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Investing in the future
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Investing in social sector and NGOs
India has now revealed its intention to extend this well-known, market-based approach to the emerging realm of social investment. Finance Minister Nirmala Sitharaman raised the concept of establishing a Social Stock Exchange (SSE) in the last Union budget. The Securities and Exchange Board of India responded by forming a working group to investigate the proposal. That study has now been released into the public domain and is open to suggestions and comments. The deadline for providing comments has been extended twice, and the new date is August 15th.
In light of this, it may be necessary to dig further into the concept and the challenges that surround it. According to McKinsey, cumulative investments in the social sector totaled $5.2 billion in 2017. This is a developing field, where market-based money may drown out traditional grants for social intervention programmes. Is it worthwhile to replicate this concept in the social investment sphere? Is it possible to reproduce it in a world where 'purpose' takes precedence above profits?
Capital is a rare resource that both commercial and social companies need. While a commercial business offers a unifocal reward of earning returns on cash, a social enterprise's profits are always social, promoting greater justice and a more just and sustainable society. How can we apply market concepts to businesses that are designed to fix the market system's flaws and solve issues caused by markets that tend to foster and depend on self-interested behavior?
The concept of establishing a market has a natural, instinctual appeal, but it is also fraught with contradictions. Even the most ardent proponents of free markets acknowledge that markets have contributed to economic injustice, environmental degradation, community deterioration, and, as the current pandemic reminds us, vulnerable public systems—the core causes of many of the difficult social challenges we face. So, given these constraints, can we use market mechanisms wisely to address social issues; discover and support organizations that handle the difficulties of earning profits, particularly when 'purpose' is elevated?
Identifying social businesses
India isn't the first nation to play with the notion of an SSE. While the concept is often praised, there is surprisingly little information on how it has really been implemented. According to publicly accessible information, the privately-run Impact Investment Exchange (IIX) in Singapore is a "crowdfunding platform." Empirically, the SSE concept has failed or, at most, performed in ways that are similar to those of current platforms, and that too on a limited scale. This does not rule out future achievement, but it does highlight the need for more critical thinking.
In India, the SEBI working group report on SSE has sparked interest. In an ideal world, the SSE would standardize data, improve the environment, and increase funding for the social sector. The report provides a platform for nonprofits and for-profit companies (FPEs) to advertise themselves as social entrepreneurs in a marketplace that has a positive social effect to financial instruments and tax advantages are among the possible perks.
The study advances the discussion on social investment, but it fails to acknowledge the conflicts and provide proper checks and balances. The report's version of the SSE is more of a registry than an exchange. The specifics for a productive interaction are missing, leaving SEBI's position uncertain. The research emphasizes that every business has an influence, whether favorable or bad. Is there a need for a special dispensation for companies that have a beneficial social effect while still providing market-level profits and might be considered mainstream?
- Clear distinction between NPOs and FPEs: The goals and tools accessible to NPOs and FPEs, as well as present regulating requirements, are vastly different. Separate exchanges with differing reporting rules would serve the interests of both types of organizations and their supporters. The fear of implied comparisons is unnecessary. In reality, the FPEs might be classed as a separate category on the major stock markets.
- Setting Standards and Measuring Practices: Even while it is desired, measuring social effect is prohibitively costly and infamously impossible, as experience has shown. According to the paper, India's social ecosystem can be developed to tackle this problem. Countries with superior ecosystems would have fixed this by now if this were true, but they haven't. In analyzing social effects, concerns of values must be handled in addition to measurement difficulties.
- Avoiding Conflicts of Interest: Intermediaries that want to engage into the verification and certification sector might benefit from the development of an SSE. While signaling efficiency is the goal of marketing the industry, specialized certification adds considerable expenses. The expense of certification may cancel out the benefits of marketing. Regardless, we need to find specialists who are familiar enough with the social sector to certify it rather than turning it into a profit-making machine.
Finding inspiration outside the for-profit world: The significant challenges faced during the covid have highlighted that, while the private sector has a wealth of expertise and fearless commitment, aligning the interests of private hospitals, schools, and the pharmaceutical industry with larger public interests is a difficult and daunting task. Regrettably, the SSE's tools, and instrumentalities are all predominantly from the for-profit sphere. As a result, the majority of the proposals focus on developing an environment for the movement of capital from the for-profit investment sector to the social enterprise world, rather than on the SSE itself.
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