Rohan Sandhu A SEBI working committee recently released a report proposing the contours for a social stock exchange, an idea proposed by the Finance Minister about a year ago. The report commendably takes a holistic look at the social financing landscape and lays out various mechanisms to fund organizations in the social sector. However, questions about the fundamental value of an SSE remain. While such exchanges have proliferated in a number of countries over the past decade, there is limited evidence on their impact — especially their ability to meaningfully transform social outcomes. A close examination of India’s social sector challenges calls for much more thought in understanding how an SSE will navigate between commerce and social impact.

A British Council survey finds that some of the largest barriers identified by social enterprises in India are funding-related — 57 per cent identified access to capital, 50 per cent identified access to grant funding, and 33 per cent identified cash flow, as constraints. Addressing these funding constraints is critical, given that India faces a deficit of $565 billion to achieve the SDGs — the SEBI report draws attention to this as well.

It will be tempting then to think of the impact of an SSE purely in terms of volume of transactions. But India’s experience of commercialisation in microfinance institutions serves as a warning about how an injection of commercial capital may end up cannibalising goals of social businesses. As Rajni Bakshi writes, injection of global capital in microfinance resulted in its most positive attributes to evaporate and “value came to be defined entirely in monetary terms.”

Impact analysis

An assessment of investment allocations by stage of business similarly suggests an adverse pressure to grow. The Global Impact Investing Network’s 2019 Impact Investor Survey reveals that investors in emerging markets allocated 49 per cent capital to growth-stage companies versus just 9 per cent in venture stage and 4 per cent in seed or start-up stage enterprises. Additionally, nearly 67 per cent of investors invested in growth-stage enterprises, compared to 35 per cent in seed/start-up stage. Several institutional impact investors also have minimum commitment sizes and maximum ownership limits.

How well a SSE champions social impact will be contingent upon two pillars — how the industry conceptualises social impact; and the incentives and ethics of the investor community. A Brookings Institution survey reports a lack of common standards for measuring impact in India, and that the metrics being used might lack credibility: “when asked of their tool of choice for impact measurement, 65 per cent of all impact investors relied on proprietary measures of impact not built on internationally-accepted indicator catalogues such as IRIS (Impact Reporting and Investment Standards).”

SEBI’s report is cognisant of this challenge. Its solution is a common minimum standard for reporting social impact. It also calls for the development of new institutions, including information repositories and a self-regulatory organisation to provide credible and standardised information. The success of these ideas is entirely dependent on their implementation, which is unlikely to be straightforward. Even globally-accepted standards such as IRIS and GIIRS are not without challenges. Economist Jonathan Morduch criticises IRIS data for being unable to provide metrics on the actual value add or “additionality” of interventions, instead providing numbers on reach and financials. He warns that “if impact investing is to evolve as a mature development strategy, investors need to find ways to measure true net impacts. Performance measures and impact measures can and do diverge big-time.”

A related constraint is the quality of investors. India’s experience with CSR funding provides some indication of how funders conceptualise impact. Several studies find funders prioritising project-based funding at the cost of organisational strengthening and leadership.

And even then, funders are more likely to fund computers being put into a classroom to eventually remain used, than training teachers. According to a report by the Bridgespan Group, “Funders typically support programs, but they scrimp on ‘overhead.’ This practice gives rise to a vexing ‘starvation cycle’ that constrains non-profits’ ability to invest in essential organisational infrastructure.”

Democratising the investor profile through an SSE will reinforce this bias to immediate outputs and limited patience, resulting in liquidity-related issues for issuers. SEBI’s overreliance on reporting impact could potentially exacerbate this project-first approach. The report also speaks about building organisational capabilities solely in terms of these reporting requirements, ignoring the complex leadership and management challenges in the sector. A key concern in existing SSEs has been to screen investors before granting them platform access, and requiring them to “subscribe to a patient investor code of conduct.” Canada’s SVX, widely regarded as the most progressive in terms of social impact, has strict guidelines for listing investors, focusing on the “right” types of investors over the volume of capital flows. According to its Investor Manual: “You should invest in SVX issuers only if you are prepared not to receive any return on your investment and to lose your investment in its entirety.”

India would do well to first develop the essential pillars of this ecosystem — an understanding of impact, measurement systems, criteria for accrediting issuers and investors — before establishing an SSE with a secondary market for trade. India’s approach should be incremental. An ‘all-at-once’ approach would make social impact subservient to commerce.

The writer is with the Harvard Kennedy School of Government