An interview with Tomas Carruthers, CEO of the Social Stock Exchange (SSX)
Swen Lorenz: Tomas, one of the most successful long-term investments over the past few decades was Philip Morris, the cigarette manufacturer. Philip Morris would certainly qualify as a typical “sin stock”. Why should any investor want to invest in shares that are listed on the Social Stock Exchange (SSX)? Please explain to us this oxymoron, and why any one of our readers should even continue reading?
Tomas Carruthers: I could launch into a philosophical debate about how Milton Friedman got it wrong back in 1970 with his famous New York Times essay, or highlight the growing financial inequality gap in the developed nations, but the important thing to remember about impact investing is this: it’s not philanthropy. Granted, companies with an objective of delivering a positive impact wouldn’t go selling their grandmother to squeeze another couple of pips out the deal, but these are real companies being run with the aim of delivering a financial return as well as a positive social or environmental impact. One of our member firms, Ashley House, has posted a total return of 125% over the last 12 months. Another, Good Energy, is up 100% since it came to market in 2012. These companies prove that social/environmental impact and shareholder benefit shouldn’t be considered as mutually exclusive.
SL: Are there independent statistics to back up your claims?
TC: I think the important factor to consider here is the weight of money that is now being put behind impact investing – for years this has been the preserve of high net worth investors and private equity, but entities like The Social Stock Exchange are truly democratising access to this market. JP Morgan claimed that, globally, in 2015 some $60bn was projected to be invested for impact, and this figure is growing exponentially each year. Investors clearly want to think about more than just the financial return.
SL: What is your background, and how did the Social Stock Exchange come into being?
TC: I have spent over two decades building and growing retail financial services companies, including ESI which became E*Trade UK, and Interactive Investor. The Social Stock Exchange came into existence in the summer of 2013 and was launched by the Prime Minister as part of the G8’s Social Impact Investment Forum that was held in London. The Exchange is backed by a number of parties including Big Society Capital and the Joseph Rowntree Foundation, and I was appointed as CEO at the end of 2013.
SL: I understand that last year, you agreed on collaborating with ICAP’s ISDX, the “Alternative AIM market”. What exactly did this partnership entail?
TC: Our agreement with ISDX gives our members access to list their securities on a segment of their market. To trade here, clients must first be admitted as members of The Social Stock Exchange, but this provides a streamlined and lower cost route to access capital markets. Looking to the future, we are aiming to grow a single venue where any investor can find impact opportunities.
SL: How many companies are now listed on the SSX, and how do they qualify for an SSX-listing?
TC: We now have 32 member clients. Around half are listed, with the others being privately held. But when they come to tap capital markets, they will be able to do so with the validation that they are an impact business and can access our own network of investors to help meet their funding goals. Of the 13 listed firms, two are only listed on our segment of ISDX, a further three are dual listed and the remainder are either traded on AIM or the main market.
Qualifying for membership isn’t easy. Over half the companies who initially apply get turned down. The process involves the production of a detailed impact report, which is then put in front of an independent admissions panel. The impact report then needs to be resubmitted on an annual basis to ensure that the company is delivering against its stated objectives.
SL: Is the idea of social impact very different from the Corporate Social Responsibility programmes that many companies have nowadays?
TC: This is a world away. CSR may have started out with good intent, but it quickly became seen as a side-show. Businesses were attempting to gloss over their absence of social responsibility with a once-a-year event to give something back to the community. Membership of the Social Stock Exchange is only granted to those companies who have – and continue to maintain – a social or environmental impact at the very core of their operation.
SL: Back to the investment aspect of the SSX. You claimed that in the long run, investors will be better off investing in companies that are conscious of their overall impact. Is there already some statistical evidence for this or do we have to simply take your word for it?
TC: As we noted previously, some of our members have already posted stellar total returns, but the question does stray into a more holistic look at how financial markets need to serve people in the future. The credit crisis of 2008 exposed the myriad of shortcomings of capital markets. Wealth inequality is now growing apace despite the best endeavours of policymakers, and the current structure cannot last. This is a consequence of the failure of today’s capital markets – and indeed capitalism. We live in a democracy, so the current rules will have to change if greater equality – and a more democratic approach to capitalism – doesn’t materialise. You could say that we’re future-proofing capital markets.
As we’ve already said, this isn’t philanthropy – one of our members is Golden Lane Housing, part of Mencap. They issued a retail bond in 2014, paying 4.375% over seven years. What’s not to like about that? Your money is in asset backed bonds, it’s doing social good, you get a tidy interest payment each year and – all being well – your money back at the end of the term.
SL: At the moment, you have a universe of 31 companies listed on the SSX and they have a combined value of £2.1bn. Are there plans in place to grow this further during the current year?
TC: Yes, we remain committed to growing the number of member firms. We are also in talks with a number of local governments over building a regional social stock exchange network, allowing local firms better access to local capital, and there are a number of other exciting collaborations underway.
SL: You are going to be at the Master Investor Show on April 23rd. Can our readers and delegates meet you at the exhibitor booth of the Social Stock Exchange?
TC: Absolutely! We will be there along with a number of our member firms, who will be keen to explain their investment propositions. Capitalism is changing; it needs to change more to ensure it can serve the needs of everyone. Even if that’s something the typical Master Investor delegate might not want to think about, it’s a topic that needs to be addressed quickly. The current investment construct needs to adapt.
SL: One final question! If you look five or ten years into the future, what do you think the SSX will have delivered to private investors in the UK?
TC: There’s a weight of momentum building behind this idea of investing for impact. We will be looking to raise awareness of how impact businesses can access capital markets, and how investors can ensure their money works well both for them and for society as a whole. We can’t say this enough – this isn’t philanthropy and you’re not impairing your returns if you invest for impact.
SL: Many thanks for the interview, Tomas!
To learn more about the Social Stock Exchange, visit: http://socialstockexchange.com
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