By Amit Bhatia
The Securities and Exchange Board of India’s initiative to create a Social Stock Exchange (SSE) will boost social and & environmental impact investing in India by creating a new platform to fund social-sector organizations, enabling direct listing through a new class of securities, and establish a standardized framework for measuring and reporting social impact for both donors and investors.
This is a big step forward in making India part of the emerging Impact Revolution. Taking it a step further will increase market efficacy by (i) aligning with global laws and definitions; (ii) setting-up ecosystem and policy levers; (iii) defining ‘impact’ so that all actors (corporate, social and environment) are on a singular continuum and, (iv) ensuring that measurement and reporting standards are adaptable to global innovations underway, such as Harvard Business School’s Impact Weighted Financial Accounts.
Globally, Responsible, Sustainable and Impact investments grew 17% annually to US$30.7 trillion in 2018, up from US$22.9 trillion in 2016. India has an opportunity not just to build its Impact Sector into another IT/ITES-like growth and employment engine but to make the country a prominent actor in the Impact Revolution. This will require four key actions.
First, the working group must define a social enterprise. Current SSE definitions and constituent forms can still be aligned to globally aligned definitions, standards and frameworks. Examples of such forms include the Impresa Sociale in Italy, the Social Purpose Company in Belgium, the Enterprise Solidaire d’Utilitè Sociale in France, the Sociétè d’Impact Sociétal in Luxemburg, the Community Interest Company in UK, and, the Low Profit Limited Liability Corporation in the USA. The working group’s disinclination to define a social enterprise, due to its complexity is inconsistent with global norms.
Second, on ecosystem levers, we must imagine how SSE can play a market-making role and enable other legislation around legally defined social enterprises. Impact sector globally secured great impetus due to public policies such as the Social Value Act of the UK, Opportunity Zones in the US, Green investments in Holland, Social Investments Tax Relief in UK and investor disclosure on climate goals in France. Since 2010, the EU has created the Single Market Act, the Social Impact Accelerator, the Social Business Initiative and the Single Market Act II. In 2013, the European Venture Capital Funds and the European Social Entrepreneurship Funds were floated. These legislations were possible and fiscal measures targeted due to the existence of legally defined social enterprises.
Third, SSE has an opportunity to replicate this global continuum and should evolve Section 8 company in line with global definitions of Social Business and/or Social Enterprise. Globally, the continuum of social sector organizations is evolving as follows:
- Non-Profit Organizations or Charities or Non-Governmental Organizations
- Social Enterprises or Social Businesses with restrictions on dividend distribution
- Profit-with-Purpose companies, with mission-locks (e.g., via AoA/MoA) but unrestricted on capitals, revenues, profits or dividends, often under Companies Acts of their countries
Fourth, we need to make reporting standards and measurement adaptable to global innovation. Corporate impact measurement and reporting is on the rise:
- 75.4% of Fortune 500 companies publish an annual Sustainability Report, Corporate Responsibility Report or an Environmental, Social and Governance (ESG) Report
- 15.8% have a Chief Sustainability Officer, 59.8% have a Senior VP or VP-level person looking at sustainability
- 2% now have a Chief Impact Officer and 1.4% publish an annual Impact Report
These Fortune 500 and other companies are all primarily reporting Impact along P&L reporting lines, focused on Products, People (Employees & Communities), Planet (Supply Chain, Operations & Sustainability) and Policies & Governance (Ethics, Transparency & Governance). This will allow them to adapt to impact-weighted accounts as the framework is validated and comes into use.
Most importantly, with the widespread adoption of ESG standards by corporations, which are fast moving to Impact, the difference in reporting standards vis-à-vis social enterprises, will get blurred over time. Fortune 500 Impact Reports are an evolution on the ESG framework. Impact-Weighted Accounts will yet be the next evolution, allowing both social enterprises and corporations to report their impact-weighted profits and EPS and thus their impact-weighted market capitalization.
SEBI must ensure that Indian social enterprises should not have to create two impact reports, one for an Indian audience and another for a global audience.
India has an opportunity to become a prominent actor in the Impact Revolution.4 The SSE must seize the opportunity to make India a key player in the global Impact Economy by enabling its constituents to collaborate and compete seamlessly with their global counterparts.
(The author is Founder of Aspire Circle & Aspire Impact (since 2007), was Inaugural CEO of The Global Steering Group for Impact Investment (2017-20). Views expressed are the author’s own.)