Tuesday, November 10, 2009

Trading on Social Stock Exchanges Creates Responsible Returns

Social Stock Exchanges are emerging as an innovative market mechanism to make money while doing good.

If you’ve ever worked for a non-profit organization you are all too familiar with the mantra “there’s too much need and too little funding”. Non-profits constantly struggle to connect with donors and investors who share their mission and are willing to foot the bill to realize social and environmental gains. The concept of Social Stock Exchanges (SSEs) has emerged as an innovative market mechanism to make money while doing good, offering public investment opportunities with a social return.

In South Africa, more and more NGO’s are expanding their reach and their budget by listing on the South Africa Social Investment Exchange, SASIX. The exchange provides research, risk analysis and continuous evaluation to ensure that listed projects meet established criteria and deliver measurable social returns. In its first three years, SASIX has brought in over $2.2 million for 53 projects. In addition to espousing a new approach to investment in social development, SASIX hopes to foster a culture of accountability for social performance within its listed organizations. Brazil’s Social and Environmental Stock Exchange, which is linked to the Bovespa Index, the standard Sao Paolo market, has raised over $5.5 million for civic groups since 2003. Similar efforts are underway in India, New Zealand, Portugal and Thailand.

For-profit examples of this model include the Dow Jones Sustainability Index, launched in 1999. The DJSI were the first global indices tracking the financial performance of sustainability driven companies. Over 70 DSJI licenses are held by asset managers in 16 countries, who collectively manage over $8 billion. Most recently, the Rockfeller Foundation has pledged $500K toward the creation of a stock market for “social-purpose” business and investors.

There are various reasons why socially responsible investment (SRI) is becoming more attractive than traditional investments. These impact investments are generally based in emerging economies, which have faster expected growth rates than developed countries. They may not be tied to other assets, and so provide diversification and reduce exposure to risk. Further, as “doing well by doing good” becomes increasingly popular, these investments can bring in socially minded clients and boost brand equity.

Critics of this model claim that philanthropic causes cannot and should not be driven by market incentives. They fear that the tainted values and conflicts of the current financial system will be imported in this new blend of “philanthrocapitalism,” exposing development projects to opportunistic exploitation. However, proponents of social investment instruments and exchanges have demonstrated that engaging the private sector to support development in a way that is profitable and results-driven, can also increase the efficiency and accountability of these projects. The infrastructure for these tools is still young and needs careful guidance to develop into a social market that fairly values these projects for the true wealth they create.

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