Consumer Demand Could See A New Type Of Exchange Emerge.
Over the last 40 years, ethical business practice has moved from the outer edges of commerce to become a core proposition for any company, regardless of size, field or sector. Today’s truly successful firms are seen as those that show a strong commitment to sustainability and responsibility – in the treatment of workers, including those at their suppliers, and the environment – as part of their ability to turn a profit.
Central to this is the idea of ethical investment. Prior to the mid-1970s, this essentially meant two things: putting money in co-operatives, and not putting money into the arms trade (or alcohol or gambling, depending on where your moral compass points) or businesses overtly profiting from abusing workers or the environment.
The world’s first ethical fund, Pax World, was launched in America in 1971 by two men who did not want money going to firms profiting from the Vietnam War. Thirteen years later, UK investors could invest in the Friends Provident Stewardship fund, which backed companies with a ‘long term benefit to the community’. Both funds had slow starts, but are now figureheads in a huge and rapidly expanding market.
According to the Global Sustainable Investment Alliance, sustainable responsible investment (SRI) assets in the US, UK, Canada, Asia, Australasia and Africa were worth $21.4 trillion at the start of 2014 – an increase in size of 60 per cent in two years. In 2016, ethical funds make up about a third of all professionally managed assets in those regions.
One factor boosting this growth is ethical businesses foregoing the traditional issuing of shares to raise capital, to avoid traditional markets. There is a belief among companies in this sector, in particular mid-to-small sized firms and start-ups, that listing on existing markets may be detrimental, since there is no reflection of the environmental and social returns which cannot be measured on a balance sheet.
Is it time for an ethical exchange that supports social entrepreneurs in such a way that profitability is not the only measure of success?
Some would argue that the existing markets are already committing to ethical and responsible investment. In June 2012, five of the world’s leading stock exchanges, including the NASDAQ in the US, became the first markets to commit to the SRI policies laid out by the United Nations in its Sustainable Stock Exchanges Initiative; since then, a further 54 markets have followed suit.
The UN’s project is admirable, but its critics argue that in encouraging corporate responsibility, it does not go far enough. There are also a handful of so-called ‘social stock exchanges’ worldwide – the largest are in London, Singapore, South Africa and Canada – connecting investors to companies and offering information and advice. None are truly public exchanges, but it can only be a matter of time before one of them, or a start-up exchange, becomes a new kind of market: an ethical exchange that supports and encourages social entrepreneurs in such a way that profitability is not the only measure of success.
Such a truly ethical market would have strict conditions of entry and continued membership – just as any market would. Its promotion of ethical responsibility could set a new benchmark which existing markets could not afford to ignore. There would be different sectors compared with traditional markets. This ethical market could also highlight a company’s social responsibility, measured by an algorithm and include that measurement alongside a share price in a company’s listing, or even combine the two values to make a ‘share-care’ price.
Calculating the ethical rating of a business would be controversial, and let’s not forget that any such market would indeed also be a market like any other, and would therefore live or die on the financial success of its traded companies. But, as a way to capitalise on the ethical investment boom, and offer an alternative market that investors knew was 100 per cent committed to ethical businesses, it is an idea with solid foundation.
Consider another disruptor market that launched to raised eyebrows and doubters. In 1971, when Pax World became the first ethical investment fund, lesser-considered American stocks were listed and traded for the first time on the NASDAQ. The first all-electronic stock trading exchange, it grew to attract the tech stocks that would make its name, and in 2016, two billion shares a day are traded, the most of any exchange. Might an ethical exchange, over time, make similar waves?