Tuesday, April 7, 2015

Bangladesh's Entry Into Impact Investing

This article was published in Daily Star on February 22, 2015

Growing up as a daughter of a high ranking civil servant in Bangladesh, I have distinct memories of my father's trip to Paris every year in the 1980s. To me it was exciting -- Papa was seeing Paris -- the most romantic city in the world. To him it was a dreaded trip because it was Donor Consortium that brought him to France to beg for donor money for Bangladesh.

I remember my father sadly referring to himself as the 'official beggar of the country'. His begging would put in place the much needed public sector goods and services such as food, health care, medicine and education for millions. No matter how good the ultimate goal of the 'begging' was, the process was demeaning and unsustainable. It went on the same way year after year.

Fast forward 30 years later, some of the good that did come out of the donor money is the creation of multiple infrastructures by the government and non-government bodies in Bangladesh that gave rise to parallel economies along with the traditional private/export sector such as microcredit, village health programme, education and healthcare for the poor.

Bangladesh's enabling regulatory environment has resulted in a vibrant development landscape with development giants like BRAC, Grameen Bank, ASA as well as over 26,000 smaller NGOs and 600 microfinance institutions. The unprecedented efforts of these institutions to galvanise the country's development agenda have put Bangladesh on track to achieve five of the eight Millennium Development Goals.

According to the 2013 report by the Social Progress Imperative (SPI), Bangladesh produced another 'development surprise' in the Saarc region, ranking 99 among 132 countries -- a relatively strong performance when compared with Nepal (101), India (102) and Pakistan (124).
The efforts, launched by the NGOs and microfinance institutions, may have had their birth with the assistance of donor funding but there is an increasing awareness that there is, without doubt, more to be achieved in terms of responsible, equitable growth and sustainable impact for Bangladesh by Bangladeshis.
Disturbingly, Bangladesh's economic progress has been uncorrelated with equitable social progress so far. The World Bank measured Bangladesh's GINI Coefficient at 32 percent (higher than less industrialised countries such as Albania, Niger, and Serbia) and the country was ranked 111 out of 148 countries on the Gender Inequality Index in 2012. This is exemplified by Bangladesh's readymade garment sector, which employed over 4.4 million workers in 2013, of which an estimated 85 percent were women. Although this 'feminisation' of the industry was interpreted as an indicator of female emancipation, it occurred under an extremely exploitative context. Weak labour laws resulted in most RMG factories falling short on social compliance, demonstrating the failure to provide the female workforce with basic human rights.
Incidents like the collapse of Rana Plaza magnify the need to have holistic approach to growth where financial gains accompany creation of social good and where social and development goals can be achieved in a financially sustainable manner (i.e. not relying on grant funding). This means we can no longer ignore the fact that there has to be more of a connection between the private sector and the development sector, and growth has to be achieved by both sectors working together.

If Bangladesh is to achieve its goal to become a middle income country by its 50th anniversary of Independence, is it possible for us to say the country will be a leader in sustainable development where lasting economic growth is accompanied by sustainable social and environmental returns?
By embracing the world of impact investing, Bangladesh can access to substantial private capital to address the issue of inequitable growth and drive forward the development agenda.

Impact investing refers to investments that are intended to create positive social impact beyond financial return, advocating that the two are not necessarily mutually-exclusive. The practice of grant making and donor funding has traditionally been considered separate from investing in both objective and approach, but the emerging field of impact investing creates the opportunity for a productive collaboration between these two disciplines.

The goal of impact investing is not to substitute these mechanisms, instead to tap into a much larger pool of commercial capital, endowments and fiduciary investments that can augment the impact of traditional sources of mission-oriented capital. Estimated by the World Economic Forum to reach $1 trillion by 2020, impact investing has the potential to introduce a whole new spectrum of private sector investors into Bangladesh and massively redirect private capital towards magnifying development efforts across the country.
However, providing a supply of impact-oriented capital solves only one side of the problem. Aligning the capital with demand would involve identifying and supporting, among others, social enterprises (defined as mission-driven for profit companies or market-driven not-for-profit companies), which use business methods to achieve a social or environmental mission.

Nobel Peace Prize winner Muhammad Yunus has set the stage by launching Yunus Social Business, which uses an incubate and finance methodology to bridge the gap between social enterprises and philanthropic lenders and donors. However, social business has its limitations as it dictates how much the private sector can make in financial returns. If we want effective private sector involvement we can not dictate how much businesses should or should not make in profit and what should be done with the proceeds. The focus has to be on achieving and measuring the social and environmental outcomes and allowing financial returns to go hand in hand with it. This approach works, and this is an effective way in making everyone from investors and entrepreneurs to beneficiaries a part of the process. We are seeing incredible results of impact investing across Asia, and now we need to allow the impact investing to take off in Bangladesh.
Innovative models such as Hathay Bunano, which focuses on rural livelihood creation, Waste Concern which promotes waste recycling and sustainable development and the social enterprise arm of Kazi & Kazi Tea are redefining the dominant narrative of pure business and pure philanthropy, recognising the increasingly blurring lines between the two.

However, sustainable social entrepreneurship remains a nascent concept in Bangladesh as there are few investment-ready social enterprises that have the capacity to effectively infuse capital and achieve tangible impact, and existing high-impact organisations rarely self-identifying as social enterprises. This indicates a need not only to nurture the space, but also to educate these organisations on the benefits of attracting private capital to expand their operations and deepen their impact.

The role of field-builders in the space is to catalyse both sides of the equation to ensure Bangladesh is truly ready to embrace impact investing. The supply side involves designing inclusive 'on-ramps' for investors with varying risk-return appetites and designing innovative financial products that re-endogenize social considerations into investment decisions. Nurturing the demand side of the equation entails the development of a pipeline of high-impact business models that are investment-ready and can effectively deploy this capital. This will enable impact investors to scale innovative new models that can drive, support and accelerate positive change in a sustainable way, taking Bangladesh to the next level in its development story.

Catalysing the impact investing space could help Bangladesh not only harness the potential of private capital to advance the development agenda, but also serve as a voice for progress in the region and beyond. While the donor funding is still essential in catering to many basic needs of the country, the time is right for some of these funds, coupled with constructive public policy, to be diverted to create the infrastructure for impact investing and creating the path for equitable and sustainable growth where the private sector and the development sector can effectively and efficiently come together.

British Council is bringing together a policy gathering around the social enterprise space this week. I hope this will be the beginning of many discussions on how we make Bangladesh be known as the country of 26,000 NGOs as well as 100,000 social enterprises.  Let's begin the work.

The writer is founder of Impact Investment Exchange Asia and Shujog -- two Singapore-based organisations leading the impact investing work and movement in Asia.

Monday, January 12, 2015

Joseph Wharton Award Acceptance Speech

Joseph Wharton Award Acceptance Speech
Thank you, Katherine, for the kind words. I want to thank the Wharton Club of New York, the Wharton administration, past Joseph Wharton Awardees and my fellow alums and friends who nominated me and selected me for this award.  

I humbly accept this award not only for the work that I am doing but also for the work that many other Wharton alums are also tirelessly doing to make finance into a force for good, including pioneers like Wayne Selby, who received this honor before me, and others doing equally important work today, such as Lisa Hall, Nick Donohoe, Suzanne Biegel, Jean-Philippe de Schrevel  to name a few. 

I am from Bangladesh. I was the first Bangladeshi woman to work on Wall Street and also the first Bangladeshi woman to attend Wharton. I have spent a life-time breaking down barriers and constraints and at the same time building bridges between cultures.  Looking back I can see that I have been able to accomplish what I have in part because I could effectively take the ‘best practices’ of each culture and create an effective third way for myself.  The pursuit of an effective third way is what brings me in front of you today. 

We live in a prosperous world today.  Gross World Product has increased nearly 70 times in the last century alone from $ 1 trillion in 1900 to over $70 trillion today. With continuing improvements in modern science and medicine, people are healthier and living longer. 
Despite this wonderful economic report card, if one scratches the surface a large gap between the haves and the have-nots is apparent. Globally, over 2 billion people still suffer from multidimensional poverty.  Billions of people still go hungry and don’t have access to clean water and electricity. The United States is not immune to this, with increasing inequality and persistent areas of need.
It is a reality that the economic system as it is today is not conducive to equitable, sustainable growth. If we want the world to be a more equitable place, we have to focus not only on implementing the efficiency measures we learned at Wharton but also on changing the paradigm so that the market more effectively delivers prosperity to all. It is not enough to focus on maximizing output; we also need to ensure that the outcomes achieved match with our fundamental goals.
Traditional capital markets are good at maximizing output, but lack the “heart” required to achieve our higher aims. At the same time, there are not enough dollars devoted to philanthropy to fully meet that need. To solve the world’s most pressing problems and deliver on the dream of prosperity for all, we need to harness the power and scale of the capital markets together with the social consciousness of the philanthropic sector.  Thus, A third way is necessary. 
I believe that this third way is the social capital markets which will enable socially conscious investors to combine the efficiency of the free market with the higher mission of philanthropy and to invest for impact.
This third way requires the creation of a vibrant marketplace which harnesses the power of the capital markets to bring together investors, entrepreneurs and the entire financial ecosystem who value social and environmental returns as well as financial returns. This impact investing phenomenon is now a movement.
My contribution to this movement has been the two companies I created – Impact Investment Exchange, in short IIX and Shujog – which are now leading the impact investing movement in Asia and effectively working towards expanding this movement from niche to mass.
IIX has become a market leader in impact investing in Asia. IIX runs successful accelerators for impact enterprises, operates a private placement platform for direct investment and has recently launched the world’s first social stock exchange. Through its work, IIX channels investment capital from investors like yourselves to impact enterprises that are working in the field to serve millions of disadvantaged people in Asia, giving them access to credit, clean water, electricity, vocational training and low cost housing and education. IIX is also structuring innovative financial securities to float on our exchange, such as a Women’s Impact Bond that I announced at the Clinton Global Initiative last week. Women’s Impact Bond will impact the lives of millions at a go and also provide financial returns to investors. We are also now launching a private equity fund that will make growth investments in Impact Enterprises in South and Southeast Asia, catalyzing greater impact throughout the region.
While IIX is playing a role in raising investment capital for Impact Enterprises, my other company, Shujog, focuses on quantifying, strengthening and deepening the impact of these organizations to their communities.  
The work of the two organizations has already impacted the lives of more than 10 million people while delivering on the promise of financial returns for investors and helping to support sustainable, equitable development in the region.
Fellow alums, I urge you to join me in this journey of the ‘third way’ not only as a moral imperative but also to be a part of history in the making. If we believe Wharton is the best business school in the world, then let’s show the world that it is a leader in sustainable business. Use your skills and resources to immortalize Wharton not only on Wall Street, but also on all the Main Streets and dirt paths of this world.
Each one of you have made incredible contributions to society through your professional work and, in many cases, your philanthropic giving. Now is the time to combine these two facets of your life to support investing for impact. There are many ways to do so. As individuals or organizations, you can direct a portion of your investment portfolios into investing in impact enterprises and impact funds and supporting innovative financial mechanisms for impact -- all of which will enable you to make an impact through investing in myriad ways.
Ladies and Gentleman, I would like to take this moment to thank my life partner Robert Kraybill who has tirelessly supported me on this journey of doing good for the last 25 years. Thank you, Rob.
I leave you with the words of Martin Luther King, "The time is always right to do what is right".
Thank you again for your support and belief in my work. Let’s do the right thing and let’s invest in impact.  Thank you.

Press Release on Joseph Wharton Award

Professor Durreen Shahnaz receives the 2014 Joseph Wharton Award for Social Impact

3 October 2014 - Impact Investment Exchange Asia (IIX) and Impact Investment Shujog (Shujog) are pleased to congratulate our Founder and Chairperson, Professor Durreen Shahnaz, on receiving the 2014 Joseph Wharton Award for Social Impact. The award is presented annually to the alumnus who has made a significant impact in public services, social enterprise or philanthropy. The Joseph Wharton Award is one of the highest honor that Wharton Business School confers on its alumni.

This award effectively recognizes Professor Shahnaz’s efforts in bringing impact investing to the masses through her work at IIX and Shujog. IIX and Shujog, both Singapore-based organizations, have been at the forefront of driving impact investing, particularly across the Asia Pacific region.

In her acceptance speech, Professor Shahnaz explained, “Equitable and sustainable growth cannot be reached within our current systems. There has to be a middle ground between profit maximizing businesses and charitable organizations that rely on donations. This middle ground, or third way, is impact investing, a vibrant marketplace where social, environmental and financial returns come together." She added, “IIX and Shujog have created a vibrant ecosystem for impact investing with thousands of companies and individuals working together to create a financial system that works for all and where everyone can be a participant. The work of the two organizations have impacted the lives of more than 10 million people positively while bringing an average return of over 10% for the investors.”

Professor Shahnaz accepted the award on Thursday, 2nd October 2014, at the Metropolitan Club, New York City. Other recipients of the 2014 Joseph Wharton Awards include Robert Crandall, Former Chairman of American Airlines, Alex Gorsky, Chairman of Johnson & Johnson and Neil Blumenthal and Dave Gilboa, Co-founders and Co-CEOs of Warby Parker.

In concluding her speech, she noted that the Wharton alumni "have made incredible contributions to society by your professional work and philanthropic giving", and urged her fellow alums to “...join me in this journey of the ‘third way’, not only as a moral obligation, but to be a part of history in the making."

About Impact Investment Exchange Asia (IIX)

IIX is a Singapore-based organization with a mission to provide Social Enterprises (SEs) in Asia greater access to investment capital, allowing them to expand the impact of their activities more rapidly. IIX now offers three investment platforms – Impact Accelerator™, Impact Partners™ and Impact Exchange™. Impact Accelerator™ provides seed-stage SEs with mentorship and private capital through a structured and customized process. Impact Partners™ connects accredited impact investors to selected growth-stage SEs who are looking to raise investment capital. Impact Exchange™, the world’s first social stock exchange operated by the Stock Exchange of Mauritius in collaboration with IIX, is a regulated stock exchange dedicated to listing and trading securities issued by mature SEs and other socially-driven organizations. To date, IIX has facilitated $8.5 million of investments  impacting more than 8 million people across Asia with $13.4 million in social value created.

IIX is based in Singapore.
For more information, visit asiaiix.com and follow us on Twitter @asiaiix and Facebook at facebook.com/asiaiix.

About Impact Investment Shujog (Shujog): 

Shujog is a not-for-profit organization based in Singapore. Its mission is to strengthen, deepen, and expand the impact Social Enterprises (SEs) deliver in poor and vulnerable communities. To date, more than 1 million underserved people have benefited from the increased efficiency and effectiveness of Shujog’s social value creation; over 3,700 impact investing professionals have been introduced to the social finance space through education and training; and more than 234,000 people have been engaged and exposed to the field of social enterprises and impact investing. As Shujog diversifies its impact-driven activities across countries and sectors, its footprint in Asia Pacific has become both broad and deep, allowing it to effectively play the intermediary role, be a thought leader, and build bridges among stakeholders.

Shujog is based in Singapore.
For more information, visit shujog.org and follow us on Twitter @shujog and Facebook at facebook.com/Shujog.

About the Joseph Wharton Awards
The Wharton Club of New York's Joseph Wharton Awards Dinner has long been considered the premiere business school alumni event in New York City. The Joseph Wharton Awards recognize exceptional leaders within the alumni community in four distinct categories: Young Leadership, Social Impact, Leadership and Lifetime Achievement. The event began in the mid 1970's, and in 2006 the Wharton Club of New York revived the club tradition of hosting this prestigious event, strengthening the notion that the Wharton Alumni Association is one of the most exclusive and powerful communities in the world. Notable past recipients of the Joseph Wharton Awards include Rajiv Shah (currently the Administrator of USAID) and legendary investors Peter Lynch and Charles Schwab.

For media queries, please contact:
Li Kah Yan, Advocacy
Telephone: (65) 6221 7051

Asia's Social Stock Exchange Poised to List First Retail Impact Bond

This article was published in the Guardian Newspaper on June 26, 2014 

Asia's social stock exchange poised to list first Retail Impact Bond

The time is ripe to launch a retail impact bond in Asia, says former Wall Street investment banker Durreen Shahnaz

Social Stock Exchange – the rise of international competitors

What a social stock exchange could do for social business

Durreen Shahnaz
Former Wall Street investment banker Durreen Shahnaz. Photograph: Impact Investment Exchange Asia
In my first TED talk Defiant Optimism for Development, I had four minutes to convince the world about the benefits of a social stock exchange. Four minutes and four years later, I have created an exchange in Asia which will host a revolutionary financial product to change lives.
In its report Impact Investing: An emerging Asset Class, Global Research, 2010, JP Morgan estimated that the impact investment market has the potential to absorb between $400bn and $1trn by 2020. This is a large number to achieve and it would require participation from all investors – especially retail investors.
I am now creating what I believe is the first Retail Impact Bond (RIB) to tap into this new investment base.
The bond, which we aim to launch in the next year, will be between $5m-$10m and will float on the Impact Exchange, which I created last July. It will focus on key areas such as clean energy access, sustainable food sources, urban planning, healthcare and education.
Why did I choose Asia? With approximately 700 million people in Asia and the Pacific living on less than $1 a day, social enterprises are uniquely positioned to bring about equitable growth in the region.
The RIB creates a liquid market for public investments that generate social and environmental value. It's a bit like large scale "crowdfunding" as an investment and not a donation and can catalyse the democratisation of social capital markets, shifting its impact from niche to mass.
While Asia remains the birthplace of several large, now sustainable NGOs such as Grameen Bank – where I previously worked – and BRAC, these entities are the exception rather than the norm and receive much government and donor support.
But days of unlimited philanthropy and donor funding are going. The social enterprises emerging in Asia are not in the same position as the first generation of NGOs were in most of the Asian countries. Most of these social ventures are mid-sized with limited access to grant or investable capital. However, they are positioned to take advantage of unique opportunities for growth and support.
The rise of wealth in Asia, for one, means there is a growing appetite and awareness for impact investing. NGOs are preparing to graduate from donor dependency by changing their legal status and becoming for-profit social enterprises.
We believe this is the only full-scale social stock exchange with an ability to issue and trade shares and bonds of social enterprises from across the globe. It enables trading in securities (including shares and bonds) issued by social enterprises and funds that invest in them. Each entity intending to list will be required to appoint an Authorised Impact Representative (AIR) – an accredited social adviser – who will provide support through the listing process and ensure that the issuer complies with impact requirements.
In my recent TED talk I spoke about combining the best of philanthropy and capital markets to create "social capital markets" that work for all. Issuing an RIB on the Impact Exchange is the best demonstration of this – a much-needed task for creating sources of equitable growth in the world.
Durreen Shahnaz is founder and chair of Impact Exchange and parent company the Investment Exchange Asia (IIX).

Raising Impact Investing from Niche to Mass Market

This article was published in online Wharton Magazine on June 6, 2014


Raising Impact Investing From Niche to Mass Market

I started my company, Impact Investment Exchange (IIX), in 2010 a few months before I gave my first TED talk titled “Defiant Optimism.” I had four minutes to convince the world about the benefits of creating a social stock exchange. Four minutes and four years later, I have not only created an exchange but am now taking on the new challenge of issuing a financial product which can change the way we look at finance.
Since its birth in 2008 impact investing has gained momentum, but it is still the field of a few. To participate directly often requires a sophisticated investor, given the potential illiquidity of the investments. Platforms such as Kiva and Kickstarter (which are based on donations) make it clear that the potential for involving retail investors in impact investing is immense.

One solution to unlocking this supply of capital is issuing a retail impact bond (RIB) on a social stock exchange. RIBs create a liquid market for private investments that generate social and environmental value and shift impact from a niche to a mass market vehicle. This can catalyze the democratization of capital markets and hopefully bring about equitable and sustainable growth in our lifetime.

Watch: Durreen Shahnaz presents on “Defiant Optimism for Social Development” during a TED Fellow Talk.

Launched in July 2013, Impact Exchange, a collaboration between IIX and the Stock Exchange of Mauritius , is the only full-scale social stock exchange with an ability to issue and trade shares and bonds of social enterprises from across the globe. The proposed RIB, to be issued on the Impact Exchange, allows social enterprises to tap into the large retail investor base to raise funds immediately, offering a different approach to their existing funding channels.
The social impact bonds create value for all stakeholders within the ecosystem. Retail investors gain access to financial and social returns with liquidity options, social enterprises gain flexibility in their funding options, and most importantly, beneficiaries gain from immediate access to life-changing services. The proposition of the retail impact bond is simple: to provide social enterprises with funds up front, which allows the enterprises to act now and save more lives.
Issued on the Impact Exchange, RIBs will not only unlock mainstream capital for social investment, but also set the stage for democratizing capital markets—a much needed task for creating sources of equitable growth.
The first RIB is in the works. IIX will seek out suitable social sector organizations as potential issuers for the bond, focusing on key areas such as clean energy access, sustainable food sources, urban planning, health care and education.
As for TED, the nonprofit dedicated to spreading ideas (famously through short, inspiring talks), my latest talk, “The Third Way,” was about combining the best of philanthropy and capital markets to create social capital markets that work for all. That talk is being debated on TED groups online.
You can choose to agree or disagree in the virtual world, but if you want to be a part of the real world, join the movement today and be a part of this amazing change.
Editor’s note: Durreen invites you to find out more about RIBs and other innovations at the Impact Forum, the largest gathering for impact investing in Asia, June 12 to 13 in Singapore and Paris. Learn more here: http://www.impactforum.asia/

Social Stock Exchanges: Democratizing Impact Investing

This article appeared in World Economic Forum's Report, 'From Ideas to Practice: Pilots to Strategy' in March, 2014

Key Insights

  • Social stock exchanges, which provide liquidity, transparency and efficiency, are mechanisms that can open up impact investment to retail investors, and make it more attractive to mainstream investors.
  • Strict entry and reporting requirements for listing will help standardize impact measurement and highlight social investments as legitimate investment opportunities.
  • Much work needs to be done to build a vibrant public impact investing market; the article provides a roadmap on how to develop enabling environment which includes issuers, investors, and an ecosystem within which they can interact.

Today, impact investing is still the field of a few; to participate directly often requires a “sophisticated investor”24, given the potential illiquidity of the investments25. There are few retail investment opportunities available on a broader basis26 for several reasons.
24 Sophisticated investors are eligible to participate in private placements under the relevant laws of their jurisdiction of residence. In Singapore, an accredited investor is an individual whose net personal assets exceed SGD 2 million or whose income was at least SGD 300,000 in the preceding 12 months, or a corporation with net assets in excess of SGD 10 million as per its most recently audited balance sheet.
25 Perspectives on Progress: The Impact Investor Survey, 2013. J.P. Morgan and the Global Impact Investing Network (GIIN).
26 Several mutual funds exist, such as Calvert Funds (US), responsAbility (Switzerland) or Ethex (UK).
First, too few social enterprises (SEs) are truly investment-ready. Major impact investing funds invest in only 1% of the thousands of socially conscious companies that they evaluate.27 The low volume of deals results in high transaction and operational costs for all stakeholders, curbing the sustainability of trading platforms, impact investors and investees. 
27 Triolo, P. “Are Social Stock Exchanges the Great Equalizer to Democratize Development Finance?” Devex, 15 July 2013.
Second, measuring impact is more of an art than a science, as it is still the early days of creating quantifiable and comparable metrics. Tools such as the Global Impact Investing Rating System (GIIRS) and Impact Reporting and Investment Standards (IRIS) are steadily advancing standardized measurement and reporting.28

28 Ibid.
Third, legal concerns related to tax structures and uncertainties around exit strategies prevent impact investors from making investment decisions.29 Tax issues become considerations in investment decisions because impact investments can be made into both for-profit and not-for-profit entities. As not-for-profit entities can benefit from special tax treatment in their local jurisdictions, such as 501(c)3 status in the US, tax implications of impact investments will need to be considered. On the flip side, if a 501(c)3 is investing in a for-profit SE, it will still have to pay capital gains tax. And, to retain its status, the organization will need to ensure that investments fit under its bylaw requirements and tax-exempt status.
29 Lee, A. “Impact Exchange: How It Will Change Investing”. International Financial Law Review, June 27, 2013.
While impact investing is still far from being an accessible opportunity for the general population, investor demand for greater liquidity (see Figure 12) and platforms such as Kiva and Kickstarter make it clear that the potential for involving retail investors in the sector is immense.
Figure 12: Degree of Interest for Impact Investment Structures and Structural Features: Investor Demand for Liquidity in Impact Investments
Source: Global Impact Investing Network (GIIN), J.P. Morgan

A social stock exchange, which can create a liquid market for private investments that generate social and environmental value, is one approach to unlocking a greater supply of impact investment capital.30 From a demand side, social stock exchanges can enable SEs to access global mission-aligned investment from diverse investors. Moreover, a social stock exchange platform can accelerate the transition towards consistent and widely accepted social and environmental impact reporting.
30 Triolo, P. “Are Social Stock Exchanges the Great Equalizer to Democratize Development Finance?” Devex, 15 July 2013.

Democratizing Capital Markets

Similar to regular stock exchanges, social stock exchanges operate by facilitating the listing, trading and settlements of shares, bonds and other financial instruments. However, alongside traditional financial reporting, impact issuers must comply with social and environmental impact criteria. Listing on a social stock exchange enables financially sustainable entities that address social and environmental issues, including SEs, non-governmental organizations, impact funds and inclusive businesses, to raise capital and expand their operations.
Social stock exchanges provide a mechanism for listed companies to raise capital through primary placements of securities, and liquidity to investors through secondary trading of securities. Moreover, for all those looking to make a difference, they provide the opportunity to purchase a security. Thus, these exchanges open up impact investment to retail investors, and make the field more attractive to institutional investors.

Evolution of Social Stock Exchanges

The notion of a social stock exchange has been developing for some time. In Brazil, the Bolsa de Valores de Sao Paulo (BOVESPA) was the first philanthropic donation arm of the Brazilian stock exchange. The South African Social Investment Exchange (SASIX) was a similar philanthropic initiative with the Johannesburg Stock Exchange.
A more recent initiative is London’s Social Stock Exchange (SSE). Launched in June 2013, SSE exhibits information on socially responsible companies already listed on regulated stock exchanges. While shares cannot be bought or sold on SSE, impact information is available on the currently listed 11 companies.
In North America, Social Venture Connection (SVX), a Canadian platform endorsed by the Government of Ontario in 2008 and approved by the Ontario Securities Commission in June 2013, recently had a public launch at the Toronto Stock Exchange and is now gearing up for issuances for small- and medium-sized social enterprises in Toronto. However, shares cannot be traded on SVX. It is a direct investment platform into not-for-profit entities.31

31 Anwar, T. “Social Stock Exchanges: A Global Perspective”. Social Enterprise Buzz, 10 September 2013.
Launched in July 2013, Impact Exchange, a collaboration between Impact Investment Exchange (IIX) and the Stock Exchange of Mauritius (SEM), is the only full-scale social stock exchange with an ability to issue and trade shares and bonds of social enterprises from across the globe. Impact Exchange is the third market of the SEM and the only dedicated exchange board in the world for social impact investments.

The Mechanics of Impact Exchange

Impact Exchange works as a public trading platform, providing liquidity, transparency and efficiency while also ensuring that the social and environmental mission of the issuers is safeguarded and showcased.32

Impact Exchange is operated by the SEM and regulated by the Financial Services Commission, Mauritius. The SEM provides infrastructure and regulatory oversight while IIX prescreens potential issuers on the impact eligibility criteria and provides recommendations based on this assessment to the SEM. IIX also monitors ongoing social and environmental listing obligations of issuers listed on Impact Exchange. All issuers must demonstrate positive social and environmental impact to be listed on Impact Exchange.
Impact Exchange will allow trading in securities (including shares and bonds) issued by social enterprises and by funds that invest in social enterprises. Social enterprises will be required to meet strict standards for disclosing information about their businesses (see Figures 13 and 14), their financial results and their social and environmental performance in accordance with the standards laid out in the listing rules for the Impact Exchange Board. The rules set out the minimum standards of behaviour to protect investors and ensure the market is fair, orderly and transparent.
Impact Exchange-listed companies have a general obligation to disclose material information on a continuous basis and to release specific information periodically.
Figure 13: Overview of Impact Exchange Entry Requirements as per the Listing Rules33
Source: IIX
33 Impact Exchange Board Listing Guide.

Figure 14: Ongoing Listing Obligations
Source: IIX
Impact-Exchange-listed companies have a general obligation to disclose material information on a continuous basis and to release specific information periodically.

Each entity intending to list on Impact Exchange will be required to appoint an authorized impact representative (AIR). AIR is an accredited social adviser who will provide support through the listing process and ensure that the issuer complies with impact requirements. The assistance of the AIRs will boost investor confidence through independent verification of the social and environmental impact of the issuer, and increased transparency. Figure 15 shows the issuer’s steps to listing on the exchange.
Figure 15: Issuer’s Steps to Listing on Impact Exchange34
Source: IIX
34 Step 7 applies only to companies seeking to raise capital through listing.

AIRs include nominated impact advisers (NIA) and impact verification agents (IVA). Entities are required to appoint an accredited NIA for providing assistance and verifying the impact nature of the applicant prior to listing. NIAs assist prospective issuers in preparing for listing, meeting the market transparency requirements and fulfilling other listing obligations. An accredited IVA must also be appointed to verify impact reports at the end of each financial year. Only organizations accredited by and recorded on the SEM Register may act as NIAs and IVAs for the Impact Exchange Board.

Impact Exchange Ecosystem

As with any regular listing process, professional advisers assist in legal matters, accounting, valuation and due diligence. While a vibrant impact investing ecosystem has started to emerge on a global and regional level, this ecosystem will need to be developed, and advisers will need to build expertise for (public) social capital markets.
AIRs are key players in this ecosystem; they work directly with the issuers to meet entry requirements and verify impact once an issuer is listed. As the market develops, more traditional capital market players will enter.35

35 There have been early movers, such as Daiwa Securities Group, which has raised over US$ 5 billion to date for SRI funds and social bonds.
Investment banks, brokers and financial advisers will be key to moving capital to scale, providing the market information to attract and connect institutional and retail investors to SEs listed on the social stock exchange. Only with these market linkages in place can capital markets democratize, and individuals as well as institutional investors use their investment funds to contribute to larger social impact.

The Path to Developing a Vibrant Public Impact Investing Market

The development of the public impact investing market is poised for a quick take-off if concerted effort is made among intermediaries (investment bankers, advisers and investment platform operators), the ecosystem (lawyers, accountants and AIRs), policy-makers, issuers and investors. These stakeholders should use the road map of the following actions: 

Develop strong investment opportunities

  • Intermediaries need to work with potential issuers as well as investment and social advisers to develop a strong pipeline of investment opportunities.
  • Advisers may also look to create innovative financial instruments that pool together the financial needs of a group of SEs in a certain sector, and structure a bond around that, such as the Water Bond or Health Bond. 
  • Policy-makers and foundations may seek to coordinate support for the first issuers and develop the templates for further issuances.

Develop an enabling environment for impact investing

An enabling environment encompasses a fluid ecosystem, a ready and able issuer, and willing and informed investors. For this to happen, much advocacy and education is needed as well as alignment of incentives among all the players. The list of priorities to initiate this virtuous cycle would be as follows:
  • Educate the ecosystem on the specific characteristics of the public impact investment market and its potential to build early engagement
  • Provide incentives for the ecosystem to engage with first listings 

    These incentives can be driven by DFIs, policy-makers or foundations that would like this space to get off the ground to help relieve their burden of developmental support over time.
  • Educate and provide incentives (e.g. tax incentives) to retail and institutional investors to build awareness and steer investor behaviour
  • Enable ease of access to impact investment opportunities for retail investors by engaging a broad range of global brokers
  • Provide easier regulatory hurdles for issuances to be marketed in large retail and institutional markets such as the US and Europe
  • Encourage institutional investors to play a role in moving the market for the issuances on the exchange
  • Encourage consistent social and financial reporting based on listing requirements 
  • Work with information providers to establish information flows on investment opportunities and trading information between the market, ecosystem and investors
  • Create the next generation of Impact Exchange participants by exposing them to simulation of the exchange academic institutions

Develop best practices and path to scale

  • Evaluate and develop best-in-class reporting standards based on ecosystem, issuer and investor feedback
  • Collaborate with intermediaries, ecosystem, service providers and policy-makers to share best practice 
  • Set up a task force, after demonstration effect of the first issuers, to develop and implement the roadmap to scale social stock exchanges – focused on replication of the Impact Exchange model
  • Document the trials and successes in creating fully-functional social markets, and disseminate them to the public via media and academic institutions
  • Encourage similar exchanges to be set up at the local level across the globe

Conclusion: Unlocking Mainstream Capital 

Social stock exchanges ensure alignment of a company’s social mission with the interest of its board and investors, making mission sacrifices that give way to higher profit margins a concept of the past. The first potential issuers – from mature SEs to international non-governmental organizations – are currently preparing issuances ranging from US$10 million to US$30 million for listing. These securities will unlock mainstream capital sources and give everyone a chance to invest in social good.
When floated on Impact Exchange in the next few months, the first issue will not only unlock mainstream capital for social investment, but also set the stage for democratizing capital markets – a much needed task for creating sources of equitable growth in the world.