Traditional stock exchanges are evolving their business practices to find more innovative ways to increase capital flows to sustainable companies and projects through both listed equity and bonds.
In addition, there are also new platforms that are building on the traditional stock exchange model but focused solely on investments in companies or projects that are focused on fixing social or environmental challenges.
While stock exchanges have existed for centuries to handle financial transactions and match buyers and sellers, social or impact stock exchanges are a relatively new phenomenon. Some have launched and either changed course or been dissolved; however, others have been gaining traction.
This may be due to the increased demand markets are seeing for delivering impact alongside returns. According to the Global Impact Investing Network (GIIN), investors they surveyed committed $22.1 billion to projects that deliver both social, financial and/or environmental purpose in 2016. Across the world, impact investing is expected to reach $650 billion by 2020. There may also be demand for leveraging exchange models and technology to improve access to more philanthropic focused funds.
Canada: Social Venture Connexion
Building on the idea of investing in the public markets, Canada’s Social Venture Connexion (SVX)37 launched in 2013 at the Toronto Stock Exchange (TSX). It set out to provide investment opportunities in the exempt market, or a section of the capital markets that are not available on public exchanges like the TSX. Its aim was to create a social stock market; a place where entrepreneurs and organizations seeking to tackle pressing problems could connect with investors seeking social and/or environmental impact alongside financial returns.
The idea for SVX came about following the global financial crisis, when SVX’s founders saw a need for capital to solve problems such as inequality and climate change. However, SVX did not immediately launch a secondary market for trading of impact investments, where shares change in value. It wanted to examine the technological, regulatory and moral implications of a secondary market. Today, SVX connects investors with qualified social enterprises that are not listed on a stock exchange but can raise money through private placements or crowd funding.
In order for companies to raise money on SVX, the impact of their products and services are first assessed.38 Today, they work across sectors including cleantech, health, work and learning, food, and social inclusion, providing support to enterprises focused on early cancer detection to community power co-operatives producing renewable energy. Below are the key updates since its launch:
- 149 ventures have participated in SVX investment readiness programmes and on the SVX 1.0 platform;
- SVX ventures and funds have raised over $100 million;
- SVX is registered to operate in Ontario, Quebec, Alberta, British Columbia and Saskatchewan;
- Over 1,500 investors, entrepreneurs, and community members have attended in-person workshops, demo days, events, and other educational programming hosted by SVX.
SVX is registered as an Exempt Market Dealer (EMD) with the Ontario Securities Commissions (OSC). As an EMD, it can offer a variety of options to investors looking for private market deals, from equity crowdfunding to private placements, for accredited investors. They are overseen and report to the OSC. As of 2016, Canadian regulations have changed to allow retail investors, not only accredited investors, to take part in investing in private enterprises through SVX fs crowdfunding options. SVX is supported by the MaRS Centre for Impact Investing, in close collaboration with TMX Group and with support from the Government of Ontario, Torys LLP, KPMG, RBC, the J.W. McConnell Family Foundation and a host of other partners. Though SVX is primarily focused on Ontario-based private offerings, it eventually plans to become a trading exchange open to the general public.
Singapore: Impact Investment Exchange
Another example found in Singapore’s Impact Investment Exchange (IIX) is also a great example of global collaboration. IIX is the brainchild of Durreen Shahnaz, a former social entrepreneur and investment banker. IIX is focused on connecting underserved communities to the Wall Streets of the world by raising capital and bringing solutions to build a sustainable foundation for women empowerment, climate action and community resilience. To date, IEX’s work has spanned 40 countries and impacted the lives of over 15 million disadvantaged people by raising over $75 million in investment from the private sector.
IIX is building an ecosystem for impact investing that incudes finance and business development, a platform for private placements and crowdfunding and eventually a listing on the public stock exchange. In 2013, Singapore’s IIX was launched jointly with the stock exchange of Mauritius in order to reach African as well as Asian social enterprises and investors. Initially, the exchange was only open to accredited investors, so initially, IIX was not open to retail.
Companies had to comply with listing parameters, such as having a social or environmental goal, and regularly publish social impact assessments. Trading took place online through a partnership with PhilipCapital Group, one of Southeast Asia’s largest brokerage firms. While many of the social investing initiatives started out as portals listing companies to connect them with investors, Singapore’s IIX is the only one on which publicly listed companies are traded. However, there is also the sense that social stock exchanges are still transitioning from private placement platforms to fully-fledged public stock exchanges.
While IIX was founded to develop the first public exchange for impact investment companies, it spends most of its time on other impact investment projects such as a private placement platform, working with Asian banks on fundraising and making impact companies ‘investment ready’.One of its initiatives was creating the $8 million Womens’ Livelihood Bond. The bond funds impact enterprises and microfinance institutions, with the aim of growing their businesses. In effect, this was the world’s first listed bond, with a dual focus on social impact and financial returns, helping to empower over 385,000 women in South East Asia. IIX has also launched the Women’s Health Bonds and Sustainable Fisheries Bonds. Furthermore, in July 2018, during a speech at the 72nd UN General Assembly, Ms Shahnaz announced that IIX was launching the Innovative Finance for Sustainable Peace Initiative.
This is a five-year initiative to unlock $1 billion in capital to create sustainable peace efforts through systemic economic resilience across the globe in post-conflict countries with a high risk of violence. The economic impact of violence on the global economy was $13.6 trillion in 2015. This is on top of the $5 trillion to $7 trillion estimated to be needed annually to meet the United Nation’s SDGs. These figures may seem overwhelming; however, IIX believes that by harnessing the power of financial markets, which globally total $210 trillion, the sums involved can become more manageable. The initiative aims to achieve three underlying objectives:
- To effectively use financial markets to drive sustainable peace across the world by creating ‘business-worthy’ companies, equal communities and a resilient planet for all;
- To embed a gender-lens into the global peace dividend and shift the narrative from viewing women as victims of war to recognizing women as solutions to peacebuilding;
- To galvanize key stakeholders from the public, private and philanthropic sectors to jointly create innovative financial products for peace.
Bolsa de Valores Sociais
The Socio-Environmental Investment Exchange (BVSA in Portuguese) exemplifies a partnership that utilizes the model and brand of a stock exchange to mobilize the financial market to support the SDGs. Originally launched in 2003 as a pioneering model among stock exchanges, in 2016 the BVSA began classifying projects according to their potential to impact the SDGs. Building on the growing understanding of the Brazilian stock exchange (B3) growing understanding that social disparities are a significant obstacle to sustainable economic development, BVSA was linked to its core business from the start. It was inspired by the belief that the stock market is essentially a value creation environment, in which corporations and investors meet to trade shares that add value for both parties. By the same token, this environment is well placed to host the selling and buying of shares, where non-governmental organizations (NGOs) as investees return investments in the form of social profits.
Unlike impact investing, returns on investment do not go to the investors in the form of financial profits and dividends. Instead, their investments yield beneficial impacts for the sustainable development of Brazil. Capital obtained through the BVSA helps listed NGOs implement, expand or maintain a variety of projects: a shrimp farming school for the next generation of artisan fishermen to remedy the depletion of shrimp stocks and thereby protect the livelihood of their community; a family restructuring programme that helps children repeatedly hospitalized with conditions such as pneumonia and their families to break the vicious cycle of poverty and disease; and a cultural centre in one of the poorest and most violent neighbourhoods of São Paulo, among other projects.
Investors can track the project’s progress and monitor its results in the reports available on the BVSA’s website. This is a transparent process, based on the model for B3 trading practices. Thus, organizations pass through a rigorous selection process to list projects on the BVSA. Furthermore, when the fundraising period has ended, the BVSA monitors the use of these funds to guarantee that they are going towards the previously established objectives.
On average, each year there are 650 applications and 20 projects chosen to be listed. Each receives R$50,000 in seed capital from the Brazil Foundation and will be able to raise up to an additional R$50,000 via BVSA. Since its launch, BVSA has raised R$19.1 million for 208 projects, of which 188 have completed funding and 20 more are in the active funding stage.Since 2014, B3 has combined competencies and efforts, and formed a social joint venture with the Brazil Foundation.
In addition to co-funding, the Brazil Foundation takes on the selection, assessment, training and monitoring of projects listed on the BVSA. Similarly, UN agencies such as UNDP and UNESCO provide support to the programme, as do brokerage houses and civil society. Donations made by credit card or bank slip pay discounted bank service fees thanks to partnerships with financial institutions. The B3 Institute guarantees that all raised funds are transferred entirely to the NGOs. The BVSA’s impact goes beyond merely the capital raised. It has served as a conduit for dialogue between investors and NGOs, business and community, rich and poor. It bridges the divide between these groups, because it offers an environment for people who normally do not speak to one another to begin to understand each other’s worlds. In addition, the BVSA gives them a new vocabulary that facilitates connections between their distinct realities. At the same time, it also improves B3’s image, and therefore its business. Sonia Favaretto, Managing Director, Media Relations, Sustainability, and Communications, BM&FBOVESPA, was recognized as one of the Global Compact’s ten Local SDG Pioneers in 2016. Thanks in part to her work on BVSA, Sonia and other BM&FBOVESPA officials have remained committed to this kind of initiative as part of the role of exchanges and capital markets in creating just and sustainable societies. They intend to use this as an example to spark the imagination and commitment of other exchanges to launch similar initiatives.To invest, a person has to register on www.bvsa.org.br, choose the project theme, target audience or region – and build the donation portfolio.
India: Biomass Exchange platform
Governments in certain regions are partnering with technology providers to develop an exchange mechanism to solve problems such as waste treatment. In Delhi, UK-based GMEX Technologies, a provider of exchange technology, is collaborating with the Centre for Ganga River Basin Management and Studies (CGanga) to launch a waste trading platform and exchange venture to address major pollution problems in the Indian Ganga River Basin.47 Solid waste being dumped in the river is a huge challenge for the government of India.
The exchange solution will include technology to deliver market data, warehouse receipts, and finance and trading, including auctions, quoting and continuous trading facilities. A contact database will run in parallel on blockchain technology to include a distributed registry and contract database for tracking thousands of product suppliers. The new trading platform will provide a ready spot market for trading waste, and drive a sustainability model for the usage of biomass.
Commodity investors and traders are looking to back this new Biomass Exchange platform, as it will lead to process and product standardization, effective biomass price establishment, and clear and equal rules for all participants.
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Evolving business models and new applications of technology by stock exchanges