Do we need social stock exchanges?

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Cross posted from The Conversation

by Danielle Logue, Senior Lecturer in Strategy, Innovation & Organisation at University of Technology, Sydney & Markus A. Höllerer, Senior Scholar at UNSW Australia

Public interest in the development of global impact investing received a significant boost last year, due to an international campaign to divest in fossil fuels by superannuation, pension, and university endowment funds.

This emerging market (estimated to be worth $650 billion by 2020) aims to connect social enterprises with so-called “impact” investors. An important aspect has been the creation of social stock exchanges.

While securities exchanges have been facilitating financial market transactions for centuries, the first social stock exchanges were officially launched only recently. So what are they? Are they working? And do we need them?

We explore these questions as part of our ongoing researchinterviews and analysis, and recent business media attentionon this market innovation.

What is a social stock exchange?

These sorts of exchanges operate just like investment and financial markets – to help to connect supply and demand. “Impact” investors need information on where to invest, consistent measures of return (in this case, additionally to the standard return on investment (ROI) there is another measure, the social return on investment (SROI)), opportunities to build portfolios, and options to exit. On the demand side, social enterprises need to raise capital and market their activities. Broadly, such an exchange enables private capital to be mobilised for public good.

Do they actually work?

Social stock exchanges which have recently emerged globally operate in different ways in their attempt to grow impact investing markets. Here are some examples:

  • United Kingdom (Social Stock Exchange): the Social Stock Exchange was officially launched in London in 2013; it showcases publicly listed impact enterprises that trade on the London Stock Exchange. It is designed to connect the general public (not only accredited investors) with impact investments, and has a common social impact framework applied to all issuers. It is not yet a transactional platform, instead profiling impact investments. By 2014 it had 12 enterprises listed.
  • Canada (Social Venture Connexion): Launched in 2013, the SVX is registered as a restricted dealer with the Ontario Securities Commission and aims to address social finance market failures by providing social ventures with a low cost method of gaining access to investors. SVX approves membership (for organisations on the supply and demand side) on several criteria, including assessing impact using B Corporation standards, a recognised social and environmental performance measure. It has already exceeded its initial objectives in terms of capital raised and enterprises listed.
  • Singapore (Impact Investment Exchange): Also launched in 2013, the IIX trades out of Mauritius. It sets out to support listing, trading, clearing, and settlement of securities issued by social enterprises across Africa and Asia. It is the only public social stock exchange at this time, and in generating social enterprise issuers, it also runs programs to assist social enterprises to become “investor ready”.

As Forbes reports, other exchanges are emerging in Brazil, and also in Kenya.

Does Australia need a social stock exchange?

The World Economic Forum suggests that social stock exchanges have the potential to offer value to retail and institutional investors by providing access to liquid securities of impact enterprises.

As we have learnt from previous studies on the rapid diffusion of stock exchanges during the 1980s and 1990s, exchanges were adopted out of diverse motivations and showed great variation in subsequent performance. University of Alberta Professor Michael Lounsbury and his colleagues’ study demonstrated that policy makers need to selectively adopt policy innovations that suit local contexts.

What are the challenges?

In Australia, we have a nascent but growing market for impact investing, in particular when divestment activities in fossil fuels (and consequent investments in renewable energy) are included in this market growth. But reflective of global trends, we suffer from barriers such as lack of awareness and access to investment opportunities.

Indeed, it seems that in the Australian market we do not have an economic problem. We have supply of impact investment funds and demand from social enterprises, but we do not have the social and market infrastructure to connect the two more easily and efficiently.

There is no doubt that more capacity building is needed on the demand side, and education is needed on the supply side of the market. An exchange might also provide the opportunity to better mobilise private capital in addressing foreign aid objectives around poverty alleviation in our region, if impact investment deals are not restricted to Australia.

As our research progresses on this topic, we may find that rather than inventing a new version of a social stock exchange, we would do well to borrow infrastructure or connect to existing platforms, enabling synergies in operational models as the global market grows.

Increasing numbers of Australian companies taking on B Corporation certification also demonstrate progress in (voluntarily) adopting impact measurement tools and impact disclosure.

Yet we also need to recognise criticisms of such exchange platforms, as well as unintended consequences – for instance, limitations to calculating social returns on investments, “crowding-out” effects and mission drift in the not-for-profit and social enterprise sector (the social economy) .

We also need to ensure that mobilising private capital does not lead governments to shirk their responsibilities in dealing with those social and environmental problems that will not be addressed through market mechanisms.

The social stock exchanges established so far are building gradually. Yet incremental change can be transformative in providing one mechanism to mobilise more capital for organisations that seek to address many of the current social and environmental problems in our society.

Comments

  1. migtronixMEMBER

    also launched in 2013, the IIX trades out of Mauritius

    What!?!? Where I can I send them all my money. No wait, all my BTC?

  2. A ‘social stock exchange’ like the one in London is not actually a stock exchange, it is just a middleman facilitating access to already listed stocks. This could be beneficial if it reduces investor search costs.

    A real social stock exchange would reduce access of such firms to highly liquid existing markets and potentially reduce market pricing efficiency. Such outcomes would destroy economic value.

    It is a stupid idea.

    • @gramus in a perfect market yes, however the issue is investors can’t find the organisations to invest in. Through a dedicated market this would help to facilitate this.

      Having said that the issue isn’t capital in the social enterprise market, if an enterprise is investible it gets the cash, be that through an ‘impact’ investor or not. The UK market is about 10 times the size of Oz and they’ve only got 12 listed? Hardly worth getting out of bed for.

      We don’t need a social stock exchange in Australia, What is more needed is 2 things:
      -more angel and venture capital style investors willing to take on higher risk early startups
      -further sector infrastructure to produce more scalable enterprise.

  3. What nonsense.

    “As our research progresses on this topic, we may find that rather than inventing a new version of a social stock exchange, we would do well to borrow infrastructure or connect to existing platforms, enabling synergies in operational models as the global market grows.”

    She has already solved her problem – there isn’t one.

    The US venture market is so deep right now they use the listed markets as a dumping ground (exit strategy).

    Can you eat SROI?

    What we really need is an exchange with 1000s of these deals listed so I can collateralise them.

    Create some AAA tranches – I will call them Feelgood Bonds.

    • migtronixMEMBER

      LOL! The problem is the lefites aren’t working – either retired themselves or just never bothered starting – so who will do the paying out?

      Always the same thing, the people who hate money and its evils are always thinking up schemes to make someone else pay for their profligacy!

  4. Social stock exchanges? I thought this was what tinder was for?

    You could imagine those late night TV commericals:

    “I’m looking for something to invest in not on the ASX….. not on the ASX….. not on the ASX…..”

  5. The Commodifying of everything proceeds apace, sadly humans are not well priced.

    Wait for the water exchanges, then things will be quite interesting.

    Opps…

    “A disturbing trend in the water sector is accelerating worldwide. The new “water barons” — the Wall Street banks and elitist multibillionaires — are buying up water all over the world at unprecedented pace.

    Familiar mega-banks and investing powerhouses such as Goldman Sachs, JP Morgan Chase, Citigroup, UBS, Deutsche Bank, Credit Suisse, Macquarie Bank, Barclays Bank, the Blackstone Group, Allianz, and HSBC Bank, among others, are consolidating their control over water. Wealthy tycoons such as T. Boone Pickens, former President George H.W. Bush and his family, Hong Kong’s Li Ka-shing, Philippines’ Manuel V. Pangilinan and other Filipino billionaires, and others are also buying thousands of acres of land with aquifers, lakes, water rights, water utilities, and shares in water engineering and technology companies all over the world.

    The second disturbing trend is that while the new water barons are buying up water all over the world, governments are moving fast to limit citizens’ ability to become water self-sufficient (as evidenced by the well-publicized Gary Harrington’s case in Oregon, in which the state criminalized the collection of rainwater in three ponds located on his private land, by convicting him on nine counts and sentencing him for 30 days in jail). Let’s put this criminalization in perspective:

    Billionaire T. Boone Pickens owned more water rights than any other individuals in America, with rights over enough of the Ogallala Aquifer to drain approximately 200,000 acre-feet (or 65 billion gallons of water) a year. But ordinary citizen Gary Harrington cannot collect rainwater runoff on 170 acres of his private land.

    It’s a strange New World Order in which multibillionaires and elitist banks can own aquifers and lakes, but ordinary citizens cannot even collect rainwater and snow runoff in their own backyards and private lands.

    “Water is the oil of the 21st century.” Andrew Liveris, CEO of DOW Chemical Company (quoted in The Economist magazine, August 21, 2008)”

    http://www.globalresearch.ca/the-new-water-barons-wall-street-mega-banks-are-buying-up-the-worlds-water/5383274

    Skippy…. that’s 2012 so its been on going for a bit.

    • migtronixMEMBER

      So first you tell people that water is going to be way scarce in the future, then you buy up all the reservoirs, cut off supply and jack up the water charges.

      Nice scam if you can get it….

    • But water is fundamentally a commodity… what’s the problem?

      If water is mis-priced due to prior administrative allocation (Qld style) then there is a real investment case to buy water allocations on the expectation that policy settings will change to allow water to be priced according to its actual marginal value.

      This is a smart move by the ‘water barons’ who still bear all the regulatory and market risk which comes with water (which is HUGE).

      Water is a constrained resource so it fundamentally makes sense to price it efficiently such that the shadow price becomes the market price.

      This is a GOOD THING!!!!!!

  6. “http://en.yibada.com/news/toyota-releases-5600-fuel-cell-patents-at-ces-2015-similar-to-teslas-move-9247”

    “Automobile maker Toyota has made 5600 patents free for anyone who wishes to use it. They are now royalty free patents which consisted of 3.350 fuel cell platform software, some 1970 fuel cell stacks, and 290 hydrogen pressure tanks, and 70 hydrogen production and other supply patents.”

    How cool is this.

    • migtronixMEMBER

      The Toyota patents shall only be available to other car makers who have created fuel cell vehicles, hydrogen powered buses, industrial equipment makers, and energy companies who are planning to manage fuel stations. Free patents can only be used up to the year 2020

      So once you commercialise it and build it it’ll cost you money again. Genius.