Capitalism with a conscience? Social stock exchanges could be the answer
- Instead of serving markets, we should have markets serving our needs for a fairer, greener world. Enter social stock exchanges – the institutionalisation of doing good
Financial markets do not seem to factor long-term climate issues into short-term price considerations. This raises the question: who do the markets really serve?
Finance, of course, is a virtual human creation to serve the real economy. But after four decades of global financialisation, it seems the real economy is now serving financial interests. Markets are becoming more concentrated.
How should we reimagine the role of money and finance? Finance is the glue that links those who work for a living and those who rely on capital, which comprises natural capital such as land and resources, and human capital such as intellectual property rights. Across the world, the share of labour income in gross domestic product has noticeably fallen.
After decades of quantitative easing and negative real interest rates, capital is being rewarded more handsomely than labour – and those who can borrow money cheaply are effectively doing so at the expense of poor savers and the labour force majority.
But rising interest rates are beginning to restore the balance between labour and capital. Higher real interest rates will begin to squeeze asset bubbles, reduce speculation, and force business and consumers to be more efficient.
The Gulf Stream, which flows in a cycle throughout the Atlantic Ocean, reminds us that life moves circularly to restore balance. Warm water meets cool water and marine life thrives from that natural mixing. Similarly, finance cannot become more concentrated without huge social consequences.
Economists such as Thomas Piketty have delved into history to argue that inequality rises when returns on capital exceed output growth.
Before the Industrial Revolution, when land was the most important form of capital, abuses of land rights and farm labour caused the French people to rise against the monarchy and landed gentry.
Disaster looms if leaders continue to ignore cries for a fairer world
Today, intellectual property is more highly valued than natural capital because it preserves the rights of the minority who control the technology. With technology increasingly concentrated in large tech platform companies, inequality has, again, tended to worsen.
Traditionally, income and wealth have been redistributed in two ways to reduce inequality, through higher taxation of the rich or charity. In Islamic finance, for example, there are the concepts of zakat, the obligation to donate wealth annually to charitable causes, and wakaf, or charitable endowment.
In India, a social stock exchange has been launched to institutionalise donations to social enterprises. For the first time, a new financial infrastructure is being provided to help donors (individual or corporate) to fund qualified social enterprises to transparently and accountably deliver social impact.
The legal instrument is the trading of a zero-coupon, no-return financial instrument. The buyer or donor expects social impact rather than a financial return. Finance can serve not only profit-making enterprises, but also those that deliver social good.
Using this, we can institutionalise wakaf, because endowments in assets or claims on social enterprises can be achieved with accountability. Social enterprises will be audited to show that the funds they receive are ethical and used as promised in their filed documents, much as a listed company’s prospectus.
The idea of a social stock exchange shows how technological and institutional innovations can reshape finance to serve corporate and individual social responsibilities in imaginative and creative ways.
Central banker Paul Volcker used to say the only useful banking innovation was the cash machine. Today, social stock exchanges could be the financial innovation that revolutionises the market in social entrepreneurship.
Andrew Sheng is a former central banker who writes on global issues from an Asian perspective