Who Can List on a Social Investment Exchange?
One of the intriguing questions to come out last weeks' meeting of social financiers in Bellagio, Italy was: who can list on a social investment exchange?
The current presumption is that the platforms will offer investors a range of social investment opportunities; that is that the platform will vet all investment opportunities and only list those social enterprises (or other hybrid forms) that offer positive social returns. Sounds simple enough, but it is very difficult in practice: consider what this excludes.
Firstly, social investment exchanges propose to exclude pure-profit companies that do not have a social mission. This is slippery proposition that ultimately values the intent to achieve social impact over the actual delivery of social impact. Consider the following thought experiments:
- A social enterprise develops a woven basket that can be made in refugee camps and increases the incomes of 50 of the displaced persons to $3/day. Nike sees an opportunity and opens a shoe factory in the same camp and increases incomes of 100 displaced persons to $5/day. If only social enterprises can be listed, only the less effective of these two investment opportunities will be presented to investors.
- A social enterprise developed a door-to-door recycling business that hires from at-risk populations. The wage paid to them is above minimum wage but below the going rate for trash-collectors. The enterprise just breaks even; it gets listed on a social investment exchange. A waste management company points out - correctly - that it too hires from a similar demographic and pays a higher wage. It wishes to be listed on the social investment exchange but is excluded.
A second group the social investment exchanges will exclude are those organizations who have a neutral or negative social impact. This will create a conflict between the exchange’s ability to enforce its listing requirements and between the investors it serves. Consider this scenario:
- One of the enterprises listed on the exchange is a social enterprise with a strong track record of raising incomes through marketing cooperatives and secondary processing of commodities. Results are released from a five-year study comparing the enterprise’s beneficiaries to a matched control group. The study finds the enterprise has simply helped the target communities capture market share at the expense of other communities but not increased overall incomes; furthermore families in the target communities have not experienced an increase in quality of life, possibly because incomes were paid to men and men are statistically less likely to spend income on food and education. The exchange calculates the enterprise has a net negative social impact; does it delist the enterprise? Doing so will result in a financial loss for investors in the enterprise, and deter other enterprises for embarking on similar in-depth studies of social impact.
Social investment exchanges should have listing standards. They should be standards related to transparency; to the quality of the social impact reporting. It should be left to the investor, perhaps with paid advice from social investment analysts, to determine for themselves which organizations offer compelling social return.
Ordinary stock exchanges provide a very clear analogue. The TSX does not list only those companies which it thinks present a compelling investment opportunity; identifying those is the job of the investor herself, or his paid advisors. Nor does the TSX de-list companies with negative financial returns; it does, theoretically, de-list those who fail to comply with GAAP or fail to disclose audited financial statements. The same should hold for social investment exchanges.
So who can list on a social investment exchange? I propose that any organization that adequately reports its social impact, irrespective of their legal form, intent and performance can list on the exchange. Opponents of this view point argue that a social impact exchange must have a squeaky clean reputation in order for the brand and concept to get traction in the market, and that one or two questionable listing would ruin the exchange. What do you think? Does listing a company like Nike, with the required social impact reporting, tarnish the social brand? What listing criteria would you set for a social investment exchange?
