CREATING AN ETHICAL STOCK EXCHANGE - JAMIE HARTZELL AUGUST 2007 - Saïd ...
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SKOLL CENTRE FOR SOCIAL ENTREPRENEURSHIP WORKING PAPER
CREATING AN ETHICAL
STOCK EXCHANGE
JAMIE HARTZELL AUGUST 20072 CREATING AN ETHICAL STOCK EXCHANGE JAMIE HARTZELL 3
CONTENTS
5-13 SECTION 1 – WHY IS AN ETHICAL EXCHANGE NECESSARY? 22-26 SECTION 4 – THE STRUCTURE OF AN ETHICAL EXCHANGE
5 THE EXISTING MARKETS 22 THE STAKEHOLDERS
6 PRICE SETTING ON THE EXISTING MARKETS 22 THE FUNCTIONS OF THE ETHICAL EXCHANGE
EXECUTIVE SUMMARY
CREATING A
7 UNSUITABILITY OF THE EXISTING MARKETS FOR 22 TRADE AND NEW INVESTMENT EXECUTION
ETHICAL BUSINESSES 22 COMPLIANCE WITH THE FINANCIAL SERVICES
8 THE EXTENT OF ETHICAL PUBLIC OFFERINGS (EPOS) AND MARKETS ACT AND THE COMPANIES ACT
10 DEMAND FOR AN ETHICAL EXCHANGE FROM 22 MARKETING
SOCIAL ENTERPRISES 23 OWNERSHIP AND CONTROL OF THE EXCHANGE
MARKET FOR
11 THE BENEFITS OF A WIDE PUBLIC SHAREHOLDER BASE 23 ELIGIBLE INVESTMENTS
12 DEMAND FOR AN ETHICAL EXCHANGE FROM INVESTORS 24 PRICING SOCIAL AND ENVIRONMENTAL RETURNS
25 CRITERIA FOR MARKET LISTING
14-17 SECTION 2 – THE EVOLUTION OF AN ETHICAL EXCHANGE 25 FINANCIAL CRITERIA
ETHICAL CAPITAL
14 HISTORY OF ETHICAL SHARE TRADING TO DATE 25 SOCIAL AND ENVIRONMENTAL CRITERIA
15 WHAT WOULD AN ETHICAL EXCHANGE DO? 25 TRANSPARENCY AND THE PROVISION
15 GENERATE LIQUIDITY IN INVESTMENTS IN OF INFORMATION
SOCIAL ENTERPRISES
15 BRING NEW ISSUES TO MARKET 27-29 SECTION 5 – PRICING SHARES AND BONDS
15 ATTRACT NEW INVESTORS 27 THE FIVE MODELS
16 SUPPORT SMALLER ENTERPRISES WITH 27OPTION 1 – FIXED PRICE TRADING
START-UP FINANCE 27OPTION 2 – SET PRICE TRADING
16 CREATE NEW FINANCIAL OPPORTUNITIES 27OPTION 3 – SET PRICE TRADING, BUT WITH THE
16 OFFER TRAINING IN FINANCIAL AND ADDITION OF A LIQUIDITY FUND
COMPLIANCE ISSUES 27 OPTION 4 – VARIABLE PRICE, ORDER DRIVEN
28 OPTION 5 – VARIABLE PRICE, QUOTE DRIVEN
18-21 SECTION 3 – HOW THE EXCHANGE WOULD WORK 28 WHICH MODEL?
18 AVOIDING SPECULATION 28 RULES FOR SETTING PRICE
19 NON PROFIT NATURE 29 COMMUNICATING PRICE TO INVESTORS
19 MEMBERSHIP
19 THE ‘RULE BOOK’ 30 SECTION 6 – FINANCING THE EXCHANGE
20 COMMUNICATIONS WITH INVESTORS 30 TRADE EXECUTION
20 CHARGES
20 THE SHAPE OF AN ETHICAL EXCHANGE IN THE FUTURE
Editing: OPEN ACCESS. this policy statement in a prominent position
Alex Nicholls SOME RIGHTS RESERVED. The text is not altered and is used in full (the
As the publisher of this work, the Skoll Centre use of extracts under existing fair usage rights is
Production: for Social Entrepreneurship has an open access not affected by this condition) The history of the Stock Exchange dates back to volumes of shares traded increases, the workings of
Liz Nelson policy which enables anyone to access our content The work is not resold 1694, when William III first made government these markets are becoming more speculative, and
electronically without charge. A copy of the work or link to its use online is
borrowing transferable from one person to another. less transparent. Vast fortunes are won or lost in a
Layout: sent to the address below for our archive.
Society Media We want to encourage the circulation of our This gave rise to a number of ‘stock-jobbers’ who matter of minutes with just a few clicks of a mouse.
work as widely as possible without affecting the Copyright Department made money trading in these debts. For many And the trades that do take place have less to do
Skoll Centre for Social Entrepreneurship ownership of the copyright, which remains with Skoll Centre for Social Entrepreneurship years these traders operated from a courtyard with the activities of the company itself and more
Saïd Business School the copyright holder. Saïd Business School in Sweetings Alley and a nearby café called to do with the system that allows the trading.
Park End Street Park End Street
Oxford OX1 1HP Users are welcome to download, save or distribute Oxford Jonathan’s. But over the next three hundred In 1984, Traidcraft launched the first public
United Kingdom this work electronically or in any other format, OX11HP years they helped to mobilise and pool the share issue ever undertaken by an ethical business.
including in foreign language translation, without United Kingdom nation’s savings by investing them in the capital Over the last 20 years, the public appetite for this
Tel: +44 (0)1865 288 838 written permission subject to the conditions set
developments and new companies that are so form of investment has steadily grown. Yet the
Email: skollcentre@sbs.ox.ac.uk out in the Skoll Centre open access licence which Tel +44 (0)1865 288 838
you can read at the back of this publication. Email: skollcentre@sbs.ox.ac.uk familiar to us today, creating the London Stock process of putting together a share issue and of
For full details of the Skoll Centre’s work, see Exchange which in 2005 turned over £420 million. setting up the subsequent trading mechanisms
www.sbs.ox.ac.uk/skoll Please read and consider the full licence. The You are welcome to ask for permission to use this The practice of stock trading has never been remains haphazard and uncoordinated. Despite
following are some of the conditions imposed by work for purposes other than those covered by
popular. Robert Louis Stevenson referred to it as this, ethical businesses raising share capital have
Creating An Ethical Stock Exchange the licence: the Skoll Centre open access licence. The Skoll
© Skoll Centre for Social Entrepreneurship 2007 Centre circulation licence is adapted from the ‘knavish in its private practice and treason in its chosen to make their own arrangements rather than
Some rights reserved – see copyright licence The Skoll Centre for Social Entrepreneurship ‘attribution/no derivatives/ noncommercial’ version public’. Today the world’s stock exchanges are list on the existing markets, which are too focused
for details. and the author(s) are credited of the Creative Commons licence. To find out more some of the main drivers of the global economy. on financial and not enough on environmental and
ISBN: 978-1-905551-51-4 The Skoll Centre website address (www.sbs. about Creative Commons licences go to
ox.ac.uk/skoll) is published together with a copy of www.creativecommons.org
Government’s can thrive or fall according to social returns.
changes in the fortunes of these markets. Yet as the There is then a need for a genuinely ethical
SKOLL CENTRE FOR SOCIAL ENTREPRENEURSHIP SAID BUSINESS SCHOOL UNIVERSITY OF OXFORD4 CREATING AN ETHICAL STOCK EXCHANGE JAMIE HARTZELL 5
SECTION 1
exchange which is as supportive of the activities
of an enterprise as it is of its profitability. With
an increasing number of social enterprises now
This institution should already have an ethical
outlook before being asked to take on the running of
an ethical exchange. However, a key question at the WHY IS AN ETHICAL
EXCHANGE
raising capital through share and bond issues, outset is the extent to which this organisation should
this market would channel the nation’s appetite itself own the exchange, or whether it should be
for direct ethical investment. The market would owned by its members, with the activities limited to
also open new horizons in ethical investment, ensuring that the needs of members are met whilst
NECESSARY?
presenting a direct challenge to the existing system remaining within the law and rules and guidance
and a benchmark for other markets to live up set by the Financial Services Authority. This issue is
to. Section 1 therefore outlines the need for an explored in Section 4.
ethical exchange, the wider context in which it Section 5 is dedicated to the complex issue
would operate, and the evolution of ethical trading of pricing. It examines the full range of pricing
mechanisms to date. mechanisms currently in use and which would
The reason for such a market is so not only to prove most appropriate for an ethical exchange.
provide a mechanism by which equity investors in Ultimately, an ethical exchange would need to
social enterprises can disinvest when they need to. be self-financing. The exchange has the capacity
Properly constructed, such a market could achieve to generate income, from membership fees as well
much more, eventually becoming a vital support as services provided. Whether this is likely to be
service for all public share and bond issues of enough to ever make it self-financing is explored in
an ethical nature. For not only could it generate Section 6.
liquidity in shares listed on the market, it could Setting up a working ethical exchange does not
also undertake new issues thereby providing a necessarily mean that it will prove attractive to the
focal point for the marketing of new and existing enterprises who might list on it. Some enterprises,
ethical investment products, look to raise financial for example, may not wish to encourage greater
standards within the companies listed on the liquidity for their investors. Providing clear and
market, thereby increasing transparency and investor transparent financial information of adequate
confidence, and help to bring smaller, start-ups to quality to meet the demands of a increasingly
market through Ethical Public Offerings (EPOs), sophisticated investor and of the increasingly
thereby providing an exit route for ethical venture strict Financial Services Authority is also a serious
capital investors. Section 2 outlines the activities an challenge to many social enterprises. Whether the
ethical exchange would undertake. level of advice and support needed to meet these THE EXISTING MARKETS Moreover, the Financial Services and Markets Act
In the minds of many of the members of standards can be provided at an achievable cost There are currently three main trading markets (FSMA) limits the extent to which the investment
the public who make up the ethical investment remains to be seen. The limitations of an ethical in the UK – The London Stock Exchange, the can be marketed.
community, the trading of shares is an unethical exchange and the hurdles it will need to overcome Alternative Investment Market (AIM) and OFEX. The three mainstream markets can be
practice, leading to profit through speculation with are explored in Section 7. Historically, there was also a stock exchange considered as a hierarchical tree, in which
little benefit to society.An ethical exchange would Finally, Section 8 tries to outline a process in each region. These regional exchanges were companies graduate from one to the next as
need to be carefully crafted so that it is protected for bringing an ethical exchange to fruition. The amalgamated into the main London Exchange, they grow in size. Indeed, AIM was established
against exploitation for private benefit, but still first step should be to bring together the larger although consideration is now being give to reviving by the LSE for companies at an earlier stage of
remains flexible enough to be treated as a genuine enterprises likely to list, to discuss the models a West Midlands exchange with trading taking place development. The markets higher up the tree offer
exchange by both individual and institutional outlined in this paper. Also, a market operator online. In recent years the LSE has also introduced greater liquidity, but are more expensive to list
investors. This is achieved through the way the would need to be appointed in the early stages. some specialist indices such as FTSE for Good and on and the listing requirements more stringent.
exchange functions, trading regulations and In summary, the establishment of an ethical trading markets such as Nasdaq. Mostly, these listing requirements relate to
crucially the way prices of investment products are exchange is an idea whose time has come. A company not listed on these markets can procedures to ensure an orderly market and timely
set and declared. Section 3 explores how the ethics Although complex to develop, the increasing usually only trade its shares through a matched disclosure of price sensitive information, although
of the exchange are reflected in its operations and number of social enterprises now raising patient bargain market. This is usually run by a broker socially responsible governance and probity issues
takes a closer look at what we mean by the terms capital through equity and bond issues will or a recognised financial institution, and involves are covered to some extent.
liquidity and speculation. inevitably drive the formation of the exchange holding a list of buyers and sellers of the shares Thus a company might first choose to list on
Such a market could not operate unless forward. And just as the development of the London and matching them at the price they both wish OFEX in order to achieve some liquidity. OFEX was
managed and regulated by a financial institution Stock Exchange back in the early 1700s was to pay. However unless both buyers and sellers at first a matched bargain market. It is currently
with the authority to run a market in bonds and crucial to the financing of sea-borne trade with the are available a trade cannot take place. Matched the market of choice for co-operatives and social
shares and recognised and respected by both the East, so an ethical exchange can play a crucial role bargain markets usually operate for one company enterprises. The cost of listing is only around
Financial Services Authority and the general public. in the financing of social enterprise. in isolation rather than for a group of companies. £10,000 a year or less and most companies who
SKOLL CENTRE FOR SOCIAL ENTREPRENEURSHIP SAID BUSINESS SCHOOL UNIVERSITY OF OXFORD6 CREATING AN ETHICAL STOCK EXCHANGE JAMIE HARTZELL 7
have undertaken full public share issues will exchanges, the enterprise must appoint a broker running the market who would recommend a price, these markets are primarily profit driven, and have
already meet the requirements for a listing. to make a market in the shares of the enterprise. based on information provided by the company. little interest in ethical concerns. Indeed the kinds
The OFEX market serves to give the company a This then enables the shares to be traded even Thus in a matched bargain market, the company of individuals who invest in social enterprises are
publicly quoted share price as well as generating when both buyers and sellers are not available. itself has much more control over the share price. unlikely to be at all familiar with, if they have even
some liquidity in the shares. However this can be A market is maintained in a share by the market- This is usually regarded as an unsatisfactory heard of, OFEX or AIM. Thus a listing on these
deceptive, as some OFEX shares are not traded at maker buying the shares with a view to selling situation open to abuse, as both of the assumptions markets will give existing ethical investors little
all for long periods. The share price then remains them on at a profit. listed above are not met. However, I present a comfort and may even undermine their confidence in
static and may not reflect the value that a share The difference in price between buying and refinement of this model in Section 5. the ethical nature of the company.
might achieve in a more liquid market. selling is called the ‘bid-offer spread’ and is the Historically, a market-maker used to operate Second, in many cases the purpose of listing
At the point of listing on OFEX, a company may market-maker’s profit. If the market-maker cannot on the floor of the exchange and was referred to as is for an entrepreneur or venture capital investor
experience a fall in its share price. This is because sell the shares, he or she drops the price until the a jobber, whilst the broker merely liased between in a start up company to be able to realise the
the directors of the company may up to this point shares sell. It is in this way, through the demand the investor and the jobber. This separation of roles gains they have built up through their early stage
have had near full control over the price of its for and supply of the shares of a company, that the was intended to stop a conflict of interest arising investment by undertaking an Initial Public
shares. The temptation then is to keep the price price is set. for the broker between his/her own interests and Offering. They would hope to achieve a significant
up. But once open market trading is introduced, Price is not therefore based on an objective that of the client. profit on their initial investment through this
the share may well drop as a lower share price measure of the intrinsic worth of a share at the The need for faster and larger trades led to offering, and this will be of far greater concern
relative to the company’s overall value gives more current moment in time, but rather a reflection of the distinction between jobbing and broking firms than the future shape and direction of the
confidence to the investor and to the exchange. the perception of buyers and sellers as to whether being abandoned with the ‘Big Bang’ of 1986. company. A listing then tends to signal a major
On the OFEX market, new share issues are the current price reflects the future price that the Instead ‘Chinese Walls’ were erected between change in the management of a company as the
undertaken for companies for sums between half share is likely to achieve. If an investor considers departments of the same firm, to prevent sensitive founding members move on. This tends to generate
a million and one and a half million pounds. a share to be under-valued, they buy and if over- information passing between them. Today, two something of a financial ‘slash and burn’ culture
However the costs are high (£100,000 to valued, they sell. Thus the old saying that the computerised systems of trading are used. that is presently particularly inappropriate for
£150,000 in fees alone) and the money can be markets are a voting machine in the short term but SEAQ is a quote driven system. Users can call social enterprises, although there may in the future
hard to raise as OFEX is generally shunned by a weighing machine in the long term. up a screen for each security on the system. This be cases where a social enterprise wishes to sell on
institutional investors. Investors make their own assessment of value shows the bid and offer prices from the market- through an ethical exchange.
Although many companies go straight to AIM, a in a number of different ways. Like the market maker dealing in the stock. All market-makers are Social enterprises are much more likely to
listing on OFEX is often a first step towards an AIM itself, none of these are perfect. The commonest obliged to quote prices for their stocks, ensuring undertake an EPO because they are looking for
listing. At this point, it becomes possible to attract and most intuitive method is to try to estimate the there is always a market.The broker can identify early stage investment. They will have members
major institutional and other investors. However, true worth of the company. This is usually done the best price on screen and place an order. or directors who are less likely to have significant
fees for listing on AIM are likely to be between by a combination of methods such as looking The SETS system is an order-driven system sums to invest, but who are likely to remain loyal to
£300,000 and £500,000 even before marketing at the net asset value of the company per share that removes the need for a market-maker. It is the company they started and not look to make a
costs. It is essential then that the company is (measured as shareholders funds divided by now the main system used for trading the larger quick profit through an IPO. They will also wish to
extremely profitable, or else that the amount to be the number of shares in issue), the return the and more liquid FTSE 100 stocks. Under this ensure that the new investment does not jeopardise
raised is sufficiently large to make this level of fees company achieves on capital and the dividend system, buyers and sellers enter their desired their control or the future shape of the company.
relatively insignificant. For a social enterprise, where flow to shareholders. This form of analysis also purchases and sales, usually through a broker, Listing on mainstream markets is therefore
a high profit level is not to be expected, share issues assesses the likely performance of the company and the order book automatically matches them completely inappropriate for social enterprises.
therefore need to be in the £10 to £20 million range in the context of the economy as a whole and the up. Trades can be done either at the best price
to stand a chance of covering the costs of fees. business sector in which the company operates. available at the time, or at a set price, with a set THE EXTENT OF ETHICAL PUBLIC
Raising this level of investment is often unrealistic. However, this model for assessing value time frame before the bid expires. OFFERINGS (EPOS)
The larger of the AIM companies move to the requires at least two conditions to be met to Table 1 offers a complete list of public share issues
Stock Exchange. Some have a balance sheet value work effectively. The first is that the market is UNSUITABILITY OF THE EXISTING MARKETS undertaken by ethical businesses off-market since
as small as £10 million, but most are much larger. sufficiently liquid for expectation of value to be FOR ETHICAL BUSINESSES Traidcraft’s first issue in 1984. The largest amount
Even on the existing markets then there is a quickly reflected in the current price. The second Although the mainstream markets offer a raised by any one share issue has increased from
gap for those looking to raise sums from £2 to is that investors have all and equal information recognised route for companies wishing to attract £1 million in 1986 to £5 million in 2004. This is
£10 million. Many companies look to raise these available to them surrounding the situation of a outside capital, they are not suitable markets for significantly more than might normally be raised on
sorts of sums from a few institutional investors or company. When either of these conditions are not social enterprises for two main reasons. OFEX and is comparable with AIM.
VCTs rather than from a wider investment base. met, anomalies occur and some individuals can First, the culture of these markets is very In recent years, there has also been an increase
However, this type of investment is likely to result benefit over others. different from the culture of social enterprises. There both in the number of ethical share issues taking
in a significant loss of control of the company. Price-setting on a matched bargain market is are few or no companies with a primarily ethical place in the UK and the amount of money raised,
usually a much more haphazard affair. Quite often remit, and indeed corporate social responsibility as shown in Table 2. This rate of growth looks
PRICE SETTING ON THE EXISTING MARKETS it is left to buyer and seller to agree, but if any issues are afforded a lower priority on OFEX and set to continue, with at least two further issues
In order to list on any of the main trading price at all is recommended, it is usually the broker AIM than on the main Exchange. The investors in planned for 2006.
SKOLL CENTRE FOR SOCIAL ENTREPRENEURSHIP SAID BUSINESS SCHOOL UNIVERSITY OF OXFORD8 CREATING AN ETHICAL STOCK EXCHANGE JAMIE HARTZELL 9
TABLE 1: PUBLIC SHARE ISSUES BY ETHICAL BUSINESSES
TABLE 2: NUMBER OF ISSUES AND TOTAL RAISED
COMPANY DATE LEGAL FORM TYPE OF INVESTMENT AMOUNT RAISED (£M)
Traidcraft 1984 PLC Share 0.3 PERIOD NUMBER OF ISSUES TOTAL RAISED (£ MILLION)
Mercury Provident 1985 PLC Share 0.5 1984-1990 6 3.35
Traidcraft 1986 PLC Share 1 1991-1995 8 4.17
Paperback 1987 IPS Loan stock 0.05 1996-2000 13 10.55
ICOFund 1987 IPS Loan stock 0.5 2001-2005 16 32.03
Centre for Alternative Technology 1990 PLC Share 1
Mercury Provident 1991 PLC Share 0.4 TOTAL 43 50.1
Traidcraft 1991 PLC Share 0.4
Ecological Trading Company 1993 PLC Share 0.2
ICOF Community Capital 1994 IPS Withdrawable share capital 0.45
Paperback 1994 IPS Loan stock 0.07 DEMAND FOR AN ETHICAL EXCHANGE FROM year period before redemption also means that,
Out of This World 1995 IPS Loan stock 1 SOCIAL ENTERPRISES although the bond can in principle be traded, the
Shared Interest 1995 IPS 5 year Loan stock 0.65 The enterprises who would be interested in listing need for investors to do so is more limited as the
Wind Fund PLC 1995 PLC Share 1 on an ethical exchange can be categorised under redemption date is not too far away. For these
Bay Wind 1996 IPS Withdrawable share capital 1.2 three headings: reasons, only a limited market is required.
Out of This World 1996 IPS Loan Stock 0.2 However, for these organisations, a market
Shared Interest 1996 IPS 5 year Loan stock 0.85 • PLCs issuing shares would enable the redemption period to be set
Aston Reinvestment Trust 1997 IPS Withdrawable share capital 0.41 • PLCs, charities and IPSs issuing bonds and loan over, say, a 10 year period rather than 5 years.
Out of This World 1997 IPS Loan Stock 0.2 stock This would be possible because the investor
Shared Interest 1997 IPS 5 year Loan stock 1.2 • IPSs issuing withdrawable share capital (WSC) would know that they could probably still get their
ICOFund 1997 IPS 10 year Loan stock 1 money back through the market at any time, so a
Wind Fund PLC 1998 PLC Share 1.3 An exchange tailored to the needs of social 10 year redemption period would not discourage
The Phone Co-Op 1999 IPS Withdrawable share capital 0.4 enterprises is of most interest for those issuing investment. This would then give the social
Bay Wind 1999 IPS Withdrawable share capital 0.67 shares in a PLC. As it is difficult to redeem shares, enterprises issuing the bonds greater security and
Ethical Property Company 1999 PLC Share 1.32 and as it is both legally complex and a great strain enable them to raise more funds.
Shared Interest 1999 IPS 5 year Loan stock 1 on cash flow for a company to buy back its own The principal co-operatives to raise funds from
Citylife (Sheffield) 1999 IPS 5 year Bond 0.8 shares, a market is generally the only way to allow the public are Bay Wind, Westmill Wind Farm,
Monkton Group (Good Energy) 2001 PLC Share 0.66 investors to disinvest. This also serves to attract Paperback, The Phone Co-Op, ICOFund, Aston
Shared Interest 2001 IPS 5 year Loan stock 1 investment in the first place in the knowledge that Reinvestment Trust, London Rebuilding Society
Citylife (Newcastle) 2001 IPS 5 year Bond 2 it will be possible to disinvest. and Unicorn Wholefoods.
Traidcraft 2002 PLC Share 3.25 The seven PLCs who have already undertaken For co-operatives issuing withdrawable share
Ethical Property Company 2002 PLC Share 4.2 issues and that are still actively trading are capital (WSC), historically a market is of limited
Shared Interest 2002 IPS 5 year Loan stock 1 Traidcraft, The Triodos Renewable Energy Fund, interest, as the product could not be traded.
London Rebuilding Society 2002 IPS Withdrawable share capital 0.06 The Ethical Property Company, Good Energy, However, Westmill Wind Farm is an IPS that
Citylife (East London) 2002 IPS 5 year Bond 1.9 Café Direct, Triodos Bank NV and the Centre undertook a share issue in 2005 on the basis of
Unicorn Wholefoods 2003 IPS Loan stock 0.3 for Alternative Technology. All of these have issuing a tradeable share rather than witndrawable
Shared Interest 2003 IPS 5 year Loan stock 1 limited trading arrangements in place, except for share capital and so needs to offer a market in
Golden Lane Housing 2003 Charity 10 year bond 1.5 the Centre for Alternative Technology, who has its shares. Even for those issuing withdrawable
Café Direct 2004 PLC Share 5 instead looked to buy back share capital from share capital, there is still a need to attract new
Monkton Group (Good Energy) 2004 PLC 0.66 those wishing to disinvest when sufficient profit is investment should existing investors withdraw their
Shared Interest 2005 IPS 1 available, or to encourage investors to donate their funds, though consumer co-ops can often attract
Triodos Renewable Energy Fund (formerly Wind Fund PLC) 2005 PLC Share 4.75 shares to the CAT charity. investment from their own customer base. And a
Westmill Wind Farm 2005 IPS Shares 3.75 Bond issues have been undertaken by Shared listing on an ethical exchange may enable these
Interest, City Life, Golden Lane Housing, ICOF co-operatives to issue bonds or even shares, thereby
TOTAL 50.1 and Out of This World. These are all IPSs, except giving them longer term security of investment.
for Golden Lane, which is a charity. A market There are then some 20 organisations in the
would be of some but less interest to these UK who have already undertaken share or bond
enterprises, as those issuing bonds often have issues or issued withdrawable share capital and
a very loyal following, with investors reinvesting so are under varying degrees of pressure from
in new issues once the bonds are repaid. A five their investors to put in place effective trading
SKOLL CENTRE FOR SOCIAL ENTREPRENEURSHIP SAID BUSINESS SCHOOL UNIVERSITY OF OXFORD10 CREATING AN ETHICAL STOCK EXCHANGE JAMIE HARTZELL 11
arrangements. In addition the New Economics than large ones, and more investors means that the reasonable time frame when they need to any increase in share price.
Foundation is currently researching ethical demand to sell shares is likely to be more evenly 4. That it is possible to make a fair and reasonable As yet then there are a limited number of
businesses already listed on OFEX, AIM and spread over time. assessment of the value of their investment companies offering a financial return, although
the FTSE who may be interested in an ethical in the last two years the numbers have increased
marketplace. And this is in the UK only - there DEMAND FOR AN ETHICAL EXCHANGE FROM Most would expect their money to at least be as both Café Direct and Traidcraft have paid a
are of course a wide range of ethical businesses INVESTORS safe and many would like it to produce a return dividend.
in Europe, especially in the Netherlands and The last twenty years have seen significant growth and/or for their capital investment to appreciate. Strengthening the financial aspects of ethical
Belgium, who might also be interested to list on a in ethical investment on the main markets, usually As a rough guide, one might consider that an investments made through EPOs is one of the main
European ethical exchange. through ethical unit trusts buying shares in a ethical investment should present minimal routes to attracting significant further investment.
However, an ethical exchange has the potential portfolio of listed companies considered to be more perceived risk to the capital invested, and should A well-functioning ethical marketplace would be
to offer more than the secondary trading of shares. ethical than others. offer a rate of return in line with or above current an essential part of strengthening these financial
An ethical exchange could enable more companies Screened ethical investment reached over building society account interest rates. aspects and so attracting this investment.
to raise capital through share or bond issues £5 billion in 2005, and yet for the larger ethical A key indicator for an investor is whether a A second issue central to attracting investors,
by supporting them in coming to market in the investment companies such as Henderson Global company has a track record of dividend payments. particularly the institutions, is to be able to
first place, and also by allowing them to take on Investors, the amount of money in mainstream Table 3 shows the dividends and yields currently attach a clear and fair value to the shares of an
new investment on an ongoing basis. For private ethical investment is no more than 1% of their offered by ethical businesses. This does not ethical business. This issue is discussed further in
companies backed by ethical venture capital, total funds. The potential for further growth in this include any return offered to an investor through Chapter 5.
becoming a PLC and undertaking an EPO is a sector is therefore very large.
logical next step in a company’s development. Although this investment is handled by the
For social enterprises issuing withdrawable share larger investment institutions, the money originally
capital or other non-transferable investments, this comes from over half a million individuals who TABLE 3: DIVIDENDS AND YIELDS OFFERED BY ETHICAL BUSINESSES
would be a very useful function. have chosen to invest in ethical unit trusts.
Overall, an ethical exchange is of great This compares to some 20,000 individual share PLCS SHARES IN ISSUE NET DIVIDEND PAYABLE FOR HOW MANY YEARS PAID
importance as it will change thinking by investments in ethical businesses.
encouraging both social enterprises and ethical The £50 million invested in ethical social Ethical Property Company PLC 6,282,000 3% approx 6
investors to take seriously this means of raising businesses is around 0.1% of total ethical Triodos Renewable energy Fund 7,250,000 3% approx 6
finance. How this would work is explained in investment. To what extent then can ethical Traidcraft PLC 4,200,000 2.5% approx 2
Section 2. businesses access further funds? This can be done Café Direct PLC 5,000,000 Expected 1
either by individual investors investing directly Good Energy 1,333,000 Expected N/A
THE BENEFITS OF A WIDE PUBLIC in ethical investments or by the ethical funds Centre for Alternative Technology 1,000,000 Not expected N/A
SHAREHOLDER BASE investing on behalf of their investors. Westmill Wind Farm 4,750,000 12% average total return predicted 0
As mentioned above, small investor amounts are Ethical unit trusts have tended to offer solid
difficult for any company to raise, and usually financial investments where the ethical nature of
come from VCTs or other large private investors. the investment is less clear cut. For example, the BOND ISSUES TOTAL £ YIELD
However, social enterprises that have undertaken most popular ethical stock by far is Vodafone, a
EPOs are unusual in that they have a wide public company with no particular ethical inclination. Paperback £90,000 Approximately 5% ??
investor base. For example, Traidcraft has over Although investors with ethical concerns see this ICOF £1,000,000 2% approx (paid in WSC) ??
2,400 shareholders and The Ethical Property kind of investment as a significant improvement on Shared Interest £18,000,000 (including WSC) None (0.5% on WSC) ??
Company over 1,200. This is more than most their existing portfolio, as undesirable stocks such Golden Lane £1,000,000 (estimate) None as yet, expected
AIM companies, where the average is around 800 as arms and tobacco companies are excluded, City Life £4,700,000 None intended
investors. many of these investors would still welcome the Out of This World £1,000,000 None expected
Where a commercial company would see having opportunity to invest in more distinctly ethical
a large number of shareholders as a burden, as products, so long as financial criteria are met. This
each one needs to be serviced however small their desire is also recognised by the main ethical funds. WITHDRAWABLE SHARE CAPITAL DIVIDEND
investment, ethically directed companies tend to In general, investors have four expectations of
see it as a strength. This is primarily because of a an ethical investment: Bay Wind £1,900.000 6% approx ??
general commitment to inclusivity on the part of Phone Co-Op £371,565 3.5% 5
the companies. However it also helps to prevent a 1. That it delivers a strong social or environmental London Rebuilding Society £60,000 None, but CITR available @ 5%
handful of shareholders controlling the company, benefit Aston Reinvestment Trust £410,000 None but CITR available @ 5%
thereby helping to protect its ethicality. 2. That it produces or stands to produce an annual
A wide shareholder base also helps with return through either capital growth or a dividend
liquidity, in that small holdings are easier to trade 3. That they can cash in their investment within a
SKOLL CENTRE FOR SOCIAL ENTREPRENEURSHIP SAID BUSINESS SCHOOL UNIVERSITY OF OXFORD12 CREATING AN ETHICAL STOCK EXCHANGE JAMIE HARTZELL 13
SECTION 2
THE EVOLUTION WHAT WOULD AN ETHICAL EXCHANGE DO?
An ethical exchange should offer a genuine
complement to the mainstream markets as
undertaken. However, social enterprises that do
not run their share issues through the ethical
exchange should still be able to list, even though
OF AN ETHICAL
well as being able to play a comprehensive role extra expense is likely to be involved.
in supporting EPOs. A full list of the possible
functions is described here. ATTRACT NEW INVESTORS
An ethical exchange will increase the pool of
EXCHANGE
GENERATE LIQUIDITY IN INVESTMENTS IN ethical investors available to social enterprises, as
SOCIAL ENTERPRISES there will be one well-known port of call for those
The primary role of an ethical exchange would be looking to invest ethically. It is also likely to create
to generate liquidity in ethical shares and bonds greater interest amongst institutional investors than
once an issue has been undertaken. This would the current smattering of matched bargain markets.
not only help investors to disinvest when they An ethical exchange would also give investors
need to, but is also likely to attract more investors greater confidence that the investment they are
in the first place, as they will be more confident making is at a fair price, will be settled efficiently and
that they will eventually be able to disinvest. that a level of due diligence has been undertaken.
HISTORY OF ETHICAL SHARE and the Triodos Renewable Energy Fund. Four However at the end of the day liquidity can The collective marketing of investments could
TRADING TO DATE potential providers of a single ethical share only be created by there being a steady stream also serve to reduce the cost of marketing, the
At the time of the first share issues by Traidcraft market were asked to present to the group, namely of new investors wishing to buy shares. To be high cost of which is the main barrier to raising
in 1984 and the Centre for Alternative Technology Triodos, Brewin Dolphin, Share Mark and OFEX. successful, then, an ethical exchange will need to share and bond investment for small companies.
in 1990, no thought was given to the subsequent The group agreed that Brewin Dolphin was the market to new investors. This collective marketing could take place
trading of shares post-issue. It was not until 2000 provider of choice. This was because OFEX and through a number of vehicles such as a website,
(?), leading up to their third share issue, that Share Mark’s trading mechanisms were considered BRING NEW ISSUES TO MARKET a newsletter, regular open days for investors and
Traidcraft chose to appoint brokers Brewin Dolphin inappropriate. Triodos did not have the economies The institution that runs an ethical exchange investees and through general publicity for the
to provide a matched bargain market in their shares. of scale to run a market, whereas Brewins also will need to be authorised by the FSA, as well exchange. Investors in one company would be
Triodos Bank offered a matched bargain acted for a number of off-market companies, as having substantial knowledge of the share entitled to receive information on all the others.
market in shares in the Wind Fund after their first such as small breweries and football clubs. and bond markets. Many of the enterprises who It might eventually even prove possible to achieve
issue in 1995. However trading was minimal. In Brewins also offered to provide valuations of the are members of the exchange will also all have permanent listings in newspapers and other areas
1999, The Ethical Property Company also traded companies’ shares, creating greater transparency undertaken share and bond issues, and so will as for the main exchanges.
their shares post-issue through Triodos, increasing in pricing and relieving the directors of each have substantial experience to offer companies The establishment of an ethical exchange is
the level of trading significantly. When in 2004 company of this responsibility. looking to undertake EPOs. likely to generate substantial media coverage,
Café Direct undertook a share issue through Brewins now handle trading for The Ethical An ethical exchange will therefore be in a which will in turn attract new investors.
Triodos and Good Energy considered doing so, Property Company, Café Direct and Traidcraft, strong position to assist enterprises in coming to
Triodos gave consideration to the notion of starting with the Triodos Renewable Energy Fund planning market, and should be able to put their knowledge SUPPORT SMALLER ENTERPRISES WITH
a single market for all ethical shares, to also to switch to Brewins soon. To date, Good Energy to maximum effect through an exchange and START-UP FINANCE
include Golden Lane Housing, and provisionally has remained with OFEX. Capita provide registrar so ensure costs of undertaking an issue are The bringing together of so much knowledge in
called Ethex. However, the bank was unable to services through Brewins. In the case of The minimised. In addition, the fact that these social raising finance creates an opportunity for smaller
commit the resources required to get the project Ethical Property Company, the switch to Brewins enterprises have gone through a due diligence enterprises to be supported. This then means that the
underway and it floundered. Good Energy chose to has resulted in a higher level of trading on a more procedure will give investors greater confidence ethical exchange can support the start-ups. Although
list on OFEX instead. frequent basis. For the first time in some time, the in the investments presented. This stands to public share and bond issues may not be appropriate
Triodos traded all shares at a fixed price, with company has an excess of buyers over sellers and encourage them to invest larger sums. for all social enterprises, it would be possible to
the price as far as possible based on NAV but has been able to take on new investment. Having a market where EPOs can be produce guidelines on the advisability of undertaking
in practice set by the directors of the company More recently, there has been a flurry of undertaken will also give greater confidence to an issue and the minimum level of investment that
traded. Matching of trades took place on set interest in an ethical exchange, with The New ethical venture capital trusts, knowing that there the exchange might undertake to raise.
trading days, from two weeks to two months apart. Economics Foundation undertaking further is a tidy exit route for their funding that will not
A reasonable level of trading took place, but research, both Investing for Good and Share Mark jeopardise the ethics of the company. CREATE NEW FINANCIAL OPPORTUNITIES
sellers always slightly outnumbered buyers. interested in developing and running a market, Although an ethical exchange need not The pooling of knowledge of financial issues and
With the arrival of Café Direct into the market and the topic being a strong theme at the 2006 require social enterprises to undertake an issue of investments should also lead to new financial
for an ethical exchange, The Ethical Property Skol Forum. There have also been discussions through the exchange, doing so would ensure opportunities for social enterprises.
Company saw fit to call a meeting of the main on setting up a single website highlighting to the that companies coming to the exchange already Both the Triodos Renewable Energy Fund and
ethical PLCs being Café Direct, The Ethical general public investment in all the companies meet its ethical and financial criteria and that the the Ethical Property Company have been able to
Property Company, Traidcraft, Good Energy mentioned above. necessary due diligence work has already been attract new investment beyond the close of their
SKOLL CENTRE FOR SOCIAL ENTREPRENEURSHIP SAID BUSINESS SCHOOL UNIVERSITY OF OXFORD14 CREATING AN ETHICAL STOCK EXCHANGE JAMIE HARTZELL 15
SECTION 3
share issues using an options mechanism. The
Ethical Property Company has also established
a small liquidity fund that can buy shares from HOW THE
EXCHANGE
those wishing to sell when no buyer is available.
These two mechanisms together mean that an
investor is close to being able to buy and sell
shares in the Ethical Property Company at any
WOULD WORK
time on a continuous basis.
On the longer term, an ethical exchange might
find that it can employ a number of the financial
mechanisms used by the mainstream markets.
Perhaps the most useful of these would be funds
established to hold several or all of the ethical
investments on the exchange. These would be
similar to mainstream ethical unit trusts and would
most likely be particularly attractive to institutional
investors who are looking for ways to invest large
amounts of funding in small companies.
A market would also be able to identify and
promote the tax opportunities available through
the companies listed. These include EIS and
Inheritance tax relief.
OFFER TRAINING IN FINANCIAL AND
COMPLIANCE ISSUES
Given that most ethical investments have The principal attraction of an ethical exchange is Liquidity is the speed with which a buyer or
tended to be stronger on ethical performance that it offers a positive alternative to the mainstream seller can be found for a share once a potential trade
than financial, an ethical exchange could play markets. As well as playing a key role in developing has been brought to the market. Within the principal
a strong role in helping to develop the financial investment in the social enterprise sector, the financial markets, the liquidity rate is now very
and compliance capacity of the social enterprises exchange would challenge the mainstream markets high, particularly with computerised trading and a
listed on the exchange. This will also help to by setting an ethical standard for them to meet. global market, though of course technically a 100%
raise financial standards in the market, thereby liquidity rate can never be achieved.
improving investor confidence. • Thus an ethical exchange needs to be structured Stock market speculation can be defined in three
Training in compliance issues will also help to avoid the perceived social and environmental different ways:
to ensure that companies meet the stringent inadequacies of the existing markets. These are the
requirements of the Financial Services and views that the majority of companies listed have no • Borrowing to invest in the market, then repaying
Markets Act and understand how to factor them or limited social and environmental priorities; that the loan from any gain.
into their business planning there is a lack of accountability amongst those who • Buying and selling shares to make profit,
Examples of the kinds of training an ethical operate the exchanges for the social consequences particularly taking large risks for large profits.
exchange might offer include: of their actions; and that traders on the existing • Buying and selling stocks and shares to make
markets are engaged in excessive speculation and money off a short-term rise or fall in the stock price,
• Understanding balance sheet, cash flow and profiteering. even over just a few hours.
profitability
• Valuing a social enterprise By clearly seeking to avoid these limitations, an The first practice was prevalent at the time of the
• Understanding financial promotions ethical exchange should be able to attract significant stock market crash of 1929, and indeed helped to
• Social Auditing and business transparency new investment as well as raising standard in ethical bring the crash about, as when stocks began to fall,
investment generally. panic set in and loans were recalled. The second
A certain level of financial compliance will is the simplest definition of speculation, but this is
anyway be necessary for an organisation to be able AVOIDING SPECULATION not the kind of speculation that an ethical exchange
to list on an ethical exchange, both in terms of An ethical exchange would look to create liquidity, would look to avoid. Indeed it is essential that
Companies Act requirements and rules imposed by whilst aiming to avoid and discourage speculation. investors are prepared to take this kind of risk if they
the exchange. However the two are very closely related. are to invest in social enterprises.
SKOLL CENTRE FOR SOCIAL ENTREPRENEURSHIP SAID BUSINESS SCHOOL UNIVERSITY OF OXFORD16 CREATING AN ETHICAL STOCK EXCHANGE JAMIE HARTZELL 17
It is the third definition of speculation that we MEMBERSHIP In addition the market operator could provide of companies listed might also be charged a fee.
are concerned with here, as this practice can lead Enterprises joining the exchange will need to meet a dedicated enquiry line for servicing investor Charging and likely income is dealt with in more
to rapid changes in share prices, meaning that the criteria outlined above. In addition, the market enquiries and investment requests. This would be detail in Section 6.
the ‘professional’ investor profits at the expense operator is likely to need to go through a due able to provide factual information only and not
of those less actively engaged, and also increases diligence procedure prior to listing an enterprise advice on investments. THE SHAPE OF AN ETHICAL EXCHANGE
the extent to which the market becomes the driver to ensure that the requirements of the Financial IN THE FUTURE
of a business rather than the underlying business Services and Markets Act and the Companies Act are CHARGES Should it succeed and grow, one can imagine
fundamentals. This kind of speculative investor has met. This procedure would also determine the price Investors would be charged an annual a market listing social enterprises in which the
no interest in the business of the company in which at which an investment is to list. The procedure membership fee, paid in order to give them traditional market sectors, such as ‘Oil Gas and
he or she invests, only in the opportunity to make a is likely to be less complex for an enterprise that access to information about the companies Utilities’, are replaced by more desirable headings,
quick profit. has already undertaken a public share or bond listed, as well as transaction charges on such as ‘Renewables’.
Ironically, the rapid buying and selling of issue recently, particularly one in which the market purchases and sales. Enterprises listed would be The following table sets out the main FTSE
shares that gives rise to speculation is only possible operator has played a key role. charged an annual membership fee together with companies categorisations listed in the Financial
through a high level of liquidity. But it is increased In addition to the enterprises listed becoming further charges for transactions, advice services Times and suggest alternative ethical headings as
liquidity that we are trying to create through the members of the exchange, potential investors should and share issues. Brokers dealing in the shares well as some of the companies that might fit them:
establishment of an ethical exchange. This then be asked to join before receiving information on the
raises the question, what level of liquidity, and investments, making the ethical exchange closer
possibly even what level of speculation, is desirable to being an ethical investment club. This may help
and ethical? A simple answer would be that a market with compliance issues. In addition, these members TABLE 4: MAIN FTSE COMPANIES CATEGORISATIONS LISTED IN THE FINANCIAL TIMES
need not aim for 100% liquidity, but need only might be charged an annual fee to help pay the
provide a level of liquidity that investors expect in costs of marketing. A higher fee could be charged to
order to meet their need to buy and sell. institutional members. FTSE SECTOR ETHICAL EXCHANGE SECTOR COMPANIES THAT MIGHT LIST ON AN ETHICAL EXCHANGE
One key difference then between the existing Enterprises listed on the exchange would be
markets and an ethical exchange is that on the expected to encourage their existing investors to Aerospace and Defence None None
existing markets liquidity is the mechanism used to join the exchange. In addition the exchange could
determine price. But on an ethical exchange price be marketed to the customers of ethical financial Communications and IT Ethical providers The Phone co-op, rural broadband co-ops
would be in part a function of liquidity and in part institutions such as Triodos and the Co-Operative
a question of intrinsic value. This issue is discussed Bank. Ideally, all ethical investors and depositors Finance and Insurance Community and Ethical Finance, micro-credit City Life, ICOF, Triodos Bank, London Rebuilding Society,
further in Chapter 5. should become members of the exchange. Aston Reinvestment Trust
NON PROFIT NATURE THE ‘RULE BOOK’ Food and Drink Organic Food and Farming, whole Foods Unicorn Wholefoods
Like the social enterprises that list on it, the ethical The market operator will need to devise a rule book
exchange’s primary focus would be as much to – akin to the Stock Exchange’s Purple Book and AIM Health and Pharmaceuticals Natural Health, care co-ops Neal’s Yard
support the social enterprises that list on it as to Rules – which set out the listing requirements for
make a profit. It might even be a non-profit entity companies in order for them both to comply with Industrial Manufacture Environmental technologies Resource Revolution, Centre for Alternative Technology
such as a Community Interest Company, particularly statutory regulations and to ensure that the quality of
if it is run as a trade body. enterprises listed on the market is maintained. Leisure and Media Community radio and TV , eco-tourism
The exchange would function as a sophisticated
matched bargain market. This would mean that COMMUNICATIONS WITH INVESTORS Oil Gas and Utilities Renewables Bay Wind, Good Energy, Triodos Renewable Energy Fund
at least initially there would be no market-makers Investors would be kept informed of the performance
or brokers profiting from the purchase and sale of and developments of the companies listed on the Property and Construction Ethical Property, eco-housing, social housing Ethical Property Company, Golden Lane Housing
shares at differing prices (known as the bid-offer exchange through:
spread). At a later stage, if the volume of trading Forestry and Mining Sustainable timber, recycling companies
increases, it may prove beneficial to introduce • A dedicated website which would include a
market-makers. However at all times, transactions mechanism for dissemination of price sensitive Retail Distribution and Packaging Fair trade, local shops, recycled goods, eco-produce Traidcraft, Shared Interest, Out of this World, Cafédirect,
taking place on the exchange would be transparent, information Paperback
with no hidden charges. • A bi-annual newsletter with news of the enterprises
Annual accounts would be produced and made and details of trades and prices Transportation and Automobiles Low energy transport, sustainable transport, Smart Moves, Parry’s People Movers
publicly available, showing how funds earned by • Copies of annual reports of the companies listed sustainable fuels, bicycle shops, car club operators
the exchange had been used. Ideally, a social • Circulars providing information on events that
audit of the ethical exchange according to agreed are required to be reported to shareholders (e.g.
performance criteria should be carried out each year. significant acquisitions etc)
SKOLL CENTRE FOR SOCIAL ENTREPRENEURSHIP SAID BUSINESS SCHOOL UNIVERSITY OF OXFORD18 CREATING AN ETHICAL STOCK EXCHANGE JAMIE HARTZELL 19
SECTION 4
THE STRUCTURE members could also support marketing initiatives.
Careful attention would need to be paid to possible
conflicts of interest for the market operator and the
this model as it is the simplest model requiring the
least commitment on their part.
The second option conveys advantages however,
OF AN ETHICAL
broker in this area. as it allows for limiting the market operator’s
potentially monopolistic position. But it will require
OWNERSHIP AND CONTROL OF THE EXCHANGE substantial commitment from the enterprises listing
There are three alternative ways to structure the as well as these enterprises undertaking more of
EXCHANGE
ownership of an ethical exchange. the financial risk of running the market.
First, the exchange could be a project of the The third option is a compromise position
market operator. Under this model, the market that may offer the best starting point, as it is a
operator has the freedom to set the terms on which pragmatic option that allows for the formation of a
a social enterprise joins the exchange and a social trade body without that body taking on significant
enterprise chooses to join if it considers those responsibilities. Alternatively, a more powerful
terms attractive. The market operator would execute trade body may be a safer long -term option, with
the trades and would also hold the list of investors initially many of the responsibilities of that body
and social enterprises that are members, dealing delegated to the market operator. This leaves open
with each directly. Marketing would be undertaken the possibility of moving towards either of the first
collectively by the market operator and by the or second options as things progress.
individual companies for their own investments.
THE STAKEHOLDERS This would take place through buyers being Second, the exchange could be a trade body, ELIGIBLE INVESTMENTS
The three main stakeholder groups within the encouraged to buy at a higher price if no shares are either a co-operative or a company limited by In order to be listed on an ethical exchange, an
exchange would be the social enterprises who available, thereby encouraging sellers; and on the guarantee, controlled by its members. The market investment product must be transferable. This
would wish to list on it, those who would wish other hand sellers being encouraged to take a lower operator would deal with compliance and market means that it can legally be sold on to another
to invest in the enterprises listed and those price if it will enable the sale to take place. execution and the trade body would deal with the investor without having to be redeemed.
responsible for the execution, regulation and legal market operator on behalf of members and would Shares are usually fully transferable, although
compliance of the market. A fourth stakeholder who COMPLIANCE WITH THE FINANCIAL SERVICES negotiate the fees collectively. The trade body some companies have articles of association that
would be a valuable addition to the market would AND MARKETS ACT AND THE COMPANIES ACT would hold the list of investors and enterprises restrict the transfer of shares. Any such restriction
be one or more brokers who would be able to offer a This is the business of ensuring that the practice that are members and would provide them with would need to be reviewed and most likely removed.
professional opinion on the value of, and a suitable of the social enterprises listed on the exchange and marketing information. The market operator would Bonds are sometimes transferable, sometimes
price for shares. of the exchange itself meet the requirements of the ensure that the trade body complies with the FSMA not. However, research would indicate that most
Enterprises would need to meet ethical and Financial Services Act and the Companies Act. While and the Companies Act. Members would pay fees if not all of the enterprises discussed here have
financial criteria in order to win membership. the responsibility for compliance remains with the to the trade body, and the trade body would appoint issued their bonds on a transferable basis, and so
Investors would also become members of the directors of the company, the exchange would seek the market operator in much the same way as a could be listed on an ethical exchange. Depending
exchange, receiving regular information in exchange to maintain certain standards through its rule book. company appoints an auditor. on the repayment terms specified in the original
for a membership fee. Companies may be required to provide information Third, the exchange could be a project of the investment, even those bond investments that are
at certain times and be subjected to sanctions if they market operator, but a trade body would also be not transferable could be repaid and new bonds
THE FUNCTIONS OF THE ETHICAL EXCHANGE fail to comply with laws. formed, albeit with fewer powers than outlined issued to a new investor, meaning that the social
The functions of the exchange fall into three above. In this case the market operator would hold enterprises could not list on the market but could
headings: MARKETING the list of members, collect fees and deal directly still attract new investment through it.
This is the business of attracting new enquirers with the social enterprises, however all parties Withdrawable share capital is transferable only
TRADE AND NEW INVESTMENT EXECUTION to the exchange through publicity and marketing. would be required to join the trade body which in certain cases. But given that an investor can
This is the business of maintaining lists of buyers, The first two functions would need to be would be assigned certain powers and activities, withdraw their funds at any time, there will be a
sellers and enquirers, providing them with the conducted by an FSA registered body with the such as co-ordinating members meetings, inputting need for the co-operative issuing the withdrawable
necessary information on how the market works appropriate approvals to manage an exchange. It into strategic development and undertaking some share capital to replace it. So although
and carrying out the trading and issuing of shares, therefore seems sensible that the market operator publicity and marketing. Under this model the withdrawable share capital could not be traded on
collection of stamp duty and transaction fees, should perform both of these functions. It is trade body would be able to influence the market an ethical exchange, it may be possible for new
and the execution of the paperwork necessary to probably most appropriate for this operator to also operator but would not be able to transfer the withdrawable share capital to be attracted through
support it. be the company’s registrars, and indeed some exchange from one market operator to another. the marketing undertaken by the exchange.
This role could be extended beyond a passive operators may insist on this. Of these options, the first would be preferable
matching service to include an active opinion from Marketing could be carried out by the from the point of view of the market operator as PRICING SOCIAL AND
a broker on the value of shares, as well as an active enterprises themselves, the market operator, the it allows them the greatest freedom of operation, ENVIRONMENTAL RETURNS
match-making service designed to improve liquidity. broker or all three operating together. Investor and indeed some social enterprises might prefer Another key role then that an ethical exchange
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