The awesome power of markets, ctd.

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Social Funds provides a nice addendum to my previous thoughts and theories on markets:

The Social Investment Forum (SIF) reviewed the performance of 160 socially responsible mutual funds from 22 of its members, and found that 65% outperformed their benchmarks in 2009. The SRI funds reviewed by SIF outperformed their benchmarks across nearly all asset classes.

This essentially means that those who invested in companies they believed to have a social impact achieved greater financial returns on average than those who invested in just traditional companies.

This is another nice setback for those who cling to the theory that you cannot do well by doing good.

Posted on January 26th 2010 in news

The awesome power of markets, ctd.

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As mentioned, I think the power of markets holds some potential for the public and social sectors.  Imagine.  Could a mechanism exist whereby funders, taxpayers and investors could assess the potential impact of an organization or program in real time and reflect the value and potential of that impact immediately?  Could there be a social stock market?

Durreen Shahnaz seems to think so.  She has tested many waters in her career, which includes time at Grameen Bank, the World Bank and Morgan Stanley, and now is the Head of the Programme on Social Innovation and Change at the Lee Kuan Yew School of Public Policy in Singapore.

Today, Shahnaz aims to develop an Asian social stock exchange.  According to her:

It is a stock market where investors who care about social and economic returns buy stocks and bonds of companies that have strong economic and social returns. Interestingly, in a social stock exchange both not-for-profit and for-profit companies can participate. For-profit entities can either issue shares representing ownership in their companies or issue bonds. Meanwhile not-for-profit companies can utilise the stock exchange to issue bonds an action in itself that can bring operational accountability to the not-for-profit sector (as opposed to carte blanch donations from foundations).

It is quite a compelling idea, and many iterations exist.  In Europe, there is the FTSE4Good, which measures the performance of companies that meet globally recognized responsibility standards.  The Canadian-based Green Stock Exchange allows trading in companies the exchange has deemed as promoting environmental sustainability.

There are still links missing between these models and the ideal.  The companies on these exchanges are pre-screened and, once listed, the investment criteria becomes the same old financial returns.  There is no opportunity to assess social impact in real-time and use it to make investment decisions.  It lacks that responsiveness that makes financial markets so powerful, that lets them weed out those who can’t deliver.  Investors must accept the potential for social impact from the assumed wisdom of the exchange gatekeepers.

And when the metrics are only financial, there is still that sticky problem of what to do when the solution has no price.  The impact may not be quantifiable in the company’s potential profits and we miss out on the chance to fund some good.

Brazil’s BOVESPA Environmental and Social Investment Exchange has thought of an alternative model.  They merely mimic the idea of a stock exchange, but attempt to replace financial metrics with social ones.  The listings are purely NGOs and funders can follow the impact and adjust their “investments” accordingly.

I like this, but why can’t we have the best of all worlds?  If the Benevolent Barons of the world want double- and triple-bottom line companies, then why can’t the social stock exchanges have two or three lines instead of one?

I can see it: an exchange with multiple lines, side-by-side, measuring the gains and losses in both social and financial terms.  We could then even run correlations, and have some empirical data on whether or not profit comes at the expense of social impact, and vice versa.  And if the thought of drawing conclusions from more than one metric (egads!) drives you into convulsions, there is no reason we can’t compress it into a single line that simply places weights on each component based on where the financier falls on the spectrum of socially-driven to commercially-driven investor.

That’ll do just fine for what I have in mind.  Any takers or makers?

Posted on January 19th 2010 in ideas
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