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.

The New Business of Business is Sustainability

New and old financial players invest time and resources to manage broader risks and meet new opportunities.

Today’s business leaders are rejecting Milton Friedman’s famous theory that “the business of business is business.” As corporate responsibility becomes a leading global business trend, it is clear that sustainability is a strategic, long-term investment necessary for survival in an increasingly volatile global economy. Financial markets and the financial services industry are key to sustainability as they raise, allocate and price capital, and provide risk coverage, influencing access to financing and risk protection. Therefore, engaging in sustainable finance means that these firms are providing financial capital and risk management products and services in ways that shore up economic prosperity, environmental preservation, and community development. There are many financial institutions and organizations worldwide that are investing time and resources to meet these goals and create an economy that values a broader range of inputs such as natural resources and human capital.

Non-governmental organizations are emerging to hold the finance industry accountable to the public and increase awareness on the importance of responsible lending. The World Business Council for Sustainable Development, a coalition of 175 international companies, has developed the business case for sustainability in the finance sector. The council asserts that by taking into account social and environmental aspects, investors minimize risk, further improving the bottom line and creating long term value for stakeholders. International Finance Corporation (IFC) has taken the field a step further by requiring its clients to develop and implement a Social and Environmental Management System (SEMS) as a convenant of any loan/investment agreement. The SEMS is a systematic framework which integrates social and environmental considerations into an organization’s business processes. IFC believes that integrating these concerns into decision making facilitates improved risk management and higher return on investment.

Financial firms are not only effectively managing risks presented by social and environmental concerns, but also taking advantage of opportunities in this arena. Tsing Capital, a Beijing-based cleantech venture capital management firm, is leading the charge from China. Worth over US $200bn in environmental protection and renewable energy, the Chinese market has the world’s highest growth rates in environmental spending. The Fund invests in businesses with economic drivers that provide sustainable revenue streams as well as demonstrable environmental and social return. Tsing Capital has an exemplary track record of generating excellent financial returns while surpassing environmental and social targets.

With new public and private players around the world using a plethora of valuation instruments, the market is ripe for a set of standards that will benchmark these investments across industries and economies. However, the concern here is that the more broadly one tool is applied, the more diluted or less meaningful the metrics will become. It remains to be seen if one player or index will rise above the rest. For now, it is important to monitor the financial, environmental, and social returns of these sustainable funds to gauge their long-term performance and impact on business, society, and the environment.

More Support to the Green Investment Sector

New as well as existing venture capital funds across the world are providing the much needed support to the green investment sector. Recently, the Rutherford Innovation Fund announced an investment of 50 million dollars towards the clean energy sector. At present, business organizations, financial institutions and individuals are also riding the wave of the trend in green and clean technology. This time is being considered best for putting money in a sector that will not only bring great returns but also make a difference to the society and environment.

The clean technology sector includes clean water, bio-fuels, green buildings, CO2 reduction, smart grids, transportation, wind power and solar energy. The Rutherford fund is one of a number that was launched this year for providing funds to early stage technology companies. Another such fund is 2Ignite, established by Henry Tait, scion of the Todd family for raising approximately 25 million dollars high net worth investors and investment institutions to fund 12 companies. Earlier this year, over 20 million dollars were offered to Endeavour Capital from the government. This amount was a much required boost for the growth fund and it hopes to add 100-150 million dollars more from New Zealand investors in the near future.

Besides solar power and bio-fuels, investors are also looking into diverse areas for investments. The fact that venture capitalists across the world are investing their money towards green technology, there are chances this new trend will bring about significant changes to the environment and communities.

Sustainable Investment for Sustaining Small Producers

The financial sector holds tremendous growth potential as far as sustainable development of economies is concerned. Sustainable investment opportunities should not only take ethical, environmental and social concerns into consideration but also support the growth of local communities. While millions of investors across the world are investing in green stocks and mutual funds to reap long term benefits, an Indian company named Livelihoods Equity Connect is adopting a different approach to combine development with sustainable investment.

Started by Adarsh Kumar, Livelihoods Equity Connect is focusing on the creation of sustainable companies for sustainable investment instead of looking for existing opportunities. Efforts are being made to build a new venture capital funding model that will serve businesses employing or owned by low income producers. With the help of this fund, the producers can scale up their business and turn into a successful commercial enterprise. Unlike I-bankers or venture capitalists, constantly looking for exit routes, this enterprise plans to create community owned companies, bringing together marginal farmers, dairy farmers, fishermen and craftsmen.
A large and profitable business can be created with the help of collective synergies of low income producers. Even though local farmers and craftsmen in rural India engage in business activities on a daily basis, their income is very low due to the systemic inefficiencies. Livelihoods Equity Connect strives to change this and make them financially independent. Adarsh Kumar had also started the All India Artisans and Craftworkers Welfare Association (AIACA) that helps local craft producers gain market access to increase their income.

There is no doubt that most banks and investors are reluctant in investing their money in community owned companies. But the success of such business organizations forces them to change their mindset and extend their support to the sustainable development of the poor.

Sustainable Investment in Africa – Is It Possible?

Food prices are set to rise on a global level and countries like Africa are being predicted to feel the worst effects of it. However, experts believe that sustainable investment from large companies and governments across the world will not only solve food issues for Africa but it will also help the continent turn into breadbasket of the world.

Growth has been outstripped by demand for more than three decades due to the technology driven revolution in the agriculture sector. Even though the production of grain has increased with the latest agricultural methods, global food crisis continues to create problems. Nations are getting affected with the rise in food prices and decline in yield of crops due to the impact of climate change. Even though the situation has been manageable in several developed as well as developing countries, the impact has been disastrous for people in countries like Africa.

Even though the continent is a food deficit region, it holds a lot of potential for increasing the production of food. For years, Africa has invested more in the development of rural infrastructure rather than agriculture. But with more sustainable investment in agricultural development, this region might become the bread basket for the world. Green investment by African companies is on the rise and if the required support is provided from the global commercial finance sector to Africa, the world can find a solution to global food shortage.

Sustainable Finance for Ontario: Creating More Jobs

Ontario is all set to become a leading North American province with its new green energy rules. This new act is being predicted to generate thousands of jobs in Ontario’s green economy. It will also provide a stable platform for investors and companies from all over the world that are looking for green investment opportunities.

The government is in talks with Samsung and South Korean electronics for the establishment of renewable energy business within the province. The global recession resulted in shedding of thousands of jobs from the manufacturing sector of Ontario but this new energy act might prove beneficial in creating more jobs and attracting sustainable investment. The green energy act will have a feed-in-tariff program that will allow business organizations and individuals sell renewable energy like landfill gas, wind, biomass and solar at set rates into the grid. It will also include regulations to set new wind turbines at a certain distance from homes and other properties. A renewable energy facilitation office will also be set up in Ontario from where future renewable energy projects for the province will take off.

It is notable that Ontario is the leading province of Canada in wind power. The electricity produced is enough to power approximately 300,000 homes. The green energy act will also aid Ontario in elimination of coal fired power by 2014.