The highs and lows of creating the world’s first social stock exchange

The world is coming around to social stock exchanges (SSEs).

In just the past few months, Scotland, Jamaica, and now India have thrown their hat in the ring to launch their own platforms, all with the hope of solving one of the greatest challenges to social capital markets: the need to connect capital to socially-minded organisations at scale.

In 2009, when I launched the world’s first SSE, the Impact Investment Exchange (IIX), in Singapore, I did so with the vision that it would become a beacon for impact investing—the symbol of a perfect financial system, where everyone could participate and have a voice.

The experience was a humbling one because it soon became clear that building inclusive markets would require much more than a platform. As I look back upon IIX’s journey, here are the top three things I learned.

There is no ready-made deal

The budget proposal by India’s finance minister Nirmala Sitharaman, in July, to create an SSE in the country is a positive sign—a broader commitment to support inclusive growth.

An SSE brings the hope of improving access to capital for social enterprises.

Yet, if raising capital is the end goal, the finance ministry must understand that an SSE alone will not lead to greater access to capital. The country has been witnessing a rush of funds to the space in recent years—totaling $4.2 billion in the last five years, according to McKinsey.

In view of this, the government will need to think holistically about how to channel the capital that is in the space, and what might be keeping more investors from coming in. Listing on an SSE is much harder for impact enterprises than many are prepared to admit. 

One of the first lessons that IIX learned is that the journey to listing on an SSE is much harder for impact enterprises than many are prepared to admit.

Before listing, impact enterprises in emerging and developing markets require 12-18 months to become investment ready—to understand the responsibilities that come with equity financing, and to prepare their business and financial models.

In addition, they must prepare a standardised impact assessment report that communicates their social and environmental impact on investors.

To address this need and grow the pipeline of enterprises, social or otherwise, that can one day list on a real exchange, IIX took a step back and built a stepping stone for firms in this space to grow and scale.

In 2011, we created another platform, Impact Partners—one of the first crowdfunding platforms for impact investing that supports enterprises in investment readiness and connects them to a global network of accredited impact investors (representing $12 billion assets under management). Singapore-based Impact Partners currently is the largest equity and debt crowdfunding platform in the impact investing space.

Platforms alone don’t close deals

Just as enterprises require support before they can list on an SSE, so do investors before they decide on making an investment. There is a tendency in impact investing to romanticise the notion of “deal flow,” which ends up leading to a misguided belief that deals can be automated through a platform or a conference (I marvel at the naivety of our space when people think you can put enterprises and investors in a room, or do a Shark Tank equivalent, and the investors will just start writing cheques.)

Over the years, a host of impact investing platforms that cropped up to test this belief has launched and failed at an alarming rate. The closure of one of these platforms, ImpactUs, in 2018, just after a year of launching, was widely seen as an industry failure because of the sheer amount of support that went in to the company—millions of dollars from the MacArthur Foundation, Ford Foundation, Kellogg Foundation, Open Road Alliance, etc.

In the same way that a standalone SSE is unlikely to address the needs of an enterprise, so too are standalone crowdfunding platforms unlikely to address the needs of an investor.

Impact Partners has been able to successfully close over 50 deals across Asia, in part, because of a larger commitment to educating a spectrum of investors, each with their own understanding of a “good return.” Investors require transparency and data. 

Investors also require transparency and data. Among the host of platforms that have launched and failed, it was widely assumed that impact data is a readily available asset just waiting to be displayed. The hard truth is that such data must be measured and valued through impact assessments, most often with enterprises who are tackling problems in underserved and rural areas. A rigorous methodology that ties impact to investment dollars forms the foundation for accountability and transparency of investments.

It takes a village

Fragmented and loosely-defined platforms are endemic in this market, but these must give way to a broader ecosystem of support that addresses the needs of investors and enterprises. In the rush to create a social stock exchange, we must remember to create platforms that truly support stakeholders across the impact value chain—from capital to enterprise, from assessment to exit.

Whether it is a true stock exchange or a directory of socially-minded organisations, each platform will face the challenge of finding and screening enterprises, building trust and maintaining relationships over the long run, and building pathways for them to grow and become ready to list. We will come full circle once investors have structured options of liquidity and exits, which requires a deep understanding of the investors’ needs and the right opportunities in the market.

The growing presence of like-minded people who are looking to launch an SSE demonstrates a major accomplishment for impact investing. Our task is to collectively dream bigger and bolder so that we are not limiting our vision to one platform, but truly creating inclusive markets by enabling everyone to play a role in finance for good.