Over the last two decades, Social Stock Exchanges (SSEs) have evolved as a potential funding mechanism for non-profit organizations and for-profit social enterprises. SSEs function as a type of impact funding, spanning from simple grants to innovative finance to impact investment.
Securities and Exchange Board of India (SEBI) constituted panel on social stock exchanges on June 1, 2021 had recommended direct listing of non-profit organisations (NPOs) through the issuance of bonds and a range of funding mechanisms in a report submitted to the market regulator.
A study by Samhita suggests that these are particularly relevant in a vast country like India with wide socioeconomic differences across segments. The SSE will aim to provide a more organized and structured approach for the functioning of non-profit organizations and further help unlock funding for social impact in the country.
SEBI’s credibility and endorsement promises to help reduce the trust deficit that social organizations face in India. SEBI has specified that SSE will allow both, non-profit and for-profit social organizations to list on the Exchange. SSEs have emerged in recent times in many countries to address some of the challenges between the social sector and private capital.
SSEs are regulated platforms that bring together social organisations, donors, and investors to facilitate funding and aid in the growth of organisations with a social purpose.
Brazil instituted the world’s first SSE in 2003, with the establishment of Bolsa de Valores Socioambientais (BVSA). Since then, stakeholders in several countries – including South Africa, Portugal, Canada, the UK, and Singapore have instituted social stock exchanges.
These SSEs have aspired to harness the resources of financial markets and private capital to combat some of the most pressing social and environmental issues of our time.
As India gears up to construct an SSE, a comprehensive analysis of the experiences, structures, and learnings from SSEs across the world can help civil society, policymakers, and the private sector creates a more enabling environment for social organizations.
Study on SSEs by Samhita
The report reviews seven SSEs in countries including Brazil, Portugal, South Africa, Jamaica, UK, Singapore and Canada. Based on these findings, the report analyses the SSE recommendations proposed by India’s SSE Working Group and provides some additional suggestions.
The SSEs instituted to date have functioned across the spectrum of impact funding, from simple grants to innovative finance to impact investment.
SSEs across the world have been established to direct resources and capital towards social organisations. However, their structure and design have differed depending on the maturity level of financial and philanthropic ecosystems, the participation of the corporate sector in social and environmental development, and the government’s role in regulating the social sector.
According to Samhita’s report, SSE holds the potential of becoming an agent of change for civil society. It can theoretically unlock new capital, promote equity, introduce new instruments for donors to fund operations, streamline regulations and create an ecosystem of enabling frameworks for civil society.
But on the other hand, the report also lays down the risks such as duplicating the operations of a conventional stock exchange, segmenting or further exacerbating inequalities within and between sectors and failing to create a strong culture of giving.
Stakeholders must create a representative that incorporates the concerns and wisdom of civil society and social organisations. Samhita’s report concludes that an SSE can be a means for the markets to serve the society; not for society to serve the markets.
“Our report did a comprehensive analysis and reviewed SSEs across seven countries. It suggests that engaging and educating donors/ investors about effective and strategic forms of giving, and providing commensurate tax incentives to incentivize them, are critical factors that can determine the success and sustainability of the SSE in India, in addition to the provisions already created by SEBI,” says Anushree Parekh, Advisor, Samhita.
This report, written by Samhita in partnership with ICNL provides general takeaways, as well as detailed analyses on various issues. Based on these findings, the report analyses the SSE recommendations proposed by India’s SSE Working Group and provides some additional suggestions.
Key findings
Finding from the report’s country reviews include the following:
- SSEs have struggled to establish and sustain themselves; of the handful that have existed, about half are no longer in operation due to financial and other structural challenges.
- SSEs may perpetuate funding imbalances in the social sector due to a preference for issue areas that are more visible and lend themselves to revenue streams (for instance, environmental projects tend to feature heavily, while projects related to mental health or gender issues are less common).
- While SSEs generally allow both retail (individual) and institutional (foundation/legal entity) investors, institutional investors are more common due to limited opportunities and regulatory restrictions on individual investors.
- SSEs have struggled with capturing social impact and measuring their own efficacy.
- Most SSEs allow both for-profit and non-profit organizations to list; high barriers to entry may make it more difficult for non-profits, particularly smaller or grassroots groups, to meet listing criteria, leading to further skewing of resources towards established NPOs and for-profit organizations.
- Design of an SSE and the relevant regulatory regime, undertaken in consultation with civil society, can help to alleviate some of these issues, and better fulfill the promise of an SSE as an alternative fundraising mechanism for non-profits.
Recommendations
Policymakers undertaking design of an SSE, in India and elsewhere, should aim to:
- Define an SSE’s mission as an agent of positive change. This serves to distinguish it from traditional stock exchanges. An SSE should be participatory and representative with respect to civil society, independent from other institutions, and be designed, in consultation with the non-profit sector, so as not to detract from existing funding models.
- Bridge inequalities in access to capital by providing training and financial support for non-profits (particularly smaller ones), separate, tailored platforms and requirements for non-profits versus for-profits, and instituting other incentives like additional tax benefits for non-profits and donors.
- Promote under-resourced causes in consultation with civil society, periodically featuring thematic areas in need of support, including projects relating to marginalized groups and communities.
- Ensure a sustainable financial model for longevity, actively engage investors and donors to achieve scale and sustainability and bringing individual and smaller donors into the fold.
- Consciously measure the impact of listed projects and the SSE itself, by instituting effective reporting metrics and engaging independent evaluations.
