Last month’s Financial Times article, “A market less efficient” considered why stock exchanges across the globe are in crisis and whether the declining perception of usefulness of exchanges in developed economies is based on the belief that they are no longer able to fulfil their fundamental purpose—mobilising capital to enable enterprises to grow.  Nexii’s Kelly Notcutt reflects on what the markets might be missing.

The public capital markets are increasingly viewed with distrust as unrealistic expectations, short term thinking and a desire for large and quick returns drive a general lack of transparency in investment practice and decision making; all factors that have significantly contributed to the escalating market turmoil.  Initial Public Offerings (IPOs) are struggling to fulfil their main function of directing growth-enabling capital to smaller enterprises due to high costs and an unrealistic demand for liquidity[1].  Long-term, sustainable growth and profitability of companies has been forfeited for short-term outcomes, creating an unsustainable market that is out of touch with the real world economy and resulting in extensive job losses.  With the very nature and usefulness of stock markets in question, the market turmoil has revealed an unprecedented need for alternatives.

Five hundred years ago, stock exchanges were, among other things, a means of sharing risk between sea voyagers, royalty, and the common people. A ship owner would announce his mission on a board downtown (similar to today’s IPO) and the royalty and townspeople alike would provide the finance necessary for a ship owner in whom they were confident, to undertake a sea voyage that they believed would bring about returns.  If the voyage was successful, the investors would receive a portion of the proceeds and be rewarded for their patient sharing of risk.

The modern-day stock exchange has since evolved in sophistication but in essence until about 15 years ago remained predicated on the notion of mobilising risk capital for the long term realisation of value.  Unfortunately, however, modern day stock exchanges have increasingly become inaccessible to common people – whether these be the financiers or the financed “ship owners”.  They increasingly lack connectivity and accessibility to a broad public and seem unable to provide sustainable infrastructure appropriate for the 21st century world.

In the past decade or so, stock exchanges have become primarily the domain of bigger companies and are largely inaccessible for smaller, early stage businesses.  This has not only severely limited the flow of capital to smaller businesses, it has also depersonalised the connections between companies and communities, inhibiting the creation of new employment opportunities or the growth of capital markets that are representative of opportunities in emerging economies.  The use of increasingly more sophisticated technology to revolutionise the way in which trading of stocks is achieved has further removed the connection between the company and its investors, rendering it so far removed from the human element that investors have largely – if not entirely – lost sight of the nature and purpose of companies that they share risk with.

The global markets crisis has brought this unsustainable system into a harsh light and illustrated the need for a more participatory, democratic and connected infrastructure to prevail.  So, what does this mean in practical terms?

First, such an infrastructure must democratise access to information for all, second, it must open the flow of risk capital to smaller enterprises and emerging world markets, and third, it must embrace better systems for monitoring and reporting in order to foster greater levels of connectedness, transparency and accountability. 

These changes are essential to re-introduce purpose to the capital markets overall as well as to the practice of investing and to rebuild trust between those willing to share risk in a collectively beneficial and sustainable future.  Sharing risk plays a fundamental role in promoting inclusive growth and development.  It draws the human connection back to the monetized trading of risk, providing the potential for empathy and connectedness that is so vital for a sustainable long term realisation of value.  Such a system would establish a strong and cohesive “with” economy based on meaningful relationships between investors and purpose driven initiatives designed to deliver sustainable value to all.

Nexii’s offerings recognise this need to combine the original potential and intention of capital market structure with meaningful and sustainable investment in high impact initiatives that are not only in touch with, but designed to address the needs of the real world economy.  To that end, Nexii’s stage appropriate impact investment platforms provide a place for high impact initiatives to raise capital and access finance, to scale their impact and achieve their full impact potential by democratising access to markets, access to information and access to capital.  They accommodate businesses of various sizes and stages and offer low listing costs and a wide range of services to assist in the listing process.  

As importantly, Nexii’s platforms acknowledge the necessity of transparency and access to coherent, symmetrical information and the role this plays in maintaining the stability and sustainability of an exchange.  As importantly, accountability through clearly defined listing rules and reporting frameworks that protect both investors and listed companies provide the means in which to create transparency and build trust.  This ensures that the potential risks and rewards of sustainable investments that pursue long-term social and/or environmental impact are made clear to investors and the high impact enterprise itself. Such reporting also ensures that enterprises remain accountable to sustainable practices, so that long-term impact is not forfeited for short-term, quick-profit outcomes.

Much of Nexii’s work involves advocacy around the alternative, more-sustainable investment options available to investors and social businesses, how to list or invest and the benefits of listing on, or investing through transparent, credible impact investment platforms.  With education and advocacy, Nexii aims to dilute, if not eliminate, the fragmentation that has for so long characterised the relationship amongst critical actors: exchanges, high impact businesses, intermediaries, etc. By merging stock exchanges with impact investments, high impact enterprises can access capital without compromising their social and/or environmental mission, and investors can invest in socially and environmentally responsible enterprises with the benefits of transparency, reporting frameworks, liquidity and exit opportunities.

Impact investing provides a much needed and very under-served investment alternative that not only strives for long-term sustainability, but works to enable risk-sharing between those willing to voyage on the seas of social and environmental challenges to bring home positive change, high impact and profitability.

The ability for a common person to once again be able to connect to a mission listed on a stock exchange instead of just a stock price, may also be the essential reminder from history and the future that force conventional stock markets to improve the way they do business.