the Social Economy Action Plan in 2021 for implementation this year, with plans for an EU Social Taxonomy.  A European stalwart of the social economy, based in the Basque Region of Northern Spain, is the Mondragon Cooperative Corporation.  Established in 1956, Mondragon is one of the largest corporates in Spain, with sales in over 150 countries. It comprises a collection of mutually supporting social enterprises engaged in education and innovation, finance, retail, and manufacturing/engineering (including the esteemed Orbea bicycles brand and Urssa, the world-renowned steel manufacturer).  Mondragon is particularly intriguing given its social impact aspirations — the structures and practices it has created to differentiate itself as social (such as maintaining a pay ratio limit of 6:1), while maintaining success in an ill-fitting capitalist economic structure.  Ireland also has its own booming social enterprise sector, with plenty of examples across a wide range of sectors, such as:  FoodCloud (connecting retailers with charities to donate food);  Airfield Estate (a working farm, kitchen, education, and food destination in Dublin); WeMakeGood (Ireland’s first social enterprise design brand) and; Moyee Coffee (“a radical company with radical [Fairchain] impact”). The circular economy The circular economy is also gaining ground, driven by the threat of climate change. The circular economy designs out waste by optimising scarce resources to build a restorative and regenerative economy.  It does this by deploying interdisciplinary systems thinking, i.e. considering complex systems holistically, and incorporating relationships and interdependencies between parts.  A long-term approach to resources, especially minimising the use of raw materials, fundamentally contrasts the circular economy with the linear ‘take-make-waste’ economic system.  The circular economy treats natural resources as scarce, which serves to keep climate breakdown and the threat to our survival front and centre. Maintenance and repair services grow, while production becomes more focused on non-virgin sources, thereafter prioritising regenerative materials. The emphasis is on prolonging the life and utility to be gained from products. This shifts the focus from expiry-bound consumption to ongoing use. The circular economy also diversifies the ways we transact – from individual ownership to shared ownership or rental (product-as-a-service).  The Whole of Government Circular Economy Strategy 2022–2023: Living More, Using Less, the first of its kind in Ireland and the Environmental Protection Agency’s Circular Economy Programme 2021–2027, both launched in December 2021.  These are core to the Irish Government’s drive to achieve a 51 percent reduction in greenhouse gas emissions by 2030 and to reach net-zero emissions by no later than 2050. A Circular Economy Bill is also in development.  Similarly, the EU is enabling the circular economy as part of the European Green Deal, adopting a new circular economy action plan (CEAP) in March 2020.  This action plan introduces both legislative and non-legislative measures aimed at facilitating the transition to a circular economy, including the establishment of the European Circular Economy Stakeholder Platform for sharing and scaling up the circular economy. Examples of businesses successfully applying circular principles include MUD Jeans, which offers a discount on the next purchase or lease for each pair of end-of-life jeans returned, recycling the returns into new jeans, eliminating waste, and using 92 percent less water in production.  Locally, the Rediscovery Centre in Dublin is the National Centre for the Circular Economy in Ireland. It hosts four up-cycling social enterprises in fashion, furniture, bicycles, and paint, as well as an Eco Store, and provides various educational offerings. Traditional businesses are also increasingly incorporating circular elements. Harvey Norman, for example, is offering preowned, refurbished phones. Holistic view While the traditional economy has a limited singular focus on the point-of-purchase, many of the alternative economy models, such as social and circular, take a more holistic view and can recognise and pursue multiple goals simultaneously.  Such models reflect the complexities of our environment, including the challenges of climate change, and intrinsic value, more accurately. These alternative ideas are also more dynamic. They can be combined with one another and enable better designed, more resilient outcomes.  Greater care is taken in defining what an organisation does as well as how it does it, generating more equitable outcomes by holistically considering impact, and providing greater long-term efficiency in synthesising society’s needs and the management of scarce natural resources.  In doing so, these alternatives better address critical unpriced externalities and offer ways to change our current self-destructive trajectory. Our traditional economy appears to focus on scarcity of value, durable efficiency, and resources, while the alternative economy models focus on their regeneration and restoration.  These alternative ideas offer fundamentally different approaches in how value is created, measured, and maintained, and are better suited to the holistic and inclusive economy needed by current and future generations. Kate van der Merwe, FCA, is a Sustainability Advocate and member of the Institute’s Sustainable Expert Working Group.