Marrying cash and change: Social 'stock markets' spread worldwide(Read article summary)
In social-investment exchanges, donors choose what projects to 'invest' in. But the return is in the form of social good, not cash.
For those looking to make a social impact with their investments, life just got a little easier. Stock exchanges serving only socially oriented companies will soon open in Singapore and London, with others to follow.
The first social investment "exchange" was born in Brazil in 2003. The Bolsa de Valorous Socioambientais (BVSA), or social and environmental investment exchange, operates more like an online crowdfunding platform, such as Kickstarter or Donors Choose, than an actual investment opportunity. BVSA screens projects, whose solutions must be aligned with UN Millennium Development Goals, for quality. Donors can choose what to "invest" in, but the return is social, not financial. According to the Daily Beast, one of the first projects to be listed and funded – an informal small-claims court for favela residents – later became public policy in 14 Brazilian states, showing that up-front funding can spark further investment in long-term projects.
Shortly after Brazil's experiment in targeted philanthropy began, South Africa launched its own social investment exchange operating along similar lines but calling donations "shares," and adding a project risk and organization rating scheme to its offerings.
While these social investment exchanges are useful as intermediaries between well-meaning donors and charities, and have undoubtedly focused attention and funding to worthwhile projects, neither offer an investor any direct financial returns.
The Impact Investment Exchange (IIX) of Asia pushed the markets a significant step forward through its private platform for investment in social enterprises, launched in 2011. The IIX's "Impact Partners" team is like an investment dating service for do-gooders: they vet social enterprises seeking investment capital and match them with investors seeking a social and financial return. IIX plans to launch its public platform in 2012. "Impact Capital" will run more like a traditional stock exchange, allowing investors "to purchase and trade shares issued by for-profit social enterprises and bonds issued by either for-profit or not-for-profit social enterprises." Despite the direct financial returns, the company is still careful not to call itself a "stock exchange" or "securities exchange."
A partnership between the stock exchange of Mauritius and Nexii, a social business and advisory firm focused on impact investments, produced the Impact Exchange Board (iX) in 2011, the first fully regulated social stock exchange. The board allows social businesses to publicly list debt or equity securities, and claims to provide "all the benefits, efficiencies and opportunities that large listed companies enjoy" because of the partnership with a globally recognized stock exchange.
Nexii's achievement has yet to be replicated elsewhere. However, the London Social Stock Exchange (SSE) hopes to accomplish the feat by the first quarter in 2013. The initial focus will be on enterprises with market capitalization of less than $15 million and broker-led initial public offerings.
"We’re not talking about big companies with a good CSR record, but smaller ones that specialize in providing goods and services explicitly for a social purpose," Pradeep Jethi, SSE co-founder and chief executive, told the Rockefeller Foundation, which funded the feasibility study in England that led to the exchange's creation. "That could be anything from a company working in the health care or education field, to green technology businesses, fair trade enterprises, and any of the ethical consumer companies out there. But this is not for start-ups – it’s for the more mature companies that need to raise significant amounts of money for growth and expansion."
A question these new exchanges have been asked is why social businesses wouldn't simply list on traditional stock exchanges. Aggregating mission-oriented businesses on a separate exchange, but one which uses the same functionality and transparent vetting process as traditional exchanges, drives down transactions costs for all, including corporate brokers, market-makers, and social impact investors. It becomes a one-stop-shop for those interested in double- and triple-bottom lines.
In their 2011 book, "Impact Investing: Transforming How We Make Money While Making A Difference," Jed Emerson and Antony Bugg-Levine (former Rockefeller Foundation managing director) comment on the role of impact investing in solving major social problems:
"The 'bifurcated’ world is built on two fundamental beliefs: that the only purpose of investing is to make money and that the only way to solve social and environmental challenges is to donate money to charities [through philanthropy] or wait for government to act.
"Impact investing’s sweet spot is exactly where the limits of traditional philanthropy and governmental programs begin. Especially now, government and traditional philanthropy lack the resources to solve social challenges alone. Impact investing is not a replacement for government action or philanthropy, which will always be necessary to provide true public goods and push the frontiers of social justice. But impact investing can be a powerful complement to government and philanthropy."
Impact investment still suffers from the problems faced by an adolescent industry: a lack of consistent data and regulation, the need for mission-oriented businesses to gain greater visibility, and a scarcity of mature enterprises to absorb available capital from interested impact investors, all of which lead to low investor confidence. Through their vetting processes and borrowed standardization techniques from traditional exchanges, social impact exchanges fill in some of these gaps.
In 2013, stock tickers will start following the ups and downs of companies out to make a positive impact on their communities, countries, and the world. Now would be a very good time for the return of a bull market.
The Global Impact Investing Network
The Global Impact Investing Rating System
Social Capital Markets: At the intersection of money and meaning 2012 Conference, October 1-4, San Francisco
• Sign up to receive a weekly selection of practical and inspiring Change Agent articles by clicking here.