I. Table of contents I. Table of contents ...................................................................................................... 2

II. List of figures ............................................................................................................ 5

III. List of tables ............................................................................................................. 7

IV. List of boxes .......................................................................................................... 8

1. Introduction .............................................................................................................. 9

1.1. Understanding the market for Social Enterprises ................................................... 9

1.1.1. Snapshot of the trouble with definitions ............................................................ 9

1.1.2. Definitions of social enterprises by existing social stock exchanges .................. 14

1.1.3. Commonalities & differences in existing definitions ......................................... 14

1.1.4. Basic qualifications and framework for determining the eligibility of social enterprises for the SwiSOX ............................................................................................. 15

1.1.5. Estimating the number of social enterprises ..................................................... 17

1.1.6. HR limitations, market constraints & financing needs of social enterprises ....... 21

1.1.7. Social enterprises, socially responsible businesses and SwiSOX ........................ 23

1.1.8. Market trends ................................................................................................. 27

1.1.9. Conclusions & relevance for the SwiSOX .......................................................... 28

1.2. Understanding the Impact Investing market ........................................................ 28

1.2.1. Definition & scoping ........................................................................................ 28

1.2.2. Market size & players ...................................................................................... 30

1.2.3. Market growth & drivers ................................................................................. 34

1.2.4. Market obstacles & needs ............................................................................... 35

1.2.5. Findings from impact investor survey ............................................................... 36

1.2.6. Conclusion & relevance for SwiSOX .................................................................. 37

1.3. Making the case for a Social Stock Exchange ........................................................ 38

1.3.1. Definition and key figures ................................................................................ 38

1.3.2. Key players at stock exchanges ........................................................................ 40

1.3.3. Characteristics of stock exchanges ................................................................... 40

1.3.4. Remuneration models of stock exchanges ....................................................... 42

1.3.5. Stock exchanges & sustainability ..................................................................... 45

1.3.6. SME exchange platforms ................................................................................. 46

1.3.7. Alternative exchange mechanisms & platforms ................................................ 49

1.3.8. Value proposal of a social stock exchange ........................................................ 51

2. Competitive Landscape ........................................................................................... 53

2.1. Introduction ........................................................................................................ 53

2.2. Defining a social stock exchange .......................................................................... 53

2.3. SSE Competitors and SFP Actors .......................................................................... 54

2.3.1. Investor-project matching platforms ................................................................ 54

2.3.2. One-side transaction platforms ........................................................................ 56

2.4. Profiling the primary social stock exchanges ........................................................ 57

2.4.1. Social Stock Exchange (UK) Overview ............................................................... 57

2.4.2. Social Venture Conexion (Canada) Overview .................................................... 58

2.4.3. Impact Exchange (Singapore) Overview ........................................................... 60

2.5. Key themes to consider in evaluating SSE competition ......................................... 61

2.5.1. Attracting issuers ............................................................................................. 61

2.5.2. Business Model – Staffing ................................................................................ 62

2.5.3. Business Model – Revenue Production ............................................................. 63

2.5.4. Listing criteria .................................................................................................. 65

2.5.5. Social ratings criteria ....................................................................................... 67

2.5.6. Additionality ................................................................................................... 68

2.6. Strengths & Weaknesses of SSE Competitors ....................................................... 69

3. Gaps, opportunities and the value proposition ........................................................ 72

3.1. Defining the framework ...................................................................................... 72

3.1.1. Performance review of existing solutions ......................................................... 72

3.1.2. Main gaps of existing platforms ....................................................................... 75

3.2. Defining SwiSOX’s offering .................................................................................. 76

3.2.1. Buy-side stakeholder & client analysis ............................................................. 76

3.2.2. Sell-side client analysis .................................................................................... 78

3.2.3. Product analysis .............................................................................................. 82

3.2.4. Linking the buy-side and sell-side to define SwiSOX’s offering .......................... 85

3.2.5. Pricing strategy ................................................................................................ 86

3.2.6. Limits & constraints ......................................................................................... 88

3.3. Defining SwiSOX’s Unique Value Proposition ....................................................... 89

3.3.1. Our promises for impact investors and issuers ................................................. 90

3.3.2. SwiSOX’s strategic framework ......................................................................... 91

3.3.3. Key success factors .......................................................................................... 91

4. Implementation scenarios & impact assessment ..................................................... 93

4.1. Definitions and background information ............................................................. 93

4.1.1. Distinction between stock exchanges & platforms ........................................... 93

4.1.2. The stock exchange value chain ....................................................................... 94

4.1.3. Overall assessment framework ........................................................................ 95

4.2. Overview of potential partner stock exchanges ................................................... 96

4.2.1. SIX – The Swiss Stock Exchange ........................................................................ 96

4.2.2. BX Berne eXchange – The niche player ............................................................. 97

4.2.3. Xetra – the leading European electronic exchange ........................................... 98

4.3. Evaluation of potential partner stock exchanges .................................................. 98

4.4. Option A: Partnership with an existing Stock Exchange ........................................ 99

4.4.1. Legal & capital structure, ownership ................................................................ 99

4.4.2. Organization .................................................................................................. 101

4.4.3. Operational model ........................................................................................ 103

4.4.4. Business model .............................................................................................. 105

4.4.5. Financial forecast ........................................................................................... 107

4.4.6. Investment case ............................................................................................ 112

4.5. Option B: Partnership with an existing platform ................................................ 112

4.5.1. (Why not) build a platform from scratch ........................................................ 112

4.5.2. Overview of potential platforms .................................................................... 113

4.5.3. Evaluation of potential platforms................................................................... 113

4.5.4. Legal & capital structure, ownership .............................................................. 115

4.5.5. Organization .................................................................................................. 115

4.5.6. Operational model ........................................................................................ 115

4.5.7. Business model .............................................................................................. 116

4.5.8. Financial forecast ........................................................................................... 117

4.6. Input: blockchain and stock exchanges .............................................................. 118

4.7. Assessing the impact of social enterprises ......................................................... 120

4.7.1. How to measure impact ................................................................................. 120

4.7.2. Main features of the assessment tool ............................................................ 121

4.7.3. Landscaping existing solutions for impact assessment .................................... 122

4.7.4. Evaluation of existing impact assessment tools .............................................. 124

4.7.5. Caveats regarding the development of a new impact assessment tool ........... 127

4.7.6. Investment case ............................................................................................ 128

5. Discussion & recommendations ............................................................................ 128

5.1. Option A vs. Option B ........................................................................................ 129

5.2. Impact Assessment tool: buy vs make internally vs make externally .................. 130

5.3. Concluding remarks and recommendations ....................................................... 131

V. List of literature references ................................................................................... 132

VI. Annex ............................................................................................................... 133

II. List of figures Figure 1: Countries with marks, labels or certification schemes for social enterprises. Source: European Commission (2015). .............................................................................................................. 10 Figure 2: Framework of a social enterprise for the SwiSOX. Own illustration...................................... 15 Figure 3: Number of small and medium-sized enterprises according to region. Own calculations and illustration with data from IFC (2018). .................................................................................................. 18 Figure 4: Number of small and medium-sized enterprises according to country income group. Own calculations and illustration with data from IFC (2018). ....................................................................... 18 Figure 5: Estimation of medium-sized social enterprises in 108 countries grouped by region. Own calculations based on IFC (2018) and various country reports cited in Table 2. .................................. 20 Figure 6: Formal MSME finance gap in developing countries. Source: IFC (2017). .............................. 21 Figure 7: Share of bank loans and issued securities as percentage of enterprises’ balance sheets. Source: Deutsche Bank (2014). ............................................................................................................. 22 Figure 8: Financing needs of European enterprises with 50-249 employees to realise growth ambitions over the next two to three years. Source: European Commission (2017). ......................... 22 Figure 9: Mapping of social enterprises according to company size and social purpose. Own illustration. ............................................................................................................................................ 23 Figure 10: Mapping of impact investors in a generalized investors landscape. Own illustration based on Sonen Capital (2018). ....................................................................................................................... 29 Figure 11: Geographic allocations by AUM and percent of respondents. Source: GIIN (2018). .......... 30 Figure 12: Sector allocations by AUM and percent of respondents. Source: GIIN (2018).................... 31 Figure 13: Allocations by stage of business, by AUM and percent of respondents. Source: GIIN (2018) .............................................................................................................................................................. 32 Figure 14: Total green bond issuances by type. Source: ICMA (2018). ................................................ 32 Figure 15: Estimation of the impact investment market growth using a compounded annual growth rate of 13 %. Own calculations with data from GIIN (2018). ................................................................ 34 Figure 16: Distribution of organization type of interviewed impact investors and aligned organizations. Own illustration. ............................................................................................................ 36 Figure 17: Simple mechanism of SwiSOX. Own illustration. ................................................................. 38 Figure 18: Distribution of listed companies by market capitalisation. Source: WFE 2017. .................. 39 Figure 19: Numbers of electronic and floor equity exchanges. Source: Bank of England (2017). ....... 41 Figure 20: Share of algorithmic trading in FX spot markets. Source: BIS (2016). ................................. 42 Figure 21: Revenue structure of stock exchanges 2004 and 2014. Source: OECD Business and Finance Outlook (2016). ..................................................................................................................................... 42 Figure 22: Number of SME platforms in operation. Source: UNCTAD (2017). ..................................... 46 Figure 23: Sectoral distribution of companies listed on WFE Exchanges across regions. Source: UNCTAD (2017). .................................................................................................................................... 48 Figure 24: Initial returns by proceeds in the United States between 1980 and 2016. Source: OECD (2018). ................................................................................................................................................... 48 Figure 25: Global Crowdfunding Industry estimated fundraising volume in 2015. Source: Massolution (2016). ................................................................................................................................................... 50 Figure 26: Services offered by IIX. Source: IIX (2018): What we do ...................................................... 61

Figure 27: Breakdown of valuations of enterprises listed at the AIM. Source: Syndicate Room (2018): AIM ........................................................................................................................................................ 64 Figure 28: Listing criteria for enterprises to be listed at IIX. Source: IX (2017): Listing Guide ............. 66 Figure 29: Listing criteria for enterprises to be listed at SVX. Source: SVX (2018): FAQ ...................... 67 Figure 30: Performance rating of social stock exchanges based on research in this paper. Own illustration. ............................................................................................................................................ 73 Figure 31: Performance rating of SME exchanges based on research in this paper. Own illustration. 73 Figure 32: Performance rating of alternative exchange platform based on research in this paper. Own illustration ............................................................................................................................................. 74 Figure 33: Performance rating of traditional stock exchanges based on research in this paper. Own illustration ............................................................................................................................................. 75 Figure 34: Stakeholder matrix of SwiSOX project. Own illustration. ..................................................... 77 Figure 35: Profiling potential financial instruments for listing and trading at SwiSOX. Own illustration. .............................................................................................................................................................. 82 Figure 36: Summary of SwiSOX’s value proposition. Own illustration. ................................................. 90 Figure 37: Summary of SwiSOX’s strategic framework. Own illustration. ............................................ 91 Figure 38: Simplified value chain of a fully-fledged stock exchange. Own illustration with information from different sources (see footnote). ................................................................................................. 94 Figure 39: Modules to analyse for section 4. Own illustration. ............................................................ 95 Figure 40: Key figures for the Swiss Exchange business area. Source: SIX Annual Report (2018). ...... 96 Figure 41: SIX segments financial information. SIX Annual Report (2018). .......................................... 97 Figure 42: Proposed capital structure of SwiSOX. Own illustration. .................................................. 100 Figure 43: Simplified organizational chart of SwiSOX in a partnership scenario. Own illustration. ... 101 Figure 44: Flowchart of SwiSOX operational model under option A. Own illustration. ..................... 105 Figure 45: Assumed development of market participants over time at SwiSOX under option A. Own illustration ........................................................................................................................................... 108 Figure 46: Assumed development of trading activity on SwiSOX under option A. Own illustration.. 108 Figure 47: Evolution of SwiSOX income statements over 5 years under option A. Own illustration. 111 Figure 48: Evolution of SwiSOX income generating businesses over 5 years under option A. Own illustration. .......................................................................................................................................... 111 Figure 49: Flowchart of SwiSOX operational model under option B. Own illustration. ..................... 116 Figure 50: Assumed development of market participants over time at SwiSOX under option B. Own illustration ........................................................................................................................................... 118 Figure 51: Evolution of SwiSOX income statements over 5 years under option B. Own illustration. 118 Figure 52: Blockchain transaction process: Source: Blockgeeks (2018): What is Blockchain Technology? A Step-by-Step Guide For Beginners ............................................................................. 119 Figure 53: The logic model for impact measurement. Source: EVPA (2015): A Practical Guide To Measuring And Managing Impact ....................................................................................................... 121 Figure 54: Symbiose of the three main require features for the SwiSOX impact assessment tool. Own illustration. .......................................................................................................................................... 122 Figure 55: Comparison of SWOT analysis for both implementation scenarios. Own illustration. ..... 129 Figure 56: Types of organizations and their aims. Source: McKinsey & Company (2016). ................ 133 Figure 57: Social enterprises within the sustainability spectrum. Source: ATKearney (2015). .......... 133 Figure 58: Main impact themes of interviewed impact investors. Own illustration. ......................... 134 Figure 59: Expected development of share of impact investments over the next 3 years according to interviewed impact investors. Own illustration. ................................................................................. 134 Figure 60: Sources for impact investment possibilities / deals of interviewed impact investors. Own illustration. .......................................................................................................................................... 134 Figure 61: Classification of difficulty to source quality impact deals according to interviewed impact investors. Own illustration. ................................................................................................................. 135

Figure 62: Experience with existing social stock exchanges of interviewed impact investors. Own illustration. .......................................................................................................................................... 135 Figure 63: Possible added value of a social stock exchange according to interviewed impact investors. Own illustration. ................................................................................................................. 135 Figure 64: Approach of assessing impact investments of interviewed impact investors. Own illustration. .......................................................................................................................................... 136 Figure 65: Usage of SDGs in impact assessment of interviewed impact investors. Own illiustration. ............................................................................................................................................................ 136 Figure 66: Desired usage of the rating at a social stock exchange according to interviewed impact investors. Own illustration. ................................................................................................................. 137 Figure 67: Detailed SwiSOX income statement for option A based on own assumptions. Own illustration. .......................................................................................................................................... 138 Figure 68: Detailed SwiSOX income statement for option B based on own assumptions. Own illustration. .......................................................................................................................................... 139

III. List of tables Table 1: IFC’s Working Definition for SMEs. Source: IFC (2012): Interpretation Note on Small and Medium Enterprises and Environmental and Social Risk Management ................................................. 9 Table 2: Summary of various definition frameworks of social enterprises from selected government bodies, organization and commercial institutions. For sources please refer to footnotes. ................. 13 Table 3: Key figures of social enterprises from selected reports around the world. Sources: Please refer to footnotes in the table. ............................................................................................................. 19 Table 4: Estimation of total social enterprises in 108 countries. Own calculations based on IFC (2018) and various country reports cited in Table 2. ....................................................................................... 20 Table 5: Examples of enterprises which would be eligible for a listing at SwiSOX, according to defined scoping. ................................................................................................................................................. 25 Table 6: Examples of enterprises which would not be eligible for a listing at SwiSOX, according to defined scoping. .................................................................................................................................... 26 Table 7: AUM by organization type. Source: GIIN (2018) ..................................................................... 31 Table 8: Summary of different impact investing market elements. Sources: Various (refer to text in respective section) ................................................................................................................................ 33 Table 9: Key data of major stock exchanges around the world and the Swiss Stock Exchange (SIX). .. 39 Table 10: Fee models from major stock exchanges around the world. For sources please refer to footnotes. .............................................................................................................................................. 44 Table 11: Top ten of SME markets according to WFE. Source: WFE (2017). ........................................ 47 Table 12: SwiSOX Value Proposal. Own illustration. ............................................................................. 52 Table 13: SW Analysis of existing social stock exchanges. Own illustration. ........................................ 71 Table 14: Matrix of sell-side analysis for SwiSOX. Own illustration. ..................................................... 81 Table 15: SwiSOX’s added value for sell-side clients. Own illustration. ............................................... 84 Table 16: Matching investors and financial instruments at SwiSOX according to their potential. Own illustration. ............................................................................................................................................ 86 Table 17: Summary of fee structure for major stock exchanges, SME stock exchanges and social stock exchanges. Based on various sources included in this study. Own illustration. .................................... 87 Table 18: Indicative pricing model for SwiSOX. Own illustration. ......................................................... 88 Table 19: Summary of limits & constraints analysis. Own illustration. ................................................ 89 Table 20: Distinction between stock exchanges and exchange platforms for illustration purposes. Own illustration. ................................................................................................................................... 94 Table 21: Overview of pro’s and con’s regarding the partnership of the evaluated stock exchanges. Own illustration. ................................................................................................................................... 99

Table 22: Description of purpose and tasks and proposed composition of strategic and regulatory units. ................................................................................................................................................... 102 Table 23: Proposed fee structure for Option A. Own illustration. ...................................................... 106 Table 24: Overview of assumptions taken for modelling the financial forecast of SwiSOX under option A. .............................................................................................................................................. 110 Table 25: Evaluation of potential partner platforms for SwiSOX. Own illustration. ........................... 114 Table 26: Overview of assumptions taken for modelling the financial forecast of SwiSOX under option B. .............................................................................................................................................. 117 Table 27: Evaluation of potential impact assessment providers for SwiSOX. Own illustration. ........ 126 Table 28: Final assessment of the implementation options. Own illustration. .................................. 130

IV. List of boxes Box 1: Characteristics of selected social enterprises labelling schemes within the European Union. Source: European Commission (2015). ................................................................................................. 11 Box 2: Selected additional financial entities eligible for the social stock exchange. ............................ 14 Box 3: Listing requirements for different stock exchanges around the world. Sources: See footnotes on this page ........................................................................................................................................... 45 Box 4: Summary of Mission Markets. ................................................................................................... 55

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1. Introduction Sustainable Finance Geneva (SFG), a not-for-profit organization that establishes Geneva as the centre for innovation in sustainable finance, has commissioned a detailed business plan for the creation of an international Social Stock Exchange (SwiSOX) in Geneva that would be entirely dedicated to social enterprises. This first report is part of a broader study that aims at validating, deepening, and precising the initial concepts proposed by SFG in an earlier feasibility study. Key objectives of the broader study include:

▪ Analyze, categorize and quantify the demand for an international social stock exchange; ▪ Review and evaluate existing solutions and determine potential market gaps that would be relevant for

Switzerland to address; ▪ Detail what client segments and specific services should be proposed by SwiSOX in order to address

unmet demand and seize existing market opportunities; and ▪ Assess two different potential implementation scenarios.

This first chapter is dedicated to defining and describing the markets for social enterprises and impact investing (noting that other entities potentially interested in listing on SwiSOX such as social invest-ment funds, microfinance institutions, NGOs, etc. are excluded from this section but will be considered later in chapter 3 ‘Gaps and Opportunities’), analyzing trends and the main needs of the players, as well as assessing market size and potential. The goal is to put forward a ‘working’ proposal for the project, provide a detailed understanding of both markets and making the case for a social stock ex-change.

1.1. Understanding the market for Social Enterprises 1.1.1. Snapshot of the trouble with definitions

In the context of a market economy, the definition of an enterprise is clear: enterprises produce goods or offer services to customers for which in return they are compensated. To do so, enterprises hire workers and pay them wages. Furthermore, at least formal enterprises pay taxes and are obliged to follow laws and guidelines, provided by the state. Enterprises are commonly grouped by their size and can take the form of micro, small, medium (MSME) as well as large enterprises. Common understand-ing is that MSMEs play a crucial role in fueling economies, especially in developing countries. The World Bank classifies MSMEs according to their size as follows:

Indicator Micro enterprise Small enterprise Medium enterprise

Employees < 10 10 < 50 50 < 300

Total assets (USD ) < 100,000 100,000 < 3 million 3 million < 15 million

Total Annual Sales (USD ) < 100,000 100,000 < 3 million 3 million < 15 million Table 1: IFC’s Working Definition for SMEs. Source: IFC (2012): Interpretation Note on Small and Medium Enterprises and Environmental and Social Risk Management

Consensus on what exactly defines a social enterprise is limited. The size of the company is certainly not a defining factor. Most scholars and practitioners agree that social enterprises are organizations or ventures that combine a social or environmental purpose with pursuit of financial success in the private marketplace (see for example Mair, & Ignasi (2006), Zahra et al. (2009) or Young & Lecy (2014)). However, this is where the consensus ends. What constitutes a social purpose? And what defines financial success? What are the relative priorities between them? The snapshot below illus-trates the current discord regarding the definition of social enterprises in Europe:

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Figure 1: Countries with marks, labels or certification schemes for social enterprises. Source: European Commission (2015). Figure 1 shows countries with social enterprise marks or labelling schemes in the European Union. On the one hand, only a few countries have developed such schemes, even though social enterprises account for a significant portion of employment and GDP contribution (see section 1.1.5.). On the other hand, schemes and marks are defined individually by country and not coordinated across the Union, differing widely in scope, coverage and content. Box 1 on the next page highlights some char-acteristics and key eligibility criteria of the different labelling schemes in Europe. Recently, the Euro-pean Union voted in favor of creating a label for social enterprises. However, the criteria in the pro-posal are very soft and include a consultation processes for the establishment of an effective business strategy or adaptation to local social needs and to the local employment market. It remains to be seen, if a European label can boost social entrepreneurship. 1 One of the main reasons why there is still limited consensus on the definition of a social enterprise is the research gap when it comes to social entrepreneurship in general. Mark Hand, from the RGK Center for Philanthropy and Community Service at the University of Texas at Austin, conducted a study on the 25 most influential academic articles on the topic2. He found that the literature is still young (14 of the articles were published after 2005) and very diverse in terms of topic focus. Furthermore, the researchers were surprised by the different spheres’ academic researchers and practitioners of social entrepreneurship seem to be operating within, driven by incentive misalignment as well as is-sues related to data collection and analysis. Other academics try to fill the gap: Dennis R. Young and Jesse D. Lecy (2014) from Georgia State Uni-versity conducted a meta-study on different research approaches and findings regarding social enter-

1 Market Moguls (2018): Social Enterprises Get Boost From European Parliament 2 Hand, M. (2016): The Research Gap in Social Entrepreneurship

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prises. According to them, an acceptable definition of social enterprises, which touches several cornerstones, is that: “They [social enterprises] explicitly seek to balance profit-seeking with the achievement of a so-cial mission. These enterprises take various forms including traditional for-profit busi-nesses whose owners formally declare their intent to balance social and commercial goals, new legal forms of business enterprise such as L3Cs, flexible benefit corporations and B corporations which include specific provisions for such balance in their charters and legal documents. Sub-enterprises also include privately held businesses versus pub-licly owned stock corporations, each of whose intent is to balance social and com-mercial goals in some way.” Mystica Alexan-der from Bentley University goes one step back and argues, that a useful starting point is to consider social enterprise as the appli-cation of private efforts to remedy social ills and advocates that the manner in which so-cial entrepreneurs fill the gap varies accord-ing to a country's social, political, economic, and cultural experiences. She concludes, that only supportive government efforts will ensure the recognition of social enter-prise as an indispensable aspect of a coun-try's social and economic landscape3. Governments, public institutions as well as commercial institutions have understood the signs of the time and started establish-ing frameworks for social enterprises. Table 2 presents a summary of definitions of social enterprises, with a focus on their mission statement, the legal forms and the use of profits.

3 Mystica, M. A. (2016): Achieving A Global Consensus On Social Enterprise: Understanding Government's Vital Role

In Germany, the “Wirkt” label is issued to effective social

initiatives by PHINEO, a public benefit venture established

by Deutsche Börse, the Bertelsman Foundation, KPMG,

PwC and the Mercator Foundation. The awarding of the

label is based on three project-related and five organiza-

tional criteria, which are rather high-level. Around 600 or-

ganizations have applied and been screened since 2009,

and around 150 have received the “Wirkt” label. Approx.

10-15% of the latter have market-revenue based business

models, qualifying technically as a social enterprise.

In Finland, the Social Enterprise Mark is granted and ad-

ministered by the Association for Finnish Work. Estab-

lished 100 years ago, the association is a politically inde-

pendent non-profit organization, which raises most of its

revenues from fees to its over 2’000 members. To be eli-

gible for the label, organizations should meet three pri-

mary criteria (promoting social well-being, limited distri-

bution of profits and transparency in business operations)

and additionally at least one of ten underlying features

(e.g. measuring the company’s impact, tight relations to

local communities or employing people in weak labor

market position). As of 2018, 200 social enterprises were

included in the scheme.

Since 2010 the Social Enterprise Mark Company is the sole

certification authority for social enterprises in the UK. The

primary objective is to provide a guarantee when a busi-

ness genuinely operates as a social enterprise. Enter-

prises must fulfill a wide range of quantitative and quali-

tative criteria (e.g. have social or environmental aims,

earn at least 50% income from trading or spend at least

50% of profits fulfilling social or environmental aims). As

of 2018, approx. 150 organizations hold the Social Enter-

prise Mark or Gold Mark.

Box 1: Characteristics of selected social enterprises labelling schemes within the European Union. Source: European Commission (2015).

Organization / company Definition Legal form Use of profits Other characteristics

The European Commission es-tablished the European Social Entrepreneurship Fund (EuSEF to actively promote the financing of social enterprises in the Euro-pean Union4.

«[a social enterprise] has as its primary objective the achieve-ment of measurable, positive social impacts…»

«Social enterprise means an un-dertaking, regardless of its legal form, …»

«[a social enterprise] uses its profits first and foremost to achieve its primary objective and has in place predefined pro-cedures and rules for any cir-cumstances in which profits are distributed to shareholders and owners, in order to ensure that any distribution of profits does not undermine the primary ob-jective»

«[a social enterprise] is managed in an entrepreneurial, accounta-ble and transparent way,… »

The British Department for Busi-ness, Energy & Industrial Strat-egy (BEIS) is a ministerial depart-ment, supported by 39 agencies and public bodies and central platform to promote social busi-nesses in the UK5.

«…a business with primarily so-cial objectives…»

«The term “Social Enterprise” describes the purpose of a busi-ness, not its legal form…»

«[a business] whose surpluses are principally reinvested for that purpose in the business or in the community, rather than being driven by the need to max-imise profit for shareholders and owners».

n/a

Since 1998, the Schwab Founda-tion provides platforms at the regional and global level to high-light and advance leading mod-els of sustainable social innova-tion6.

«Social enterprises drive social innovation and transformation in various fields…»

«A social entrepreneur, similar to a business entrepreneur, builds strong and sustainable or-ganizations, which are either set up as not-for-profits or compa-nies.»

n/a «The Schwab Foundation em-ploys the following criteria when looking for leading social entre-preneurs: Innovation, Sustaina-bility, Reach and Social Impact.»

Founded by the Nobel Peace Prize winner of 2006, Prof. Mu-hammad Yunus, the Yunus Cen-tre aims to promote the benefits of social enterprises7.

«Social business is a cause-driven business.»

«Sustainability of the company indicates that it is running as a business.»

«In a social business, the inves-tors/owners can gradually re-coup the money invested, but cannot take any dividend be-yond that point.»

«The impact of the business on people or environment, rather the amount of profit made in a given period measures the suc-cess of social business.»

4 European Commission (2016): Social enterprises 5 BIS (2011): A Guide to Legal Forms for Social Enterprise 6 Schwab Foundation for Social Entrepreneurship (2018): What is a social entrepreneur ? 7 Yunus Centre (2018): Social Business

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Body / organization / company Mission statement Legal form Use of profits Other characteristics

McKinsey, one of the leading management consulting compa-nies mapped social enterprises in a broader universe of organi-zations (see Annex for details)8.

«Social enterprises, have a social impact as their main objective rather than making profits for their shareholders.»

«[for the definition of social en-terprises] we exclude those owned by traditional commercial companies and public organiza-tions. »

«[in our definition of social en-terprises] we do not set limits on profit distribution.»

We refer to organizations that aim to make more than 50% of their revenues from commercial activities.

A.T. Kearney, an American man-agement consulting firm that fo-cuses on strategic and opera-tional issues, mapped social en-terprises on the sustainability spectrum (see Annex for de-tails)9.

«…social enterprise is a business whose main objective is to tackle social problems, improve lives, and advance society. »

n/a n/a n/a

Deloitte, one of the "Big Four" accounting organizations and the largest professional services net-work, also highlighted the im-portance of social enterprises in today’s work environment10.

«A social enterprise is an organi-zation whose mission combines revenue growth and profit- mak-ing with the need to respect and support its environment and stakeholder network.»

n/a n/a It is an organization that shoul-ders its responsibility to be a good citizen (both inside and outside the organization), serv-ing as a role model for its peers and promoting a high degree of collaboration at every level of the organization.

Table 2: Summary of various definition frameworks of social enterprises from selected government bodies, organization and commercial institutions. For sources please refer to footnotes.

8 McKinsey & Company (2016). Scaling the impact of the social enterprise sector 9 ATKearney (2015): Scaling up: Catalyzing the Social Enterprise 10 Deloitte (2018): The rise of the social enterprise

1.1.2. Definitions of social enterprises by existing social stock exchanges

There are three notable social stock exchanges already in place around the world, including: ▪ Social Stock Exchange (UK) ▪ Social Venture Connexion (Canada) ▪ Impact Exchange (Singapore)

Additionally, there are a small number of projects and/or entities that call themselves social stock exchanges, yet do not appear to function as financial exchanges, including:

▪ SASIX (South Africa) ▪ Social & Environmental Stock Exchange - BVS&A (Brazil)

Each exchange defines "social enterprise" differently, though some commonalities do exist. All, for example use either an ESG (Environmental, Social and Governance) framework or application to the Sustainable Development Goals (SDGs). From there, there is significant divergence. The Canadian SVX, for example, uses the B Corp certification developed by B Lab as a qualification criterion, while the Social Stock Exchange in the UK has historically had their own ESG framework, while only allowing listed companies on the London Stock Exchange to apply as a way of outsourcing primary due dili-gence. Existing social stock exchanges will be covered in much greater detail in section 3 of the report (‘Gaps and Opportunities’).

1.1.3. Commonalities & differences in existing definitions

The previous sections show that a globally accepted definition of a social enterprise is still missing. Be that as it may, one of the most relevant distinctions for SwiSOX may be the differences between social enterprises and socially responsible businesses: While social enterprises have their social mission stated in the documents of incorporation and were solely founded to achieve the social goal, socially responsible businesses are en-trepreneurially active in a field, which is cru-cial to the society or the environment and tackle these challenges using business meth-ods. Some of the key distinguished features that set social enterprises apart from socially responsible business (and traditional for-profit corporations) are:

In addition to social enterprises, there are a variety of

other entities that could potentially list on social stock

exchange, including social investment funds, micro-

finance institutions, and even NGOs. As for-profit enti-

ties, investment funds and microfinance institutions can

list fund shares or common / preferred equity shares. By

listing, impact investment funds could increase their li-

quidity, become UCITS complaint and so more attractive

for a number of institutional investors.

Microfinance institutions could potentially represent a

very large market, noting that there are over 1’000 MFIs

across the world (in both developed and developing mar-

kets) and that the sector itself is quite mature, noting the

variety of funds that invest exclusively in this asset class

(incl. previous IPOs by Compartamos in Mexico, SKS, Eq-

uitas Holdings and Ujjivan Financial Services). Finally,

while NGOs are not corporations and therefore cannot

sell share capital, they could list bonds on a social stock

exchange. For example, the Nonprofit Finance Fund man-

ages a portfolio of USD 315 million, mostly loans to U.S.

based non-profits, which provides a sample of the poten-

tial market size.

Box 2: Selected additional financial entities eligible for the social stock exchange.

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▪ Business model: Social enterprises address social and/or environmental issues by providing marketable goods and services that address these underlying issues.

▪ Mission statement: Most social enterprises clearly state their social purpose in either their articles of association, vision statement or strategy.

▪ Legal form: Social enterprises can take various legal forms from traditional for-profit private corpora-tions, associations, non-profits, cooperatives, private-public partnerships, etc.

▪ Sector: Social enterprises operate in most industries, but with a preponderance in the service sector. ▪ Redistribution of profits: Social enterprises usually re-invest (at least) a portion of profits in the social

cause rather than paying it out fully to shareholders. ▪ Size: In theory, social enterprises are not restricted in terms of size. However, the literature review

shows that most social enterprises are SMEs compared to traditional corporations. ▪ Criteria and Legislation: Government bodies are introducing country-specific policies about what clas-

sifies as a social enterprise and regulations for such enterprises as entities distinct from regular corpo-rate regulations.

▪ Reporting: Social enterprises typically purposefully include KPIs (Key Performance Indicators) on pro-gress toward meeting social objectives in reports, versus only financial information.

At the same time, one of the major differences in definitions for social enterprises is how strict the intentionality of the social enterprise must be. Most definitions would place enterprises with positive social impacts that were not the intended goal of the creation of the enterprise as a socially responsi-ble business, which could also be potentially interesting for SwiSOX depending on a variety of factors – including its commitment to social responsibility – as discussed in the section below.

1.1.4. Basic qualifications and framework for determining the eligibility of social enterprises for the SwiSOX

Based on the findings regarding various definitions of social enterprises from the section above, we put forward a framework to help in the selection and assessments of potential candidates of both social enterprises and socially responsible businesses:

Figure 2: Framework of a social enterprise for the SwiSOX. Own illustration.

First, the enterprise must have a for-profit or commercial business model, i.e. they pursue the achievement of a financial profit at the end of the financial year. While also NGOs, state enterprises or foundations can be classified as social, these models are not sustainable and require ongoing fund-raising efforts. Second, the enterprise must demonstrate a credible commitment towards tackling social or envi-ronmental challenges. This can be shown in two ways: (1) the enterprise sees itself as a social enter-prise and therefore has specified its social purpose and mission in the articles of incorporation or stat-utes, or (2) the enterprise shows its commitment towards impact through other ways: for example,

COMMIT-

MENT

RELEVANCEBUSINESS

INDICATORS

BUSINESS MODEL

Demonstrating commitment towards tackling social or environmental challenges

Commercial enterprises using a scalable business model to achieve impact

Majority of business revenue must be linked to social purpose

Strong corporate governance, stable business foundation and investable structure

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the enterprise provides regular, specific, quantitative reporting about the achieved impact in their business operations. The impact must take place in an area which serves basic needs of underserved population groups, boosts economic prosperity or supports the preservation of natural resources. More specifically, the business model must be linked to and address at least one of the 17 UN SDGs and their 169 specific underlying goals. Third, general business indicators must be solid and a strong corporate governance must be in place. Enterprises should operate sustainably and be profitable. The company must employ a modern cor-porate governance structure with no empty key management positions and a clear delineation of du-ties and responsibilities between management and the Board. Fourth, the enterprise’s revenue sources must be linked to the specified impact area. This means, that an enterprise must originate a significant portion of its revenues from serving basic needs of un-derserved population groups, boosting economic prosperity or supporting the preservation of natural resources to be relevant for SwiSOX. We advocate to use the UN SDGs as the key criteria to classify social enterprises. The use of the UN SDGs as the key criteria to classify social enterprises is justified by the following reasons:

▪ Novelty: The UN SDGs were introduced in 2015, to succeed the Millennium Development Goals (MDGs) and are therefore relatively new. Therefore, the inclusion of the SDGs in academic research about social enterprises is thin. However, as the UN is a global body and the goals were accepted by their 193 mem-ber states, their relevance is very high. Furthermore, as following chapters will show, especially in the impact investors market, the SDGs already play an important role in classifying investments.

▪ Relevance: The 17 UN SDGs are very broad, covering social and economic development issues including poverty, hunger, health, education, climate change, gender equality, water, sanitation, energy, urban-ization and environment. All these topics clearly fall into the classic definition that a social enterprise must tackle social and environmental challenges.

▪ Practicability: The 17 goals are supported by 169 individual targets. Most of these goals are clearly underlined, structured and practical. They allow for classification as well as control scheme. Many in-vestors and enterprises already use the SDGs to classify their investments for business purposes.

To achieve the 17 SDGs, the UN counts on the private sector and aims to use the SDGs as a business compass. Efforts seem to be fruitful: As of today, almost 10,000 companies signed the UN Global Com-pact to adopt sustainable and socially responsible policies and report on their implementation using the SDGs.11 Companies are also starting to use the SDGs to justify their activities and promote the results in sustainability and annual reports: According to the Centre for Sustainability and Excel-lence’s “Sustainability Reporting Trends in North America 2017” 12, 41% of the surveyed 551 relevant companies (many of them among the Fortune Global 500) are expected to embed SDGs into their strategy and business practices within five years, and 71% of businesses say they are already plan-ning how they will incorporate the SDGs. While large enterprises have the resources to adapt their reporting to the SDGs, SMEs lack resources, experience and incentives to implement sustainability in their daily operations. However, their potential contribution to sustainable development is large. Therefore, according to Verboven & Vanherck (2017), government bodies are providing tools and plat-forms to support SMEs in this matter and specialized impact & sustainability management enterprises dedicated to the needs of SMEs are emerging (e.g. Sustacon). Moreover, by linking the SwiSOX impact methodology with the SDGs we are also responding to a growing trend on the investor’s side. The annual GIIN Impact Investor Survey13 (see section 1.2.2 for further details) states, that three out four investors already track their investments to the SDGs or intend to do so in the near future. Evidence for this development can also be found in Switzerland,

11 UN Global Compact: Who we are 12 Centre for Sustainability and Excellence (2017): Sustainability Reporting Trends in North America 2017 13 GIIN (2018): Annual Impact Investor Survey 2018

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one of the main financial hubs globally: according to a survey conducted by Swiss Sustainable Finance (SSF)14, 38 % of asset managers responded that they already have products with a specific reference to the SDGs and that they report on their contribution to specific SDGs. Another 12 % indicated that they plan to do so in future. However, the link between the SDGs and a listing at SwiSOX can only be made, if the fourth part of the framework, that an enterprise must originate a significant portion of its revenues linked to an impact-driven area, is applied very strictly. The purpose of SwiSOX shall not be aiming for the listing of companies which apply high standards on corporate social responsibility (CSR). As we will see later on, existing traditional and SME exchanges are starting to offer CSR or ESG indicators to investors. In this sense, SwiSOX aims to go one step further and allow only social or socially-responsible enterprises, which source their main income in the impact-driven area. Table 5 and 6 later on shows cases of en-terprises, how they distinguish and if and why they would be able for a listing at SwiSOX. Regarding the enterprise size, no restrictions are set. However, as findings from section 1.3. will show, a listing on a (social) stock exchange comes with somehow significant listing costs as well as a com-mitment to regularly report about their impact, which means that most small enterprises will not have the financial means to afford it. At the same time, large enterprises can list already today in any con-ventional stock exchange and will need to see a rage of tangible benefits to consider a listing on a social stock exchange. Therefore, we advocate to focus on medium-sized for-profit enterprises, based on the IFC definition from table 1. As we will see later on, the sweet spot for SwiSOX is the listing of medium-sized social or socially responsible enterprises, given the absence of any successful plat-form combining the stock exchange features with an added impact methodology. We are confident, that with the chosen framework we will attract the right enterprises to the platform as well as like-minded impact investors, with a good understanding of the impact investment universe.

1.1.5. Estimating the number of social enterprises

Estimating the market size for social enterprises is hard, especially given the fact that no global defi-nition of a social enterprise exists. iGravity estimates the potential market size based on the qualifica-tions set and framework in the section above and uses three steps: First, we look at the absolute numbers of SMEs around the world. Second, we look at various country-specific reports and esti-mates regarding the number of social enterprises domestically. Third, we extrapolate these num-bers to come up with a global estimated market size for social enterprises. The IFC MSME country indicators tracks the number of SMEs15 in every country16. Using the latest available figure and grouping the data by region, the distribution is the following17:

14 Swiss Sustainable Finance [SSF]: Swiss Sustainable Investment Market Study 2018 15 The classification of SME refers to the definition of the IFC in table 1. 16 However, some of this data needs to be taken with a grain of salt as the definition of company sizes varies from country to country and therefore the total aggregate is not related to the World Bank definition used in the introduction of this chapter. Collecting years of data ranges from 1997 until 2013, however the median year is 2011. Last but not least, some countries did not report the breakdown between small and medium-sized enterprises but only the total aggregate as SME and therefore were not included in the graph. Therefore, the data is based on 108 of 149 countries reported. 17 IFC (2018): MSME Country Indicators 2014

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Figure 3: Number of small and medium-sized enterprises according to region. Own calculations and illustration with data from IFC (2018). The total number of SMEs across the globe is approximately 15.3 million, including 13.6 million small enterprises and 1.6 million medium-sized enterprises (micro enterprises are omitted, as they are not in scope for SwiSOX due to their size). The graph shows that three regions (Europe, East Asia & Pacific and U.S. & Canada) have a relatively high number of SMEs compared to most emerging countries. An alternative grouping is done by classifying enterprises according to country income level and showing a clear positive correlation between income level and the number of SMEs.

Figure 4: Number of small and medium-sized enterprises according to country income group. Own calculations and illustration with data from IFC (2018). In a next step, we look at regional studies and data in which the definition of social enterprise was explicitly used. The following table summarizes findings from different countries and regions18:

18 While all data is officially reported, definitions of “social enterprise” as well as the reporting year varies from country to country. Enterprise, employment and economic figures refer to the year of the country reports.

186,373

1,122,242

4,353,712

7,953,196

15,192

346,998

284,969

1,019,105

0

1,000,000

2,000,000

3,000,000

4,000,000

5,000,000

6,000,000

7,000,000

8,000,000

9,000,000

10,000,000

Low income Lower middle income Upper middle income High income

Number of SMEs according to country income group

Small Medium

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Country Number Economic relevance Employment Other key infor-mation

Australia19 20k social enter-prises (or 1% of all 2.2 million enter-prises)

Generating between USD 24.1 to 36.2 bn of the country’s GDP (2-3% of total GDP)

No data n/a

European Union20

2.3 million social en-terprises (10% of all 23 million enter-prises)

Generating USD 1,641.6 bn of the Un-ion’s GDP (or 10% of total GDP)

Employing more than 11 millions peo-ple (4.5% of the ac-tive EU population)

1 out of 4 new enter-prises set-up every year in the Union is a social enterprise

France21 164k social enter-prises (7% of all 2.3 million enterprises)

No data Employing 2.3 mil-lion people (10.5% of total employment)

n/a

Italy22 35k social enter-prises (0.9% of all 3.7 million enterprises)

No data Employing 460k peo-ple (0.8% of total em-ployment)

n/a

The Nether-lands23

Between 5-6k social enterprises (be-tween 1.1% - 1.4% of all 439k SMEs)

Generating USD 3.5bn turnover (or 0.3 % of total GDP)

Employing between 65-80k people (0.78% - 0.96% of to-tal employment)

Between 2010-2015 the Dutch economy lost 75,000 jobs in other sectors, while social enterprises created 25k new ones.

Sweden24 77k social enter-prises (11.3% of all 680k enterprises)

No data Employing 142k peo-ple (2.84% of total employment)

n/a

Switzer-land25

35k social enter-prises (12% of all es-timated 287,000 en-terprises with at least 2 employees)

No data No data n/a

US26 No data Generating revenues of 500bn (approx. 3.5% of total GDP)

Employing over 10 million people (7.9% of total employment)

Nearly 10% of all newly established enterprises were so-cial enterprises

UK27 471k social enter-prises (nearly 9% of the UK small busi-ness population) and 1.21 million socially-oriented enterprises (22% of the UK small business population)

Generating USD 32bn of UK’s GDP (or 1.22% of total GDP)

Employing roughly 1.44 million people (4.6% of the total working population in the UK)

Compared to SME employers, more so-cial enterprise em-ployers generated a surplus or profit. Also social enterprise em-ployers are more likely to innovate than SME employers.

Table 3: Key figures of social enterprises from selected reports around the world. Sources: Please refer to footnotes in the table.

19 FASES (2017): Finding Australia’s Social Enterprise Sector 2016: Final Report 20 European Commission (2015): The Social Business Initiative of the European Commission 21 European Commission (2016): Social Enterprises and their Eco-systems: Country update France 22 European Commission (2016): Social Enterprises and their Eco-systems: Country update Italy 23 McKinsey & Company (2016): Scaling the impact of the social enterprise sector 24 European Commission (2016): Social Enterprises and their Eco-systems: Country update Sweden 25 Gonin & Gachet (2014): Social Enterprise Models in Switzerland. An Overview of Existing Streams, Practices, and Institu-tional Structures 26 Huffpost (2012): The Facts on U.S. Social Enterprise 27 DCMS & BEIS (2017): Social Enterprise: Market Trends 2017

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As it can be seen from table 3, social enterprises often play a significant role within a country’s economy, ranging between 1 to 10% of total domestic enterprises. To estimate the total number of social enterprises we combine the IFC data on SMEs from 108 coun-tries with the findings in table 3 and we assume three different scenarios, as illustrated in table 4.

Estimated share of social enterprises, measured as the share of all firms

1% (conservative scenario)

5% (realistic scenario)

10% (optimistic scenario)

Small enterprises 136'155 680'776 1'361'552

Medium enterprises 16'663 83'313 166'626

Total 152'818 764'089 1'528'178

Table 4: Estimation of total social enterprises in 108 countries. Own calculations based on IFC (2018) and various country reports cited in Table 2.

Our conservative scenario is that 1 % of all enterprises globally are social enterprises as this was the absolute minimum figure reported in all nine analyzed country reports. However, in some jurisdictions 10% might be closer to reality, as for example 10 % of all enterprises in the European Union are social enterprises as well as in the US, where 10 % of newly established enterprises are social enterprises. Employing conservative assumptions, we estimate there are at least 16,000 medium-sized social enterprises globally which would fit one of the most common definitions of social enterprises. We deliberately focus only on medium-size enterprises as we assume that only these companies have the financial strength (turnover for these companies is between USD 3-15 million, employee number ranges between 50 and 300) to meet the basic financial, reporting, transparency and disclosure re-quirements (as briefly discussed in the sections below) to justify a listing on a social stock exchange. It also goes without saying that not all of these 16,000 enterprises would necessarily be interested in listing on a stock exchange for a variety of reasons, including loss of enterprise ownership / control, higher levels of public scrutiny and transparency requirements, maintenance of financial require-ments, and the need to shift attention away from the business toward managing shareholders. With these caveats noted, the target social enterprise population for the SwiSOX are distributed according by region as follows:

Figure 5: Estimation of medium-sized social enterprises in 108 countries grouped by region. Own calculations based on IFC (2018) and various country reports cited in Table 2.

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1.1.6. HR limitations, market constraints & financing needs of social enterprises

Social enterprises face a number of common obstacles (see Smith & Darko (2014), Barraket (2015), European Commission (2015), RippleWorks (2016), Sharma (2015), McKinsey & Company (2016), Zur-ich (2017) & Deloitte (2018) amongst others):

▪ Human resource limitations: Social enterprises face special constraints related to human resources that result from the special characteristics of hybrid organisations (combining a social mission with a commercial orientation). Hybrid institutions require people with hybrid skills which are often hard to find in combination. For many enterprises with an NGO background, lack of business skills and orienta-tion is an issue and there is a risk that entrepreneurs act more like social workers rather than managers. Furthermore, as social enterprise profits are usually significantly constrained, enterprises may find it difficult to pay competitive salaries and bonuses and may have to rely more heavily on staff commit-ment and their intrinsic motivation to do good to compensate for that. These constraints in particular may limit certain entities interest or ability to list on an exchange, as it requires an increased level of corporate discipline (especially regarding public disclosures of information) which can result in a signif-icant shift of corporate culture).

▪ Market constraints: These constraints arise from both supply and demand side. On the supply side, social enterprises with a high impact model tend to focus on niche markets, particularly those at the ‘base of the pyramid (BOP)’. It may not always be easy or possible to derive benefit from the fortune concealed there. On the demand side, social enterprises often are forced to look for alternative revenue models (subsidies, grants, diversification by customer group or region), as their main clients often lack the necessary purchasing power.

▪ Financing constraints: Access to financing, like in all other commercial enterprises, is a critical compo-nent for enabling social enterprises to deliver on their mission and to scale and achieve greater impact.

As noted above, a major constraint to social enterprises, as for most SMEs, is financing: Access to finance was identified across almost every European country as a significant barrier to the develop-ment of social enterprises. For example, in Denmark over a third of social enterprises do not have any lines of credit and in the Netherlands this figure is close to 40 %. Financing at the start-up phase was highlighted as particularly problematic in some countries, for example France, whereas financing for growth and scaling up activities was identified as a greater gap in countries like Greece. In the UK, difficulties in access to finance was prevalent across the whole enterprise lifecycle.28 In developing countries, financing constraints are even tighter: according to the World Bank, 20.7 million SMEs are facing an overall financing gap of USD 4.5 trillion.29.The regional breakdown of this financing gap looks as follows:

Figure 6: Formal MSME finance gap in developing countries. Source: IFC (2017).

28 European Commission (2015): A map of social enterprises and their eco-systems in Europe 29 World Bank (2018): Small and medium enterprises (SMEs) finance

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While the financing gap for SMEs in developing countries is well researched and quantifiable, the de-mand for financing of SMEs in developed countries is more difficult to estimate. The OECD30 provides a yearly Scoreboard on Financing SMEs and Entrepreneurs. The statistics show that in 2016 one in four SMEs applied for a bank loan, a figure that has remained more or less constant over the past years. In addition, on average 6.21 % of all SME loan applications were rejected in 2016. Bank loans make up the majority of the balance sheet of SMEs, as SMEs are mostly unable to raise funds directly from investors. The graph below shows that security issuance in the Euro zone accounts for barely 1% for smaller firms and about 4 % for large corporations31:

Figure 7: Share of bank loans and issued securities as percentage of enterprises’ balance sheets. Source: Deutsche Bank (2014). According to a recent survey by the European Commission32, more than half of the SMEs33 in the EU expect to experience annual turnover growth in the next two to three years and 10% expect to grow substantially, which will require additional financing. Looking only at enterprises with 50-249 employ-ees (medium-sized enterprises), the financing needs look as follows:

Figure 8: Financing needs of European enterprises with 50-249 employees to realise growth ambitions over the next two to three years. Source: European Commission (2017). Approximately 42 % of enterprises would need between USD 115,000 to 1 million to realize growth ambitions over the next two to three years. We now apply this same distribution of financing needs

30 OECD (2018): Financing SMEs and Entrepreneurs 2018 31 Deutsche Bank (2014): SME financing in the euro area 32 European Commission (2017): Survey on the access to finance of enterprises (SAFE) 33 Please note, that the EU definition for medium-sized enterprises refers to enterprises with 50-249 employees (compared to the IFC definition with 50-300 employees)

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to the 14,000 social enterprises in more developed markets like US & Canada, East Asia & Pacific and Europe (listed in figure 5)34:

Range of financ-ing needs accord-ing to European commission

Share of total financing needs

Number Medium Sized Social Enterprises in US & Canada, East Asia & Pacific, EU ac-cording to own research

Average Fi-nancing Need (in EUR)

Approx. Total Fi-nancing Need (in EUR)

< EUR 25k 3% 418 20’000 10m

EUR 25k – 100k 7% 975 50’000 50m

EUR 100k – 250k 14% 1’950 200’000 390m

EUR 250k – 1m 28% 3’900 500’000 2bn

> EUR 1m 32% 4’456 2’000’000 9bn

n.a. 16% 2’227

TOTAL 100% 13’926 11.5bn Table 4: Estimation of financing needs of social enterprises in US & Canada, East Asia & Pacific, EU. Own calculations based on IFC (2018) and European Commission (2017).

Thus, based on these calculations, the approx. 14,000 medium sized social enterprises in developed countries have an indicative aggregate financing need of EUR 11.5bn, or USD 13.3 billion.

1.1.7. Social enterprises, socially responsible businesses and SwiSOX

In addition to the market assessment of social enterprises in the sections above, iGravity has devel-oped a mapping to show the domain of commercial enterprises which could be in scope for a listing. The target should be to reach enterprises that meet both the basic listing requirements (using size as a proxy) and fulfil criteria in terms of social purpose (these criteria are discussed in much more detail below). Given our research findings from academic and business sources, we mapped the existing universe of commercial enterprises on a two-dimensional graph with the social purpose on the hori-zontal axis and the company size on the vertical axis as follows:

Figure 9: Mapping of social enterprises according to company size and social purpose. Own illustration.

34 The other markets (Latin America & Caribbean, Sub-Saharan Africa, South Asia, MENA) have smaller and less mature economies. There are approximately 2,700 social enterprise in these locations, but such enterprises often have less sophis-ticated corporate governance structures or higher incentives to maintain private ownership (i.e. family companies).

Company size

Social purpose

Small enterprises with no identifiable social

business purpose

Small enterprises contributing to the

achievements of the UN SDGs

Small enterprises with specified and

identifiable social business purpose

Medium-sized enterprises with no identifiable social business purpose

Medium-sized enterprises

contributing to the achievements of the

UN SDGs

Medium-sized enterprises with

specified and identifiable social business purpose

Large enterprises with no identifiable social

business purpose

Large enterprises contributing to the

achievements of the UN SDGs

Large enterprises with specified and

identifiable social business purpose

AbsentExisting,

intentionallyExisting,

unintentionally

Small(10<50 employees, $100k<$3m sales)

Medium(50<300 employees,$3m < $15m sales)

Large(> 300 employees,

> $15m sales)

Not in scope for SwiSOX

Main scope for SwiSOX

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For enterprise size we follow the IFC’s definition from Table 1, as it is a global accepted and compre-hensive definition. Social purpose is assessed according to two categories, the intentionality of pursu-ing social goals as made explicit in corporate documents and whether goods produced or services offered are linked to the fulfilment of any of the SDGs. The rating of social purpose intentionality has three dimensions:

▪ Absent social purpose (i.e. traditional for profit): For an enterprise with an absent social purpose nei-ther the articles of incorporation (e.g. the statutes) nor the business purpose indicate any commitment to address social and/or environmental issues. Furthermore, these enterprises are likely not active in sectors linked to the UN SDGs.

▪ Unintentional social purpose (i.e. socially responsible business): This would be indicated mostly by the enterprise’s activities. We would suggest, that a company that originates a significant amount of its revenues from an activity that is linked to the fulfilment of at least one of the 17 UN SDGs as well towards the achievement of at least one of the underlying direct goals qualifies under the definition of unintentional social purpose. The main difference between this kind of enterprise and a “fully” social enterprise, is that the social purpose does not have to be explicitly described or mentioned in the en-terprise’s articles of incorporation. However, also an enterprise with an unintentional social purpose should regularly report their progress on impact, e.g. by publishing a yearly report.

▪ Intentional social purpose (i.e. social enterprise): An enterprise with an intentional social purpose would be placed on the right side of the horizontal axis. Such an enterprise clearly states that its main business motivation is to achieve a specific (or several) social goal(s). We therefore also assume that the link with the UN SDGs and their underlying goals would be fulfilled, as well as that a significant amount of the enterprise’s revenue is originated from its social purpose.

Enterprises without any social purpose or smaller ones are obviously out of scope (highlighted in red). Enterprises highlighted in green should be the primary focus for a listing on the SwiSOX, with the following enterprise clusters identified:

▪ Medium-sized enterprises with an intentional or unintentional social purpose as the main target group for the SwiSOX. This wider scoping clearly increases the market potential of enterprises for the SwiSOX, as calculations in the next chapter will show.

▪ Large companies that would qualify for a listing at a common stock exchange, but intentionally decided not to be listed. This can apply to family enterprises, cooperatives or normal companies that are capa-ble of raising money from private investors. However, in theory these enterprises may be interested to be listed on a social stock exchange, which may also differ in other characteristics from a common stock exchange. In practice though, we do not expect many large enterprises to request a listing, due to i) the lack of large socially-driven enterprises and ii) the desire of possible enterprises to list on a bigger stock exchange.

There remain two clusters which are not the main scope for SwiSOX: ▪ Enterprises with an absent social goal and an absent tangible social impact should not be the focus

target group of the SwiSOX. After all, one of the main unique value propositions of the SwiSOX is that it creates a platform where socially orientated enterprises and investors could meet. Opening up the platform for enterprises without any social purpose would undermine that effort.

▪ Small enterprises with an intentional or unintentional social purpose would clearly fulfil the “social” criteria to be listed on the SwiSOX. However, given their size, a cost/benefit calculation for these en-terprises could be rather negative, given their lower financing requirements and the relatively high expenses and sophistication needed for a listing at the SwiSOX.

For a better understanding, table 5 portraits different kind of enterprises, which would be eligible for a listing at SwiSOX according to the scoping in figure 9 and table 6 enterprises which would not be eligible:

Examples of enterprises which would be eligible for a listing at SwiSOX

Enterprise name Summary of activity Classification for SwiSOX Rationale for classification

South Pole Group supports businesses and governments across the globe in realizing deep decarbonisation pathways across industries, based on a thorough understanding of climate risks and opportunities in specific sectors, as well as the highest emission reduction stand-ards.

We would classify South Pole Group as a medium-sized enterprise, with an intentional social purpose, which would be eligible for a listing at SwiSOX.

The main objectives of the enterprise are directly linked to the social purpose, the goal to limit global warming to well below 2°C. By realizing its vision “climate action call for all” and supporting businesses and governments in the energy transition to a climate-smart society, it achieves measurable impact and supports the realiza-tion of several UN SDGs.

3s, owned by Saraplast, was established as In-dia’s first professionally scaled portable sanita-tion and waste management company. It also provides cleaning services and most recently a harbinger for setting up bio digester based low cost household and community toilets for ru-ral and urban India.

We would classify 3s as a medium-sized enterprise, with an unintentional so-cial purpose, which would be eligible for a listing at SwiSOX.

In India almost half of the population has no access to sanitation services. This leads to severe diseases and high child mortality. 3s, despite not defining itself as a social enterprise, is tackling this circumstance by deploy-ing portable toilets to construction sites, events and re-mote areas in India, contributing to the access to clean sanitation for the population.

M-KOPA is a Kenyan solar energy company that was founded in 2011 and sells home solar systems in Kenya, Tanzania, and Uganda. Off-the-grid household customers pay a deposit to take the solar system home, then pay a daily amount through the mobile payment system M-Pesa for a year, after which they own it.

We would classify M-KOPA as a medium-sized enter-prise, with an uninten-tional social purpose, which would be eligible for a listing at SwiSOX.

M-KOPA does not describe itself as a social enterprise. Instead, the founders saw a business opportunity in a country, in which the majority of the people rely on fos-sil energy sources to power their households and de-cided to offer portable home solar systems, which in ad-dition can be paid off through a mobile payment system. In doing so, M-KOPA is actively contributing to the re-duction of greenhouse gas emissions and to health im-provements.

Table 5: Examples of enterprises which would be eligible for a listing at SwiSOX, according to defined scoping.

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Examples of enterprises which would not be eligible for a listing at SwiSOX

Enterprise name Summary of activity Classification for SwiSOX Rationale for classification

Danone is a French multinational food-prod-ucts corporation based in Paris. The company is active in four businesses (Essential Dairy and Plant-Based Products, Early Life Nutrition, Medical Nutrition and Waters) and its portfo-lio includes brands like Activia, Actimel, Evian or Volvic.

We would classify Da-none as a large enter-prise, with an absent so-cial purpose and there-fore not eligible for a list-ing at SwiSOX.

Danone certainly is a leading enterprise in the world of corporate social responsibility. They have been certified by B Corp as one of the first multinationals, publish de-tailed yearly impact reports, are part of several social re-sponsibility indexes and manage own social innovation funds,. Nevertheless, the main source of income of Da-none (sales of food and beverages) is not directly linked to a social or environmental impact.

Patagonia is an American clothing company that markets and sells sustainably produced outdoor clothing.

We would classify Pata-gonia as a medium sized enterprise, with an ab-sent social purpose and therefore not eligible for a listing at SwiSOX.

In the clothing industry, with brands like H&M, Inditex or C&A, being under pressure for socially and environmen-tally irresponsible business behavior, Patagonia is praise-worthy example: Their products are produced with or-ganic cotton and fair-trade certified, promotes new con-cepts such as “Worn Wear” and it donates 1% of its annual sales to environmental groups. Nevertheless, the main source of Patagonia’s income (production of outdoor clothes) is not directly linked to a social or environmental impact.

Unilever is the world’s largest consumer goods company (measured by total reve-nues). Its products include food and bever-ages, cleaning agents and personal care prod-ucts.

We would classify Unile-ver as a large enterprise, with an absent social pur-pose and therefore not eligible for a listing at SwiSOX.

Similar to Danone, Unilever is re-thinking the impact of its core business. The company’s CEO is a strong advocate of the mantra “What is good for the planet, is good for our business”. Unilever’s efforts, for example to dismantle the central CSR department and integrate the topic into every business department, were recognized with a series of sustainability awards. However, the majority of the com-pany’s produced goods are not directly linked to contrib-ute to a social or environmental purpose.

Table 6: Examples of enterprises which would not be eligible for a listing at SwiSOX, according to defined scoping.

Furthermore, while specific basic financial and reporting (and other) initial requirements will be fur-ther developed in Section 3 (‘Gaps and Opportunities’), it is suggested to develop listing parameters along the following lines:

• Minimum share capitalization of USD 2 million and turn-over of USD 5 million

• Historic track record (minimum 2 years) of audited / published financial statements

• Board of Directors of at least 3-5 members

• Historic track record (minimum 2 years) of impact reports (published in according with SwiSOX princi-ples)

• Any geographic restrictions regarding country of domicile / incorporation per Swiss regulatory author-ities

• Evidence of structures in place to comply with listing disclosure and transparency rules.

1.1.8. Market trends

Social enterprises are gaining momentum worldwide, supported by a number of trends like rising con-sumer awareness, demand of future workforce and technological progress. According to a multi-country study by the Global Entrepreneurship Monitor (GEM), globally almost half as many people are creating ventures with a primarily social or environmental purpose as those with a solely commercial aim and that every third new start-up aims for social good35. What are the factors influencing the rise of social enterprises? Most importantly to note, is that all important stake-holders are contributing to it. In the past years, public sector or market failures have intensified. These failures were one of the original causes for social enterprises to emerge36. In many countries, govern-ments are privatizing the provision of public services. In addition, ODA is insufficient and accounts for about 0.3% of the Gross Nation Income (GNI) of developed countries, far below the targeted 0.7%. As a result, social entrepreneurship is gaining momentum worldwide to tackle some of the global chal-lenges such as climate change, food security and the lack of basic services.37 Businesses are also being expected to fill a widening leadership vacuum in society. Across the globe, people trust in business versus the government can vary greatly. There is a widespread perception that political systems are becoming more polarized and less effective at meeting social challenges.38 And businesses respond to this trend. According to the KPMG Survey of Corporate Responsibility Re-porting 2017, CSR is standard practice for large and mid-cap companies around the world. 78 % of the 4,900 companies studied in the survey suggest that CSR is relevant for investors.39 The newer generations are also an important stakeholder and driver of a more ‘social and inclusive’ economic system. For example, the Millennial’s generation wants to work for enterprises which are not only profit maximizing but also looking at the social impact of their business. A study by Deloitte found that 86 % of Millennials think that business success should be measured in terms of more than just financial performance.40 A study from the Stanford Graduate School of Business written by Mont-gomery & Ramus (2003) revealed that 90% of MBAs from business schools in Europe and North Amer-ica prefer working for organizations committed to social responsibility. And enterprises seem to be aware of that fact: according to the 2016 PwC Global CEO survey,41 76% of CEOs define business suc-cess by more than financial profit. Moreover, as social enterprises are statistically more inclusive than

35 GEM (2018): Global Entrepreneurship Monitor 2018 36 Newing (2011): Social enterprises: Filling the gap where market has failed 37 EY (2014): Social entrepreneurship: Emerging business opportunities creating value for society 38 Deloitte (2018): The rise of the social enterprise 39 KPMG (2017): Survey of Corporate Responsibility Reporting 2017 40 Deloitte (2018): The rise of the social enterprise 41 PwC (2016): 19th Annual Global CEO Survey

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traditional enterprises42 they are well positioned to capture the vast potential of women entering the labor market and looking for leadership positions43. Millennials are relevant not only as potential workforce but as well as consumers, further driving the rise of social business models. A Nielsen global online study found that Millennials continue to be most willing to pay extra for sustainable offerings—almost three-out-of-four respondents in the latest findings, up from approximately half in 2014.44 Last but not least, technology is also having a large impact on society as it creates massive opportuni-ties to achieve sustainable, inclusive growth. For example, blockchain could authenticate a richer, more accurate global ledger of a social enterprise’s social and environmental performance to enable truer assessment45. Hazam et al. (2017) show, that crowdfunding platforms have the potential to mo-bilize large investments globally at small costs. Mobile technology has the potential to connect and empower the poor and the underprivileged in the remotest areas.46 Furthermore, in a globalized world, technology will play a critical role in enhancing value chain transparency. Social enterprises could be able to track products from the manufacturer to the end consumer to help confirm quality but also its social impact.47

1.1.9. Conclusions & relevance for the SwiSOX

This analysis of the state of social enterprises has shown the following: there is an overwhelming con-sensus that social enterprises in form of SMEs will play a crucial role in the future, but there is little consensus on how to define a social enterprise. Further, not all social enterprises are of the proper size, sophistication or lack the appropriate motivation and interest to be listed on a social stock ex-change, resulting in the conclusion that the approximate 14,000 medium-sized social enterprises within developed countries would be one of the clusters of potential listers for SwiSOX. These com-panies have a roughly estimated aggregate capital demand of USD 13.3 billion. By further classifying the broader universe of commercial enterprises by size and social purpose intention, we identified the second potential cluster for listing on the SwiSOX as medium to large enterprises with unintentional social impacts (which could also be defined as socially responsible businesses, though definitions re-main fluid). We also proposed a feasible and useful framework for the classification of enterprises for SwiSOX based on basic listing requirements and social impact parameters. To summarize, the framework con-sists of a business model tackling social or environmental challenges, a credible commitment towards impact, the relevance of the business activities and sustainable business indicators. Finally, we also suggested that SwiSOX link its impact methodologies with the SDGs.

1.2. Understanding the Impact Investing market 1.2.1. Definition & scoping

In the past years, impact investing has experienced increased public attention as the investor base has grown significantly. The term “impact investing” was first used at the Rockefeller Foundation’s meet-ing with leaders in finance, philanthropy and development at the Bellagio Center in 200748. It refers to investments made into companies, organizations, and funds with the intention to generate social and environmental impact alongside a financial return. Impact investments can be made in both emerging and developed markets, with a target range of returns from below market to market rate,

42 DCMS & BEIS (2017): Social Enterprise: Market Trends 2017 43 Stoddard (2018): 5 social responsibility trends to watch for in 2018 44 Nielsen (2015): Green Generation: Millennials Say Sustainability Is A Shopping Priority 45 Stoddard (2018): 5 social responsibility trends to watch for in 2018 46 Management Study Guide (2018): The Role of Technology in Social Entrepreneurship 47 Deloitte (2014): The path to supply chain transparency 48 The Case Foundation (2018): A short guide to impact investing

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depending on investors' strategic goals. The growing impact investment market provides capital to address the world’s most pressing challenges in sectors such as sustainable agriculture, renewable energy, conservation, microfinance, and affordable and accessible basic services including housing, healthcare, and education. In a generalized investors landscape, impact investors would be allocated as follows49:

Figure 10: Mapping of impact investors in a generalized investors landscape. Own illustration based on Sonen Capital (2018).

At the bottom are philanthropic investors or donors. They donate or invest money without expecting a financial return, as maximizing impact is their first priority. According to UBS, global assets of phil-anthropic foundations in 23 countries and Hong Kong identified in their Global Philanthropy Report total close to USD 1.5 trillion and spend about USD 150 billion per annum50. Because their study does not include all countries, or all foundations in the subject countries, and because many foundations are reluctant to make public financial information, the true figure is certainly greater. New trends are emerging in this segment: foundations are increasingly employing a range of social investment strat-egies to maximize their impact and there is a growing interest in evaluating and measuring program outcomes.51 A growing number of foundations are also starting to offer low-interest loans, buying into green business ventures, and investing in other asset classes to advance their missions52. Going up, at the very left, we find traditional investors who don’t integrate any filters regarding sus-tainability or impact. They are followed by traditional investors who apply any form of filter to exclude harmful investments and minimize negative impact or to select best in class investments following a methodology, e.g. ESG integration. This is the most common approach for investors to invest in a sustainable manner. According to EY53, sustainably managed investments (implementing exclusion criteria like ESG or SRI) already account for 18% of total AUM in the wealth and asset management industry. In Switzerland alone, according to a market study conducted by SSF, assets following an ESG approach were reported at CHF 538.1 billion, followed by ESG engagement at CHF 475.6 billion (ESG engagement goes beyond passive screening to proactively using the ESG framework to engage with firms around these issues). The exclusion of controversial business practices or areas ranked third,

49 Sonen Capital (2018): Impact Investing Spectrum 50 UBS (2018): The Global Philanthropy Report: Perspectives on the global foundation sector 51 UBS (2017): Global Philanthropy Report 52 Kramer & Cooch (2007): The Power of Strategic Mission Investing 53 EY (2017): Sustainable investing: the millennial investor

Financial return

Impact

Philanthropic investors investing but not expecting a significant financial return

Traditional investors not integrating any

sustainability or impact indicators

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Zero HighLow to medium

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amounting to CHF 382 billion.54 While the majority of ESG integration methodology is adapted on equities, according to MSCI55 (an investment research firm), the trend to integrate ESG into fixed in-come products will accelerate in the near future, as demand from leading asset owners to align their ESG frameworks across asset classes coincides with interest in how ESG factors can add value to credit analysis. Impact investors can be found at the very right and can be described by the four applying character-istics56:

▪ An investor’s intention to have a positive social or environmental impact through investments is essen-tial to impact investing.

▪ Impact investments are expected to generate a financial return on capital or, at minimum, a return of capital.

▪ Impact investments target financial returns that range from below market (sometimes called conces-sionary) to risk-adjusted market rate, and can be made across asset classes, including but not limited to cash equivalents, fixed income, venture capital, and private equity.

▪ A hallmark of impact investing is the commitment of the investor to only invest in companies that can report on their social and environmental impacts, ensuring transparency and accountability while in-forming the practice of impact investing and building the field.

1.2.2. Market size & players

To estimate the overall impact investing market size, we combine the GIIN Annual Impact Investor Survey with some of the main instruments most likely not covered by the GIIN survey such as green bonds, social bonds and Social/Development Impact Bonds (SIBs/DIBs). In the latest edition of GIIN’s annual impact report57, the organization interviewed 226 impact inves-tors which currently manage USD 228.1 billion in impact investing assets, with a median of USD 92 million. Compared to 2017, impact assets have nearly doubled from USD 114 billion, with only 17 additional investors were surveyed. Even though the report does not provide estimates of the overall size of the impact investing market, it is the best available proxy. Putting these numbers into global perspective, the UNDP estimates that total impact investment assets account for only 0.2 % of global wealth, based on GIIN figures from 201658. The graph shows, that surveyed investors are spread across the globe:

Figure 11: Geographic allocations by AUM and percent of respondents. Source: GIIN (2018).

54 Swiss Sustainable Finance [SSF]: Swiss Sustainable Investment Market Study 2018 55 MSCI (2018): 2018 ESG trends to watch 56 GIIN (2018): What is Impact Investing? 57 GIIN (2018): Annual Impact Investor Survey 2018 58 UNDP (2018): Financing Solutions for Sustainable Development

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The breakdown of the organization type of the surveyed investors shows the dominance of Develop-ment Financial Institutions (DFI) as main source of funding. Only seven DFIs account for almost half of the total impact investments AUM covered in the survey, while 106 fund managers (which are almost half the respondents) only manage 30 % of total AUM.

Table 7: AUM by organization type. Source: GIIN (2018)

Furthermore, respondents allocate the greatest share of capital through private debt (41%), followed by private equity (18%) and public equities (14%). It is important to point out that not all impact in-vestors would be inherently interested in a social stock exchange for a variety of factors. Notably, DFIs may have development mandates which may limit their ability to participate in public exchanges. Con-trastingly, a social stock exchange could increase participation from institutional / fiduciary investors (such as pensions / insurance companies) which often have regulations restricting their investments to those registered on public exchanges. Further, in terms of asset allocation, it is interesting to note that the largest portion of impact investments were made in the private debt sector, which may indi-cate that SwiSOX should focus equally on developing debt products (in addition to equities) for the platform. The impact investment funds from these organizations are invested in the following sectors:

Figure 12: Sector allocations by AUM and percent of respondents. Source: GIIN (2018).

Five-year repeat respondents grew their allocations to listed equities most substantially (CAGR of 57%), albeit from a very small base. Allocations also increased to private equity (19%) and private debt (17%). On the other hand, allocations decreased for equity-like debt (−5%) and other instruments (−7%). This capital is invested to businesses across stages of development. The greatest share of AUM is invested in mature, private companies (39%) and growth-stage companies (35%). High numbers of

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investors allocate smaller amounts of capital into seed and venture-stage companies, as the break-down below shows:

Figure 13: Allocations by stage of business, by AUM and percent of respondents. Source: GIIN (2018) Another important contributor to impact investing is the green bond market. Green bonds finance projects with a clear environmental benefit (e.g. renewable energy, energy efficiency, climate change adaptation)59. In 2017, green bond issuances passed the USD 100 billion benchmark (growth of 78% compared to 2016), as the figure below shows:

Figure 14: Total green bond issuances by type. Source: ICMA (2018). This means, that green bond transactions accounted for approximately 2.7% of global bond market transactions60. And this should not be the top of the flagpole: former UN climate chief Christiana Figueres said green bonds issuance needed to hit USD 1 trillion a year by 2020 to support international climate goals61. Up to now, investments in renewable energy continue to be the most common use of proceeds, followed by low carbon buildings and energy efficiency and clean transport. The biggest issuer of green bonds is China, followed by France, the U.S. and Germany. Aggregated, Europe is at the forefront of green bond issuance: in 2017, 145 entities have issued green bonds in Europe, mak-ing it a third of the global total, indicating that green bonds could be a strong potential market niche for SwiSOX.62 Interestingly, the issuer base is very diversified: Investors and underwriters, such as Bank of America Merrill Lynch, Credit Agricole and HSBC, have seen a tremendous growth of issuers and issues, as numerous public and private entities joined or issued green bonds in 2017. Sovereign states like Poland and France hit the market with the first sovereign green bonds, principally for the financing

59 International Capital Market Association[ICMA] (2018): Green & Social Bond Market Update 60 Climate Bonds Initiative (2017): Green Bonds Market Summary - Q3 2017 61 Darby (2018): Ex-UN climate chief calls for green bonds to hit $1 trillion by 2020 62 Climate Bonds Initiative (2018): The Green Bond Market In Europe

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of renewable energy and sustainable infrastructure projects. Furthermore, large corporations have issued green bonds, including Apple, Iberdrola, Intesa SanPaolo, QBE Insurance Group and TenneT.63 Two other instruments, that have seen rapid growth rates in the universe of impact investing in the past years are social bonds and SIBs / DIBs. Both bonds have the goal to finance social projects, but while SIBs / DIBs are being backed by an international finance institution or private actors and have a standardized yield to maturity structure, they only reimburse investors if the outcome of the project is successful.64 Both instruments are even newer than green bonds, but have gained a lot of attention in the aftermath of the financial crisis. Since 2014, social bonds annual issuance volume has grown 17x as of 2017 with the majority of issuances based on the social bond principles. At the end of 2017, social bond issuances reached USD 8.8 billion, issued by the public sector (USD 5.3 billion), supranational organizations (USD 2.1 billion) and the private sector (USD 1.3 billion).65 An example for a successful social bond program is the Edu-cation, Youth, and Employment (EYE) bond series, issued by the Inter-American Development Bank (IDB). The bonds fund effective teaching and learning among children and youth or policies to improve job opportunities. Currently total volume exceeds USD 1 billion.66 The first SIB was launched 2010 in the UK: the Peterborough SIB, which was set up with £5 million from trusts and foundations, helped to fund the One Service in the city, an organization that works to prevent prisoners from reoffending. Seven years on, the service has cut reoffending rates by 9 %, 1.5 percentage points above the target set by the Ministry of Justice. The 17 investors in the bond have also been repaid their initial capital plus a 3 % return.67 Since then, over 100 SIBs have been imple-mented across 24 countries collectively mobilizing USD 392M in capital seeking to achieve a multi-tude of social outcomes68. Up-front capital commitments for all active SIBs range from an estimated USD 110k - 7.5 million, with an average commitment of USD 2 million69. Amongst issuers are also tra-ditional financial intermediaries, such as Goldman Sachs70 or UBS71. The following table provides a summary of the portrayed impact investing market elements:

Market Estimated size Geographical focus Investor base

Impact investing USD 228.1 billion Globally Private and institutional investors, DFIs

Green bonds Approx. USD 160 billion Globally Private and institutional investors, DFIs

Social bonds USD 8.8 billion Developing countries IFIs, DFIs

Social/Development im-pact bonds

USD 392 million Developed and develop-ing countries

Foundations, Banks, Governments

Table 8: Summary of different impact investing market elements. Sources: Various (refer to text in respective section)

Summing up the figures gives us a current estimated market size of almost USD 400 billion in impact investments. As of today, most of this amount is invested directly into enterprises or through securi-ties like investment funds and bonds. In the future, a portion of these investments could be exchanged through SwiSOX.

63 World Economic Forum [WEF] (2017): The green bond market, explained 64 The CSR Practice (2017): Difference between Social Bonds and Social Impact Bonds 65 International Capital Market Association[ICMA] (2018): Green & Social Bond Market Update 66 IDB (2018): About IDB EYE (education, youth, employment) bonds 67 Kay (2017): World’s first social impact bond achieved goals and repaid investors 68 Social Finance (2018): Social Impact Bonds reach global mass: 108 projects launched in 24 countries 69 Brookings (2016): Impact Bonds In Developing Countries: Early Learnings from the Field 70 Goldman Sachs (2018): Social Impact Bonds 71 UBS (2017): DIB - The new kid on the development block

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1.2.3. Market growth & drivers

The impact investing market is growing at a rapid pace. Again, of all the respondents to the survey, over 50% made their first impact investment in the past decade, indicative of the ongoing entry of new players to the industry. Additionally, 82 respondents that completed the survey in 2013 and again in 2017 demonstrated a CAGR of 13% for their collective AUM, growing from USD 30.8 billion in 2013 to USD 50.8 billion in 2017 and demonstrating the long-term viability of impact investing to investors. Applying this CAGR to the whole impact investment market covered by the GIIN survey until the year 2025 gives us the following growth estimation:

Figure 15: Estimation of the impact investment market growth using a compounded annual growth rate of 13 %. Own calcu-lations with data from GIIN (2018). Using this calculation base, the impact investment market as currently measured by GIIN could reach over USD 600 billion by 2025. To add another source, Research and Markets estimates that the global impact investment market is estimated to be valued at USD 307 billion by 2020, implying a 18% CAGR, which would be in line with the estimated growth chart72 above. According to the GIIN73, the main reasons for the strong growth rates are:

▪ Increasing client demand for impact investments ▪ Investments are part of the investor’s commitment as a responsible investor ▪ Impact investments are an efficient way to meet the investors impact goals ▪ Impact investments are financially attractive relative to other investment opportunities.

Technological advancements also have the potential to support impact investments in the future. Respondents of the GIIN survey expect the most important technologies to be analysis and use of big data (56 % rating this ‘very important’) and automated data collection and analysis (45 %). 29 % also cited blockchain technology as ‘very important’ for impact investing.74 As already stated in the chapter about the social enterprises’ trends, millennials are also in the driving seat when it comes to impact investing:

▪ Bank of America reported that 76 % of millennials see investment decisions as a way to express their social, political and environmental values75. Impact investments would fit that description perfectly.

▪ A recent study by Campden Wealth Management and Oppenheimer Funds also showed that a 64 % of American UHNW Millennials are interested or very interested in impact investing and 70 % expressed interest in social and responsible investing76.

72 Research and Markets (2017): Impact Investing Market by Illustrative Sector and Country - Global Forecast to 2020 73 GIIN (2018): Annual Impact Investor Survey 2018 74 GIIN (2018): Annual Impact Investor Survey 2018 75 CNN Money (2017): Impact investing: A $250 billion game-changer for finance 76 Campden Wealth Research, OppenheimerFunds (2015): Proving Worth The Values of Affluent Millennials in North Amer-ica

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▪ TONIIC, a global action community for impact investors, conducted a survey amongst wealthy Millen-nials and results underscore the findings quoted above: Of the 58 millennials around the world who participated in TONIIC’s survey, 79 % describe themselves as impact investors. The 21 % who do not describe themselves as impact investors explained that they lack knowledge about the field, have not yet invested in impact or simply do not have the interest at this time. Half of this group aspire to be impact investors.77

▪ Furthermore, as a lot of wealth will be transferred to Millennials through inheritances in the next couple of years (e.g. the amount in the US is to be reported at USD 40 trillion in the coming 30 years), this target group will become even more important for the development of impact investing.

Nevertheless, there remain challenges and obstacles around the impact investment market. The next section will look into details and what concretely is hampering the market to grow even faster.

1.2.4. Market obstacles & needs

As the impact investment market is growing, a heterogeneous investor base is emerging, with differ-ent needs. Some of the main obstacles and needs which would be effective in pushing impact invest-ment towards financial mainstream include:

▪ Sourcing & evaluation of deals: Sourcing companies which qualify for impact investments are not sim-ple: evaluating such companies has proven challenging, as they are highly diverse, spanning various sectors, levels of risk, and expected returns78. Sourcing the right deals and identifying appropriately mature companies can be costly, often requiring local country support, especially for deals in frontier markets79.

▪ Deal sizes: Investors often seek to invest larger amounts of capital than investees need, leading them to pass over smaller deals80. Especially institutional investors, which are needed to push impact invest-ments towards financial mainstream, are constrained by small deal sizes81. According to a WEF report82, the average direct investment made by impact investment funds into impact enterprises is significantly less than the growth capital deals of traditional private equity firms. Because the deal sizes are smaller, the costs of due diligence may be higher for impact investments and the deal economics may look fundamentally different.

▪ Exit options: Due to low standardization and absent central platforms, exits from impact investments are not simple. Investors agree, that there too few suitable exit options, especially if investors pursue the possibility of a “responsible exit”.83

▪ Standardization: Impact investors seem to wish for a range of well-defined offerings. Just as some mu-tual funds and exchange-traded funds concentrate on geographies, industries, and asset classes, so should impact investors come up with targeted offerings. Focusing on distinct social and environmental themes can help when it comes to setting goals for how much nonfinancial impact a fund will make.84

▪ Impact measurement: One of the greatest challenges in the space is the measurement of the social impact. With its unique dual mandate, impact investing has a number of measurement and reporting considerations that traditional investments don’t. However, the numerous standards for measuring so-cial and environmental impact (like GRI or IRIS) can be overwhelming, even for industry specialists.85 “Low sophistication of social impact measurements” was ranked as the second biggest barrier prevent-ing further allocation to impact investments in the Barclays Investing for Global Impact Report 201786.

77 TONIIC (2016): Millennials & Impact Investment Report 78 McKinsey & Company (2016): How impact investing can reach the mainstream 79 GIIN (2018): Annual Impact Investor Survey 2018 80 GIIN (2018): Annual Impact Investor Survey 2018 81 The Economist (2017): “Impact investing” inches from niche to mainstream 82 WEF (2013): From the Margins to the Mainstream Assessment of the Impact Investment Sector and Opportunities to Engage Mainstream Investors 83 GIIN (2018): Lasting Impact: The Need for Responsible Exits 84 McKinsey & Company (2016): How impact investing can reach the mainstream 85 McKinsey & Company (2016): How impact investing can reach the mainstream 86 Barclays (2017): Investing for Global Impact

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Standardization will also be critical when it comes to impact measurement: large institutional investors are not willing to accept ten investment funds reporting in ten different ways.87

▪ Information mismatch: Impact investment value chains are complex. Many parties are involved before an investment can be made. Coordination among and within these parties is complicated and funds are often reduced to a few key figures, with important nuances being lost in the intercommunication pro-cess.88

▪ Education gap: Even among wealth advisers that are aware of the concept, a handful of persistent myths and misperceptions constrain the growth of the market. For instance, it is often automatically assumed that impact investing requires a cut in financial performance, even though a growing body of literature has consistently provided evidence that risk-adjusted market-rate returns are achievable in impact investing. 89 This also leads to a lack of common understanding of the definitions and segments of the market90. To change this, a standardized education also at universities would be desirable.

Many of these obstacles and needs from investors seem to indicate the need for a centralized plat-form for impact investments, where social enterprises and impact investors can meet and satisfy their capital demand or supply.

1.2.5. Findings from impact investor survey

The sections so far on the impact investment universe will be complemented with insights from stand-ardized surveys, which iGravity conducted between mid-August and mid-September 2018 with 20 selected impact investors with different organization types and locations. Collectively the organiza-tions manage approx. USD 920 trillion of assets, thereof USD 20.5 billion are currently invested in impact investments. The distribution of the organization type of interviewees looks as follows:

Figure 16: Distribution of organization type of interviewed impact investors and aligned organizations. Own illustration. Figures 58 – 66 in the annex offer a detailed insight in the interview results. This section presents some of the highlights worth mentioning:

▪ A growing investment area: According to our interviews, 85 % of the interviewed institutions expect an increase or even a significant increase of their share of impact investments over the next three years. Most of the institutions rely on their own in-house team or/and specialized independent advisors to source quality impact deals. Interestingly, conferences and events were cited by 25 % of interviewees as a important source for quality impact deals, even though the answer possibility was not foreseen in the interview.

87 EY (2017): Profit and purpose: impact investing goes mainstream 88 Schramade (2017): The challenges of impact investing 89 Bouri (2018): Impact investing needs to break out of its niche 90 GIIN (2018): Annual Impact Investor Survey 2018

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▪ Difficulty in finding quality impact deals: 3 out of 4 interviewed impact investors state that they

would classify the procedure in findings quality impact deals as difficult or even very difficult. This fig-ures are in line with the findings from other reports cited in this study (e.g. the GIIN Annual Impact Investor Survey). When asked about the specific obstacles, investors named mostly the low deal sizes, finding the right risk/return profile and the lack of liquidity.

▪ High potential for a one-stop shop: Despite the fact, that only 15 % of the interviewed investors used one of the existing social stock exchanges so far, the potential for a social stock exchange offering mul-tiple products is high: The purchase of mutual funds and exit of own investments, were mentioned buy at least one-third of the interviewed investors as possible transaction options at SwiSOX, besides the purchasing of equities and bonds of social enterprises.

▪ Standardization of impact assessment is desirable: 85 % of the interviewed impact investors use their own in-house rating methodology to assess the impact of their impact investments, while only 11 % rely on an external provider exclusively – this makes the case for standardization, which would allow for a much simpler comparability of impact investments. Furthermore, almost half of the interviewees use the SDGs as a comprehensive part of their investment process and another third at least for report-ing purposes. Only 5 % are not using the SDGs and do also not intend to start using them in the near future.

▪ The rating at a social stock exchange should be an indicator: The question that got the interviewees most thinking was about, if the rating at a social stock exchange should be an entry barrier (so that enterprises with a too low rating cannot be listed) or an indicator (so that theoretically all enterprises that fulfil minimum criteria can be listed, independently of their rating). In the end, almost 2 out of 3 interviewees stated the indicator option would be preferable, but only if certain minimum criteria (such as regular reports about social outcomes and progress or that enterprises must clearly state their social mission) are fulfilled.

1.2.6. Conclusion & relevance for SwiSOX

Currently there are ten main types of impact investors, with the largest type as measured by AUM being DFIs, followed by for profit investment funds, and finally by pensions / insurance companies. In terms of instruments, impact investors have the highest investment allocation in private debt, fol-lowed by private equities. Excitingly, an aggregate 74 % of AUM are invested in either mature private companies or growth stage companies, indicating a potentially strong market for listers does exist in the market. Combining different market elements in the impact investment universe (impact invest-ments, green bonds, social bonds and social impact bonds) values a current market size of estimated USD 400 billion. In the future, part of these investments could be placed through a social stock ex-change, with the noted potential for niche products for debt or green bonds. There are also a number of underlying trends and facts that seem to support the launch of a social stock exchange. On the one hand, growing consumer demand for social investment options (especially from Millennials and from crowdfunding platforms), growing investor awareness and technological advancements are driving the demand for impact investments. According to Barclays, 54 % of individ-ual investors are interested in impact investing, for Millennials the number rises to 84 %.91 Asset man-agers and other financial institutions constantly keep reporting a growing number of assets allocated to impact investing92. Nevertheless, in relation to total assets globally, impact investing is still a niche. Furthermore, there are obstacles hampering financial mainstreaming like standardization, complex process of deal sourcing and evaluation and an education gap (also due to a lack of reliable data) amongst investors. In addition to the financing elements, we see real market gaps (such as investment matching, information asymmetry, and exit options, among others) that impact investors face that could be addressed by a social stock exchange. As it can be seen from the picture below, SwiSOX should function as a hinge between the two stakeholder groups:

91 Barclays (2017): Barclays Compass Q1 2017 92 GIIN (2018): Annual Impact Investor Survey 2018

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Figure 17: Simple mechanism of SwiSOX. Own illustration.

The next section will therefore show how stock exchanges work in general and present alternative exchange platforms to lay the ground for the value proposal of SwiSOX.

1.3. Making the case for a Social Stock Exchange 1.3.1. Definition and key figures

In the financial world, a stock exchange is an organized and regulated capital market where securi-ties are bought and sold by any investors – including individuals and institutions - at prices governed by the forces of demand and supply. Securities in this sense are financing or investment instruments that denote an ownership interest, provide evidence of a debt, a right to share in the earnings of the issuer, or a right in the distribution of a property. Securities include bonds, debentures, notes, options, shares, and warrants but not insurance policies, and may be traded in financial markets such as stock exchanges.93 Stock exchanges basically serve as primary markets where corporations, governments, municipalities, and other incorporated bodies can raise capital by channeling investor capital into pro-ductive ventures and also as secondary markets where investors can sell their securities to other in-vestors for cash, thus reducing the risk of investment and maintaining liquidity in the system.94 A more specific distinction between primary and secondary markets is included below95:

▪ Primary market: The primary market, also called the "issuance market", is the market in which a secu-rity is first issued. Companies use the primary market to raise capital. By issuing securities, they can divide major capital outlays into small units. In a first step, securities are placed directly with investors on the stock exchange or indirectly via banks without the involvement of the stock exchange. This latter option of the firm-deal underwriting of the issue by a bank or banking group is the most important kind of placement and the one that is most common in Switzerland. In a firm-deal underwriting, after exam-ining the issuer's accounts, a bank acquires all of the bonds or shares at a predetermined price. The placement risk is then taken on by the banks and the company / capital seeker can dispose of the pro-ceeds from the transaction.

▪ Secondary market: The market in which securities are traded on the stock market. All traded securities are public and available to everyone. In general, when talking about the public perception of a stock exchanges, the intended meaning is the secondary market.

93 Business Dictionary (2018): Definition Security 94 SIX (2018): Tasks of the Stock Exchange 95 SIX (2018): Primary and Secondary Market

SOCIAL ENTERPRISES

IMPACT INVESTORS

SwiSOXThe Swiss Social Stock Exchange

Tackling social or environmental challenges, by applying financially sustainable business operations.

Providing capital to enterprises aligned with the UN SDGs

Social enterprises are rated by the SwiSOX

Impact investors achieve double return bottom

line

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Table 9 shows the most important secondary markets (hence stock exchanges) globally and some key data:

Stock exchange Establishment date

Market capitaliza-tion (as of 2018)

Average daily trad-ing volume 2017

Average no. of daily trades 2017

New York Stock Ex-change (NYSE)96

1792 USD 21 trillion USD 41.9 billion 4.0 million

NASDAQ97 1971 USD 10.9 trillion USD 4.5 billion 1.6 million

London Stock Ex-change98

2007 USD 4.4 trillion USD 7.0 billion 1.0 million

Euronext99 1851 USD 4.6 trillion USD 8.3 billion 1.8 million

Tokyo Stock Ex-change100

1878 USD 6.2 trillion USD 24 billion 2 million

Shanghai Stock Ex-change101

1990 USD 5.0 trillion USD 3.1 billion 1.1 million

SIX102 1873 USD 0.97 trillion USD 5.4 billion 0.2 million Table 9: Key data of major stock exchanges around the world and the Swiss Stock Exchange (SIX).

On a global level, according to the World Federation of Exchanges (WFE), at the end of 2017 there were 46.5k companies listed on 114 stock exchanges with a total market capitalization of USD 87.1 trillion.103 To compare: total world GDP reached 80 trillion at the end of 2017.104 The breakdown of all enterprises per market capitalization shows that nearly 40 % of all listed enterprises have a market capitalization of less than USD 50 million, and nearly 20 % less than USD 10 million, a fact that will be elaborated further around the topic of SME exchanges:

Figure 18: Distribution of listed companies by market capitalisation. Source: WFE 2017. While equity shares are the most single traded financial instrument on stock exchanges, there are other financial instruments that can be bought and sold on stock exchanges. According to the WFE, in 2017, 17,000 bond issuers globally issued 170,000 bonds (thereof 46,000 new ones) valued at USD 67.2 billion, an increase in value of 10 % compared to 2016. Furthermore, while Exchange Traded Funds (ETF) listings were up 5.7% on 2016, with increased across all regions, value traded was down 12.6 %, almost entirely driven by the 13.9 % decline in turnover in the Americas (which accounts for over 85 % of the value traded of ETFs). Both listings and value traded of investment funds were down

96 NYSE (2018): Transactions, Statistics and Data Library 97 NASDAQ (2018): Statistical Milestones 98 London Stock Exchange (2018): Statistics 99 Euronext (2018): Factbooks 100 Japan Exchange Group (2018): Other Statistics 101 Shanghai Stock Exchange (2018): Historical Data 102 SIX (2018): Annual Statistics 103 WFE (2018): Annual Statistics 104 Statista (2018): Global gross domestic product (GDP) 2022

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on 2016 (9.5 % and 15 % respectively). Other financial instruments which are traded regularly are derivatives such as stock options and futures as well as currency, interest rate and commodity deriv-atives.105 Some of these financial instruments / products do not have perfect correlations with the impact in-vestment market – for which a social stock exchange would likely trade equity shares (both common and preference shares), bonds, and investment funds – and eschewing more complicated financial products such as ETFs and derivatives until the market reaches a higher degree of maturity.

1.3.2. Key players at stock exchanges

The trading world is divided into two groups: the customers (the buy side), and the people who take and execute the customers' orders (the sell side) 106. Customers can be grouped as:

▪ Retail: These are usually ordinary people who trade online or have a brokerage account and interact with their brokers.

▪ Asset Managers: Mutual funds or pension fund managers (public and private) who manage money on behalf of investors.

▪ Professional Traders: These can be for example hedge funds or high frequency traders. They trade alone or with a firm, who trade for a living using their own money, their firm's money, or on behalf of high net worth individuals.

The sell-side can be grouped as follows: ▪ Brokers: An individual or firm that buys or sells stocks for its clients and charge a commission (this is

known as agency trading). ▪ Broker-Dealers: Brokers that can buy and sell stocks for clients (agency trading) but can also execute

trades for their own accounts (principal trading). ▪ Market Makers: They quote prices to both buy and sell stocks and other securities. They make their

money by profiting from the difference (the spread) between the buy and sell orders.

However, the access to the stock exchange can be restricted to professional participants only. In Swit-zerland for example, admission to professional securities trading requires authorization from the Swiss Financial Market Supervisory Authority (FINMA).107 Looking at the market participant lists of SIX108 or Euronext109 one quickly notes that the vast majority of participants are banks, which are key to the functioning for the stock market, especially for the buy-side.

1.3.3. Characteristics of stock exchanges

According to the United Nations Conference on Trade and Development (UNCTAD)110 there are at least four main benefits for investors from a stock exchange:

▪ Investment horizons: Stock markets provide investors with a comparatively easy means of exiting their investment, in that the shares listed on a stock exchange can be sold in the secondary market. Investors do not have to identify a specific buyer for their securities nor do they have to negotiate the terms of the sale as these are determined by the rules of the market. This reduces the risk for investors in putting money into an investment with different time horizons than their own investment horizons.

▪ Transparency: Through the initial listings and ongoing disclosure requirements, exchanges reduce the costs that investors would otherwise incur in finding out the information they would need for invest-ment decisions. This also helps to address the information asymmetry problem where company insiders necessarily have more information about the company than outsiders.

105 WFE (2018): Annual Statistics 106 CNBC (2010): Man Vs. Machine: ECNs, ATS, HFTs—Who the Players Are 107 SIX (2018): Securities Trading 108 SIX (2018): Liste der Handelsteilnehmer 109 Euronext (2018): Member List 110 UNCTAD (2017): The Role of Stock Exchanges in Fostering Economic Growth and Sustainable Development

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▪ Investor protection: The rules of the exchange, combined with relevant securities market regulation and associated settlement infrastructures address or at least mitigate contract enforceability risks where investors might not otherwise be sure that they would receive the benefits of the investment they have bought.

▪ Pooling funds: By bringing together a large and diverse set of investors, markets reduce the size of an individual investment. This allows investors to manage the extent of the risk they take on and thereby the risk to which an individual investor is exposed.

These features can be summarized as risk mitigation, risk spreading, risk transformation and benefit enterprises: stock markets can reduce the cost of capital for enterprises and increase the potential investment pool for bigger or riskier ventures. In addition, stock exchanges also matter on a macro-economic level as several studies show there is a positive, causal link between the presence of stock markets and economic development: Demiguc-Kunt and Vojislav (1996) found that firms in countries with active stock markets experience higher-than predicted growth rates. Looking at data from 40 countries over four, five-year periods, Beck and Levine (2002) found that that financial market devel-opment is important for economic growth and both banks and stock markets independently and con-currently have a role to play. Caporale et al. (2004) again demonstrated a causal link between stock markets and economic development. The world’s top stock exchanges are increasingly competitive and increasingly beholden to investors expecting growth. As a result, the exchanges are undertaking bold marketing initiatives, seeking to access foreign markets through acquisitions (for example Euronext which is a result of a merger of the Amsterdam Stock Exchange, Brussels Stock Exchange, and Paris Bourse) and alliances (for example the creation of NYSE Euronext in 2007) and attempting to differentiate themselves from the rest of the field. Additional offerings include service portfolios covering the entire process chain, including secu-rities and derivatives trading, transaction settlement and the provision of market information, as well as the development and operation of electronic trading systems.111 Technology is to be seen as the most important factor influencing the development of stock exchanges. Pictures from traders and brokers on stock exchange floors are indeed a relic from past times. According to the Bank of Eng-land112, only a small number of stock exchanges still have an actual physical trading floor:

Figure 19: Numbers of electronic and floor equity exchanges. Source: Bank of England (2017). Especially the highly liquid foreign exchange (FX) market is dominated by electronic and increasingly automated, algorithmic trading as the next graph will show:

111 EY (2009): IPO Insights 112 Bank of England (2017): Keeping up with fast markets

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Figure 20: Share of algorithmic trading in FX spot markets. Source: BIS (2016). In these markets, there is less need for intermediaries to warehouse risk, due to the inherent liquidity characteristics that attract a wide range of participants, making it easier to find a near-instant match between buyers and sellers. This has allowed the emergence of new technology-focused, smaller, non-bank, market participants that specialize in using algorithms to execute and route orders at high speed. Chief amongst these are principal trading firms (PTFs), who trade on a proprietary basis, using sophisticated technology.113 1.3.4. Remuneration models of stock exchanges

Stock exchanges usually get remunerated through different types of fees. On a global level, according to the OECD, the revenue structure for the major stock exchanges in the world has changed as the picture below shows:

Figure 21: Revenue structure of stock exchanges 2004 and 2014. Source: OECD Business and Finance Outlook (2016). Still, most revenue is originated from trading activities. Stock exchanges basically charge fees to issu-ers (the most common ones are listing/placement fees) and fees to traders (trading and access fees). Table 8 gives a snapshot of the fee models from the major stock exchanges globally.

113 Bank of England (2017): Keeping up with fast markets

Charged to market participants Charged to listed enterprises

Stock exchange Basic fee Trading fees Access fees Listing fees

Tokyo Stock Ex-

change114 (TSE)

USD 4’450 (JPY 500’000) one-off Calculated by Monthly Trading value × Trading fee rate e.g.: < USD 4.5 million (< JPY 500 mil-lion) = 0 or between USD 0.89 billion (JPY 100 bil-lion) and 4.45 billion (JPY 500 billion) = standard rate × 2.7 where standard rate is between 0.20/10,000 to 0.30/10,000 depending on trading value. Value could be USD 48,000 (JPY 5.4 million) assuming lower standard rate and USD 0.89 billion (JPY 100 bil-lion) trading value

Charged based on the number of or-ders per month e.g. < 1 million orders = USD 1’780 (JPY 200’000) + USD 0.027 (JPY 3) per order or Between 3 and 5 million orders = USD 0.0062 (JPY 0.7) amounting to USD 18,600 (JPY 2.1 million) with 3 million orders

When the TSE is the main market (first section) the following one-off fees apply: Listing examination fee = USD 36’000 (JPY 4 million) Initial Listing fee = USD 135’000 (JPY 15 million) Public Offering fee = Number of new shares offered × offer price × (9/10,000) Furthermore, listed foreign compa-nies shall pay the Annual Listing Fee depending on the market capitaliza-tion: < USD 45 million (JPY 5 billion) = USD 8’500 (JPY 960’000) Between USD 450 million (JPY 50 bil-lion) and USD 2’250 million (JPY 250 billion) = USD 28’000 (JPY 3.12 mil-lion)

New York Stock Exchange115

USD 25’000 for first trading license (one-off)

Transactions in stocks with a per share stock price of USD 1.00 or more = USD 0.0012

USD 7’500 per month One-off fees for common stock, pre-ferred stock, and warrants issued by domestic issuers: < 30’000’000 shares = USD 100’000 Between 30 and 50 million shares = USD 125’000 > 50 million shares = USD 150’000 Annual fees for same security type: < 10 million shares = USD 30’000 > 100 million shares = USD 85’000

114 Tokyo Stock Exchange (2016): Trading Participation Fees; Tokyo Stock Exchange (2015): Listing 115 NYSE (2018): New York Stock Exchange Price List 2018; NYSE (2017): SCHEDULE OF FEES AND CHARGES FOR EXCHANGE SERVICES; NYSE (2018): NYSE Proprietary Market Data Fees

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Euronext116 Euronext does not charge one-off joining or annual membership fees.

Traders can choose between 2 op-tions, depending on trading volume: Option 1: Charge per executed order = USD 0.18 (EUR 0.15) Option 2: minimum commitment fee = USD 234’824 (EUR 200 000) per month: Between USD 0.7 and 1.17 (EUR 0.6-1) per order no minimum commitment = Between USD 1.17 and 1.53 (EUR 1-1.3)

Members are charged for their order entry session, or SLE, connections. No fee structure available.

Depends on market capitalization: < EUR 10 million market cap. = USD 11’741 (EUR 10’000) Additional annual fee of max. USD 64’576 (EUR 55’000) Between 100 and 500 million market cap. = 0.04% but max of USD 25’2436 (EUR 215’000)

SIX117 The one-off admission fee payable to the Exchange is USD /CHF 5’000 per general clearing member (GCM). In addition, the exchange charges par-ticipants an annual fee of USD /CHF 20’000 each.

Depends on the interface with the ex-change system. Standard trades for Blue Chip Shares are charged with USD /CHF 0.75-1 per transaction and USD /CHF 0.5-1 for mid cap shares.

Monthly access fee depends on con-nectivity option and bandwidth. Rates range from USD /CHF 0 with in-ternet connection of up to 1 Mbps up to USD /CHF 4’500 with optical link connection and bandwidth of up to 100 Mbps.

A basic charge of USD /CHF 3’000 is levied for the processing of a listing application. Additionally, a variable charge of USD /CHF 10 per CHF one million of capitalisation is levied, but max. USD /CHF 80’000 For maintaining listing, an annual basic charge of USD /CHF 6000 is lev-ied for each listed security. In addi-tion, an annual variable charge of CHF 10 per CHF one million of capitalisa-tion is levied, but max. USD /CHF 50’000.

Table 10: Fee models from major stock exchanges around the world. For sources please refer to footnotes.

116 Euronext (2018): Fees & Charges; Euronext (2019): Listing fees 117 SIX (2018): List of Trading Charges; SIX (2018): List of Charges under the Listing Rules

The table is not complete, as fee models can be very complex and additional fees can be charged for clearing and other ser-vices provided by the stock exchange. Fur-thermore, different fee models may apply for market makers. These are firms, that stand ready to buy and sell stock on a regu-lar and continuous basis at a publicly quoted price. In doing this, they ensure a minimum of liquidity for the functioning of the market.118 Comparing the portrayed stock exchanges in Table 10, it can be seen that for traders there seem to be two different approaches: either initial costs are very high, but then every transaction comes at a lower price. Or initial costs are low or even absent, but then transaction costs are relatively high. Normally for issuers, pricing follows the at-tractively and reputation of a stock ex-change but also liquidity in the market and hence potential turnover. To conclude this section, box 3 presents re-quirements that have to be satisfied that enterprises can be listed on selected stock exchanges around the world119.

1.3.5. Stock exchanges & sustainability

While financing is at the heart of what exchanges do, stock exchanges have also historically played a strong role in the development of capital market institutions, standards and corporate practices.120 More recently, this traditional role of promoting good governance has expanded to include the intro-duction of capital market policies and instruments designed to promote more sustainable investment practices, address the challenges posed by climate change, and support the achievement of the SDGs. According to the UNCTAD121, 38 stock exchanges of 82 worldwide have ESG indices, 12 have ESG listing rules and 11 list green bonds. Furthermore, the growth in membership of the UN Sustainable Stock Exchanges (SSE) initiative, which has more than tripled in the last two years, and the establishment of the WFE’s Sustainability Working Group (SWG), can both be seen as proxies for the increasing atten-tion exchanges are giving sustainability. Partner exchanges of the SSE range from global giants like NYSE and Nasdaq (United States) to large emerging market exchanges like B3 (Brazil) and JSE (South Africa) to small developing country exchanges like the Rwanda Stock Exchange or the Namibian Stock Exchange. ESG indices remain the most popular sustainability instrument among exchanges. These types of indices are used to promote sustainable investment, while also encouraging greater ESG transparency

118 SEC (2018): Market Maker 119 Nasdaq (2018): Initial Listing Guide; Euronext (2018): Next step; Shenzen Stock Exchange (2018) Listing requirements 120 UNCTAD (201): World Investment Report 2017 121 UNCTAD (2017): The Role of Stock Exchanges in Fostering Economic Growth and Sustainable Development

Being the biggest stock exchange in the world for tech

companies, NASDAQ has listing requirements on many

levels: Companies that want to be listed have to satisfy

criteria regarding finance, liquidity and governance. A

minimum market cap of USD 550 million, annual revenues

of over USD 110 million and at least 2,200 shareholders

are one of the main requirements.

Besides the main stock exchange, Euronext also offers

smaller exchanges for SMEs or family businesses. To be

listed on the SME exchange Euronext Growth, enter-

prises need a listing sponsor, a company accredited by Eu-

ronext that plays a lead role in the listing process, as well

as EUR 2.5 million free floating shares and the two last

financial years of audited accounts.

To be listed on the biggest SME exchange in world, the

Shenzen SME board, net profits of enterprises must be

positive over the last three years and aggregate value

must not be less than USD 4.4 million (RMB 30 million).

Furthermore, cash flow of the enterprise must be no less

than USD 44 million (RMB 300 million) with accumulated

revenue of the past three years. A catalogue of govern-

ance criteria must also be fulfilled to get listed.

Box 3: Listing requirements for different stock exchanges around the world. Sources: See footnotes on this page

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from issuers. There are more than a hundred ESG-themed indices around the world, created by ex- changes as well as specialist companies such as FTSE-Russell, MSCI, Standard & Poor’s, Thomson Reu-ters and others. As an extension of their role in promoting good corporate governance and ensuring the availability of relevant information for investors, many exchanges are playing an important role in promoting greater, and better quality, ESG disclosure. By mid-2017 there were 32 stock exchanges providing for-mal guidance to issuers on reporting ESG information, including 17 exchanges that introduced guid-ance for the first time in 2016 and early 2017. Still more exchanges are expected to introduce such guidance as the global trend among stock exchanges shifts towards explicitly recommending issuers report on sustainability issues. Moving beyond voluntary disclosure, ESG information is incorporated into the listing rules on 12 ex-changes as of mid-2017. Mandatory ESG disclosure rules are emanating from stock exchanges (e.g. Hong Kong Stock Exchange, Singapore Stock Exchange) as well as securities regulators (e.g. Securities and Exchange Board of India). These rules can have different scopes of application, sometimes apply-ing only to a subset of the largest listed companies, thus relieving smaller companies of any undue additional disclosure burden. Furthermore, an increasing number of exchanges are doing their own sustainability reporting and nine exchanges are reporting against the UN SDGs. This includes education/information programs for listed companies about the SDGs and SDG-specific disclosure guidance for listed companies.122

1.3.6. SME exchange platforms

While the main public stock exchanges are designed to absorb trading capacity of large enterprises, in the past few decades, an increasing number of stock exchanges worldwide have set up specialized SME boards or market segments with the intention of expanding SMEs’ financial access (among other reasons). The presence of such SME stock exchanges has been growing heavily in the past, as the figure below shows:

Figure 22: Number of SME platforms in operation. Source: UNCTAD (2017). Most of them can be found in high income countries (27) and upper middle-income countries (13). Many of these boards encourage listings by having different entry standards than the main board, streamlining the listing process and reducing the associated costs.123 Such alternative and SME mar-kets recorded a 16.7 % increase in domestic market capitalization in 2017, up to an aggregate USD 1.4 billion124.

122 WFE (2018): Sustainability Survey May 2018 123 WFE & Milken Institute (2017): Small and Medium-Sized Enterprises and SME Exchanges 124 WFE (2018): Annual statistics guide (vol 3)

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The table below shows the top ten of these SME stock exchanges and some key figures:

Table 11: Top ten of SME markets according to WFE. Source: WFE (2017).

As it can be seen from the table above, the majority of the major SME exchange platforms are based in Asia. The SME Board of the Shenzen Stock Exchange (SZSE) in China is by far the biggest SME stock exchange according to market capitalization. Furthermore, the Shenzen Stock Exchange also runs Chinext, a board specialized on small tech companies. The boards were inaugurated in 2004/2009 respectively as a cornerstone of SZSE’s strategy to develop China’s multi-tiered capital market system, serving national economic development and transformation and supporting the national strategy of independent innovation.125 Key to this strategy is ease financing difficulties for SMEs.126 The plan seems to be successful: Both of revenue growth and profit growth of listed SMEs have hit the record high in recent five years and the overall performance increases at a steady pace.127 Detailed figures about the evolution of the SME board are rare. A 2014 presentation from CNindex, a leading Chinese index provider, reveals, that at the time 85% of the listed enterprises are not state-owned, since the launch of the SME board there were over 600 IPOs and that the median market capitalization of an listed SME on the SME board is USD 574 million.128 However, like main Chinese stock exchanges the SME Board and ChiNext are facing tighter regulation resulting from illegal activities in the past years.129

125 Enternext (2018): Shenzhen Stock Exchange (SZSE) overview 126 Reuters (2013): China launches its biggest OTC board in bid to aid SME financing 127 Mondovisione (2017): Shenzhen Stock Exchange: SME Board’s 2016 Earnings Growth Hits Five-Year Record High, Show-casing Great Growth Potential 128 CNIndex (2014): Introduction of Shenzhen Market 129 Xiao (2017): Tight liquidity, regulations to hit Shenzhen SME board

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According to the WFE there are approx. 10,000 listed SMEs globally130. They come from different sectors, with a strong presence in the manufacturing as well as the finance and insurance industries, as the breakdown per region shows below:

Figure 23: Sectoral distribution of companies listed on WFE Exchanges across regions. Source: UNCTAD (2017).

As shown in figure 18, every fifth enterprise that is listed has a market capitalization below USD 10 million. However, the trend seems to be that less and less SMEs are going public: according to Rose & Solomon (2016), within the segment that contains enterprises with an initial market capitalization below USD 75 million, there were 168 IPOs in 1997, but only seven in 2012. Another indicator of this trend is the IPO proceeds. Within the groups of enterprises with proceeds under USD 30 million and between USD 30 - 120 million, the number of IPOs was much lower, as the graph below shows131:

Figure 24: Initial returns by proceeds in the United States between 1980 and 2016. Source: OECD (2018).

Nevertheless, there remain SMEs that go public and list on an SME exchange. According to the WFE report132, which surveyed 161 listed and unlisted SMEs globally, the key reasons were:

▪ Improving financial access: Raising capital at a lower cost to position the enterprise for growth is (or was) achieved by listing on a stock exchange. Enhancing creditworthiness and the ability to raise addi-tional finance, including funding from banks, was a core driver in this topic.

▪ Diversifying the investor base: Enterprises typically take more interest in diversifying their investor base as they grow and mature in their listing cycle

130 WFE (2017): SME Financing & Equity Markets 131 OECD (2018): Financing SMEs and Entrepreneurs 2018 132 WFE & Milken Institute (2017): Small and Medium-Sized Enterprises and SME Exchanges

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▪ Improving brand reputation: A listing always goes hand in hand with public attention and rising aware-ness from different stakeholders, including consumers. It also increases market visibility and lies the ground for further expansion.

According to the survey, most of the expectations formulated in the reasons above were fulfilled: Nearly three-quarters of all surveyed enterprises (74 %) said they would list their enterprise again. Over 90 % of all surveyed listed enterprises raised capital at the time of listing and a further 22 % raised additional equity capital post-listing. This supported the listed enterprises to be less constricted by financial constraints: while surveyed listed and unlisted companies were equally reliant on bank financing as a source of external finance, unlisted companies were more reliant than listed companies on shorter-term sources of finance such as trade credit and retained earnings.

1.3.7. Alternative exchange mechanisms & platforms

Technological advancements and globalization are paving for other, non-traditional exchange plat-forms. Some of the most important innovative platforms or technologies include:

▪ Crowdfunding platforms: Crowdfunding is by definition “the practice of funding a project or venture by raising many small amounts of money from a large number of people, typically via the Internet.” 133 It can take different forms such as reward-based, equity-based or donation-based crowdfunding134. Well-known crowdfunding platforms are Kickstarter, Indiegogo, RocketHub, or investment platforms like 1000 Angels.

▪ Club deal platforms: A club deal is a private equity buyout or the acquisition of a controlling interest in a company that involves several different private equity firms. This group of firms pools its assets to-gether and makes the purchase collectively. The practice has historically allowed private equity to pur-chase more expensive companies together than they could alone. Also, with each company taking a smaller position, risk can be reduced.135 Elite Club Deal or Mergers Club are well-known club deal plat-forms.

▪ P2P (Peer-to-peer) business lending platforms: P2P lending describes a process whereby cash-rich in-vestors lend their money directly to borrowers, normally via an online P2P lending platform where borrowers and lenders are matched. Both parties benefit from these platforms – lenders achieve higher interest rates than if they had put the capital in yielding bank accounts, and typically borrowers a lower interest rate.136 Popular P2P platforms are Upstart, Funding Circle or Peerform.

▪ Microfinance platforms: Microfinance refers to the lending of small sums to entrepreneurs who are often economically disadvantaged and financially marginalised. These platforms usually refinance Mi-crofinance Institutions by the issuance of a debt security. New platforms such as Plumseeds (developed by the well-known microfinance provider Symbiotics) or Kiva allow investors to directly participate in microfinance investment deals, thought the latter works with grants only.

▪ Factoring: Factoring allow SMEs to sell their invoices or receivables to many individual or institutional investors at a discount for working capital.137 Factoring solutions are generally offered by banks, but in the past years several online factoring platforms have appeared such as Advanon or Inwise.

Due to the fact that most of the platforms are relatively young, global research findings and figures are rare. In 2015, KPMG estimated the alternative finance market at USD 145.3 billion, traded on over 1,000 platforms. China alone accounts for 70 % of the global volume, KPMG says. Furthermore, P2P consumer lending is valued at over USD 80 billion, followed by P2P business lending (USD 51 bil-lion including real estate) and balance sheet consumer lending (USD 3 billion).138

133 Prive (2012): What Is Crowdfunding And How Does It Benefit The Economy 134 EY (2015): Moving Mainstream: The European Alternative Finance Benchmarking Report 135 Investopedia (2018): What is a 'Club Deal' 136 The Route – Finance (2015): Understanding The Alternatives: A Guide To Alternative Finance Platforms 137 EY (2015): Moving Mainstream: The European Alternative Finance Benchmarking Report 138 KPMG (2016): Global insights from regional Alternative Finance studies

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The third European Alternative Finance Industry Report by the Cambridge Centre for Alternative Fi-nance139 gathered data from 344 crowdfunding, P2P lending and other alternative finance intermedi-aries across 45 countries in Europe, estimating that this database captures 90 % of the visible alterna-tive finance market. The study shows that the total European online alternative finance market grew by 41% to reach EUR 7.7 billion in 2016. Excluding the United Kingdom, which remains the largest individual market, the European online alternative finance industry grew 101 % from EUR 1.0 billion to EUR 2.0 billion in 2016. This represents a substantial increase in annual growth from 72% in 2015, and is also above the average annual growth of 85% between 2013 and 2016. A source specialized on crowdfunding platforms, the latest Massolution Crowdfunding Industry Re-port140 (based on data gathered from 1,250 crowdfunding platforms worldwide), reports that sums raised through crowdfunding have grown enormously from 2012 to 2015 (over 1,000%) though the absolute volume raised as of end 2015 was still relatively small (USD 34.4 billion) and that equity fi-nancing through crowdfunding platforms is still in a very early phase:

Figure 25: Global Crowdfunding Industry estimated fundraising volume in 2015. Source: Massolution (2016).

Recently, the Cambridge Centre for Alternative Finance announced that it would launch its annual research initiative pertaining to the global alternative finance industry and for the first time to aggre-gate regional findings to a global report.141 Some exchanges are exploring the possibility of partnering with crowdfunding platforms to crowdsource retail participation into IPOs (e.g. Syndicate Room and the London Stock Exchange). Oth-ers are introducing their own pre-IPO platforms (such as the Deutsche Börse Venture Network), providing a secondary market for crowdfunded shares (KRX Startup Market) or offering an aggregation platform for crowdfunding initiatives (Taipei Exchange Gofunding Zone). At least one exchange has introduced a platform to enable investors to engage directly with the management of listed compa-nies, and the exchange assists in ensuring that companies are responsive.142

139 University of Cambrdige (2017): Expanding Horizons: The 3rd European Alternative Finance Industry Report 140 Massolution (2016): Crowdfunding Industry 2015 Report 141 Crowdfund Insider (2018): Cambridge Centre for Alternative Finance Launches Global Research to Provide the Most Comprehensive Research on Fintech Available Today 142 WFE (2017): SME Financing & Equity Markets

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1.3.8. Value proposal of a social stock exchange

Summarising the previous sections, we have seen that: ▪ Social enterprise is taking off as a new model for providing solutions to unaddressed social problems,

driven by private initiatives, government failures, consumer demand and a raising awareness to protect people and the planet.

▪ According to our estimates, there are at least 16,000 medium sized social enterprises globally and almost 10,000 in high income countries; reported growth figures indicate that the number will increase rapidly in the coming years.

▪ Medium-sized social enterprises lack access to financing, with an aggregate estimation of a global fi-nancing gap of USD 13.3 billion.

▪ The 17 UN SDGs and the underlying 169 indicators have a wide recognition and are being used on both sides – both enterprises and investors – to justify, select, track and report activities.

▪ While still being a niche market, impact investments are growing fast and have reached an aggregated USD 400 billion of assets, with USD 220 billion under direct management by impact investors. Estima-tions see the market to increase steadily until at least 2020, driven by increasing consumers demand (especially from Millennials), investor’s impact goals and technology.

▪ Investors are eager to expand their impact investment universe. Their main needs are adequate exit options, better sourcing and evaluation of deals and a higher sophistication of social impact measure-ments.

▪ A study of existing traditional stock exchanges and alternatives (such as crowdfunding or SME ex-changes) shows that there is hardly any platform except the existing stock exchange in Canada and London that allow for the exchange of equity and capital between social enterprises and impact inves-tors.

Based on the above, the creation of SwiSOX could provide unique value to both social enterprises and impact investors by serving as a hinge between the groups, reducing search and discovery costs for both sides, improving information asymmetry, providing critical third-party validation of enterprises’ financial and social returns and providing liquidity opportunities needed for the sector to continue to grow and mature, among other services. The value proposition for SwiSOX exists along three dimen-sions – relevancy, benefits and differentiation – as presented in the table below:

Relevancy Benefits Differentiation

Social enterprises ▪ A social stock exchange like SwiSOX has the poten-tial to support social enterprises in their fundrais-ing efforts by offering a central platform with ac-cess to adequate financing from like-minded im-pact investors.

▪ SMEs especially often lack access to sufficient fi-nancing – a phenomenon observed in developing and developed countries.

▪ SwiSOX would offer social enterprises a central plat-form where they would be able to list their company in a smooth process at reasonable costs

▪ It would allow social enterprises to conduct a more ef-ficient capital raising compared to traditional private placements, which also reduces the risk of mission drift which can occur with private placements.

▪ By being listed on SwiSOX, social enterprises would be labelled along a dedicated impact framework, which would be a differentiation factor in terms of marketing their mission for further capital raising

▪ The platform offers networking and business expansion possibilities for social enterprises by gathering like-minded enterprises in one place.

▪ With one platform combining access to fi-nancing from like-minded investors and dedi-cated impact rating process, social enterprises would benefit from efficiency gains and cost reductions.

▪ By being designed towards the needs of me-dium-sized enterprises, SwiSOX could offer further services to social enterprises like con-sultancy for IPO-readiness or different forms of listing.

Impact investors ▪ While in proportion to global finance impact in-vestments are still a niche, they are growing at a high rate and more and more traditional investors are looking for adequate investment possibilities.

▪ A social stock exchange like SwiSOX has the poten-tial to offer adequate investment possibilities for impact investors delivering financial and social re-turns.

▪ Through SwiSOX, impact investors could seek adequate investments into social enterprises on a central plat-form with appropriate liquidity, transparency and exit options.

▪ The concept of fair price discovery, which is a central element of a stock exchange, would benefit impact in-vestors by ensuring that they don’t invest in overpriced investments.

▪ Aggregated data and research from future listings and related transactions would support reducing the exist-ing education gap around impact investments, ensuring a more qualitative and quantitative backing of impact investments in the future.

▪ Certain regulated institutional investors could poten-tially participate as they are typically limited to invest-ments registered on public exchanges.

▪ The platform might offer networking and business ex-pansion possibilities for impact investors by gathering like-minded investors in one single place.

▪ Due to a comprehensive and relevant meth-odology to assess social enterprises, impact investors would be ensured that their invest-ments create the desired impact – a relevant differentiation factor from traditional stock exchanges.

▪ In contrast to traditional stock exchanges, SwiSOX could aim for a more sustainable ap-proach, like for example supporting longer-holding periods and disincentivizing short sell-ing and daily trading.

Table 12: SwiSOX Value Proposal. Own illustration.

To summarize, a social stock exchange has the potential to match the needs of both social enterprises and impact investors by creating a central matching, clearing and certification platform. As the next section will show, SwiSOX is not the first attempt for a social stock exchange. What learnings can be drawn from existing and failed social stock exchanges is crucial to build a successfull platform in Swit-zerland.

2. Competitive Landscape 2.1. Introduction The social stock exchange (SSE) space, to date, remains a near-greenfield venture for solutions exog-enous to primary stock exchanges. While a small handful of actors have attempted to conceptualize and launch actual SSEs, the practice of actively matching philanthropic projects to donors through a customized lens of impact and then calling it a SSE seems a more common practice. A third layer of social financing platforms that offer a one-sided transaction, such as crowdsourcing solutions, has also arisen to some popularity though again not an actual SSE.

2.2. Defining a social stock exchange For the purpose of this competitive landscape, it is necessary to clearly define what is a social stock exchange in order to narrow the scope of models to be closely analyzed. While the term is used loosely by actors wishing to bolster donor and investor interest in their activities, we define the social stock exchange as ‘a regulated platform upon which for-profit social enterprises can list in order to raise capital, and investors can purchase shares of equity or debt securities in those same enterprises’.143 While the terms exchange and marketplace are often used interchangeably, it is worthwhile to make a key distinction. A marketplace is a space for competitive commercial dealings144, where goods, ser-vices, or instruments are up for sale by money or barter and subject to the forces of supply and de-mand.145 An exchange is simply a regulated market for financial products, with a structured second-ary market component where interests can be bought and resold between investors.146 Exchanges set the institutional rules that govern trading and information flows about that trading. They are closely linked to the clearing facilities through which post-trade activities are completed for securities and derivatives traded on the exchange. An exchange centralizes the communication of bid and offer prices to all direct market participants, who can respond by selling or buying at one of the quotes or by replying with a different quote. Depending on the exchange, the medium of communication can be voice, hand signal, a discrete electronic message, or computer-generated electronic commands. When two parties reach agreement, the price at which the transaction is executed is communicated throughout the market. The result is a level playing field that allows any market participant to buy as low or sell as high as anyone else as long as the trader follows exchange rules. 147 Breaking down this definition of a stock exchange, we define a regulated exchange due to the nature of buying and selling securities within the vast majority of markets.148 While there may be a front-end website (“platform”) for marketing a particular financial product or security, this does not constitute an exchange. Instead, the transaction to purchase the security must take place on the platform itself, which in the vast majority of markets globally will require that said platform be regulated.

143 Social Stock Exchange Asia (2018): What is a social stock exchange? 144 Merriam Webster (2018): Marketplace 145 Business Dictionary (2018): Market 146 Business Dictionary (2018): Stock Exchange 147 IMF (2017): Markets: Exchange or Over-the-Counter 148 ibid.

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We define for-profit social enterprise, as non-profit entities do not permit the purchase, transfer or granting of equity in the corporation, and as such their ownership interests cannot be securitized. We further define that both investors and enterprises must be able to buy and sell on the platform. An exchange is characterized by a company’s ability to list for public purchase, and an investor’s ease of entry and exit, as ownership stake is actively bought and sold between companies and investors, and between multiple investors, on the same platform149 versus off-exchange transactions that are common in venture capital and private equity. Finally, we define a social enterprise as the distinguishing characteristic of a social stock exchange. While the term “social” is open to interpretation (and you will indeed see variance across competitors within this report), the concept is critical to distinguishing a social stock exchange from the rest of the market.

2.3. SSE Competitors and SFP Actors The above definition allows us to narrow our focus to three primary competitors, who have attempted to launch a social stock exchange (SSE) within our defined criteria:

▪ UK Social Stock Exchange (London, UK) ▪ Social Venture Connexion (SVX) (Toronto, Canada) ▪ Impact Exchange (IIX) (Singapore)

And while each model has adapted over time, they remain the only three actors to have, either in past or present, have entered into our defined space. We will come back to these three key players for analysis. Other actors, which we will classify as Social Financing Platforms (SFP) and are described below, have either made attempts beyond traditional philanthropy to raise funding for both for- and non-profit companies, or have looked for new ways to match or classify investments and investors/donors. They are worth mentioning and briefly understanding, above all, to clarify the role of the SSE in the broader evolving ecosystem of social finance. For ease of reference, within the SFP space, we will define two categories of actors: (1) investor-pro-ject matching platforms, which seek only to connect potential investors with projects of various types without actually housing or managing the investment or donation on the platform and (2) one-side transaction platforms, which house the transaction but do not allow for a secondary trading market.

2.3.1. Investor-project matching platforms

In this first category, we find six primary offerings that are popular examples in social stock exchange literature – many of which have called themselves social stock exchanges either in media or directly in their materials. 150 None of these actors, however, offer an actual exchange as they are basically set up as online retail stores, and instead offer capital- and donation- raising services to for- and non-profit entities, respectively. Distinguishing themselves from traditional firms that raise capital, they offer a more advanced social front end to their product, offering classification and vetting criteria and services that allow investors to pick from a variety of investments/donations according to their own criteria.

149 Business Dictionary (2018): Stock Exchange 150 This list is not intended to be representative and not exhaustive.

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▪ Mission Markets (US): Opened in 2008, it was established as a brokerage platform whereby accredited investors input personal values through a web survey tool, and the platform attempted to match pri-vate equity placement opportunities – as well as a few public offerings – to the investor’s specific social profile. See box 5 for further details.

▪ My4 (US): Founded by the former head of Mission Markets, My4 is a smartphone application that offers investors two unique ratings on publicly-traded companies: a sustainability rating based on My4’s own analysis, and a personal values match based on an investor survey tool. My4 aims to produce revenue through data resale alone, and aims to launch in 2019. 151

▪ South Africa Social Investment Exchange (SASIX, South Africa): SASIX calls itself a social stock exchange, though in actuality it is a one-way transaction platform to match donors with philanthropic projects. While SASIX issues “shares” by breaking the cost of a donor project into bite-size pieces, there is no active exchange or inherent financial value in these shares beyond purchase. The primary function of SASIX is to research, evaluate, and monitor social projects put forth by philanthropic organizations seek-ing funding, and to offer a front-end for donors to match themselves to projects they wish to fund based on SASIX’s research. 152 SASIX was launched in 2006 and is an initiative of the Greater Good South Africa Trust. 153

▪ Brazil’s Impact Investment Exchange (BRiiX, Brazil): While BRiiX calls itself an exchange, it functions as an invest-ment intermediary and investment advisor. They offer services to inves-tors including investment advisory, prospecting investments, due dili-gence, valuation, and social business targeting. To social businesses them-selves, they offer consulting services, structuring support, business plan building, investor material prepara-tion, and analysis of impact and indi-cators. They seem to function in a similar manner to Mission Markets did in 2008; however, they publicly show only four companies for which they have raised capital. 154

▪ Kenya Social Investment Exchange (KSIX, Kenya): Conceptualized in 2009 by Allavida and funded by the Rocke-feller Foundation, KSIX was formed to provide a platform that can broker deals between social purpose enter-prises and interested investors. 155 It has two primary lines of work: bro-kering financial investments and at-tracting donors to socially impactful projects. The “listing” services that KSIX offers, as mentioned in public statements, is, in fact, the creation of a list of potential investments that have been pre-vetted through social

151 Interview with founder Mike Van Patten on 30 July 2018 152 SASIX (2018): About 153 Brand South Africa (2006): SA’s social investment 154 BRIIX (2018): About 155 Forbes (2014): Stock Exchanges for Social Enterprises? Here's Where You Can Find Them

Mission markets is a brokerage platform founded by

American Mike Van Patten in 2008, and attempted to cre-

ate a values-based investment mechanism largely into

private markets for qualified American investors. Van Pat-

ten, a 25-year veteran of the brokerage business, left the

firm in 2016, as the firm was failing to produce a sufficient

number of transactions, and the operating cost was

simply too high, according to him. “We were just too

early. Up until 2014, nobody really knew what impact in-

vestment was.” The tool developed by Van Patten and his

team of brokers involved qualified investors filling out a

web-based survey about their values. The brokers would

then use this to vet a series of private and public offerings,

whereby they would then offer the investment oppor-

tunity to the qualified investor. The firm produced reve-

nue from brokerage fees paid by the investor, and capital

raising fees from private companies where they placed

the money. The model, however, only managed to raise

$26 million in capital over a seven-year period, and did

not manage to produce sufficient revenue to stay afloat.

The majority of investors were ultra-high net worth inves-

tors who did not, ultimately, place any significant portion

of their net worth with Mission Markets. Van Patten cites

the online nature of their platform as a key failure beyond

ultra-high net worth investors, as well. “People won’t

come online and click buttons to buy private equi-

ties…they’ll [only] do that with public.”

Box 4: Summary of Mission Markets.

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criteria defined by KSIX. 156 The brokered transactions would not exist on any sort of exchange, and instead KSIX is set up as a standard brokerage house with some philanthropic and social vetting ele-ments included. 157

▪ Ground_Up Project (Switzerland): The Swiss-based enterprise is a match-making platform for profes-sional investors and entrepreneurs. Using proprietary tools intended to determine both investor inter-est and categorize the impact profile of enterprises, Ground_Up aims to lower the cost of fundraising, increase transparency, and improve the degree to which investors and entrepreneurs match in critical values-based metrics. Ground_Up also offers investor readiness training. Ground-Up does not host transactions, and instead engages only in pre-selection and pre-qualification matchmaking, after which it steps aside. The company earns profit through sale of its services and use of its proprietary tools. 158

▪ Luxembourg Impact Investing Platform (LIIP): Luxembourg is the European centre for investment funds second only in the world behind the United States. The country specialized in the administration and cross-border distribution of investment funds and profits from an investor-friendly regulatory en-vironment159. This also has positive implications for Luxembourg as a hub for impact investments. Al-most half of the worldwide assets under management by microfinance investment vehicles are regis-tered in Luxembourg, as well as 39% of all European responsible investment funds160. Moreover, half the world’s listed green bonds are listed in Luxembourg, with the Luxembourg Stock Exchange offering a dedicated platform for green securities as well as social and sustainable bonds.161 In 2011 the Euro-pean Impact Investing Luxembourg Initiative (EIIL) was launched, which contains a dedicated impact investment platform (LIIP). Its main purpose is to provide cost-efficient infrastructure required for im-pact promoters. More details are not yet publicly available, a business plan is announced to be publish soon162

▪ Luxembourg Green Exchange: In 2016, the Luxembourg Stock Exchange launched the Luxembourg Green Exchange (LGX), the world’s first platform exclusively dedicated to green securities, and today listing half the world’s green bonds. The LGX today also features a dedicated social and sustainable bond window.163

2.3.2. One-side transaction platforms

The second category of non-exchange SFPs that we have identified do, in fact, involve the develop-ment of a financing platform; however, they are spaces for one-way transactions to facilitate the flow of investment or donations to enterprises or projects deemed socially valuable by the platform spon-sor. These one-sided transaction platforms have several examples across markets, and below we iden-tify a representative group to further explain the space.

▪ Kiva.org (US): Founded in 2005, Kiva raises capital from individual retail investors for loans that are first self-capitalized by partner microfinance institutions, and then reimbursed on a 30 to 60 day lag by Kiva. The same lag applies to repayment of the loan, after which the repaid principle is applied back to the investor’s balance. The capital raised does not attract interest of any sort, and therefore does not aim to provide a return to investors; instead, funds raised by Kiva act as a risk mitigation mechanism to microfinance institutions.

▪ Socio-Environmental Investment Exchange (BVSA, Brazil): The BVSA functions nearly in parallel to SASIX. Founded in 2003, it offers a portal through which donors can select a project to fund and track its progress through implementation. Projects are classified according to five themes of people, pros-perity, peace, planet, and partnerships. BVSA has raised c. R$ 17 million (c. USD 4.5 million) for 157 projects in Brazil since its foundation.164

156 Alliance (2010): Social Investment Exchange to launch in Kenya 157 The East African (2011): Launch of social investment exchange set to raise activity 158 The Ground Up Project (2018): FAQ 159 Luxembourg for Finance (2018): Investment funds 160 EY (2018): Impact Investing 161 Luxembourg for Finance (2018): Luxembourg: the natural choice for international sustainable finance 162 EIIL (2018): Luxembourg Impact Investing Platform (LIIP) 163 Luxembourg for Finance (2018): Luxembourg: the natural choice for international sustainable finance 164 BSVA (2018): About us

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▪ Vittana.org (US): Similar to Kiva.org, during its five-year life (from 2010-2015) Vittana funded micro-finance banks with capital through crowd-sourced online fundraising, offering investors online man-agement of their funds. Like Kiva, however, the option to trade investments was not possible and the investments offered no financial return. During the latter stages of its existence, Vittana also raised bulk capital from investors for direct placement in financial institutions with strong financial products in place. Vittana focused only on education lending products to low-income individuals. The organiza-tion closed in 2015, unable to reach a point of sustainability and doubting that its financing was creating additionality in the student financing market.165

▪ Plumseeds (UK): Established by Symbiotics, Plumseeds is an online platform that connects potential investors with impact bonds issued by a dedicated Special Purpose Vehicle based in Luxembourg. The impact bonds issued by the SPV raise capital for individual microfinance institutions and SME banks in developing markets, which then utilize proceeds to onlend to entrepreneurs or SME businesses.166

There is no secondary market for the bonds, which tend to target a 3-5 year time frame to match typical SME lending requirements.

▪ Audaces Impact (UK): This commercial enterprise is a crowdfunding platform for impact investment, targeting campaigns that raise between EUR 0.5 to 2.5 million as a minority stake in an early-stage offering. Prioritizing target countries Nigeria, Ethiopia and Angola, the fund targets Sub-Saharan African markets.167 The group charges management and administration fees, and takes a cut of any profit earned by the investment upon exit in order to provide for its sustainability.168 Audaces Impact only serves accredited investors, and campaign funds are placed alongside professional investment funds.

2.4. Profiling the primary social stock exchanges From this point forward, we will focus our analysis on the three entities who are actively attempting to establish a true SSE: The UK Social Stock Exchange, Canada’s Social Venture Conexion, and Impact Exchange in Singapore. Much of the detail obtained in relation to each of the three entities below was obtained through key stakeholder interviews, including at least one interview with each of the follow-ing individuals:

▪ Mike Van Patten | Founder, Mission Markets & My4 ▪ Robert Kraybill | Managing Director, Impact Exchange ▪ Pradeep Jethi | Founder & Former CEO, UK Social Stock Exchange ▪ Adam Spence | Founder & Director, Social Venture Connexion

2.4.1. Social Stock Exchange (UK) Overview

The UK’s Social Stock Exchange (UK-SSE) launched in June 2013 with just 12 companies listed, and was the brainchild of co-founder and former CEO Pradeep Jethi. These 12 companies were described by then-Prime Minister of the UK David Cameron as “high-growth businesses in markets such as social and affordable housing, clean-tech, waste, water, recycling, renewable energy, sustainable transport, health, education and culture.”169 Instead of a stand-alone platform, UK-SSE was established as a platform partner of the NEX exchange in the UK (NEXGY) that focuses on electronic trading.170 The NEX market is largely a micro-cap ex-change, with few companies sporting a valuation above $80 million, making it an attractive market-place for UK-SSE, which would aim to target social enterprises that, for the most part, would carry relatively low market capitalizations themselves. In comments about whether the UK-SSE considered developing a proprietary exchange platform, Jethi stated, “when you asked me if it’s possible to set up a sustainable social exchange, you can’t do it if you’re starting up yourself.” He went on to cite the extremely expensive cost of establishing trading infrastructure, as well as the difficulty in early stages of a regulated exchange to raise and maintain

165 Next billion (2015): NexThought Monday – Why Did Vittana Close Down 166 Plumseeds (2018): How we work 167 Audaces (2018): Club 168 Audaces (2018): FAQ 169 Pro Bono Australia (2013) UK launches Social Stok Exchange 170 CNN (2017): Social Stock Exchange – Positive Impact

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the base of millions in required capital. This sentiment ultimately led to UK-SSE’s decision to partner with NEXGY. The exchange employed a linear process of listing companies that required a significant amount of labor against a relatively modest listing fee estimated at GBP 10,000 (USD 12,900). While the essen-tials of the listing process were handled by the NEX exchange’s own due diligence and listing process, the add-on UK-SSE’s process involved the preparation of a corporate impact profile through their pro-prietary framework, due diligence to verify impact claims made by the prospective listing, admissions panel verification, practical integration into the platform, and at a minimum, annual public reporting to investors on each listing’s impact based on data provided by the listed companies. The partnership with NEXGY meant that UK-SSE would begin by cross-list companies with the NEX exchange, and would ultimately work towards encouraging social enterprises to IPO on their platform. That, however, did not come to pass. At its peak, UK-SSE hosted less than 60 companies, and failed to host a single IPO. As a result, the UK-SSE failed to reach a sustainable financial position and partnership with the NEX exchange eventually dissolved in late 2017. The NEX exchange has since established a new partnership with the Impact Investment Network – a non-profit partnership organization bred out of the UK-SSE that now offers accreditation, events, and support services171 – offering to investors an “Impact Segment” in which social accreditation is available to NEXGY-listed companies, though not a separate exchange.172 At its peak, UK-SSE employed at most 10 staff, with a maximum annual salary of approximately GBP 120,000 (USD 154,800) p.a., according to Jethi. While UK-SSE has not officially closed as a corporation, it no longer has an exchange platform in NEXGY and, as such, cannot offer exchange services. The majority of staff have departed the company, and remaining leadership and investors are eyeing a new manifestation of the business. This new model, according to Jethi, will focus on areas in which they believe they can provide true value-add to present and future exchanges as well as impact investing houses. Services are likely to include the following:

▪ authentication mechanisms to qualify impact businesses ▪ bolt-in SDG and impact reporting framework ▪ ready-made admissions panel ▪ access to social impact intermediaries in Europe ▪ pipeline development for both companies and investors

It remains to be seen if UK-SSE has a commercial future. If it does, however, it is clear that it will not be as an exchange platform itself.

2.4.2. Social Venture Conexion (Canada) Overview

The Social Venture Conexion (SVX) does not completely qualify as a social stock exchange per our definition as yet, as it does not offer a secondary market for investor-to-investor trading; however, we have included the analysis of SVX because they are moving to establish a form of exchange with secondary market activity in the coming 12 months. SVX is an exempt market dealer, and functions like a broker dealer would in the United States. Partnered with the Toronto Stock Exchange (TMX Group Inc.), they are set up as an NGO and target sustainability, given that their objective is to bring value to the market and seed the market for future competitive actors doing the same as they are. SVX’s activities are divided into two unique lines of work. First, they assist private social enterprises in raising capital as well as non-profit actors seeking debt financing. Second, they help investors to find and make good investments in the private sector. They offer this investor support to the general pub-lic, high net worth individuals, foundations, family offices, financial intermediaries and funds, and tar-get deals that align with the combination of investors’ values and financial objectives. SVX’s work to assist enterprises in raising funds is carried out through boot camps, hands-on education and support, and general advisory work. A lot of their content focuses on the basics of how to prepare

171 Impact Invest Network (2018): About us 172 NEX (2018): Impact Investment Network

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and manage a quality, investible offering to investors, including preparation of a targeted pitch deck, preparation for handling negotiations, and investor engagement strategies. While they have a strong web interface through which substantial activity takes place, their CEO Adam Spence was quick to clarify that a lot of activity still does take place offline. It is not a case of “build it and they’ll come” with this type of work, Spence said. SVX is heavily engaged in in-person events to activate the investor community, one-to-one meetings, road shows, and investor education seminars in the form of boot camps and community meetings. SVX’s core technology is a crowdfunding platform open to both retail and qualified investors through which both investors and issuers can manage their investments on the platform. Transactions take place directly on the platform. According to SVX’s public materials, “SVX is all about putting control back into the hands of the investors and entrepreneurs to create opportunity”, meaning that enter-prises can self-list and self-determine entry level, raise amount, and investment terms while investors can solicit advice but make investment decisions and transactions directly on the platform.173 SVX re-fers to their approach as “equity crowdfunding”. Katipult174 is the selected white-label technology provider for SVX’s crowdfunding platform, which opened only last November with a total of 20 issues who have since raise approximately C$8 million (USD 6.1 million) in financing. SVX have also raised capital offline, which is done through their own channels.175 Those enterprises that choose to raise capital through SVX vary substantially in size, with some coming to SVX for a small piece of a much bigger raise, while others utilize SVX as their primary engine to raise capital. As an NGO, SVX’s ultimate goal is to reach financial sustainability to demonstrate that this type of “equity crowdsourcing” and the overall model of a social stock exchange is possible. To fund their operations, SVX charges enterprises C$2,500 (USD 1,908) to list and receive basic support services, and they offer additional support service capacity at a cost to the enterprise. SVX also charges 2% of capital raised for transactions above C$10,000 (USD 7,634), and 5% for transactions below that mark.176 In the next 12 months, SVX aims to incorporate new technology that will allow for a bid/ask auction opportunity, evolving them further towards a true social stock exchange. They have also raised a small fund to bundle smaller retail investors into a much larger pool that will then invest in enterprises, which to date has attracted C$2.26 million (USD 1.73 million) in capital. This fund will work in a similar capacity to BrightSpark’s model177, wherein they have their own capital and comes in alongside inves-tors within their platform. The model serves to offer new opportunities to smaller investors, while boosting the profile of each funding campaign on the platform. The primary drivers of SVX’s revenue are broken into three parts, including roughly 20% from upfront listing/transaction fees, between 20% and 30% from contract consulting with enterprises, and the remainder (~50-60%) from management fees of their internal fund. This split, states Spence, is reflec-tive of the balance of the Canadian market’s potential as a smaller investor base of 35 million Canadi-ans. SVX employs eight staff, including six in their Toronto headquarters and 2 forming their Montreal team. They are likely to pick up someone in Vancouver for investor mobilization in the coming months. The team is heavily weighted towards capacity to mobilize the market. Current roles include the fol-lowing:

▪ Chief Executive Officer, primarily focused on strategic partnerships and assisting with campaigns ▪ Chief Compliance Officer, who manages financial operations, compliance/regulatory oversight, and as-

sists on issuer campaigns and strategy ▪ Five staff members focused on market mobilization (3 in Toronto, 2 in Montreal)

173 SVX (2018): FAQ 174 Katipult (2018): Disrupting Impact Investing in Canada 175 Interview with Adam Spence on 3 August 2018 176 SVX (2018): FAQ 177 Brightspark (2018): About

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o one primarily focused on the investor side o four focused primarily on the issuer side o Each member of this team has both issuer and investor facing roles despite their primary focus

▪ One person to manage communications

SVX will launch in the United States in the fall of 2018, though Spence said that it has taken a long time to find the right broker-dealer partner. They have their sights set on Colombia and Mexico, as well, and have launched a separate entity with five staff in Mexico that aims to replicate the work of SVX primarily through private capital raising and consultancy services that respond to the conditions of the local market.178 SVX survives with ongoing philanthropic support and is approaching 50% self-sustainability this quar-ter. According to Spence, SVX will hit 80% self-sustainability in the coming two to three years. One of the primary reasons that SVX has taken a long time to formalize and scale their operations can be attributed to their deliberations around the impact – both positive and negative – of a secondary market for impact investments. In late 2017, Spence was quoted as saying, “we need to look at the technological, regulatory and even moral implications of a secondary market in impact investments. That will take a few years.”179 Rather than capture the market themselves, they aim to be copied by others and as such are very open to future collaboration with similar projects around the world, including sharing their tools and criteria that they’ve developed over their years of operation.

2.4.3. Impact Exchange (Singapore) Overview

Robert Kraybill, the Managing Director for Portfolio Management at the Impact Investment Exchange (IIX) in Singapore, began his interview with us by saying, “10 years ago, we thought this was a great idea,” a message that resonates across the three models for which we have completed deep dive research. Conceptually, the social stock exchange idea is extremely attractive and completely achiev-able. Kraybill expands, however, saying that 99% of what IIX now does is NOT a social stock exchange, as they’ve had to expand their business model to do many other things in order to serve the market and survive. Founded in 2009, IIX has mobilized more than $13 million in capital through their private placement platform for equity and debt funding, working only with accredited investors. IIX screens impact en-terprises using proprietary criteria. The group recently launched the IIX Growth Fund, closing its first investment in January of 2018180. The IIX Growth Fund targets a size of $50 million of investment capital to achieve, through equity investments in social enterprises in Bangladesh, Indonesia, Philippines and Cambodia, social impact in the areas of sustainable agriculture, clean energy, green technology, and WASH.181 On the whole, IIX functions across five themes, impact assessment, the IIX Impact Institute (structured training for investors and enterprises), the Impact Exchange itself. The image on the following page demonstrates the continuum of services offered by IIX, in which each core activity of the company aims to support social enterprises at different stages of their growth. The culmination of that contin-uum is the Impact Exchange itself, which aims to publicly list social enterprises that successfully pro-gress along the continuum.

178 SVX (2018): Home 179 CNN (2017): Social Stock Exchange – Positive Impact 180 IIX (2018): Press Release 181 IIX (2018): IIX Growth Fund

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Figure 26: Services offered by IIX. Source: IIX (2018): What we do

Originally, IIX was envisioned as a true stock exchange that would list and trade bonds, shares, and securities with a social purpose. They quickly realized, however, that Singapore – or any other govern-ment, for that matter – would refuse to give a license to a small company for such operations. So instead, IIX opted to set up a separate board under an exchange and user their platform (akin to UK-SSE’s approach), but the concept foundered on the Singapore exchange board’s approval. As a result, they turned to alternative markets for options, and have since established the Impact Exchange in Mauritius. There, IIX partnered with the Stock Exchange of Mauritius Ltd (SEM) to set up listing rules and ongoing listing operations. Essentially, they have adopted traditional listing rules of a developed market place, and added to it social and environmental listing criteria and reporting re-quirements, according to Kraybill. IIX claims to be “the world’s first dedicated board of an established, regulated stock exchange devoted solely to securities issued by impact entities,”182 which may well be the case, as UK-SSE cross-listed entities with social impact components to their work. Bonds and ETFs will comprise the initial focus of IIX’s activity. IIX in Singapore issued a women’s liveli-hood bond recently and listed it on the Singapore Stock Exchange, and once they have achieved 2-3 listings, they plan to migrate them to IIX in Mauritius to be the exchange’s first bond listings. Kraybill recognizes that the death of an exchange would certainly be a single listing, and intends to migrate several additional listings over time, but with no overt rush to do so. As to why IIX in Mauritius is no longer the primary focus of the group (comprising, according to Kraybill, just 1% of their activities), it’s simple economics. “Had we not gone into private placement, we would be out of business by now.”

2.5. Key themes to consider in evaluating SSE competition No single social stock exchange (SSE) has succeeded in its attempt to become a regulated exchange for social enterprises. Perhaps SVX in Canada has come the closest; however, 10 years have passed since conceptualization and it remains a nascent project which is admittedly a long way from self-sustainability. Clearly there are critical limitations that have stood in the way of achieving success in the establishment of a SSE, and those deserved to be unpacked. Additionally, each of the entities is still in existence after 10 years of operation, so not all is lost. It’s important to unpack some of the more positive elements of the models above, and discuss key themes that will be critical to Sustainable Finance Geneva’s consideration of these models moving forward.

2.5.1. Attracting issuers First among difficulties encountered by SSEs is the ability to find – and attract – the right investees. This targeting challenge was pervasive in every conversation that we had with market actors, and was

182 IIX (2017): Listing Guide

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evidenced in the minimal number of listings achieved by each exchange (~50 by UK-SSE, 13 by SVX on a non-exchange platform, and 1 by IIX on a different exchange). Robert Kraybill at IIX Singapore said that several years back, IIX put a significant amount of time and resources into business development, targeting social enterprises that would fit their listing criteria. The response he had from these target enterprises was lukewarm, with nearly all of them saying that they didn’t want to be the first to list on any exchange. His thinking, therefore, goes in two directions regarding what is possible: dual listing (akin to UK-SSE), or gathering a natural consortium of partners to begin with a big listing pool. This second concept was a direct recommendation to Sustainable Fi-nance Geneva. Kraybill said that he believes it takes 10 to 12 enterprises, as a body, to get off the ground and agree to use the exchange. He suggested that this approach is a much stronger approach than any of the three existing SSE attempts have taken to date, and says that it’s extremely difficult for an independent group to create investor and issuer demand. Jethi at UK-SSE sees the same challenge of attracting enterprises to list, and suggests that a new SSE must be able to demonstrate the following benefits to targeted listings: access to reasonably cheap capital (about the same as a conventional exchange), and aligned investors that will make their lives easier. Without this, he sees little hope for a SSE to get off the ground permanently, as there is other-wise little incentive for a social enterprise to list on a SSE versus a main market or sub-market where liquidity is high and listing criteria do not involve social reporting. In general, Jethi sees it as difficult for a SSE to compete, in that most potential issuers are either at VC stage and will require a lot of expensive work to get them ready, or are too big or sophisticated to want to list on a less established exchange. SVX, too, identified attracting issuers as the hardest step. Believing that they are on the way to estab-lishing bid/ask auctions on their existing platform, however, SVX does see themselves as having been successful in starting a SSE. In fact, he says now that SVX have been around a while and that the market has matured with respect to impact investing, they have “more [issuers] coming to us than ever be-fore”. SVX’s focus has now turned to “picking the best”. Above we have explored the basic functions and operating strategies of each of the three SSEs, which we have identified as primary players within the competitive landscape. Below, we will narrow our focus onto two critical areas that will benefit from further assessment: the staffing of a SSE model, and the production of revenue to sustain it.

2.5.2. Business Model – Staffing

Across all three actors, we see similar staffing models and numbers. SVX’s staffing model is most clear, with eight total staff, and five of them focused solely on investor/investee engagement. This bottom-heavy model focused on mobilizing issuers and investors can be attributed to the relatively limited regulation applied to investing in the private market, which is the sole focus of SVX. UK-SSE at its peak employed 10 staff members – a similar figure to SVX – though reconstructing their reality at that time shows a markedly different staffing composition. Among that headcount of 10 at UK-SSE were included the following roles: Chief Executive Officer, Chief Operations Officer, Finance Director, Strategy Manager, Technical Manager, Human Resources Director, Events & Marketing Man-ager, Events & Marketing Assistant, Business Development Manager, and an Accounts Manager.183 The regulatory weight of engagement with a public market appears to have been heavy for UK-SSE, and as a result approximately 20% to 30% of staff were directly engaged with business development on a day-to-day basis – versus 62.5% at SVX. Perhaps this was a key factor in why UK-SSE found it so difficult to mobilize issuers to their exchange.

183 Past staffing figures for UK-SSE were not made public, and so this is a reconstruction of the operating model of UK-SSE based on LinkedIn data.

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IIX, operating primarily a private placement group and advisory service, is structured in yet another differentiated model. The leadership team of the company is comprised of a CEO, COO, MD for Port-folio Management, Investment Director, Associate Director of Capital Markets, Associate Director of Corporate Finance, and Manager of Business Development & Partnerships. 184 Here it would appear that, in the private placement space, the business development work would be spread across several senior team members, with one of seven positions directly dedicated to the pursuit of new business. Their advisory business, however, requires a larger headcount, including an advisory services man-ager, several associates, investment analysts, and research team members. With the actual SSE being a very small portion of IIX’s operations, however, this is perhaps not a good model of staffing to con-sider in the formation of a future SSE.

2.5.3. Business Model – Revenue Production

As we learned from the overview of each exchange in the previous pages, existing SSE models produce revenue through three primary means:

▪ Up-front listing fees paid by issuers ▪ Contractual work on behalf of issuers to prepare for listing ▪ Transaction fees paid by investors for individual purchases

Curiously, all three SSEs experienced the same shift in business model over the course of their lifespan – the transition to private placement business as a core element of their activities. This, as Robert Kraybill of IIX mentioned, was in his case a survival strategy. The same seems to have been true of UK-SSE, though this is a fact not made available in any public documentation, and became a key point of contention between its co-founder and board. For SVX, this has been a jumping off point to build a unique version of a SSE in pieces. For all of them, however, it has constituted a primary revenue stream to support the operations of the core business, which produces revenue through:

▪ Capital raising fees ▪ Fund management fees for in-house managed funds ▪ Additional consulting revenue from issuers

Perhaps a view of the revenue model for a more traditional junior market will provide us with better perspective on what is possible for a new SSE, however. For this, we turn to the Alternative Investment Market (AIM), which is a junior market of the London Stock Exchange (LSE) in the United Kingdom. AIM launched in May 1995 as the LSE’s growth market, created to support smaller companies with capital needed to scale.185 At that time, AIM housed just 10 compa-nies with a combined market value of GBP 82.2 million (USD 106 million). The exchange grew quickly, counting 118 total listed companies by year-end 1995, 493 by 2000, and 1,179 by 2005. The number then began to drop while valuations soared, with 797 com-panies listed in 2018 with a com-bined market cap of GBP 112.8 billion (USD 145.5 million).186

184 IIX (2018): Leadership Team 185 Syndicate Room (2018): AIM 186 LSE (2018): AIM statistics July 2018

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As of July 2017, AIM housed 963 listed companies, and of those, 273 – or 28% - held market cap valuations of under GBP 10 million (USD 12.9 million). See graph 27 for a more detailed breakdown of valuations within the exchange. AIM creates revenue through four distinct types of fees, including only two of which are shared with existing SSE models:

▪ Company listing fees (including additional fees for IPOs) ▪ Transaction fees on trades ▪ NOMAD fees (NOMADs are nominated advisors that support companies in listing on AIM and manages

its regulatory compliance after) ▪ Data vending fees

Company listing fees charged by current SSEs include a relatively modest C$2,500 (USD 1,908) for SVX, and a more expensive but not cost-covering GBP 10,000 (USD 12,900) charged by UK-SSE. Transaction fees are typically a fraction of a percentage point for any public exchange, while SVX’s private placement platform charges companies 2%187 for funds raised and investors nothing. Accord-ing to many of those we interviewed for this segment of the project, however, transaction fees appear to not be a sustainable way to fund an exchange, with investors unwilling to pay high fees in the pre-sent environment, and likely trade volumes too low among an impact investor cohort. While AIM transaction volume is high (average daily trades were 212 in 1995 versus 45,625 in 2017188), as a growth market it is non-comparable to the assumed target investor of a SSE, who all three existing SSE players identified as socially motivated, more patient, and interested in holding for much longer than the average investor to see social value manifest prior to exiting. NOMAD fees are unique to AIM, and are paid by nominated advisors to the exchange. NOMADS play a regulatory support function, paying fees to AIM in order to serve pre-list and listed companies to both prepare for and manage the regulatory challenges associated with a public listing. Listed compa-nies also pay fees to the NOMADs. While Jethi of UK-SSE mentioned some hope for the NOMAD model to be regulated within a SSE, in order to cut down on regulatory liability of the exchange and create an easier pathway for recruiting companies to list, it depends heavily upon the regulatory environment in which an exchange lists as to whether such an infrastructure would be viable. We will likely have more information on the viability of the NOMAD infrastructure in the SSE space, as IIX has designed a similar role within its Mauritius exchange, called the Authorized Impact Representative (AIR). Each issuer is required to appoint an AIR, which must include the roles of a Nominated Impact Advisor as well as an Impact Verification Agent, and which must be accredited and registered with the Stock Exchange of Mauritius (i.e. pay fees).189 Data vending fees are paid by market intermediaries such as Bloomberg, Reuters and others. They buy the data based on how sellable it is to the market, with more popular exchanges obviously easier to economize through data sales. According to a number of interviewees, AIM produces a significant amount of revenue through this model; however, this comes with trade volume, again which is un-likely to be a key feature of an impact investor-led SSE. It remains to be seen if a SSE can achieve financial sustainability without moonlighting in private place-ment: if present examples are to be used as a guide, it is not. However, AIM provides us with a great example of what is possible for junior markets with strong main market partnerships. Perhaps with

187 SVX actually charge a graduated rate, with 5% charged on transactions under C$10,000 and 2% on transactions over C$10,000. We simplify above to 2%, as the vast majority of SVX’s transactions fall into that category. 188 LSE (2018): AIM statistics July 2018 189 IIX (2017): Listing Guide

Figure 27: Breakdown of valuations of enterprises listed at the AIM. Source: Syndicate Room (2018): AIM

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more substantial early funding, a longer runway, more dedicated market mobilization staff, or an im-proved go-to-market strategy, the UK-SSE junior market would have survived and thrived under the LSE. Regardless of what might have been, we now understand the core drivers of creating revenue through a SSE. Given the findings of this section, as well as the lessons gleaned from an overview of the prin-ciple SSE attempts, we can summarize requirements for future iterations as follows:

▪ Big potential market of social enterprises: smaller markets will struggle to find and recruit a niche of companies to list in the early stages of the exchange. A key consideration in early development is how an exchange within a smaller market will appropriately narrow the pool of potential investees to fit mission, while designing for a large enough potential pool to allow for scale. This also involves a careful research and implementation, to allow enterprises from around the globe to list on the social stock exchange, a point which other SSE have thus far avoided due to regulatory hurdles

▪ Ability to build a large pipeline of issuers: this requires both the large market, as listed above, a staffing focus on market mobilization, and key partnerships with venture capital, private equity, and key finan-ciers in the market to transition (and convince) privately held companies to list

▪ Lean model for handling technical and compliance roles: in our small sample of recent attempts at crafting a SSE, those with higher percentages of staffing dedicated to technical and compliance roles failed faster, and have struggled to stay afloat

▪ Software that can scale: no SSE attempt has built their own proprietary solution. Two exchanges have utilized the technology of parent exchanges, while one used a white-label product that is presently just a marketplace rather than an exchange. This is a key consideration to sort out early in the planning exercises of a SSE so as to avoid critical failures and incurring major additional cost.

2.5.4. Listing criteria

While one might expect to see a wide array of listing criteria or engagement methodologies used be-tween our three primary SSE examples, ultimately there is little conceptual differentiation due to two of three SSEs partnering with main market exchanges in London and Mauritius to pre-vet potential listings. In fact, both UK-SSE and IIX offer this as a best practice, stating that a listing partnership with a main market exchange holds the highest potential for creating a successful SSE. Even SVX, which operates a white-label platform, has a strong partnership with the Toronto Stock Exchange and uses their support to develop basic listing criteria. The UK-SSE held three primary criteria to list on their secondary exchange:

1. Admission to a regulated Stock Exchange 2. Production of an Impact Report 3. Assessment by UK-SSE’s Admissions Panel, formed of leading social impact investment experts190

While little detail is now available on the admissions standards due to the dismantling of its web pres-ence following the exchange’s closing, we can draw a number of basic assumptions as to what they might be seeking in an issuer. With IIX having partnered closely with both SVX and UK-SSE’s team in its early development, IIX’s own listing criteria is both publicly available and offers perhaps the best insight into these assumptions, as well as current practice across all SSE players. The IIX Board Listing Criteria invites issuers in the form of social enterprises, social investment funds, microfinance institu-tions, development finance institutions, social arms of “inclusive businesses”, and NGOs to list the following types of securities: common equity, preference shares, bonds, and fund shares or units.191 NGOs, of course, are restricted to listing only bonds while social investment funds are restricted to listing fund shares or units. IIX’s listing requirements for all entities are broken down into three categories: impact requirements, financial requirements, and shareholder requirements. Below is the detailed representation of each of these three categories in infographic form.

190 Pro Bono Australia (2013) UK launches Social Stok Exchange 191 IX (2017): Listing Guide

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Figure 28: Listing criteria for enterprises to be listed at IIX. Source: IX (2017): Listing Guide

Of note, the IIX does not have a specific type of social impact that they are targeting or attempting to measure, and instead asks that the issuer itself clarify and quantify this. This, we will see in the next section, is common across all three SSEs. Also note that the IIX Board requires a minimum market cap of USD 700,000 and present-day profita-bility. Beyond this, the only particularly unique criteria might be summarized as a recorded impact thesis, impact monitoring and reporting framework, and any form of independent certification of im-pact. While SVX do not operate as a board of exchange, they offer a similarly vague view of social impact, stating within their criteria only that “companies [are] assessed on the impact of their products and/or

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services”192 This will be discussed in more detail in the following section. Below are SVX’s listing crite-ria.

Figure 29: Listing criteria for enterprises to be listed at SVX. Source: SVX (2018): FAQ SVX permits the listing of “relatively simple debt or equity securities”, including loans, convertible notes, revenue shares, preferred shares, or limited partnerships.193 At present, SVX allows issuers to raise a minimum of USD 100,000, and up to C$1.5 million (USD 1.15 million) per calendar year. With their average company raising between C$250,000 and C$5 million (USD 190,840 and USD 3.82 mil-lion), it is rare that a company only raise via SVX’s platform.

2.5.5. Social ratings criteria

Social criteria across the SSEs are meant to provide cross-industry guidance, and tend to focus more on questions of reporting format and process than on any particular social standard for any single industry segment. Impact Exchange (Singapore) As we saw above with IIX in Singapore, the way in which they determine whether or not an issuer matches their impact criteria is determined wholly by a company’s written materials, monitoring sys-tem, and impact reporting. IIX outsource the determination of a company’s actual social impact by requiring some (read: any) form of certification from a body or rating agency specializing in social or environmental standards. Kraybill defends this approach, stating that IIX aren’t “going to go out and set very specific standards for companies and benefits to specific beneficiary groups” because “it’s too much of a range to cover.” He sees this as too difficult and not viable as he “can’t define it for every eventuality”. Kraybill initially saw the need to fall back to the attitude of “…as long as a company is willing to report” in order to clear this hurdle. This was, in his words, “pretty weak and there’s not much meat to it”, so IIX evolved to incorporate an external expert verification to ensure that the company meets more “high-level, aspirational criteria to define it as a social purpose organization.” This leaves IIX without quantitative measures of impact, and sees the social criteria of IIX being more “about accrediting experts to make judgments.” The result of this evolution in the formation of IIX is a mix of reporting standards and expert judgments to qualify the social element of issuers on the exchange.

192 CNN (2017): Social Stock Exchange – Positive Impact 193 SVX (2018): FAQ

ListingRequirements Description

SectorAlignment

Cleantech,workandlearning,healthandwellness,food,

andsocialinclusion

IncorporationinCanadaCanadianincorporatedfor-ornon-porfit(includingco-operatives)

OperatingHistory Minimum1yearMarketTraction Existingrevenue,customers,and/orinvestment

BusinessPlanDemonstrateunderstandingoflong-termfinances,operations,andstrategy

ImpactMustbeaBCorporreach80onBImpactAssessmentandprovidefivekeyimpactmetrics

TeamFulltimeteammember(s)withevidenceofrelevantexpertiseonleadershipteam

Coachability ManagementiscoachableandresponsivetofeedbackScalability Potentialfordeeplocalornational/globalscale

SustainabilityEntityandinvestmentaresustainablewithreasonableprofitability

BasicReporting

Financialstatements,articlesofincorporation,termsheet,backgroundchecks,references

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Social Venture Conexion (Canada) Similarly, SVX outsource much of their criteria to the Canadian B Corporation standards. They do not explicitly require every issuer to be a registered B Corp, but they do require that at a minimum, issuers achieve a score of 80 on the B Impact Assessment that measures social performance against standards that comprise B Corp registration.194 The B Corporation Certification involves two steps: an impact assessment and adoption of legal re-quirements. In the first phase, companies must score above 80 points on the B Impact Assessment that measures how a company “interacts with [its] workers, customers, community, and environ-ment.”195 The second phase requires companies to make governance changes to their company, the most important one being that B Corporations are required to consider the impact of their decision not just on shareholder profit, but on all of their stakeholders. This occurs by “updating articles of incorporation, reincorporating as benefit companies, or making other structural changes.”196 Social Stock Exchange (United Kingdom) UK-SSE came to a similar conclusion as Kraybill’s IIX, though did not include an external certification body in their approach. This resulted in perhaps the weakest social criteria that we see across our three SSE examples, with two basic requirements: an up-front and then annual impact report pre-pared by the company, and an initial screening by the Admissions Panel. This Admissions Panel was comprised of leading figures in UK’s impact investment space, but did not, critically, carry experts in each of the sectors that would end up listing on UK-SSE. Under this model, presumably it would have been impossible to garner a truly complete understanding of the interaction of social impact and profit-seeking behavior of listed companies, that would have run the risk of un-dermining the integrity of UK-SSE’s intended purpose. Jethi held a similar view to Kraybill’s early view, however, believing that anything further would have created to heavy a burden to implement for a small exchange in its infancy with strong financial pressures on its expenditures. Perhaps Adrian Henriques best summarizes the challenge of SSEs in relation to the social impact of their listed businesses, when in 2013, she wrote the following words in The Guardian: “For the SSE, the discomfort around intention is made worse by the fact that the exchange will be much more an engine of transparency about the impact created than an endorsement of the achievement of a particular level of social performance.”197 In short, Henriques rightly points out that without sector-specific criteria and standards for the actual impact – not just in theory but in practice – SSEs run the risk of becoming irrelevant gatekeepers of social impact investments to the public. “So the credibility and success of the Social Stock Exchange,” closes Henriques, “will hinge on how the issue of measurement is resolved in practice.”198 The closest to achieve this in today’s SSE landscape have been both SVX – through their requirement of B Corp standards adoption within a company’s governance – and IIX, which requires and independ-ent social impact certification. This is, however, a challenge that has not yet been fully solved by any of our present day examples.

2.5.6. Additionality

When looking at the SSE space at large, one critical question remains that has not fully been answered by any of our three SSE models: how do we understand whether or not our SSE is achieving addition-ality. The property of additionality is a determination of whether or not an intervention as an effect when compared to the starting point. In the case of a SSE, additionality asks whether or not its exist-ence create a net positive social effect.

194 B Corporation (2018): Meet the requirements 195 B Corporation (2018): Certification 196 B Corporation (2018): Legal Requirements 197 The Guardian (2013): The Social Stock Exchange: measuring companies' social impact 198 The Guardian (2013): The Social Stock Exchange: measuring companies' social impact

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It is worth the effort to break down the question of additionality, and allow it to guide an ongoing conversation as to whether or not, in a given market, it makes sense to create a SSE at all. While it is impossible to make a determination of additionality prior to launch, it is possible to plan for it in the formation of a new SSE, and to understand it in relation to present SSE initiatives. After speaking with existing actors and observing the market, we consider five possible objectives that would achieve additionality through the formation of a SSE:

1. Bring new social enterprises to market that would otherwise not reach this stage of growth 2. Bring new investors to market that might otherwise not invest 3. Connect the right investors (patient, committed) to the right companies (socially motivated) 4. Bring more capital into angel investing by extending the venture capital continuum into public list-

ing, offering a predictable exit opportunity for early investors 5. Engage retail investors across the market in impact investment

If a SSE fails to achieve one of the above, we can raise serious questions as to the rationale for its existence short of a money making exercise. These questions are particularly relevant for the now-closed UK-SSE, which is most ripe for evaluation. We know that they did not connect into the venture capital landscape and did not achieve an IPO on their platform, so we know that goals 1 and 4 were not achieved. Goal 2 is unlikely, as all listed companies had their primary listing on the main market of the LSE, while similarly goal 5 is ruled out due to listed companies qualifying as impact targets only in name. Goal number 3, then, only remains, and with limited quantities of capital ever having flowed through the UK-SSE, there’s doubt as to whether these “right” investors, if they existed, would have made any measurable difference to the companies with a secondary listing on the exchange anyways. The question we must ask, then, is whether or not there was real social value in the existence of UK-SSE – beyond, perhaps, a first attempt in a new marketplace. We see here that the question of additionality serves to challenge whether or not an SSE is legitimately necessary to a market. SVX, by tapping into young companies who are undercapitalized and pairing investors that may not otherwise seek out this type of company, is approaching goals 1 and 3. Through their collective impact fund, alongside low investor minimums, they are also engaging retail investors that would otherwise not have a way to fund impact businesses of this ilk (goal 5). That, in itself, is enough to pay close attention to the progress of SVX over the coming years. IIX, as a brand-new exchange without a first listing, is harder to evaluate but should be held to the same standard as it develops – as should any new project in the SSE space.

2.6. Strengths & Weaknesses of SSE Competitors We have now walked through, in detail, the major competitors within the global SSE space. By way of conclusions, below we walk through in summary form the major strengths and weaknesses of each SSE actor, categorized for ease of navigation.

Strengths Weaknesses

Issuers & Investors

Social Stock Exchange (UK)

Direct ties into existing main market. Limited demonstrable value to issuers Minority of staff engaged in market mobilization

Social Venture Conex-ion (Canada)

Engagement with private sector VC “pipeline” to feed listers. Majority of staff dedicated to market outreach.

Impact Exchange (Sin-gapore)

Patient funding base from private mar-ket engagement to gradually build in-terest.

Very slow strategy to build criti-cal mass in exchange. Minimal staff time dedicated to mobilizing the market.

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Business Model

Social Stock Exchange (UK)

Pivot into private placement did not work. Junior market secondary listing strategy unable to take root and failed. Unable to demonstrate suffi-cient value to investors and is-suers alike.

Social Venture Conex-ion (Canada)

Leveraged pivot into private placement towards long-term growth of a self-sustaining exchange. Substantial value demonstrated to is-suers, able to grow with them. Investor offer is powerful, with a unique, customized web-based experi-ence. Live the axiom that “securities are not bought, they are sold,” as evidenced in staffing and approach.

Pivot to exchange platform will take years, as they are “coming up from the bottom” rather than engaging in direct entry.

Impact Exchange (Sin-gapore)

Pivoted to private placement and de-veloped a business that still stands.

Attention completely diverted from the original intent of es-tablishing a functioning SSE.

Non-Social Enterprise Vetting Criteria

Social Stock Exchange (UK)

Economizes through use of existing ex-change’s own criteria.

Limited potential for additional-ity due to secondary listing sta-tus.

Social Venture Conex-ion (Canada)

Non-regulated platform approach leaves criteria open to growth and de-velopment over time.

Current criteria are “loose” and do not come with automatic as-sumption of rigor.

Impact Exchange (Sin-gapore)

Economizes through use of existing ex-change’s own criteria.

Does not control own non-so-cial criteria for listing.

Social Ratings Criteria

Social Stock Exchange (UK)

Simple and straightforward. Targeted to unsophisticated retail in-vestor.

Does not actually account for social impact or social commit-ment of the listed business. Potential to become arbitrary as it counts on personal judg-ment over framework.

Social Venture Conex-ion (Canada)

Independent verification of social ob-jectives integrated into the business, giving equal weight to impact across the stakeholder set.

Heavy criteria that may be diffi-cult to scale, given the degree to which the B Corp model re-quires governance integration.

Impact Exchange (Sin-gapore)

Approach combines expert judgments and reporting standards.

Approach does not account for the depth of expertise needed to judge social impact or poten-tial across a broad array of in-dustries. Potential to become arbitrary as it counts on personal judg-ment over framework.

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Additionality

Social Stock Exchange (UK)

First in class to attempt this model, taught the market a substantial amount about what won’t work for ad-ditionality.

No measurable additionality during its existence due to limi-tations of secondary listings. Weak investor base from target category. Unable to bring new social ven-tures to market via IPO. No evidence of raising more for any enterprise than they would have done otherwise.

Social Venture Conex-ion (Canada)

Tapped into young companies and grow with them. Attracting form-fit investors according to profile of individual enterprises. Through collective fund, bringing retail investors into the impact investment market who otherwise don’t have an-other domestic option for businesses of this type.

Limited evidence yet that their approach is able to bring new investors to market.

Impact Exchange (Sin-gapore)

Slow-to-list strategy will likely bring a few early impact bonds to market, demonstrating the potential to other markets. With private placement business at-tached to IIX, potential to develop pipeline from private social enterprise to IIX listing.

Partnering with a parent ex-change presents similar risk of repeating UK-SSE’s history. The raise-and-transfer strategy will create no additionality, and instead is likely only to plant the seeds for future listings.

Table 13: SW Analysis of existing social stock exchanges. Own illustration.

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3. Gaps, opportunities and the value proposition This chapter has the goal to determine the unique value proposition (UVP) of a Swiss Social Stock Exchange (SwiSOX). The section builds upon the findings from the previous sections, in particular an overview of existing social stock exchanges, current market gaps, and unmet demands. The section will start with a performance review of existing solutions and their shortfalls, which will be of assistance when developing structures and products for the proposed SwiSOX. The second part will use an in-depth stakeholder analysis to show which buy-side and sell-side players will be important for SwiSOX as well as use additional analysis to define a business model, including possible financial instruments that could be traded on the SwiSOX. Last but not least, SwiSOX’s value proposition will be sketched, explaining why and how investors and enterprises should engage in this new platform.

3.1. Defining the framework 3.1.1. Performance review of existing solutions

As the previous sections have shown, there are already a variety of offerings dedicated to the needs of mainstream investors and traditional enterprises seeking capital. With regards to platforms or ex-changes dedicated to match impact investors and social enterprises besides the existing social stock exchanges, SME exchanges and alternative exchange platforms (e.g. crowdfunding platforms) have also been identified as potential viable solutions given their enterprise target. This section summa-rizes the respective offerings according to the needs of impact investors and identifies gaps, which SwiSOX would need to be able to close. We defined five key topics to compare and assess the services existing platforms are offering or could offer to issuers and impact investors:

▪ Coverage: What will be the coverage of the exchange in terms of geography, platform, investor and enterprise type?

▪ Exchangeability: How extensive is the exchange regarding liquidity and speed of execution? ▪ Adequacy: How well is the exchanges’ offering designed to the specific needs of impact investors and

issuing organizations? ▪ Cost-benefit: How high is the value added of the exchange platform in relation to its costs, for both

impact investors and issuers? ▪ Impact: Does the platform offer sustainability or impact indicators so that investors can track the social

performance of their investments?

We apply these criteria to each of the identified exchanges and rate their performance on a scale from 1 (low) to 5 (high). Results are displayed in spider charts, showing the individual performance as well as the average rating across all identified exchanges, in addition to the performance of traditional stock exchanges for comparison. As the in-depth analysis in Section 2 shows, the three main social stock exchanges fell short on their promises. Even though the original idea and concept was designed to meet the needs of issuers and impact investors, the outcome has been unsatisfactory. Only a few enterprises are listed, there have been very few IPOs, and no fully-operational exchange mechanism has been established, even after several years of existence. The overall values for social stock exchanges and commercial exchange platforms is displayed in the spider chart below.

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Figure 30: Performance rating of social stock exchanges based on research in this paper. Own illustration.

Even in the case of the well-functioning social stock exchange in Toronto, the coverage in terms of geography and investor base is still limited given their domestic focus. So far, no social stock exchange has been able to establish a platform that is comparable to traditional stock exchanges in terms of tradability. The platforms rather pursue a club-deal exchange mechanism, without adequate liquidity, which is crucial for mainstreaming impact investments. SME exchanges across the globe were identified as another potential source of inspiration for the SwiSOX. SME exchanges are specifically designed to the needs of small and medium-sized enterprises, which makes up the core of social enterprises. There are over 80 such platforms globally and some of them also incorporate sustainability indicators. However, according to our research, these indicators are limited to environmental, social, and governance (ESG) criteria and do not go deeper in terms of impact reporting. Nevertheless, SME exchanges are performing on equal to or above the average across all platforms, as the graph below shows:

Figure 31: Performance rating of SME exchanges based on research in this paper. Own illustration.

SME exchanges distinguish themselves from the other portrayed platforms by being specifically de-signed towards the needs of SMEs, e.g. by demanding lower market capitalization for listing, ensuring

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a broad investor base by providing enough liquidity, and also offering additional services for SMEs as, such as listing preparation support. Crowdfunding, club-deal or P2P platforms have been summarized as alternative exchange platforms. Even if they differ regarding size, scope and functionality, the basic idea is to connect investors and enterprises through an internet-based platform. This means that the costs associated are relatively low compared to a “physical” exchange that has to meet high standards and requirements from a legal perspective. Furthermore, in theory there are no limits regarding the scope and outreach of such a platform; crowdfunding platforms especially are known for a high share of cross border transactions. However, the downside of these platforms are they do not offer any sustainability or impact indica-tors. Furthermore, liquidity is very restricted as most of the deals are conducted in a peer-to-peer way, not allowing for a secondary market for retail investors. Additional costs are integrated, as third par-ties have to be involved in the absence of an automatic clearing for the investment process. These factors also result in low transparency, especially in the price-making process. Therefore, our rating for this kind of platforms is mixed, but has to be considered when defining the offering for SwiSOX:

Figure 32: Performance rating of alternative exchange platform based on research in this paper. Own illustration

Last but not least, we also rated the performance of traditional stock exchanges according to the same criteria. As the flagship of exchange possibilities, their outreach and exchangeability mechanism is stronger than any other identified platform. Clearly the main advantages that traditional stock ex-changes possess in contrast to the other platforms is that: they have to comply with national and international financial regulations, can guarantees a certain liquidity, and provide investor protec-tions.199 Additionally, traditional stock exchanges have to follow national legislation, which generally focuses on the stability of the stock exchange, which is what differentiates them from alternative ex-change platforms and non-regulated exchanges. Furthermore, according to several reports, more and more traditional stock exchanges are integrating sustainability indicators. However, similarly to SME exchanges, most of them are restricted to ESG and a strong impact methodology is still missing. To summarize, even though the benefits in terms of cap-ital raise are clear, high costs make a listing on a traditional stock exchange still attractive only to large enterprises.

199 Luxembourg for Finance (2018): UCITS

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Figure 33: Performance rating of traditional stock exchanges based on research in this paper. Own illustration

3.1.2. Main gaps of existing platforms

Considering the findings from the first two main sections of this study as well as surveys conducted with impact investors and social entrepreneurs, we identify the following gaps regarding the existing platforms when it comes to possibly match impact investors and issuers:

▪ Impact methodology: A social stock exchange has to differentiate itself through a clear framework of how it measures the impact created by the listed products. As the results from the competitor land-scape analysis in Section 2 has shown, all main social stock exchanges fell short on this point. Either they rely on certifications from a body or rating agency specializing in social or environmental standards (e.g. B Corporation) or they are content with the publication of a yearly impact report without regular screening from an independent body. However, if impact investors were to shift significant amounts of their capital from a traditional stock exchange or impact funds, they will need a clear and standardiezes impact framework, with a comprehensive methodology and regular impact reports from listed enter-prises and securities. As seen in the previous chapters, impact investors are not willing to accept varying impact measurement tools from different providers.

▪ Scalability: Limited deal sizes were identified as one of the main constraints regarding impact invest-

ments, cited in several industry publications as well as in our own impact investor survey. Institutional investors are also especially likely to only engage in investments if the deal size passes a certain thresh-old (i.e. share offerings or IPOs valued at CHF 2M or above). Therefore, SwiSOX will need to offer size-able enough investment possibilities to attract larger investors. Furthermore, with a transaction size-based fee model, large deal sizes will also benefit the stock exchange directly in terms of remuneration. This again will support the stock exchange to achieve a certain size, expand the offering and achieve self-sustainability.

▪ Liquidity: Another crucial factor for investors is liquidity. Impact investments are often associated with

limited liquidity, a finding that is confirmed in our study. Therefore, SwiSOX would need to create a certain degree of liquidity on the exchange and ensure regular secondary transactions. This could for example be achieved through market makers, as done by traditional stock exchanges. However, it is ambitious to think of SwiSOX as an equivalent to NASDAQ, where stocks are traded in milliseconds, given that the impact focus brings along the requirement of long-term (“sticky or patient”) investors rather than “trading investors”. Nevertheless, creating a platform where impact investors would be able to find secondary buyers in a reasonable amount of time for existing investments would be an important step forward for the global impact investment market. As a side note, an important remark

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needs to be made here: liquidity is crucial for an exchange to function, but there needs to be a balance between necessary and excessive liquidity. 200

▪ Additionality: When it comes to social stock exchanges, a key question is about additionality: is the

platform creating a net positive effect for society and the environment that would not otherwise occur? Is it allowing enterprises to raise capital they would otherwise not be able to raise? Is it permitting impact investors to find additional investment opportunities that they otherwise would not have found? As shown in Section 2, this question has not been fully answered by the existing social stock exchanges, and present indications point to limited, if any, additionality. SwiSOX must ensure that at the core of its chosen operating model and reporting framework to include a clear commitment to create additionality. For example, realising several IPOs of social enterprises that would not be able to go public on other exchanges would show a clear, measurable additionality; simply listing socially ori-ented businesses that have other means or platforms to list, however, would not.

▪ Regulation: Traditional stock exchanges and most SME exchanges are strongly regulated by national

law, and more often by international regulations as well (such as UCITS for investment funds). These regulations ensure investor protection and are especially important to attract institutional investors. Alternative exchange platforms mostly lack a strict regulation and therefore are mostly closed plat-forms, which does not guarantee sufficient liquidity. By generating a platform, which would fall under FINMA regulation, the investor base could grow significantly in terms of variety (as more institutional investors would be willing to engage) and geographies, attracting also investors from other countries in Europe.

These identified gaps shall form the base for the framework of SwiSOX, which will be defined in the next section of this report.

3.2. Defining SwiSOX’s offering This section lays the ground for the value proposition of SwiSOX. It builds on the identified gaps from existing exchanges, as described in the previous section. We conducted both a buy-side stakeholder and a sell-side client and product analysis, complemented with a few recommendations regarding sales and marketing to clearly identify the main clients, products and offerings for SwiSOX.

3.2.1. Buy-side stakeholder & client analysis

This analysis has the goal to identify key buy-side stakeholders and clients201 which are needed for a successful implementation of SwiSOX. To do so, the chart below plots institutions or organizations according to their influence and interest in the project:

200 As noted in Chapter 1 of this study, traditional stock exchanges are more and more being dominated by high frequency traders, which hold stocks only for milliseconds, always looking to maximize profit. This behaviour can be harmful to the stock market and in the end to the real economy. Therefore, certain rules (such as for example a minimum holding period) should be considered right from the beginning. 201 In this sense, buy-side refers i) to clients would be buying securities on SwiSOX for themselves or on behalf of other cli-ents or ii) stakeholders (institutions or organizations) which are relevant for buy-side players (e.g. by publishing price-rele-vant information).

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Figure 34: Stakeholder matrix of SwiSOX project. Own illustration.

First, on the top right in green are listed the key stakeholders of the project. Without their commit-ment, the successful launch and establishment of SwiSOX will be very difficult. They have to be in-volved at the earliest stage possible of the project and be part of governance / decision making bodies. As can be seen from the graph, we identify banks as the most important and influential stakeholder. Banks have a broad and diversified client base, for which they can act as a lever to place investment requests on the SwiSOX platform. As shown in the analysis of existing traditional stock exchanges in Section 1, banks have a strong presence on stock exchanges. Furthermore, the demand of impact investments is growing, also driven by clients’ interests in the topic. In addition, HNWI and family offices act often much faster than “pure” institutional investors like pension funds and insurance com-panies Therefore, we argue that the early involvement of banks in the SwiSOX is crucial. Other key players from the financial sector include wealth and asset managers and institutional inves-tors. Compared to banks, the client base of asset and wealth managers if often smaller and more nuanced. Nevertheless, their inclusion in the project is important as well, for a diversified source of capital and exploitation of new clients. Institutional investors like pension funds or insurances are of-ten restricted by their (conservative) investment profile. However, if this kind of investors only allocate a small share of their assets to SwiSOX, they would obviously generate large volumes. Furthermore, given the learnings from the existing social stock exchanges, we think that the inclu-sion and cooperation with government bodies is crucial for the success of SwiSOX, mainly due to two factors: First, governmental bodies could engage in a public-private partnership (PPP) to success-fully launch SwiSOX (see chapter 4 for more details). If a government body were to provide seed cap-ital and/or show a commitment towards the project, this will send an important signal of confidence to investors. Second, development financial institutions (DFIs), which are also run by government bod-ies or manage public resources, might also be interested in working with SwiSOX, either by exiting and listing some of their investments or by actively investing some of their assets on SwiSOX. Institutions in the orange area have to be included in the project, especially when it comes to their dedicated interest area. They often set or have own standards, that have to be fulfilled, inde-pendently of the project’s characteristics. Regulatory bodies are also a public institution, but we state their interest in the project lower compared to the government as mentioned in the green box. The

Influence of stakeholders

Show consideration

Meet their needs Key players

Interest of stakeholders

Least important

Regulator Banks

Wealth & Asset ManagersBrokers

Government

Industry networks

General media

Opinion leadersCompetitors

Educational bodies

Institutionalinvestors

Specializedmedia

Low

Medium

High

Low Medium High

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regulatory body to include in the set-up of the project would be the ‘Schweizerische Fi-nanzmarktaufsicht’ (FINMA), which oversees the financial sector in Switzerland. FINMA’s main task as a regulator is to make sure that all financial service providers comply with the rules and that the fi-nancial system is stable. They are responsible for authorizing the participation of banks, insurance companies, stock exchanges and other market participants, including asset managers of collective in-vestment schemes, as well as monitoring them and acting if the market participants break the rules.202 We put brokers in the same category as the regulator, maybe with a slightly higher interest and lower influence. Brokers typically facilitate the buying and selling of financial securities between a buyer and a seller. While the concept of brokerage firms is more common in the U.S. than in Europe and Swit-zerland, well-known brokers include the Charles Schwab Corporation or Fidelity Investments. How-ever, with the digitalization of stock trading, online broker firms such as Swissquote or Saxo Bank have gained more attention lately. Including them in the establishment of SwiSOX is crucial to broaden the client base. The blue box on the right includes stakeholders that can act as ambassadors. Their inclusion is rele-vant to spread awareness and interest within the industry. They have to be kept informed regularly and more closely, but are not engaged actively in the creation of the project. We argue especially that industry networks such as the Global Impact Investing Network (GIIN) as well as opinion leaders from the impact investment universe fall under this category. They need regular updates and opinion shar-ing, but the project should avoid over-involvement of these groups, as it also can lead to protracted discussions and opinion findings. Educational bodies such as universities also fall under this category, as well as specialized finance media like Finews.ch, Handelszeitung, The Financial Times or ImpactAl-pha.com. Here we see potential for direct engagement in a classic public relations way to attract public attention towards SwiSOX (e.g. offering exclusive interviews with important stakeholders or the right for a news scoop). The red box below comprises institutions that are not crucial for the success of the project nor need an active line of communication. Nevertheless, an active monitoring is recommended. In our view, SFG should commit the least effort towards the involvement of competitors and the general media. The existing stock exchanges are struggling with their chosen business model, as Section 2 has shown. An exchange between SwiSOX and the competitors is important, but needs to be reduced to the min-imum to not jeopardize SwiSOX’s success factors. General media, not specialized on finance topics, might have a higher influence power, however their resources are constrained and their involvement should be restricted to selected press releases.

3.2.2. Sell-side client analysis

Following the examination of the buy-side of SwiSOX and its stakeholders, we now want to look at the sell-side. Here we refer to the target groups that could potentially sell or list financial products on the SwiSOX. Given our findings from Section 1 regarding the impact investor market, we identified multi-ple target groups, including impact investment funds, social enterprises, microfinance institutions, as well as issuers of green, social and social impact bonds (which can be corporates, multilateral banks or commercial banks). We describe them according to five characteristics:

▪ Market size: How big is the current market of the specified target group and what is the trend analysis? ▪ Rationale: Why would this target group matter to a social stock exchange like SwiSOX? ▪ Coverage: How well is the market for the specific target group already covered? ▪ Gaps: What gaps were identified that SwiSOX could fill and benefit from? ▪ Summary of potential: Shows the specific target group’s potential to be an important actor on the sell-

side of SwiSOX.

Findings are given in table 14:

202 FINMA (2018): FINMA briefly explained

Target group Market size Rationale Coverage Gaps Summary of potential

Impact investment funds

According to the GIIN203, in 2017 impact investment funds raised USD 18.7B, with plans to raise USD 22.5B (+20%) in 2018.

Many investors rely on im-pact investment funds to diversify their investments and achieve a wider out-reach, compared to direct investments. Furthermore, they outsource the due diligence process to spe-cialized fund managers.

It’s difficult to estimate the im-pact investment funds cover-age. The GIIN survey indicates that impact investment fund managers are raising less capi-tal than expected, maybe a hint towards a lack of quality invest-ment deals.

Most investors rely on banks as intermediaries to invest in im-pact investment funds.204 A central platform with a global and broad offering of impact in-vestment funds is missing to our knowledge. In addition, most impact investment funds are not or only partially liquid.

We see a high potential for a centralized platform with

a broad range of impact investment funds, as well as a sec-ondary market of impact investment fund shares/units.

Social enterprises According to our research, we estimate that there are globally at least 16,000 medium-sized social enter-prises. Thereof, we esti-mate 14,000 to be located in more developed mar-kets with an estimated overall financing need of USD 13.3B.

Social enterprises are pre-destined to tackle today’s social and environmental challenges by adapting commercial business prac-tices and generating sus-tainable impact.

In theory, social enterprises would have a range of financing possibilities: bank loans, the is-suance of bond and shares at stock exchanges, internet-based P2P platforms or specialized in-vestment funds. However, in re-ality medium sized (social) en-terprises especially are lacking access to adequate funding.

According to our research social enterprises are facing a vast fi-nancing gap for debt or equity financing. Furthermore, a trans-actional platform successfully connecting social enterprises and impact investors is still missing.

Done in a structured, ef-ficient and thoughtful

way, a social stock ex-change could close a part of the significant fi-nancing gap for medium-sized social enterprises.

Microfinance institutions (MFIs)

The latest Symbiotics MIV survey205 estimates the MFI market size (including microfinance investment vehicles (MIVs), refinanc-ing of MFIS, etc.) at USD 13.5B (+10.6% compared to 2016).

Microfinance has a proven track record of enabling fi-nancial inclusion to under-served populations. This leads to economic devel-opment and empower-ment. From the MFI per-spective, SwiSOX could of-fer access to a broader in-vestor base and possibly lower MFIs cost of finance.

With decades of track record, the microfinance market is get-ting more mature. In regions like Latin America, MFIs are competing with traditional banks. MIVs are experiencing slower growth rates than in the past.

There are platforms that try to connect impact investors and MFIs directly (e.g. Plumseeds or Kiva). These platforms are deal orientated and MFI driven. Ac-cording to our knowledge, there is no platform in which MFIs, MIVs and impact inves-tors can exchange investments directly.

We see a high potential for an exchange plat-form, which

connects microfinance institutions, MIVs and impact investors to ease fundraising, deal sourc-ing and exiting existing investments

203 GIIN (2018): Annual Impact Investor Survey 2018 204 However, SwiSOX will need to assess more in detail to what extent existing funds available only for qualified investors can be listed on a public stock exchange. 205 Symbiotics (2017): 2017 SYMBIOTICS MIV SURVEY

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Target group Market size Rationale Coverage Gaps Summary of potential

Sponsors of social im-pact bonds (founda-tions, governments etc.)

According to Social Fi-nance206, the global social impact bond market is es-timated at approx. USD 400M. Social impact bonds are not proper bonds but rather pay-for-perfor-mance mechanisms.

The mechanics of social impact bonds are similar to social bonds, but with the important difference, that initial investors are only paid back if specific outcomes are met. There-fore, the impact attribu-tion is even stronger with social impact bonds.

The market for social impact bonds is still very young and bonds seem to be issued selec-tively and mainly in developed countries.

There is no standardized plat-form on which social impact bonds can be issued. Further-more, the concept is rather un-known and an unified impact measurement framework is ab-sent.

Government institutions and leading foundations

could use SwiSOX to further spread the concept of social impact bonds.

Issuers of social bonds (social enter-prises, NGO’s as well as multilateral and commercial banks)

According to the ICMA207social bonds an-nual issuance volume has grown 17x between 2014-2017 with the majority of issuances based on the so-cial bond principles and totaling USD 8.8B at the end of 2017.

Social bonds are bonds linked to thematic projects specifically tackling social challenges. Often, they are backed by supranational organizations (e.g. IFC) and are aligned with Social Bond Guidelines.

Social bonds have seen a rapid evolution, primarily thanks to the promotion of supranational organizations. Similar to green bonds, the market is pretty cov-ered and purchasers are eager to invest in social bonds when rated.

Unlike green bonds, the con-cept of social bonds is still pretty unknown. Furthermore, the market is dominated by su-pranational organizations, while private issuers only issue a frac-tion of the total social bonds. There is good future potential for NGOs to also issue social bonds.

Social bonds could be a product to be considered at

SwiSOX, as the concept is relatively un-known and suprana-tional organizations might be eager to broaden their investor base. Furthermore, SwiSOX could give the opportunity to private sector institutions and/or NGOs to test the concept and issue own social bonds.

206 Social Finance (2018): Social Impact Bonds reach global mass: 108 projects launched in 24 countries 207 International Capital Market Association[ICMA] (2018): Green & Social Bond Market Update

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Issuers of green bonds (corporates, multilateral as well as commercial banks)

According to the ICMA208, the global green bond market is currently esti-mated at USD 160B, with a strong growth pace.

Green bonds are bonds linked to the financing of projects with clear envi-ronmental benefits, there-fore also tackling environ-mental challenges.

The green bond market is well-functioning. Corporates as well as government institutions are regularly issuing bonds at large scale and the market is highly liquid.

For this specific market, we could not identify major gaps that a social stock exchange could fill.

Due to high coverage, low transaction costs and a

standardized framework, green bonds are unlikely to be traded on SwiSOX and therefore we see lit-tle potential for it.

Table 14: Matrix of sell-side analysis for SwiSOX. Own illustration.

208 International Capital Market Association[ICMA] (2018): Green & Social Bond Market Update

3.2.3. Product analysis

Before we link the sell- and buy-side of SwiSOX, we need to further look at the products which will potentially be listed on the exchange itself. To do so, potential financial instruments are ranked on the graph below, with the vertical axis indicating the potential for successfully listing and trading such instruments (mostly derived from the sell-side analysis) and the horizontal axis indicating the potential trading volume, derived from the universe mapping exercise in Section 1.

Figure 35: Profiling potential financial instruments for listing and trading at SwiSOX. Own illustration.

The financial instruments can be grouped into 4 categories, as seen in graph 35:

▪ Stars (high potential, high volume): According to our analysis, we see two impact financial products with a high priority: fund shares/units of impact investment funds and shares and/or bonds of social enterprises. We see shares of impact investment funds as the financial product with the highest po-tential at SwiSOX. Impact investment funds are very popular amongst impact investors, but are often saddled with restrictions in liquidity (e.g. monthly subscription or quarterly redemptions). SwiSOX could be a platform where existing investors could trade shares of their investment funds (e.g. due to a change in asset allocation) and impact investment funds could issue new shares and access a broad investor base efficiently. Furthermore, as the first section of this study has shown, there is a growing market of social enterprises, with a need for financing. Attempts to serve these kinds of enterprises through social stock exchanges have not been very successful yet.

▪ Question marks (high potential, low volume): We place two financial instruments with impact in this category: SIBs and shares and bonds of MFIs. SIBs have, as explained in the previous section, similar features as social bonds but with a strong emphasis on the outcomes, e.g. investors are only paid back if specific key performance indicators (KPIs) are achieved. Therefore, the process needs more support for impact analysis than, for example, the issuance of green bonds. Here, SwiSOX could play an enabler role, by providing the platform for issuers/arrangers (mainly governments at the moment) and a service offering to support the development and controlling of the impact framework. Even though the volume of SIBs at the moment is low, we see high potential regarding further development of pay-for-perfor-mance mechanisms. We also see shares and bonds of MFIs as an attractive product for SwiSOX. Micro-finance is a well-known concept with a proven track record. Impact investors are familiar with the idea and demand is high. MFIs could use SwiSOX as an alternative platform to source capital from a more diversified investor base than depending on individual MIVs. Furthermore, with the sector evolving and maturing, MFIs could use SwiSOX as a platform to go public, something that would strengthen the iden-tity of SwiSOX.

Volume

Green bonds

Low Medium High

Low

Medium

High

Shares & bonds of social enterprises

Shares & bonds of MFIs

Impact investment fund shares

Social bonds

Social impact bonds

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▪ Dogs (low potential, low volume): With a global volume of approx. USD 8.8 billion, social bonds are a relatively small field in international finance. Supranational organizations like The World Bank are lead-ing the way in terms of issuing social bonds . These organizations also defined the framework in which such bonds operate. Like green bonds, social bonds have been issued at conventional stock exchanges where they already benefit from liquidity and high trading volumes.

▪ Cash cows (low potential, high volume): Green bonds are at the forefront of financial instruments with an impact. High demand and a broad issuer base have been evolving over the past years, with support from government and supranational organizations. If green bonds would be a part of SwiSOX, this would mean high volumes with relatively low costs, as the product can be seen as “plain vanilla”209. However, it is questionable why green bond issuers should be using SwiSOX as a platform, especially as Swiss financial institutions are already issuing green bonds210 and Luxembourg has already established itself as the main hub for green bonds, listing over 50 % of the total world’s green bonds211. The only differentiator could be the price, but especially in the early phase of SwiSOX it would be very difficult to attract green bond issuers to the platform. Therefore, we see little potential, despite the high trading volume.

Therefore, we believe the main product offerings of SwiSOX should focus on shares of impact in-vestment funds, shares and bonds of social enterprises, shares and bonds of MFIs, and social impact bonds. It will be important to show the issuers of these financial instruments why they should consider SwiSOX as the leading platform for such transactions. The following table therefore maps the addi-tionality for each financial product based on the evaluation criteria used in the first section of this chapter. The areas where SwiSOX may be able to bring a clear potential benefit for issuers are high-lighted in the respective text boxes:

209 Plain vanilla is a term to describe any tradable asset, or financial instrument, in the financial world that is the simplest, most standard version of that asset. 210 NZZ (2018): Der Green-Bond-Express fährt an der Schweiz vorbei 211 Foreign Policy (2018): “The Luxembourg Green Exchange lists 50% of the world’s green bonds”: Robert Scharfe, Luxem-bourg Stock Exchange

Criteria Coverage Exchangeability Adequacy Cost-benefit Impact Fi

nan

cial

inst

rum

en

t Impact invest-ment fund shares

Creating the first active secondary market for fund shares, with few limits re-garding geography or sec-tor focus

Enabling the liquidity com-ponent to attract more in-stitutional investors

Creating a customer ser-vice desk specifically for these clients to coordinate a smooth offering

Lowering fundraising costs by offering a centralized platform with a broad in-vestor base, instead of re-sources on the ground. In addition, listing may re-duce the need for funds to hold a portion of cash to serve redemptions

Contribute to a clear, in-dustry-wide “impact rat-ing” used by investors and issuing organizations

Shares & bonds of social enter-prises

Creating the first active secondary market for company shares and bonds, with few limits re-garding geography or sec-tor focus

Allowing for IPOs and sec-ondary market trading of shares of social enter-prises that otherwise would not go public on traditional stock ex-changes

Implementing an “agent” model to support social enterprises in the whole fundraising process

Possibly lowering the cost of finance via shorter in-vestment cycles

Contribute to a clear, in-dustry-wide “impact rat-ing” used by investors and issuing organizations

Shares & bonds of MFIs

Creating the first active secondary market for MFI shares, with few limits re-garding geography or sec-tor focus

Enabling the liquidity com-ponent to attract more in-stitutional investors

Creating a customer ser-vice desk specifically for these clients to coordinate a smooth offering

Possibly lowering cost of finance

Contributing to clarifica-tion around current criti-cism about microfinance (such as over-indebted-ness) by providing a credi-ble impact methodology to successfully filter MFI with real impact from MFI with damaging business models

Social impact bonds

Catalyzing the coverage of social impact bonds, a rel-atively new instrument in the world of impact in-vestments

Allowing for original inves-tors to sell stakes within SIBs as the value of the in-vestment rises or falls in relation to impact results

Creating a customer ser-vice desk specifically for these clients to coordinate a smooth offering

Possibly lowering the transaction costs to find willing investors

Contribute to a clear, in-dustry-wide “impact rat-ing” used by investors and issuing organizations

Table 15: SwiSOX’s added value for sell-side clients. Own illustration.

3.2.4. Linking the buy-side and sell-side to define SwiSOX’s offering

After having examined the characteristics of SwiSOX’s potential buy-side and sell-side, the last step is to combine both and define SwiSOX’s offering. To do so, we match the identified investors and the identified financial products (which implicitly also refer to the issuers) from the previous sections. This will give us a comprehensive overview of which products are going to be in demand for which type of investor. We indicate their potential with an arrow according to the color (green = high potential, yellow = medium potential and red = low potential). However, it is important to note, that many features of the exchange will depend if SwiSOX will partner with an existing stock exchange or if a completely new platform will be built from scratch. Therefore, the following recommendations are very general and in-depth analysis will follow in Sec-tion 4 with Table 16 showing the findings. As we already mentioned in the beginning of this section, we see banks as the most important priority group, also as an investor respective distributor. This will be an important attribution to the value proposition of SwiSOX. From the product side, we see that for every product there is at least one investor group with a high potential. Given that the majority of the investor base is more conservative, we identify bonds from social enterprises and MFIs as well as impact investment fund shares as the products with the high-est potential. Nevertheless, we also see potential for trading of shares of social enterprises and MFIs. These products are also important to generate income based on turnover, in contrary to bonds which are usually issued and not traded on a very high scale in a secondary market. As a proxy, the WFE Annual Statistics 2017212 reported approx. 190 million total bonds traded and approx. 19 billion num-ber of equity shares traded (only through the electronic order book). Social impact bonds will be a niche product, as the concept and market are still very young. Nevertheless, SwiSOX could take a pio-neer role in promoting the use of social impact bonds by successfully issuing and spreading this finan-cial innovation. Another important factor that emerges from this matching exercise is that SwiSOX has the potential to become a “one-stop shop” for all kind of impact investments. Interested investors could trade equities, bonds and funds. MIVs could, for example, play on both sides by raising capital through a listing and exiting/purchasing underlying assets on the SwiSOX.

212 WFE (2018): Annual Statistics

Target group

Asset & wealth mangers and private

banks Global banks DFIs

Institutional investors

Managers of impact investment funds

(incl. MIVs)

Function on behalf of clients

as under-writer

on behalf of clients

Listing shares to

exit

own ac-count

own account own account

Fin

an

cin

g in

stru

men

t

Shares from social enterprises

Bonds from social enterprises or NGOs

Impact investment fund shares

Shares from MFIs

Bonds from MFIs213

Social impact bonds

Table 16: Matching investors and financial instruments at SwiSOX according to their potential. Own illustration. 3.2.5. Pricing strategy

With regards to the pricing strategy, much depends on the model under which SwiSOX will operate. Therefore, in this section we summarize the type of fees and ranges that other stock exchanges use to give a first indication of which type of fees and ranges SwiSOX could price at. To start, Table 17 on the next pages gives a snapshot of fee models of the traditional stock exchanges portrayed in Table 10, as well as for the biggest SME exchanges according to the ranking in Table 11 (omitting Chinext, as this board is also operated by the Shenzen Stock Exchange) and the three main identified social stock exchanges, portrayed in Section 2 of this study.

213 Or instruments with a similar functioning like promissory notes

Type of fee Major stock exchanges SME stock exchanges214 Social stock exchanges C

har

ge t

o m

arke

t p

arti

cip

ants

One-off basic fee

Ranges between USD 4.5-25K. There are also stock exchanges that do not charge a basic fee.

AIM: Entrance fee for new members of USD 13K Shenzen & Kosdaq: No disclosure of one-off basic fees for investors

No information obtained

Trading fee Depends heavily on the stock exchange and the vol-ume. However, market participants with higher trad-ing volumes are “awarded” with lower fees per trade. The price ranges between USD 0.0012-1.50 per trade.

AIM: No disclosed trading fees Shenzen SME Board: Charged on both sides at 0.0487‰ of the traded value Kosdaq: 0.0022763% for each traded stock

SVX charges 2% of capital raised for transac-tions above USD 7.6K and 5% for transac-tions below that mark to enterprises but not investors.

Access fee Are either charged on a lump sum basis or on the number of trades. Ranges are between (at least) USD 2-7.5K per month.

AIM: Annual fee of USD 19K for members Shenzen: USD 88K for normal seat, however not clear if really needed to trade Kosdaq: USD 2.7K per year per line (up to 6)

No information obtained

Ch

arge

d t

o li

sted

en

terp

rise

s

Initial listing fee

Dependent upon the selected market and the mar-ket capitalization of the enterprise. Prices range be-tween USD 12-200K for enterprises with a lower market cap and USD 85-250K for enterprises with a larger market cap

AIM: USD 13K small, 45K medium, 140K large Shenzen SME Board: USD 44K small, 80K me-dium, 95K large Kosdaq: The initial listing fees range from USD 45 to USD 42K

Company listing fees charged by current ex-hanges include a relatively modest USD 1.9K for SVX, and a more expensive but not cost-covering USD 12.9K charged by UK-SSE.

On-going listing fee

Dependent upon on the market capitalization of the listed enterprise. Prices range between USD 8.5-30K for enterprises with a lower market cap and USD 28- 85K for enterprises with a larger market cap.

AIM: USD 10.2K small, 96K large Shenzen SME Board: USD 7.3K small, 15K medium, 22K large Kosdaq: Range from USD 5 to USD 8.3K (plus additional fees)

No information obtained

Table 17: Summary of fee structure for major stock exchanges, SME stock exchanges and social stock exchanges. Based on various sources included in this study. Own illustration.

214 Please refer to the following documents for each SME stock exchange: AIM: Membership price list, Fees for companies and nominated advisers / Shenzen: Trading fees, Listing Fees / KOSDAQ: KOREA EXCHANGE FEE SCHEDULE, The Korea Stock Exchange (“KRX”) – IPO Overview

As it can be seen from Table 17, traditional and SME stock exchanges apply the same fee model, con-sisting of at least 3 fee types for market participants and two for listed enterprises. However, regarding the social stock exchanges, we were not able to obtain a clear picture of the fee models used. Never-theless, the interpretation from the interviews is that fees are genuinely low. Therefore, for SwiSOX we advocate for a lean, transparent and sustainable pricing model. Much of it depends on the chosen set-up (new platform from scratch or cooperation with existing platform), therefore the details and financial forecasts will be given in Section 4 of this study. In general, we recommend to keep the fees for market participants and investors as low as possible and at the same time work with accredited agents (proposed working title: “Impact Agents”), similar to the NOMAD model described in Section 2 of this study. Such Impact Agents would act as agents in supporting market participants in handling admission and listing with the stock exchange and at the same time scouting for new social enterprises which could be listed on the SwiSOX. The table below summarizes an indicative pricing model for SwiSOX:

Type of fee Pricing range for SwiSOX

Ch

arge

to

mar

ket

par

tici

pan

ts One-off basic fee To cover the costs for the admission process (legal paperwork, due diligence

of investor) an one-off basic fee of between USD 5-10K would be reasonable.

Recurring trading fee The recurring trading fee shall depend on the instrument. Assuming shares of social enterprises being the main traded instrument at the exchange, a fee of 0.1-0.5% of the transaction shall be settled.

Annual access fee To cover the costs for on-going infrastructure services, the social rating service and other main fixed costs (rents, wages) an annual access fee of between USD 5-10K shall be charged.

Ch

arge

d t

o li

sted

en

ter-

pri

ses

Initial listing fee To cover the costs for the admission process (legal paperwork, due diligence of enterprise, social rating) an one-off basic fee of between USD 5-10K plus a fee of 0.5 % times the market capitalization of the enterprise would be rea-sonable.

On-going listing fee To cover the costs for on-going infrastructure services, the social rating service and other main fixed costs (rents, wages) an annual listing fee of between USD 5-10K shall be charged, based on the enterprise’s market capitalization.

Ch

arge

d u

po

n

req

ues

t

Market intelligence As soon as SwiSOX has attracted enough market participants and executed a certain amount of trades and IPOs, collected data can be aggregated and sold to individual clients such as investors, industry networks or educational bod-ies. Pricing has to be determined more specifically.

Ch

arge

d

to

Imp

act

Age

nts

Access fee Individuals or enterprises who want to act as Impact Agents and support en-terprises (or other market participants) on the exchange shall be charged an annual fee of USD 10-15K.

Table 18: Indicative pricing model for SwiSOX. Own illustration.

3.2.6. Limits & constraints

Considering some of the findings from the interviews with the existing social stock exchanges, it is clear that SwiSOX will face many constraints. We identify and describe some of these limits and con-straints as well as potential counteractions, grouped by topics:

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Topic Limits & constraints Counteractions

Regulation We identify regulation as one of the highest limiting factors for SwiSOX. Financial regula-tion in general has become stricter in the past years, especially if targeting retail cli-ents. Furthermore, regulatory requirements for a fully-fledged and public stock exchange are very high (as Section 4 will show) and are under the supervision of FINMA.

It is crucial to have a regulatory expert in the project team right from the beginning. Fur-thermore, the process for FINMA approval should be a key priority, to ensure a publicly operational platform that allows the in-volvement of not only qualified but also re-tail investors. Approval from the corre-sponding European regulator should also be considered.

Competition SwiSOX will be competing with various ac-tors: from stock exchanges (traditional, SME and social stock exchanges) as well as pri-vate equity funds, banks and asset manag-ers, which all may want to have a share of the impact investment universe.

It is absolutely crucial to identify an unique value proposition, which only SwiSOX can or will deliver compared to the major competi-tors. For example, having a long-term view when it comes to investing, a global network of Impact Agents on the ground or a com-prehensive impact rating and measurement framework. The value proposition will be discussed in the next section.

Technology While technology is definitely a major ena-bler for SwiSOX, it also carries some con-straints and risks. The technology used to set-up and run the platform must be state-of-the-art to avoid outages, which would im-mediately affect the trading platform and re-sult in a major reputation loss.

As Section 4 will show, there are major ad-vantages in cooperating with an existing stock exchange and rely on their technology. In any case, technology experts should also be a part of SwiSOX project team from the beginning.

Location While it is understandable that the physical location of SwiSOX should be Switzerland, the platform has to be accessible for inves-tors as well as enterprises from around the world, as the Swiss market is too small. Cre-ating a global platform may raise regulatory issues, which should be considered right from the beginning.

To avoid misunderstandings, it should be considered to delete “Switzerland” from the name of the stock exchange, otherwise in-vestors and enterprises might think that the platform is for Swiss-based entities only. Furthermore, the counteractions mentioned in the topic “regulation” of this table shall be considered.

Table 19: Summary of limits & constraints analysis. Own illustration.

3.3. Defining SwiSOX’s Unique Value Proposition The analysis and findings in the previous sections lay the ground to define SwiSOX’s UVP. This value proposition was developed with various goals in mind:

▪ First, the value proposition should create the conceptual framework upon which the platform is built. It will define the values, the mission and goals of SwiSOX. The framework lies at the core of SwiSOX and shall be used to measure its progress and success. All the important stakeholders have to agree early on it, as it shall remain constant.

▪ Second, the content from the value proposition shall be used to define the communication concepts and key talking points when engaging with industry leaders, important stakeholders or the media. It shows that SwiSOX is not yet another attempt to establish an alternative stock exchange, but the num-ber one platform for transactions in the impact investment universe.

▪ Third, it shall give investors as well as investees a comprehensive overview of what is “in it for them”. In the end, neither investors nor investees will engage on SwiSOX just for the good cause. They need strong incentives and benefits to use the platform and spread the word.

Our value proposition is defined by three core pillars: ▪ SwiSOX’s promises to investors and issuers ▪ SwiSOX’s strategic framework ▪ Key factors that have to be fulfilled for the success of SwiSOX

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3.3.1. Our promises for impact investors and issuers

The picture below shows SwiSOX’s promises to impact investors and issuers symbolized by six equally important pillars, which lay the ground for the unique value proposition:

Figure 36: Summary of SwiSOX’s value proposition. Own illustration.

▪ Best impact deals and transparent impact methodology for impact investors: The goal is that when

investors think about impact investments and want to source the best deals, they should come to SwiSOX first. To achieve this, SwiSOX has to ensure high-quality listed enterprises as well as implement a regular reporting of their achieved impact based on the platform’s own transparent impact method-ology.

▪ An efficient way of fundraising and access to broader investor base for issuers: Impact investment funds, social enterprises, and other target groups such as MFIs and MIVs that are raising capital should be interested in issuing on SwiSOX because it catalyzes more efficient and cost-effective fundraising. By designing the platform in an open and regulated space, issuers would be able to diversify and broaden their investor base.

▪ Best-in-class matchmaking and state-of-the-art platform for impact investors and issuers: SwiSOX’s success depends on onboarding both the most promising products to match efficiently with leading impact investors. To do so, the platform has to provide an easily accessible and state-of-the-art tech-nology which supports the efficient allocation of capital while ensuring safe transactions and clearings of securities.

The foundation of the value proposition is built upon the promise to offer a true additionality. The concept of additionality was introduced in chapter 2, and defined according to five potential objec-tives that a social stock exchange would need to realize:

1. Bring new issuers (especially social enterprises) to the market that would otherwise not reach this stage of growth

2. Bring new investors to the market that might otherwise not invest 3. Connect the right investors (patient, committed) to the right companies (socially motivated) 4. Bring more capital into angel investing by extending the venture capital continuum into public list-

ings, offering an exit opportunity for early investors 5. Engage retail investors in impact investment

To successfully deliver its mission and vision, SwiSOX needs to deliver on most – if not all – of these additionality factors.

Show true additionality

SwiSOXThe Swiss Social Stock Exchange

Best impactdeals

Pioneer of the new financial world

Transparentimpact

methodology

Efficient way of fund-raising

Best-in-classmatchmaking

State-of-the-art

platform

Access tobroaderinvestor

base

For investors

For social enter-prises

For both

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3.3.2. SwiSOX’s strategic framework

Every company needs a strategic framework to justify its existence and guide its stakeholders to where it desires to go. Crucial parts of a strategic framework are the vision and mission statements. Whereas a vision statement focuses on tomorrow and what an organization wants to ultimately become, a mission statement focuses on today and what an organization does to achieve it. Elements of mission and vision statements are often combined to provide a statement of the company’s purposes, goals and values.215 The vision and mission statement shall be complemented by a number of KPIs which shall lay the ground for measuring the success of SwiSOX and its promises towards investors and issuers. Figure 36 shows the proposed vision and mission statement, as well as possible KPIs:

Figure 37: Summary of SwiSOX’s strategic framework. Own illustration.

As stated in the vision statement, it has to become SwiSOX’s goal to become the number one trans-actional platform for all impact investment related transactions. This shall be achieved by attracting committed investors and enterprises, establishing a dedicated board and team, creating a state-of-the art platform and seeking support from public institutions and bodies. This can only be achieved if the mission statement can be maximally implemented. Furthermore, the KPIs shall support the suc-cess measurement of SwiSOX and facilitate decision making if any changes to the business model, governance structure or funding model need to be made. 3.3.3. Key success factors

As previous attempts have shown, establishing a social stock exchange is very challenging. To avoid any failures, it is crucial to identify and agree on a number of key success factors which have to be in place before the platform can go public and bring enough enterprises and investors to the platform. Below we list a set of conditions that we recommend for SwiSOX to have in place before going live:

215 Bain & Company (2018): Mission and Vision Statements

VISION

MISSION

KPIs

SwiSOX is the number one transactional platform allowing socialenterprises and other impact investment initiatives to raisepatient capital, while enabling impact investors to identify andexecute “impact rated” investment opportunities, generating apositive and measurable impact in the real world

Providing a liquid, clearable and rating-driven investmentplatform where social enterprises and impact investmentinitiatives can transact with a global base of impact investors

Success has to be measured. Criteria may include:§ Number of listed issuers§ Number & volume of listed securities§ Number of market participants§ Weekly trading volumes§ Impact progress

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Besides the promises and conditions listed, to succeed it is important to activate and animate the whole impact investor community, as well as social enterprises that are skeptical about being listed on a social stock exchange. Last but not least, it is important to keep in mind, that impact investment is still a niche in the global financial world. Even though popularity of the concept has increased in the past years, there are still many caveats towards impact investing, such as the expectation that impact investment returns are below market returns or that impact cannot be measured at all. To overcome this, SwiSOX has to actively engage with the mainstream financial world and educate investors, to make them move from ‘I am interested’ into ‘I am investing’. SwiSOX will only succeed if it becomes a worthy competitor to major stock exchanges around the world. As such, education and communication to the public will be a cornerstone of SwiSOX’s implementation strategy.

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4. Implementation scenarios & impact assessment This chapter evaluates two different implementation scenarios, as well as comes up with a proposal with regards to the impact assessment service to be used both ex ante to establish the eligibility of these enterprises to join the platform, but also ex post to measure their impact. According to the Terms of Reference, two options will be assessed. Option A will analyze the implementations require-ments, governance structure, business model and financial forecasts if SwiSOX would partner up with an existing, traditional stock exchange. Option B will assess the same points if SwiSOX would decide to create a partnership with an existing platform. As stated in the chapters before and also in the initial study, providing a detailed impact assessment of the listed social enterprises will be a key differenti-ating factor for SwiSOX. The second part of this chapter will sketch the required main features of the assessment tool, the current landscape and evaluate existing solution for impact assessment. In a sec-ond step the pros and cons of developing an internal impact assessment tool or use an existing third-party provider are described.

4.1. Definitions and background information Before assessing both options in detail, it is important to clarify some terminology and highlight what distinguishes a stock exchange (option A) from a platform (option B). 4.1.1. Distinction between stock exchanges & platforms

For this section, a stock exchange refers to a fully-fledged stock exchange, which is (i.) regulated by a national financial authority, (ii.) is public as access is allowed to all kind of investors and (iii.) covers all or most of the different parts of a stock exchange value chain (see section 4.1.1.). It allows enterprises to go public and offers a secondary market to price, trade and settle different type of securities. A platform however, refers to an electronic meeting place, where investors and investees can meet, connect and agree to exchange capital and securities at a specific price. The platform may or may not offer additional services, but at the core there is a closed-end user group that registers on a market place upon fulfilling a number of requirements to interact with enterprises and agree to transact. However, the pricing is not automatically determined by the law of force and demand nor is neces-sarily public as on a stock exchange but rather determined bilaterally or by the platform itself. Also, settlement and clearing of the transaction usually does not take place through the platform. The fol-lowing table shows a summary of the most important differences between stock exchanges and ex-change platforms (as they are defined in this study):

Stock exchanges Exchange platforms

Accessibility Public – access for professional and retail investors. Information is trans-parently available for all market par-ticipants and the general public.

Restricted – Limited to accredited in-vestors. Information is not generally available and often restricted to the actual deal makers.

Secondary Market Available – Shares, bonds and other securities can be traded at each point of time, as long as demand and sup-ply match, offering a high liquidity base.

Limited availability – Through the private design of the platforms, trad-ing is highly limited. Attempts are be-ing taken to create a secondary mar-ket, however through the rather closed system, liquidity will always be low.

Pricing mechanism Public – Pricing between investor and issuers is determined through a matching in the publicly available or-der book

Private – Investor and issuer agree bilaterally on the price and close the deal

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Clearing and settle-ment mechanism

Included – Public stock exchanges of-fer a complete service of the whole clearing and settlement process

Limited availability – Integrated clearing and settlement mechanisms exist, but often do requires addi-tional steps by the investor and is-suer (e.g. the have to notice the bank of the upcoming settlement)

Revenue sources Various – Stock exchanges source their revenue from many different sources (fees for listing and trading, access fee, data services fee etc.)

Limited – Through the limited busi-ness model, platforms often have only few revenue sources, access and transaction fees being the main ones

Regulation High – Due to their crucial role for the functioning of financial markets, stock exchanges are highly regulated by national regulators and protect in-vestors and issuers as best as possi-ble

Low – Due to their private nature, platforms are often not or very lim-ited regulated, therefore protection of investors and issuers is not totally given

Table 20: Distinction between stock exchanges and exchange platforms for illustration purposes. Own illustration.

4.1.2. The stock exchange value chain Based on the analysing of several stock exchanges and their value chains, we come up with a simplified value chain of four steps, as described in the next graph, including as an additional step specifically designed for SwiSOX the impact rating (incl. impact assessment).216

Figure 38: Simplified value chain of a fully-fledged stock exchange. Own illustration with information from different sources (see footnote).

The first step, which is not so relevant for bigger stock exchanges but will be for SwiSOX, is about sourcing. With sourcing we mean the identification of new enterprises (and other financial instru-ments) for a listing. Major stock exchanges are not in need of this step in the value chain, as enter-prises approach them once they want to go public. However, for smaller stock exchanges and also for SwiSOX, it is crucial to invest early-on in building sourcing capabilities to identify and onboard new investment opportunities and ensure that such investment opportunities match the social criteria that will form the core value of the SwiSOX proposition.

216 Information obtained from various sources, incl. SIX, LSE or NASDAQ

Sourcing

§ Finding the right investment opportunities

Matching

§ Process of bringing together investor and investee

Trading

§ Determination of prices

Clearing & settlement

§ Processing whole transaction and administration

Impact assessment

§ Assess enterprises and other market participants according to their impact and rate them respectively

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Matching describes the process of how the investor and the investee are brought together and ex-change capital and the respective security. This can happen through intermediaries, like brokers, which collect orders from investors and place it at the exchange (and in the meantime are the legal owners of the financial products). Technological advancements increasingly allow investors to access the exchange directly, by paying an access fee. A proper matching requires a certain amount of public information about the investee and/or the security. The trading part is a core part of any exchange. For shares of listed enterprises, it relates to the sec-ondary market activity, but also for trading of financial products such as investment funds or deriva-tives. An important aspect is how the pricing is determined. Within shares trading, the most common method is the on-order-book trading. The exchange offers an order book, which collects the interest of buyers (bids) and sellers (asks) in a particular security. A matching engine uses the book to deter-mine which orders can be fulfilled (i.e. what trades can be made). Order books also show how deep the market is and are important to determine the opening and closing price of a security. Once buyer and seller have agreed on an exchange of capital and the security, the transaction has to be processed. This step of the value chain is hereby referred as clearing & settlement. The process validates the availability of the appropriate funds, records the transfer, and in the case of securities ensures the delivery of the security to the buyer. Stock exchanges use either integrated settlement solutions, cooperate with partner stock exchanges, which allows for clearing and settlement of secu-rities which are not directly listed on the exchange where the trade happened (e.g. SIX has a partner-ship with the LSE allowing for the clearing of securities which are listed in the UK) or outsource this part of the value chain to an external provider (clearing house). Practically speaking, at the end of the process the funds and securities are transferred from one financial institution to another. An overall process step which will be crucial for SwiSOX and no major stock exchange is applying yet, is the impact assessment. This step refers to the assessment of an enterprise according to their impact on selected key metrics. The whole framework and possible providers will be examined at the end of this section. 4.1.3. Overall assessment framework

As laid out in the introduction of this chapter, options A and B will be assessed according to the same six modules. The following graph presents the modules including a short descriptive information note of what the modules will look at:

Figure 39: Modules to analyse for section 4. Own illustration.

§ Identifying potential partner institutions and analyze their strengths & weaknesses

Potential partners

§ Identifying the ideal ownership structure

Capital structure & owners

§ Distribution of services and products to clients

Operational model

§ Operational set-up of the company

Organization

§ Realization of revenue streams

Business model

§ Detailed cost / revenue forecast and analysis for 5 years

Financial forecast

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This framework allows for a detailed assessment, independently of the chosen partner. Furthermore, after portraying option A and B, the findings can be compared using the findings from the six modules.

4.2. Overview of potential partner stock exchanges Before evaluating option A in detail, potential stock exchanges for a partnership are portrayed. Of course, the universe of potential stock exchanges worth considering is much bigger than the herein described options. However, based on the discussions with SFG preference is given to the two ex-changes physically located in Switzerland: SIX and the Berne Stock Exchange (BX). As third option we have added the leading European “electronic” exchange Xetra, because of the state-of-the-art tech-nology. Other stock exchanges based outside of Switzerland were therefore not considered. 4.2.1. SIX – The Swiss Stock Exchange

The main Swiss stock exchange, SIX, would be a natural candidate to consider for a partnership. SIX is not only a stock exchange, but a central infrastructure provider, offering financial services such as banking services (e.g. card-based and mobile payment transactions), financial information or fintech solutions. It employs approx. 4,000 people in 23 countries generating a turnover of approx. CHF 2 billion and a group net profit of CHF 207.2 million in 2017. The company is owned by its users, around 130 banks. 217 The shares are distributed in a way that they mirror the utilization of SIX on one hand and on the other hand in a way that no single owner or bank category holds an absolute majority.218 The SIX Swiss Exchange is the largest Swiss stock exchange and was created in May 1995 through the merger of the three stock exchanges Geneva, Basel and Zurich. At the end of 2017, the platform was home to 230 issuers of Swiss and 36 issuers of foreign shares. On total, over 35,000 financial products were traded on the platform, whereas over 31,000 of it were structured products and warrants. In 2017, 51 million trades generated a yearly trading turnover of CHF 1.2 trillion.219 Figure 40 comple-ments this information with other key figures from the SIX Exchange Services:

Figure 40: Key figures for the Swiss Exchange business area. Source: SIX Annual Report (2018).

SIX offers the main services a big stock exchange is expected to offer (matching, trading and clearing). Additional services include the creation and maintenance of several indices220, educational services221 and data services222. As it can be seen from figure 40, this results in an operating income of approx. CHF 200 million in 2017. The financial report states, that the result of the Swiss Exchange business

217 SIX (2018): Overview of SIX 218 SIX (2018): PostFinance is a new shareholder of SIX 219 SIX (2018): Annual statistics 220 SIX (2018): Index Overview 221 SIX (2018): Our License – your seal of quality 222 SIX (2018): Data services

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area was influenced by considerably higher trading activity on the positive side and the implementa-tion of new regulatory requirements (MiFID II / MiFIR) on the negative side. A detailed analysis of the business area financials is not possible, as information is only reported on a group level. However, looking at the breakdown of revenue per segment, it can be seen, that the exchange segment is the most profitable segment of the group, even if it generates the lowest revenue from external custom-ers and employs the smallest number of employees:

Figure 41: SIX segments financial information. SIX Annual Report (2018).

This indicates for a strong margin in the exchange business, probably driven by investments in infra-structure and technology. Listing requirements at SIX include amongst other things:

▪ an equity capital of at least CHF 2.5 million on a consolidated basis at the first day of trading ▪ a corporate history of at least three years prior to the IPO ▪ the company must have audited its financial statements for the last three financial years from an au-

thorized audit firm.

4.2.2. BX Berne eXchange – The niche player

Unlike the Zurich, Basel and Geneva stock exchanges, the Berne Stock Exchange (BX) did not partici-pate in the 1995 merger to form the SIX Swiss Exchange. Until 2014, BX was a private club in which most of the Swiss banks were members. However, the existence of BX came into question, as there were days were no single financial instrument was traded.223 This led to a location move from Zurich to Bern and a strategic reshuffle.224 In 2017, BX was granted a fully-fledged status as a Swiss stock exchange by FINMA and in 2018 the stock exchange of Stuttgart, Germany (Börse Stuttgart GmbH) acquired first a majority stake and shortly afterwards became the sole owner of BX. While the opera-tional business is conducted in Zurich, the legal domicile of BX Swiss AG remains in Berne. Trading

223 BZ (2016): Berner Börse zieht nach Zürich 224 BX (2018): History BX Swiss

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members include a global Swiss bank (Credit Suisse), several private and cantonal banks (e.g. Julius Bär, BEKB, Vontobel) and Swissquote, an online trading platform and two dedicated market makers (Lang & Schwarz and Baader Bank)225. BX relies on the Scandinavian trading system Elasticia226 and employs six people.227 As end of 2017, 1,314 financial instruments were traded, thereof 22 Swisscaps and 831 worldcaps. Total turnover reached over CHF 380 million.228 According to recent press publications, BX aims to focus on foreign shares and ETFs and increased the number of tradeable worldcaps to 3,650 and ETFs to 560.229 Therefore, the overall strategy of the exchange seems to be to focus on the listing and trad-ing of shares of mid-cap Swiss enterprises (even if this means that from time to time some enterprises delist from BX to be listed on SIX230), double-listing and trading of shares of enterprises which are also listed on SIX or on a foreign stock exchange (such as ABB, Julius Bär or LafargeHolcim)231, and more “exotic” financial products such as ETFs.232 For listing, the similar rules apply as for a listing at SIX, but share capital must amount only CHF 2 million.233 Unfortunately, there are no public financial figures available; therefore a detailed analysis of the business model is not possible. However, according to a preliminary discussion with several representatives of BX, the stock exchange would be very open towards a deepening of a potential partnership. 4.2.3. Xetra – the leading European electronic exchange

"Xetra" is the name for the trading system of the cash market of Deutsche Börse and the stock ex-change in Vienna. It connects 200 market participants from 16 European countries as well as Singapore and the UAE. In June 2017, the trading venue Xetra migrated to its proprietary modern trading infra-structure T7, a technology also used by Eurex Exchange. According to Deutsche Börse, Xetra has been able to reduce the processing time of technical transactions significantly.234 The first version of Xetra was introduced on the Frankfurt Stock Exchange in November 1997 and is regarded as the world's most powerful and flexible system infrastructure for the fully electronic trading of securities. The sys-tem works independently of the trader's location and allows access to the order book in which buy and sell offers are shown. Over 1,000 German as well as shares from important European indices but also commodities, bonds and funds are traded on Xetra.235 In total, more than 90 % of all trading in shares at all German exchanges and approximately 30 % of trading in ETFs in Europe is transacted through Xetra.236 The centralized order book guarantees a high amount of liquidity and a higher mar-ket transparency. Regarding SwiSOX, Xetra could be a potential partner to develop a social stock ex-change and using the Xetra trading technology.

4.3. Evaluation of potential partner stock exchanges All the portrayed stock exchanges fulfill the needed requirements of the stock exchange described in section 4.1.2. (except of the impact assessment component). In addition, no in-depth conversations were held with any of the exchanges, therefore not allowing for predictions of financial matters. Therefore, the following evaluation is rather qualitative and simple and shall only provide an overview of the pros and cons applied to every stock exchange:

225 BX (2018): Trading members 226 Finews.ch (2018): BX Swiss nach Deutschland verkauft 227 Der Bund (2018): Die Berner Börse verlässt Bern 228 BX (2018): Jahresbericht 229 Cash (2018): BX Swiss erweitert Spektrum bei Aktien und ETFs 230 NZZ (2018): Fundamenta wird es an der Berner Börse zu eng 231 Der Bund (2015): Berner Börse startet Gegenangriff auf die Zürcher Konkurrenz 232 Fondstrends (2018): BX Swiss listet weitere ETFs von iShares 233 BX (2018): Listing rules 234 For technical details, please see the following presentation by Deutsche Börse 235 Godmode Trader (2018): Xetra und Eurex: Elektronische Börsenhandelsplattformen 236 Deutsche Börse (2018): Xetra – The market

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Stock Exchange Pros Cons

SIX ▪ Access to a big universe of domestic and some foreign market participants (banks, asset managers, brokers etc.)

▪ Strong reputation, also abroad, being main stock exchange in Switzerland

▪ Financial strength ▪ All major banks are shareholder, so

potentially easier onboarding on the trading side?

▪ Potential scepticism regarding a new, small (and not highly profita-ble) business model

▪ A broad shareholder basis has the potential to delay the implementa-tion of SwiSOX

▪ Not core business

BX Swiss ▪ Agile structure and lean business model

▪ Actively looking for new business op-portunities and positioning

▪ Strong and patient shareholder

▪ Limited access to market partici-pants

▪ Low visibility in domestic and foreign markets

Xetra ▪ Access to a vast universe of market participants (banks, asset managers, brokers etc.) from all over Europe

▪ State of the art technology ▪ Technological-driven platform,

therefore future oriented

▪ Headquartered outside of Switzer-land (Frankfurt)

▪ Main product is the technology, therefore potential for a segment like SwiSOX unknown

Table 21: Overview of pro’s and con’s regarding the partnership of the evaluated stock exchanges. Own illustration.

However, we take the liberty of making the following concluding remark: after having had initial con-versations with representatives from BX Swiss, we feel a very enthusiastic and open attitude towards the SwiSOX project. Furthermore, the exchange is actively looking for new business opportunities to compete with the “top dog” SIX. Therefore, if option A is to be chosen, we advise strongly to deepen discussions about a potential partnership with BX Swiss.

4.4. Option A: Partnership with an existing Stock Exchange 4.4.1. Legal & capital structure, ownership

This section looks into the optimal legal set-up for SwiSOX and sketches a potential capital and own-ership structure. Our initial recommendation is that SwiSOX should be set-up as a separate legal en-tity and run as a limited company, even under a partnership scenario.237 The rationale behind this recommendation is that a separate entity allows for visibility in the market as well as for the mainte-nance of a certain control over the mission and vision of SwiSOX, which would be more difficult in case of integration into an existing enterprise. Historically most exchanges were not-for-profit organiza-tions owned by their members. Over the past few years, there has been a clear trend among ex-changes to adopt alternative governance structures than their traditional mutual or cooperative mod-els. In most cases, the exchanges have been transformed into for-profit, shareholder-owned enter-prises. According to Chesini (2001) or Fleckner (2006), some of the most important European stock exchanges (including SIX), following their demutualization, have even become public companies listed on their own exchanges. Therefore, for this scenario we recommend to set-up SwiSOX as a limited company, but without listing (yet). This set-up would have some major advantages for SwiSOX:

▪ Representation of important stakeholders: A limited company allows for a broad shareholder base, which ideally in our case includes major banks, investors and partners. As we will also see in the next section, the board of directors should be constituted by experts with different backgrounds, while rep-resent the most important shareholders. Offering a seat in the board of directors often is a pre-requisite to attract significant shareholders for the company.

237 Full disclosure: This recommendation is not based on a comprehensive legal opinion. We strongly recommend to con-sult an attorney or legal firm about the specifics.

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▪ Public-Private-Partnership: A limited company is favourable to a public-private-partnership, as public support will be crucial for the success of SwiSOX. A limited company structure would probably allow for an ownership by the public sector (as seen in examples like Swisscom, BLS or Publibike).

▪ Capital increase: A limited company has the advantage that it can raise additional money through cap-ital increases., It could also one day be listed on its own exchange to diversify shareholder base and attract further capital.

▪ Mission control by initiators: The advantage of setting up an own company structure (rather than just

integrate a social stock exchange segment into an existing stock exchange), is that the initiators (in our case the founding members of SwiSOX) can remain in control of the mission and vision of SwiSOX. It gives the liberty set up the own listing rules (especially with regards to the impact component) and in the worst case, it allows SwiSOX to change the partner stock exchange if needed.

▪ Liabilities: A specific advantage of a limited company is that, in comparison with other legal entities, it

is liable only with its corporate assets.

With regards to the ideal ownership structure and distribution of SwiSOX, it will be crucial to attract at least ten founding members from the financial community, which will not only back SwiSOX ideo-logically but also with transactional commitment and capital. In sum, these founding members should be the majority shareholders, as they guarantee the running of the underlying business. Further-more, we recommend, that it would make sense to offer a minority shareholding to the partner stock exchange. This is due to two main reasons: First, by on-boarding the partner as shareholder, the foun-dation for a long-term and sustainable cooperation is stronger than in a simple contractual relation-ship. Second, by sharing profits in the middle to long-term, a reduction in the running costs for using the platform is realistic and would benefit SwiSOX’s financials (see section 4.4.5.) Last but not least, as already announced in this section, we argue that on-boarding a public institu-tion as a minority shareholder would benefit SwiSOX in several ways: First, public money is patient money, meaning that share capital provided by a public institution could absorb the losses SwiSOX will produce with certainty in the first years of existence (see section 4.4.5.) Second, on-boarding a public institution implies public commitment for the project and can grant access to decision makers on the political level. Third, launching a stock exchange with the support of public authorities has been the normal way of business in many places. As mentioned in the introduction of this section, stock exchanges in advanced economies in the past were traditionally established as member- owned or-ganizations or government institutions.238 By applying the described shareholder structure above, we suggest the following capital structure:

Figure 42: Proposed capital structure of SwiSOX. Own illustration.

238 OECD (2016): Changing business models of stock exchanges and stock market fragmentation

> 50.1 %

< 29.9 %

< 20 %

SwiS

OX

shar

e c

apit

al

Founding members

Partner stock exchange

Public institution

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The financial forecast sub-section later in this section will provide details about the capital needs of SwiSOX in a partnership scenario. 4.4.2. Organization

This section shows the organizational set-up of SwiSOX in a partnership scenario. Within such a sce-nario, most of the process steps within a stock exchange value chain (see section 4.1.2. for details) are outsourced to the partner. Nevertheless, SwiSOX needs to have an organization in place that ensure the smooth flow of the platform. The organization is divided in three areas:

▪ Strategic: The strategic units are not involved in day to day activities and meet at regular intervals to discuss and decide about strategic issues of the enterprise.

▪ Regulatory: Regulatory units are often required to be set-up by law and shall ensure the regulatory compliance of the enterprise. They are often represented by independent individuals or organizations.

▪ Operational: The operational area contains all units that are responsible for the day to day business. The people working for these units are usually employed by the company and ensure the on-going functioning and running of the business.

The organizational chart below pictures a simplified governance structure and set-up of SwiSOX’s or-ganization:

Figure 43: Simplified organizational chart of SwiSOX in a partnership scenario. Own illustration. The organizational chart shows the relationship between the different units using direct and indirect reporting lines. While direct reporting lines imply a direct reporting relationship between a supervisor and a subordinate unit and with accountability, the indirect reporting line implies an advisory or in-formation sharing role without an employment relationship. The table on the next page summarizes the purpose and tasks as well as the proposed composition of the three strategic and two regulatory units:

Mana-gement

Board of Directors

Impact Board

Investors Listings OperationsCorporate Functions

Internal Audit

direct reporting line

indirect reporting line

Partner Institution

General assembly

Strategic unit

Regulatory unit

Operational unit

Unit Purpose & tasks Composition

General as-sembly

The highest authority of a limited company is the general assembly. According to the Swiss law239, the general assembly is the only authority that can decide about significant changes of the company such as the change of the purpose of the company, an authorized or conditional capital increase or the dissolution of the company. It also appoints the board of directors and grants the yearly “dé-charge” to the management.

The general assembly is constituted by all shareholders, respectively by their representatives. Therefore, the exact composition relies on the share-holder distribution.

Board of di-rectors

The board of directors is a group of individuals, elected to represent sharehold-ers and sometimes also other stakeholders. A board's mandate is to establish values and policies for corporate management and oversight, making decisions on major company issues and define the strategy of the company. Ideally, a board of directors is constituted of experienced people with a diverse back-ground.

There is no defined number of how many representatives should be ap-pointed, but to ensure both a comprehensive coverage and efficiency, we recommend to appoint six to eight representatives. Furthermore, we rec-ommend that at least three of these individuals should have a strong track-record in banking and finance (at least one of them also with experience of working at a stock exchange), as well as individuals with experience in en-trepreneurship (to cover the social enterprise side), financial regulation (to cover the regulatory background) and impact investments (to cover the im-pact assessment side). In reality the composition of the board may depend on shareholder proportion and/or political involvement.

Internal audit Good corporate governance is crucial for the success of a company and an in-ternal auditing unit is key to ensure that. It carries out objective and independ-ent audits on behalf of a superior body (usually the board of directors). These audits may include organizational units, processes or systems. At the end of the audit, a report is drawn up on a regular basis which includes an audit opinion and points out any weaknesses. The audited entity is required to define measures to remedy the vulnerabilities. For the financial sector (including stock exchanges) a yearly internal auditing is mandatory.240

Organizational independence is an important feature of an internal audit function. The head of internal audit must be subordinated to the level within the organization that can ensure that Internal audit can perform its duties properly. Ideally, internal audit should report directly to the chair-man of the Board of Directors.

Impact board The impact board would be in charge to review the application of social enter-prises and issuers of other financial securities that intend to be listed on SwiSOX and/or are recommended by the Impact Agents, and give appropriate recom-mendations to the management of SwiSOX. This task is mandated to an external board on purpose, to avoid conflict of interest, as for example the management or a division reporting to the management would have own incentives to list as many companies as possible.

The impact board should be constituted of impact investing experts with background in different geographies (emerging and developed markets) and financing instruments (equities, bonds, funds).

Table 22: Description of purpose and tasks and proposed composition of strategic and regulatory units.

239 OR Art. 698 ff. 240 WEKA (2017): Interne Revision: Massnahmen zur Behebung der Schwachstellen

With regards to the management of SwiSOX, the CEO would obviously play a key role and needs to bring a number of strong attributes. He should have strong experience in banking and finance, proven experience in impact investment and be a recognized personality. Ideally, he has an entrepreneurial background and already launched businesses in the space. The CEO would be responsible for all the operational activities of the enterprise, represent SwiSOX in negotiations with the partner institution and have the direct reports shown in the organizational chart. The remaining business units have to ensure the smooth operation of the platform and organize its activities. The key components are:

▪ Investors: This unit would primarily act as an interface between SwiSOX and the investors. The goal is to attract and on-board investors as smoothly as possible. This requires deep knowledge of the impact investing market and a strong network. We recommend to allocate 1-2 FTE to this unit

▪ Listings: This unit would be the contact point for interested enterprises, which would like to be listed at SwiSOX and fund managers or bond issuers, which would like to list their financial products at SwiSOX. In contrary to the investor’s unit, the listings unit does not actively source new enterprises, as this task is outsourced to the impact agents (see section 4.4.3.). This unit handles the listing requests, prepares them and ensures a smooth listing process. We recommend to allocate at least 1 FTE to this unit.

▪ Operations: Given the importance of the technological component in SwiSOX business model we rec-ommend to give visibility to this are and create an organizational unit in charge of it (even though in this scenario SwiSOX would rely on the partner’s technology). It shall ensure, that the day-to-day activ-ities on SwiSOX are peformed smoothly and according to the SwiSOX rules. We recommend to allocate at least 2 FTE to this unit.

▪ Corporate fuction: This unit would execute all the functions needed to ensure a smooth appearance and on-going of SwiSOX as a company. This includes marketing & communication as well as accounting and HR tasks. We recommend to allocate at least 1 FTE to this unit.

4.4.3. Operational model

The aim of this section is to sketch an operational model of how services will be produced and distrib-uted to clients in the partnership model. The graph below shows the main operational units and their relationship with clients and key stakeholders (the letters in the graph refer to the sequence in the following paragraphs).

a) SwiSOX pays a licensing fee to the chosen technological partner (i.e. the partner stock ex-change). In return, SwiSOX receives access to the partner institution’s infrastructure and tech-nology. This includes important services such as the matching of trading activities and the clearing and settlement of individual trades. With this access SwiSOX is able to offer a variety of services to investees, issuers and investors (the next sub-section will provide a detailed overview of the respective revenue streams).

b) A core service is the listing of social enterprises to allow for capital raising. To do so, the social enterprise must be financially, operationally and socially eligible for a listing (see section 1.1.7. for details).

c) To support the listing process, social enterprises can rely on the services of advisors, so

called Impact Agents. This a role, showcased in section 2 of this study, has been successfully used by the AIM stock exchange and is also being increasingly used by club deal platforms, such as Elite Network. These agents are officially recognized and accredited by SwiSOX in or-der to allow them to make new investment suggestions to SwiSOX. The number of impact agents is limited and should ideally be geographically diversified, to allow a constant pipeline of possible listing for SwiSOX. These impact agents are paid a relatively low fix fee of CHF 20,000 p.a. but if one of the suggested investments is listed on SwiSOX, they will participate

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in the variable fee every listing enterprise is charged. In practice, the Impact Agents work to-gether with the social enterprise, supporting them in preparing their financial eligibility and impact application to SwiSOX and the impact rating agency.

d) Issuers of other financial products (such as impact investment fund shares or social impact

bonds) can directly approach SwiSOX for a listing, as we assume that these issuers have more experience in the financial sector and therefore do not need to rely on the support of Impact Agents.

e) Before any listing at SwiSOX, an impact rating agency checks the social eligibility of the social

enterprises and/or financial products. A detailed explanation of the process and an evalua-tion of potential assessment methodologies will be given in section 4.7. In brief, this agency analyzes potential social enterprises and issuers of financial instruments according to several impact criteria and provides a detailed assessment towards the SwiSOX impact board. The impact rating agency is remunerated by SwiSOX for every assessment. Nevertheless, the final decision for an initial listing of a social enterprise or another financial product behooves to the SwiSOX impact board. As described in section 4.4.2. this board is composed of experts with a background and proven track record in impact investment, social entrepreneurship or the financial sector. The board meets regularly to discuss new listing requests and take a de-cision.

f) On the other side of the spectrum, market participants pay a yearly access fee to be able to

invest in and trade securities listed on SwiSOX. These market participants can be asset man-agers, banks, institutional investors or market makers. These market participants benefit from a centralized platform for impact investments and a familiar trading environment. Last but not least, other clients can also request special services from SwiSOX, such as market eval-uations, data packages or qualitative analysis of the impact investment trading environ-ment.

g) This operational set-up allows for a dynamic and transparent price matching function. While

on private platforms the pricing details are negotiated between investor and issuer bilaterally, the pricing mechanism on SwiSOX with option A would be similar to the pricing determination on a regular stock exchange. This means, that orders are collected in a central order book and trades are always executed at the best price possible (for details please see section 4.1.2.)

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Figure 44: Flowchart of SwiSOX operational model under option A. Own illustration.

4.4.4. Business model

This section shall provide a detailed overview of how SwiSOX will be remunerated offering its services to clients. We differentiate between two main and two side revenue lines:

▪ Listing business: The listing business includes all revenue streams originated by listing securities at SwiSOX. These will primarily be shares or bonds of social enterprises, but also shares of impact invest-ment funds, shares or bonds of MFI and other securities listed in section 3 of this study.

▪ Trading business: The trading business generates another revenue stream for SwiSOX. Trading is de-fined as the process of exchanging securities between investors (secondary market) or between inves-tor and the investee (primary market).

▪ Data services: Once SwiSOX has a large enough universe of listed social enterprises, impact securities and investors, data intelligence can be produced and sold to external clients. As it will be seen in the next section, this revenue stream has become increasingly important for major stock exchanges.

The table below shows the proposed fee model for every revenue stream:

SwiSOX

Impact Rating Agency

Impact Board

Source and

suggestinvestments

Partner institution

Pays licensing

fee

Provides

infrastructure &technology

Pay by analysis

Provides impactassessment

Final decision for allowance

Market participants

Pay a yearly access fee

Grant access to platform for participating in

market activities

Pay different fees

Issuers of financial products

Provi

de ac

cess

to p

latfo

rm

Pay

indi

vidu

al fe

e

Impact agentsSocial

enterprises

Support process

Pay fee

Pay different feesGrant access

to platformfor listing

Other clients

Provi

de oth

er

serv

ices (

e.g.

data)

Paid

indiv

idual

fee

Must submit listing request

(A)

(B)

(C)

(D)

(E)

(F)

(G)

Frequency

One-off Recurring Rationale for fee composition Li

stin

g b

usi

ne

ss

Listed enter-prises

Fix one-off fee of CHF 15,000 + a 0.75% var-iable fee subject to market capitalization241 for initial listing (market cap x 0.75% )

Fix fee of CHF 10,000 p.a. to maintain list-ing

One crucial factor for a successful implementation and maintenance of SwiSOX is to attract enough enterprises, as well as issuers of bonds and fund shares. There is therefore a delicate balance between an attractive price offering and generate sufficient revenues for the company. The sug-gested one-off fees are slightly lower than at comparable SME stock exchanges (see table 17 for more information) while the variable fees are in the same price range. Fur-thermore, a part of the variable listing fee is shared with the impact agents.

Issuers of bonds Fix one-off fee of CHF 5,000 for bond issu-ance + a 0.3% variable fee subject to bond size (bond nominal amount x 0.3% )

Fix fee of CHF 3,000 p.a. for maintaining every financial product listed

Managers of listed funds

Fix one-off fee of CHF 5,000 for initial list-ing of every fund + variable fee subject to capital raised for fund at SwiSOX (capital raised for fund in CHF x 0.1 %)

Fix fee of CHF 3,000 p.a. for maintaining every financial product listed

Trad

ing

bu

sin

ess Market partici-

pants Fix one-off fee of CHF 10,000 to receive ac-cess to the trading platform of SwiSOX

Fix fee of CHF 10,000 p.a. to maintain ac-cess to the trading platform of SwiSOX. Variable fee of 0.1% x the traded amount in CHF for every trade occurring on the SwiSOX platform.

While the one-off and recurring fix fees are relatively lower than at comparable SME stock exchanges, the variable for variable fee is higher. The main rationale behind this is the assumption that investors at SwiSOX are “patient” impact investors and therefore not willingly to trade in a very high frequency. Furthermore, the somewhat higher trading fee would also be an incentive to limit trading to the minimum.

Dat

a

serv

ices

Other clients n/a Individual fee charged based on the extent of the requested service

Individual fee models have to be developed further in de-tail.

Table 23: Proposed fee structure for Option A. Own illustration.

241 Market capitalization (market cap) is the market value of a publicly traded company's outstanding shares. Market capitalization is equal to the share price multiplied by the number of shares outstanding.

4.4.5. Financial forecast

This section shall sketch a financial forecast for the first five years of SwiSOXs operational activities. These forecasts have to be taken with a grain of salt due to several reasons:

▪ Several of the assumptions in the model need still to be validated. ▪ There is no pipeline yet for the listing side (which would a key deliverable in the next phase), rather we

work with assumptions based on market knowledge/dynamics and comparable SME exchange. Most of the calculated income depends heavily on the activity on the platform (e.g. how many IPOs were executed).

▪ Because of lack of reliable/quantifiable data we work with average values for some important key met-rics like deal size or trades per day.

▪ One major unknown variable are the costs a potential partner (e.g. SIX) would be charging to SwiSOX for the usage of their services. As of this stage, no negotiations have been conducted and therefore the assumed costs are indicative only.

The financial forecasts are built on the assumption that in the first year SwiSOX will incur high costs but generate only modest revenues, as the platform is new. Furthermore, our calculations are based on the ten recommendations that were given at the end of section 3 which are in our view the key requirements for SwiSOX to be successful, such as to have at least ten founding members committed to transact CHF 10 million each for the first three months. Otherwise, the financial success is very unlikely. It is also difficult to extrapolate findings from looking at competitor stock exchanges. Major stock ex-changes have diversified their income base heavily and rely only partially on trading or listing activities. For example, the LSE only generates 20 % of its total group income from primary and secondary mar-ket activities, which would be at least at the beginning the core of SwiSOX’s activies.242 The NYSE gen-erates almost half of its revenues from data services and only 9 % from listings.243 Stock exchanges that are not publicly listed themselves do publish very limited information about their financials. Before discussing the financial forecast, we want to introduce all the assumptions that have been used for the model. The model includes fix and variable assumptions. Variable assumptions affect mostly activity on the stock exchange, e.g. how many enterprises are being listed on the stock exchange each year or how many trades per day happen. Here we see a thin line between realistic assumptions that are attractive enough for the enterprises and activity needed to run a financially sustainable stock exchange. However, we think that the assumptions taken are well-founded by the comprehensive research undertaken in this study. Regarding the development of market participants (listed enterprises, listed funds, listed bonds, trad-ing participants and impact agents), we assume the following distribution over time:

242 LSE (2017): Annual report 243 ICE (2017): Annual report

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Figure 45: Assumed development of market participants over time at SwiSOX under option A. Own illustration At first sight these numbers seen ambitious, however as the findings in the study show, there are i) at least 13,000 medium-sized social enterprises, which would be eligible for a listing at SwiSOX ii) existing SME stock exchanges have hundreds of listed enterprises each (see chapter 1.3.6. for more details) and iii) a rapidly growing demand and supply of impact investment funds (see chapter 1.2.2. ff. for more details). The assumption about market participants also influences the estimated trading activity on the platform, which as we will see is one major income source for SwiSOX:

Figure 46: Assumed development of trading activity on SwiSOX under option A. Own illustration. Again, the numbers here seem ambitious, but comparing them with existing SME stock exchanges (see chapter 1.3.6. for more details) it is at the lower bound. Further down we show the fix assumptions taken for the main revenues and expenses, as well as the rationale behind. In addition, we also kept the following market practices, trends and facts in mind:

0

2

4

6

8

10

12

14

0

100

200

300

400

500

600

700

800

1 2 3 4 5

Ave

rage

tra

de

s p

er d

ay

CH

F M

illio

ns

Total yearly trading turnover Average trades per day

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▪ Share of revenues from listing new companies and issuer services (new listing fees and fees paid by existing listed companies), dropped from 14 % in 2004 to 8 % in 2014 of revenues from stock ex-changes244

▪ Income from trading (cash, capital markets, derivatives and OTC) is the largest source of revenue, with a total share of 48 % in 2014245

▪ Overall, the share of total trading volume attributed to the largest 10% of companies in terms of market capitalisation was over 70 %. Moreover, in most markets 20 % of all trading was attributed to the largest 1 % of companies246

▪ To determine the average market capitalization to be expected at SwiSOX, we compared market capi-talizations of enterprises listed at other SME stock exchanges. Analysis of enterprises listed at AIM shows that the median market cap is between 15 and 25 million pounds (13 and 32 million CHF)247. Average market cap of enterprises at Nasdaq Nordic Exchange is CHF 45 million248. The rest of relevant SME stock exchanges are located in Asia, but skewed heavily towards technological enterprises, which tend to have much higher valuations (and therefore market capitalization) and therefore not compara-ble for SwiSOX.

▪ To determine the average bond size, we looked at the issuance of bonds on several SME exchanges as well as alternative exchange platforms (such as Plumseeds). Median bond sizes ranged between USD 7-10 million, therefore we recommend to use a more conservative number and use CHF 5 million.

As mentioned in table 21, fixed fees are relatively lower than at comparable SME stock exchanges, while variable fees (such as the trading fee) are relatively higher, as we expect impact investors to act as patient investors and do not trade shares and other instruments on high frequency.

244 UNPRI (2018): Evolving business models and new applications of technology by stock exchanges 245 UNPRI (2018): Evolving business models and new applications of technology by stock exchanges 246 OECD (2016): Changing business models of stock exchanges and stock market fragmentation 247 WFE (2017): SME Financing & Equity Markets 248 Syndicate Room (2018): Introducing AIM

Table 24: Overview of assumptions taken for modelling the financial forecast of SwiSOX under option A.

Assumptions for Option A

Assumptions for listing business Amount in CHF Explanation

Average market cap of listing enterprises 15'000'000

One-off listing fee for enterprises 15'000

Additional ratio fee charged to listing enterprises 0.75%

On-going listing fee for enterprises 10'000 Fix fee that every listed enterprise is charged on a yearly basis

One-off listing fee for products (average) 5'000 Fix fee that every issuer of a financial product meant to be listed for trading at SwiSOX is charged at time of listing

Average bond size 5'000'000 Assumed average size of issued bond

Additional ratio fee charged to issuers of bonds 0.30% Variable listing fee component that every bond issuer is charged at time of listing (x bond size)

Average capital raised for funds through SwiSOX 50'000'000 Assumed average size of listed fund

Additional ratio fee charged to issuers of funds 0.10% Variable listing fee component that every fund manager is charged at time of listing (x fund size)

Average on-going listing fee for products 3'000 Fix fee that every issuer of a financial product being traded at SwiSOX is charged on a yearly basis

Assumptions for trading business

One-off basic fee for market participants 10'000 Fix fee that every market participant is charged to receive trading access to SwiSOX

Access fee for market participants 10'000 Fix fee charged to every market participant on a yearly basis for maintaining trading access to SwiSOX

Average fee per trade 0.10% Assumed average fee component per trade x average deal size = fee charged to trader of the specific traded security

Average deal size 250'000

Assumptions for impact agents

Basic compensaton 20'000 Fix compensation the official SwiSOX impact agents are paid each year

Variable compensation 0.15% Variable listing fee component that every impact agent is remunurated with in case of a sucessful listing (x market capitalization)

Assumptions for impact rating business

Fee per assessed enterprise (one-off) 15'000 Fee that is paid one-off to the external impact assesment agency per assessed enterprise requesting listing to SwiSOX

Fee per assessed enterprise (p.a.) 5'000 Fee that is paid yearly to the external impact assesment agency per assessed enterprise requesting retaining to SwiSOX

Other assumptions # CHF per #

Staff (Option A)

CEO 1 216'000

Senior level 4 156'000

Junior level 2 108'000

Board members 8 30'000

Rent per year 1 120'000

Including 20% social security surcharge

Assumed average market capitalization at time of listing and on-going for each enterprise

Fix fee that every enterprise is charged upon day of IPO at SwiSOX

Variable listing fee component that every enterprise is charged at time of listing (x market capitalization)

Plugging in all the assumptions in our financial model, generates a 5-year financial forecast, which details are display in the Annex. The graph below summarizes the calculated development of the in-come statement over the five years:

Figure 47: Evolution of SwiSOX income statements over 5 years under option A. Own illustration. The evolution of the income follows a typical J-curve of a newly founded company, facing high initial upfront costs leading to accumulated losses in the first years, but as business starts to pick up, recur-ring profits bend the line upwards. Based on the described assumptions, we expect SwiSOX to reach break-even after the third year of existence (generating a yearly revenue of almost CHF 300,000 in year 4) and an overall accumulated loss of approx. CHF 1 million in the fifth year. From the chart below, it can be seen that the listing business is expected to be the main income driver over the next 5 years, but the more enterprises are listed, the higher gets the share of trading revenues:

Figure 48: Evolution of SwiSOX income generating businesses over 5 years under option A. Own illustration.

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4.4.6. Investment case

The financial forecast based on the described assumptions has direct consequences for the capital requirements of SwiSOX. Based on our financial model, SwiSOX will be profitable in year 4 the earliest and might have accumulated losses of roughly CHF 2 million during the first three years. Therefore, we recommend to capitalize SwiSOX with at least CHF 3.0 million. Assuming the proposed ownership and share capital structure in section 4.4.1., the founding members would be paying in CHF 1'252'500, the partner stock exchange CHF 747'500 and the public institution 500'000, to guarantee a minimum capitalization of CHF 3.0 million. As described at the end of section 3, we think it is absolutely crucial to win at least 10 founding partners, who are also willing to contribute capital. These founding part-ners should ideally already be represented at SFG and be committed to transform Geneva towards a hub of sustainable finance with SwiSOX. Even though the findings in this study were well researched and the potential for social stock exchange in Switzerland seems to exist, as always with new ideas there remains a certain proportion of risk, especially for the shareholder. One of the main risks, which has also been observed with the failed attempts elsewhere to create social stock exchanges, is the risk of attracting too few issuers and market participants to the platform. This would result in very high fix costs, which could not be cov-ered by regular income and would therefore result in very high losses for the shareholders. As men-tioned at the end of section 3, this risk can be best mitigated by creating a pipeline of potential issuers, which would be willing to get listed at the very first day of SwiSOX’s existence. This would create a momentum and possibly attract further issuers. Another risk which should not be neglected is the operational risk regarding the set-up of the software with the partner stock exchange. Technology is crucial for the functioning of a stock exchange and system failures in the beginning of the operations would be deadly for the reputation of SwiSOX. This risk can be managed through a close collaboration with the partner stock exchange and adequate lead time before going live.

4.5. Option B: Partnership with an existing platform 4.5.1. (Why not) build a platform from scratch

The second option to consider and evaluate for SwiSOX is building a new platform from scratch. At this stage we argue that building a new platform would not be very realistic, nor financially responsible due to the following reasons:

▪ Designing and programming a new platform requires considerable financial resources and time and involves many operational risks. As SwiSOX has no competitive advantage on that it seems unrealistic to go down this path. Using an existing technology, which has already proven its resilience in the market, would mean time savings and a faster go-live for SwiSOX.

▪ As seen in the financial forecasts for option A, the assumed licensing fee to use the partner stock exchange’s technology is a relatively low part of the total expected costs. Even though it is not yet completely clear how big this cost block would actually be, working with a technology partner can un-leash economics of scale which would benefit SwiSOX much more than setting-up a new platform.

▪ Headcount costs are the major cost factor, as it can be seen in the forecasts for option A. Would SwiSOX decide to develop its own technology, this would either mean more FTE employed by SwiSOX to de-velop the technology in-house or contract an outside agency to develop it, both options associated with increasing costs. Furthermore, the second option would mean additional FTE for SwiSOX, as inter-nal implementation employees (e.g. Business Developers) will be required to successfully implement the technology and further updates.

▪ According to a recent study by Bertelsmann Stiftung, Sphaera & Artha249 there exist already at least 150 (!) impact platforms, somehow committed to allocate impact capital the right way. The chances, that a newly launched platform by SwiSOX would suddenly become more successful that all of the ex-isting ones, is very low.

249 Bertelsmann Stiftung, Sphaera & Artha (2018): Impact platforms

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Looking at these caveats and at the fact, that there exist already a number of promising alternative platforms pursuing similar objective, we strongly advise against the idea of building a new platform from scratch but rather recommend partnering with an existing platform. 4.5.2. Overview of potential platforms

Before Option B will be evaluated in detail, potential platforms which are worth considering as part-ners will be portrayed. Again, the potential universe of deal platforms is much bigger than what will be presented in this section (see section 1.3.7. for more details). This evaluation focuses on platforms which operate in the impact investment space and offer at least two steps of the stock exchange value chain portrayed in section 4.1.2. By applying this filter, the following are the platforms worth consid-ering (in alphabetical order):

▪ Audaces: Audaces is an impact investment platform that offers crowd investors access to impact deals, with a geographical focus on Sub-Saharan Africa. Investors have the opportunity to directly co-invest in social businesses, with the deal sourcing, due diligence, legal work and management capability of a venture fund, while maintaining the flexibility to pick and choose those investments that interest them.

▪ Brazil’s Impact Investment Exchange (BRIIX): Functions as an investment intermediary and investment advisor. Services include prospecting investments, due diligence, valuation, and social business target-ing.

▪ The Ground-Up Project: The Ground_Up Project is a deal-sourcing platform for sustainability and part-ners with entrepreneur networks and international organizations to source impact ventures looking for funding under USD 20 million. See section 2.3. for more details.

▪ Plumseeds: Plumseeds, established by Symbiotics, is an online platform that connects potential impact investors with impact bonds issued by a dedicated Special Purpose Vehicle based in Luxembourg. See section 2.3. for more details.

▪ Social Venture Conexion (SVX): SVX is one of the other existing social stock exchanges, though in reality much closer to an impact investing platform, and functions like a broker dealer for sustainable enter-prises by connecting impact investors with impact funds and ventures. Catapult is the selected white-label technology provider for SVX’s crowdfunding platform. SVX is a not-for-profit corporation, pow-ered by MaRS Discovery District, supported by TMX Group Inc., the Government of Ontario, Torys LLP, the Mirella & Lino Saputo Foundation, the Caisse de dépôt et placement du Québec, Esplanade, and many other partners. For more details please see section 2.4.

▪ Socio-Environmental Investment Exchange (BVSA): A portal where donors can select a project to fund and track its progress in the implementation. It aims to encourage the donation culture in Brazil, con-necting two ends: Brazilian organizations that need support for their environmental projects and social investors. It has the support of the UNESCO and the UNDP and was recognized by the Global Compact as a study case and model to be followed by other exchanges.

4.5.3. Evaluation of potential platforms

Potential partner platforms for SwiSOX will be analyzed and rated along the five steps in the stock exchange value chain described in section 4.1.2.: (i.) sourcing (ii.) matching (iii.) trading (iv.) clearing & settlement and (v.) impact measurement. For every step, a short qualitative summary and a rating from 1 to 3 is given, where 1 state that the platform does not offer the described service, 2 that the platform offers the described service but only in a limited way, or platform does not offer service but intends to do so in the future and 3 that the platform offers the service in a comprehensive and ex-tensive way. The individual valuations are weighted equally and the corresponding average is dis-played at the end of the assessment, together with a short qualitative summary. Table 25 presents the results, by showing the platform with the highest score (whereas 3 would be the maximum) at the top:

Table 25: Evaluation of potential partner platforms for SwiSOX. Own illustration.

Platform Qualitative assessmentQuantitative

assessmentQualitative assessment

Quantitative

assessmentQualitative assessment

Quantitative

assessmentQualitative assessment

Quantitative

assessmentQualitative assessment

Quantitative

assessmentQualitative summary Score

Social Venture Conexion

The platform hosts enterprises

that want to raise equity. At the

time of investigation, the

platform only offered one

potential investment, but

investment details and the

dashboard are very informative.

2.5

Investors can browse through the

deal platform and invest the

desired amount. Pricing is set by

SVX.

2

Investors invest through a special

purpose vehicle, set up by SVX.

Investors will be Limited Partners

and this might carry legal

restrictions (e.g. at the moment

only Canadian citiziens are

allowed to invest)

2

The platform does not offer a

secondary market option, but

intends to start in the near future.

2

SVX relies on the the B Impact

Assessment developed by B Lab,

examining impact on the

environment, community, and

workers as well as the

governance and business

operations of ventures. However,

the admission standards are set

relatively low

2

SVX offers the most complete package

amongst all the analzyed platforms. It

covers the most important steps of the

stock exchange value chain and would

offer a good starting point to partner

with SwiSOX. However, the

geographical distance could be a

negative factor.

2.1

Plumseeds

All the bonds on the platform are

sourced by Symbiotics, a MIV with

strong track record, and issued by

the MSME Bonds platform in

Luxembourg. Registration is

needed, but the mechanism

seems to be intuitively. Only

indicative information about the

deals are available publicly.

2

Registered (potential) investors

are alerted through e-mail, once a

new bond is investable. Pricing is

set by default by the MFI. The

MSME Bonds platform sets up a

loan agreement with the MFI for

each bond and handles the

operational transactions between

the investor and the MFI.

2

The clearing cannot occur directly

between the platform and the

investor. Instead, the investor has

to inform ist custodian bank about

the investment, which afterwards

receives payment instructions

from Symbiotics. The transaction

is then settled by Euroclear or

Clearstream.

2The platform does not offer a

secondary market option1

Each institution has been

analysed and assessed by

Symbiotics. The results are

summarised in the Investment

Advisory Report and can be found

on the deal page for each deal.

The report contains a short

impact analysis of the MFI.

2

Originally more created for marketing

purposes, Plumseeds is steadily

evolving. For example, all new issued

bonds will be listed Luxembourg Stock

Exchange - Securities Official List (SOL),

making the investment process much

easier. However, it is still unclear if a

cooperation with SwiSOX would be

desired by Symbiotics.

1.8

Audaces

The platform hosts enterprises

that want to raise equity.

Currently the number is very

small, but the offered information

is extensive.

2

The platform is based on the in-

house Impact Fund, with the

additional feature that investors

can pick and choose those

investments that interest them.

Pricing is set by Audaces.

2

Investors invest through a special

purpose vehicle, set up by

Audaces. Investors will be Limited

Partners and this might carry

legal restrictions

2The platform does not offer a

secondary market option1

The social impact of the deals are

only described in a descriptive

way. The platform does not offer

rating methodologies for their

investments.

1.5

Audaces offers a personalized platform

in a niche area. Nevertheless, the

practical implementation is far away

from a fully-fledged stock exchange.

1.6

Ground_Up Project

With the support of local experts,

the platform actively sources

investment opportunities on the

ground. At the same time, the

platform also sources investors

who wish an exit of current

investments.

3

The platform offers a closed

database with over 1,200

enterprises and 80 investors. The

portfolio mapping tool customizes

the search by investment criteria

or by the six dimensions of the

Value Compass. Pricing is

determined between investor and

investee directly.

2The platform does not host any

transactions1

The platform does not offer a

secondary market option1

The platform used to offer a Multi-

dimensional Benchmarking Tool

("Value Compass") which

analyzed, scored and

benchmarked a business on six

dimensions, including social

impact andenvironmental issues,

but mixed with operational

figures. However, due to lack of

eligible enterprises, the service

has been shut down for the time

being.

1.5

The Ground Up Project performs strong

on the investee side, but lacks several

critcal components on the investor's

side. Furthermore, it seems to be

unclear what the exact business model

of the platform should be, being

displayed by the latest changes in its

offering.

1.6

Socio-Environmental

Investment Exchange -

BVSA

0.0

Brazil’s Impact

Investment Exchange0.0

The platform focuses on donations exclusively and therefore cannot be considered for this assessment.

No evaluation possible due to limited information available

Sourcing

Does the platform actively source investment

opportuntities? How accessible is the platform

for both sides?

How efficient is the matching between

investees and investors? How is the pricing

determined?

Matching

Does the platform also clear and settle the

whole transaction (e.g. transferring the

investment amount and securities)?

Clearing & Settlement

Does the platform ofer a secondary market?

How is the pricing determined?

Trading Impact

Does the platform ofer an impact rating

methodology?

As it can be seen from the scoresheet above, the Canadian platform SVX is at the top of the preliminary assessment with an average score of 2.1, followed by Plumseeds with a score of 1.8 and Audaces with a score of 1.6. However, as the assessment shows, no platform currently covers all the parts of a stock exchange value chain described in figure 38. SVX also lacks clearing & settlement and currently does not offer a secondary market. However, the operators of the platform intend to launch this function-ality in the upcoming months. Preliminary conversations with the operators of SVX have been positive and SVX has confirmed interest to further explore opportunities for collaboration through for example a joint venture, license model or white labelling. As conclusion, if Option B were to be further pursued SVC would be the preferred partner. However, it is important to remind that a collaboration with a platform would never allow for the functions of a fully-fledged stock exchange, as under option A. 4.5.4. Legal & capital structure, ownership

When it comes to the legal and capital structure, as well as the ownership, we don’t see strong varia-tions from the proposed set-up in option A. We still advocate to set-up SwiSOX as a separate legal entity and run it as a limited company. Furthermore, we still think that the founding members should be majority shareholder to be in control of the endeavor and the original mission. However, for option B it is questionable if the partner platform would be willing to participate as a minority shareholder or at least in the magnitude shown in figure 42. We therefore expect the founding members to come up with a larger share capital for SwiSOX (for details see section 4.5.4), alongside a public institution as a minority shareholder. 4.5.5. Organization

When it comes to the organizational set-up, the fact, that the trading part is omitted from option B, reduces the effective headcount of SwiSOX, as less people are needed to handle the core business. Compared to option A, we recommend a reduction of 2 FTE, which would mean that 1 FTE would be allocated to each unit (investors, listings, operations, corporate functions). Apart from this adaption, we think that the operational set-up can be took over from the proposed set-up in section 4.4.3. 4.5.6. Operational model

As mentioned already, the main discrepancy between option A and option B regarding the opera-tional and business model is that whereas the partnership model with an existing stock exchange in option A allows for a secondary market and for public access, in option B this would not be the case and be restricted to registered and compliant users. Given legal restrictions, option B would be a private platform, similar to the club deal platforms por-trayed in section 1.3.7. of this study. Therefore, the whole trading part of the stock exchange value chain sketched in figure 38 would drop from the operational and business model. This also implies that the dynamic pricing mechanism would not work anymore and the price of any transactions is negotiated bilaterally and possibly in a confidential manner between investors and the issuer of a security. Therefore, the following operational model would be applied (again the letters in the graph refer to the sequence in the following paragraphs):

a) SwiSOX pays a licensing fee to the chosen technological platform. In return, SwiSOX receives access to the partner institution’s infrastructure and technology

b) Social enterprises, which seek to raise capital through SwiSOX, must submit their request to SwiSOX (for legal eligibility check) but also to the impact agency of SwiSOX, to allow for an analysis of the created impact of the enterprise. If they successfully raise capital through SwiSOX, they pay a transaction fee to SwiSOX.

c) The same procedure applies to the Issuers of other social (impact) bonds.

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d) Before any investment deal is offered at SwiSOX, an impact rating agency checks the social eligibility of the social enterprises and/or financial products. A detailed explanation of the process and an evaluation of potential assessment methodologies will be given in section 4.7. In brief, this agency analyzes potential social enterprises and issuers of social impact bonds according to several impact criteria and provides a detailed assessment towards the SwiSOX impact board. The impact rating agency is remunerated by SwiSOX for every assessment. Nev-ertheless, the final decision for an initial listing of a social enterprise or another financial product belongs to the SwiSOX impact board. As described in section 4.4.2. this board is com-posed of experts with a background and proven track record in impact investment, social en-trepreneurship or the financial sector. The board meets regularly to discuss new listing re-quests and take a decision.

e) On the other side of the spectrum, investors can register at SwiSOX to check out current investment opportunities. If they wish to invest, the deal details are disclosed between the investor and the investee separately, where SwiSOX would only be the matchmaking platform.

Figure 49: Flowchart of SwiSOX operational model under option B. Own illustration.

4.5.7. Business model

The ceased trading part also has implications for the business model of SwiSOX under option B. The listing business, which is already the main income source of SwiSOX in Option A, becomes the only

SwiSOX

Impact Rating Agency

Impact BoardPartner

platform

Pays licensing

fee

Provides

infrastructure &technology

Pay by analysis

Provides impact

assessment

Final decision for allowance

Market participants

Grant access to platform investing capital

Register on platform

Issuers of social (impact) bonds

Provi

de ac

cess

to p

latfo

rm

Pay

indi

vidu

al fe

e

Social enterprises

Grant access

to platformfor capital raising

Other clients

Provi

de oth

er

serv

ices (

e.g.

data)

Paid

indiv

idual

fee

Must submit listing request

(A)

(B)

(C)

(D)

(E)

Must

submit l

isting re

quest

Pay fee on

capital raised

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and sole revenue source together with investor access fees. With these restrictions, the agent busi-ness proposed for a smooth IPO procedure in option A is not necessary anymore under Option B, as the platform solution is more of a club deal function. Furthermore, also the listing business would be reduced, as this platform would not be attractive an-ymore for impact investment fund shares. Therefore, we omit this possibility from the business model in option B and keep the focus on social enterprises that seek investors capital on the plat-form. Of course, this mechanism is not a proper listing and therefore the listing business shall be re-named as “capital raising” for option B. Regarding the issuance and purchasing of bonds, we see lim-ited potential under option B. The function itself is still possible and there seems to be a market for it (see Plumseeds for example), however with the reduced investor accessibility of SwiSOX under Op-tion B and no liquidity we expect less bond activity to happen on the platform. Therefore, the ex-pected figures were adapted in the next section. 4.5.8. Financial forecast

The reduced offering under option B has also drastic implications for the financial forecast. Before analyzing the impact on the income statement, we want to show the reduced assumptions set used for this financial model. Our assumptions, that differ from the assumptions in option A, are based on the following market practices in mind:

▪ Regarding the capital raising fee, which enterprises would pay if they raise capital through SwiSOX, there are no current and/or comprehensive sources. Therefore, after talking with several experts in the field, we follow market practice, which suggests that fees typically lay between 3-5% and assume 4%.

▪ We assume an average financing need of CHF 2 million per enterprise, according to the SME survey conducted by the European Commission250.

Table 26: Overview of assumptions taken for modelling the financial forecast of SwiSOX under option B. Furthermore, as described in section 4.5.7., the business model and therefore the revenue streams are reduced drastically under option B. The platform specializes on capital raising for social enterprises and issuance of social (impact) bonds. We assume the following distribution over time:

250 European Commission (2017): Survey on the access to finance of enterprises (SAFE)

Assumptions for Option B

Assumptions for fundraising business

One-off admission fee for enterprises 10'000

Fee charged for each transaction settled over the platform 4.00%

Average deal size 2'000'000

One-off fee for bonds 5'000

Average bond size 5'000'000 Assumed average size of issued bond

Additional ratio fee charged to issuers of bonds 0.30% Variable listing fee component that every bond issuer is charged at time of listing (x bond size)

Assumed average investment size transacted on the platform

Fee that every enterprise is charged to create a profile on the platform

Fix fee that every issuer of a bond meant to be issued at SwiSOX is charged at time of listing

Variable listing fee component that every fund manager is charged at time of listing (x fund size)

Other assumptions # CHF per #

Staff (Option B)

CEO 1 216'000

Senior level 2 156'000

Junior level 2 108'000

Board members 8 30'000

Rent per year 1 120'000

Including 20% social security surcharge

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Figure 50: Assumed development of market participants over time at SwiSOX under option B. Own illustration Plugging in these assumptions into our financial model generates a 5-year financial forecast, which details are display in the Annex. The graph below summarizes the calculated development of the in-come statement over the five years:

Figure 51: Evolution of SwiSOX income statements over 5 years under option B. Own illustration. As it can be seen from the figure above and based on our assumptions, SwiSOX would not even hardly be close to financial sustainability. While the costs have been almost reduced by 1/3 compared to option A (due to reduced resources needs), income has collapsed in the light of the missing listing and trading business area. This would result in an accumulated loss of almost CHF 4 million after 5 years of existence. Based on this forecasting, we strongly discourage to consider option B as a reasonable alternative for SwiSOX.

4.6. Input: blockchain and stock exchanges Blockchain is a decentralized electronic ledger system that records any transaction of value whether it be money, goods, property, work or votes. It is also an interlinked and continuously expanding list of “blocks” stored securely across a peer-to-peer network. Each block is uniquely connected to the previous blocks by including the hash of the previous block in the new block. Digital signatures are then used to authenticate transactions. This structure means that making a change without disturbing

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the subsequent records in the chain is extremely difficult. These characteristics make blockchain cryp-tographically secure and currently tamper-proof. Verification of transactions is achieved by partici-pants confirming changes with one another, replacing the need for a third party to authorize transac-tions. Decentralized consensus makes blockchain platforms immutable, and updatable only via con-sensus or agreement among peers. This design is meant to protect against domination of the network by any single computer or group of computers. 251 The figure below shows a typical blockchain trans-action process:

Figure 52: Blockchain transaction process: Source: Blockgeeks (2018): What is Blockchain Technology? A Step-by-Step Guide For Beginners

The technology has gained a lot of interest in the recent past. While most of the public interest has been dedicated to bitcoin, a cryptocurrency system that relies on the blockchain technology, the tech-nology itself has slowly but steadily found its way into everyday business life. Gartner252 forecasts that blockchain will generate an annual business value of over USD 175 billion by 2025 and rise to over USD 3 trillion by 2030, with the possibility that 10% to 20% of global economic infrastructure will be running on blockchain-based systems by that same year. In a recent KPMG business survey253, which interviewed 600 executives from 15 countries, 84% of the interviewed executives stated that their company has some involvement with blockchain technology and that the financial industry was the sector with the highest involvement by far, driven by Tokenisation, the representation of real or virtual assets on a blockchain, and Initial coin offerings (ICOs), in which a company sells a predefined number of digital tokens to the public. Not surprisingly the technology is also disrupting stock exchanges and related services. In 2015, Nasdaq chose blockchain startup Chain for a pilot to test the trading of shares in private companies, which do not trade on an exchange and entail a lot of paperwork. Already in 2015, NASDAQ unveiled Linq, a solution allowing private companies to digitally represent share ownership using blockchain-based technology254. A few years later, NASDAQ partnered with San Francisco-based startup Chain to test Bitcoin technology for the trading of shares in private companies in NASDAQ Private Market, which is a marketplace for pre-IPO trading of shares in private companies255. In 2017, the London Stock

251 WEF (2018): Building Block(chain)s for a Better Planet 252 Gartner (2018): Blockchain Potential and Pitfalls 253 KPMG (2018): Blockchain is here. What’s your next move? 254 Forbes (2018): Blockchain Technology Set To Revolutionize Global Stock Trading 255 Forbes (2015): Nasdaq Selects Bitcoin Startup Chain To Run Pilot In Private Market Arm

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Exchange Group (LSEG) teamed up with IBM to build a blockchain-based platform to digitally issue shares of small and medium size enterprises in Italy. The project was built and tested by Borsa Italiana, which is part of the LSEG.256 Recently, Japan’s Financial Services Agency has allowed the Japan Ex-change Group, which operates the Tokyo Stock Exchange, to use blockchain as its core trading infra-structure. 257 However, on an aggregated level stock exchanges seem more reluctant to advance with the new tech-nology: A recent study conducted by NASDAQ and Celent, a research firm that advises financial com-panies on technology, found that only 5% of 20 leading stock exchanges worldwide have deployed some form of blockchain or blockchain-similar technology, while 20% have “no plans” to develop on or implement it. Other technologies seem more advanced: 40% of the interviewed stock exchanges are using cloud computing, 35% are applying artificial intelligence (AI) tools, and 70% are making use of robotic process automation. According to the study, IT budgets, which at some firms are almost entirely consumed by maintaining current systems, leaving scant resources for innovative new tech-nologies and the need to provide tight security and stability, while navigating strict regulations, are the main hurdles holding stock exchanges back to advance faster with the implementation of the blockchain technology.258 In addition, a Deloitte study found that the widespread belief that the block-chain technology is overhyped, is adding to the overall restraint.259 Nevertheless, we would recommend to separately evaluate the opportunities for blockchain technol-ogy for SwiSOX. The technology could enhance a stock exchange in several ways260:

▪ Applying blockchain and smart contracts to post-trade activities can eliminate the need for intermedi-aries, reduce counter-parties and operational risk, while providing the infrastructure for faster trade settlement. Financial institutions can settle securities in minutes instead of days, with the major bene-fits being streamlined real-time settlement, improved liquidity, supply chain optimisation and increased transparency.

▪ If implemented, blockchain can act as an online automated surveillance system for each transaction. A blockchain-based exchange can have inbuilt characteristics to track, block and report illegitimate at-tempt made by anyone on the network, and can provide a robust platform to implement the security policy and standards.

▪ Blockchain transactions are faster, as trade confirmations are done through smart contracts by peers instead of any intermediary, reducing transaction costs.

4.7. Assessing the impact of social enterprises This section has the aim to come up with a proposal with regards to the impact assessment service, which will be used both ex ante to establish the eligibility of these enterprises to join the platform, but also ex post to measure their impact. This assessment is a crucial differentiation factor from other stock exchanges, which are also starting to integrate sustainability criteria. Different approaches and challenges regarding impact measurement are portrayed below, followed by a description of the main features of an assessment tool, so that afterwards existing solutions can be evaluated according to selected criteria. The goal is to give an optimal decision guidance to support SwiSOX in how to benefit from a powerful and credible impact assessment tool. 4.7.1. How to measure impact

In order to understand the implications of the different impact measurement methodologies and tools, it is important to first describe what needs to be measured and why. One of the most crucial parts of impact measurement is a clear definition of the term social impact. Hofer (2017) summarized

256 UNPRI (2018): Evolving business models and new applications of technology by stock exchanges 257 CCN (2017): Blockchain Trading Greenlit for Asia’s Largest Stock Exchange Operator 258 Wallstreet Journal (2018): Stock Exchanges Slow to Embrace Blockchain 259 Deloitte (2018): Breaking blockchain open 260 Hackernoon (2018): The Collision of Stock Exchanges and Blockchain and UNPRI (2018): Evolving business models and new applications of technology by stock exchanges

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some of the current definitions around social impact: The Center for Social Impact of the University of Michigan261 has defined social impact as “a significant, positive change that addresses a pressing social challenge”. They argue that social impact includes all the change that lead to the improvement of a particular societal problem. Other institutions, like The Rockefeller Foundation262, the European Com-mission263 or the EVPA264 go one step further and have adapted the impact value chain, also known as the logic model, to clarify the term social impact. This model focusses on explaining the cause-and-effect relationships of the undertaken actions and the intended impact, by segmenting the impact value chain into five steps, depicted in the graph below:

Figure 53: The logic model for impact measurement. Source: EVPA (2015): A Practical Guide To Measuring And Managing Impact

Step 1 and 2 show the planned work of an institution, which resources are allocated and which actions are taken. This part is clearly measurable and reported by the institution itself. Steps 3-5 show the social or environmental results an institution intends to achieve. Step 3 refers to the outputs, so what the institution actually produces or distributes as services to its clients (e.g. for an MFI how many microfinance clients it serves or for a producer of solar panels how many solar panels it actually sells). Most of the times, this step is also clearly measurable and well reported. However, impact investors require at least one additional step, which is described as outcomes. This refers to the change that directly results from the activity of an institution. For an MFI this could be the number of businesses and jobs that could be established due to the loans granted to the entrepreneurs or for a producer of solar panels how much renewable energy was produced because of the panels. But only step 5 refers to what is described as impact: the outcomes, but adjusted for what would have happened anyway, incl. actions of others (e.g. government or competitors) and unintended consequences. In reality, this is difficult because changes and impacts are influenced and caused by many different factors and circumstances. Furthermore, to measure the direct impact exclusively linked to the institutions inputs and activities, scientific studies such as random control trials (RCT) or difference-in-differences meth-ods are needed. To conclude, most practitioners take the approach to calculate outcomes while ac-knowledging (and if possible adjusting for) the factors described in step 5 (see Hofer (2017) or So & Staskevicius (2015) for a more detailed discussion about this). 4.7.2. Main features of the assessment tool

As mentioned in the introduction of this chapter, the assessment of the impact is crucial for the suc-cess of SwiSOX. It is therefore important to define the framework and the main features such a tool should cover, including reliable, consistent and detailed data. Such data can come from the listed enterprises themselves, but also from outside providers, such as industry organizations, NGOs or ac-ademic institutions. The tool should clearly also at least try to go beyond traditional ESG indicators, by

261 Center for Social Impact of the University of Michigan (2017): What is social impact? 262 Rockefeller Foundation (2004): Double Bottom Line Project Report: Assessing Social Impact in Double Bottom Line Ventures. 263 GECES (2014): Proposed Approaches to Social Impact Measurement in European Commission 264 EVPA (2015): A Practical Guide To Measuring And Managing Impact

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for example applying innovative analysis or gathering impact-related data. Data is of course key, but the right application also matters, as well as the produced outcome reporting key-figures. Therefore, we suggest that the selected tool should combine three core features, as shown in the graph below:

Figure 54: Symbiose of the three main require features for the SwiSOX impact assessment tool. Own illustration. Analysis: First and foremost, the assessment tool must provide detailed, independent and reliable qualitative and quantitative analysis. The data for these analyses should come from different sources, incl. enterprise-own reports, but also inputs and reports from NGOs, industry organizations, independ-ent research providers, as well as media. These analyses shall be updated on a regular basis, in order to provide investors using SwiSOX accurate and trustworthy information to make their investment decisions. Rating: Theses analysis shall lay the ground for a respective rating. This rating can be used either as an entry barrier for the enterprises, so that enterprises with a low rating cannot be listed at SwiSOX, or as a mere indicator for all enterprises fulfilling the minimum formal requirements laid out in earlier chapters of this study. The rating acts as an important signal to the market, comparable with ratings from important credit agencies such as Moody’s or S&P. The rating shall therefore reflect and illustrate in the simplest manner the positive contributions of the enterprise towards the environment and so-ciety. Reporting: Impact measurement is not static, but shall be assessed on a regular basis. To keep track of the latest developments of an enterprise regarding its impact, a detailed impact reporting is nec-essary. This reporting shall aggregate published impact information from the enterprises together with own calculations and findings from the provider of the impact assessment tool and inform inves-tors on a regular basis. The selected impact assessment tool shall obviously go a step further that the most commonly used sustainability indicators (e.g. RepRisk, InRate or Sustainalytics) that focus solely on ESG assessments of enterprises (E= Environmental, S = Social and G = Governance) and do not require intentionality of actions nor measure tangible outcomes. 4.7.3. Landscaping existing solutions for impact assessment

This section introduces both the most widely used as well as new promising tools regarding impact measurement. The content is informative, as the tools will be evaluated critically in the next section (displayed here in alphabetical order): ENEA is an independent strategy consultancy in energy transition and sustainability serving the indus-

trial and financial sector, headquartered in Paris. ENEA provides their clients with advisory services

Analysis

Reporting

Rating

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– preliminary studies for the definition of a marketing, strategy or financial vision – and operational support for the implementation of their projects. 265 While supporting the energy transition is the company’s main work, it also developed an own impact measurement tool for assessing ecological and to a lesser extent also social impact of investments. The tool works along the whole investment value chain (from due diligence, to pre-approval and post-investment) and uses the SDGs and the underlying targets as framework. The Global Impact Investing Rating System (GIIRS) was launched by B Lab, a non-profit organization, to provide the impact investing industry with a rating agency similar to traditional credit rating agen-cies like S&P or Fitch. GIIRS makes third-party assessments of companies, measuring the social and environmental performance but does not take financial aspects into account in their evaluation pro-cess.266 Aside from the rating and analytics, the GIIRS also serves as an educational and management tool that provides companies and funds with additional information on how to improve their impact and shares information of best practices from peer companies and funds.267 The GIIRS rating consists of the B Impact Assessment (BIA) that is used by the B Lab to assess for-profit companies that desire to become certified as a benefit corporation (B Corp). The B Corp certification recognizes and honors for-profit companies for their social and environmental efforts and practices, by dividing a company’s performance into four categories and evaluating them independently by allocating points to each area. These so-called impact areas are B Lab’s perception of the prevailing ESG factors and are split up into governance, workers, community, and environment with additional sub-categories.268 At the end of the assessment, all points of the categories are added up to the overall score, which ranges from 0 to 200 (a minimum score of 80 points is needed to become certified as a B Corp). Each year, 10 % of certified B Corporations are selected for an in-depth site review. The companies that undergo site review each year include Certified B Corps who are randomly selected and those that are required to undergo an annual Site Review as part of expanded terms of Certification. Site reviews take place virtually or on-site at the discretion of the B Lab team.269 The BIA (and therefore GIIRS rating system) uses IRIS metrics in conjunction with additional criteria to come up with an overall company or fund-level rating (the set of IRIS metrics that are included in the BIA can be found here)270. One of the most recent impact assessment tools on the market uses a completely new approach to impact measurement: Impaakt271, founded 2018 in Geneva, relies on collaborative analysis from many people around the world. These people are not required to have a certain education or degree, but time and dedication to analyze the impact of businesses of all sizes and continents. The output pro-duced are impact notes, in which a qualitative assessment of the impact organized around the SDGs is summarized, and impact scores, which reflect the overall impact as well as the impact related to SDGs. The impact that a company has on the environment and society is measured in two dimensions: if the impact is positive or negative and the magnitude, e.g. if it’s rather national or global. The impact rating process relies on users, which on the one side provide detailed and reliable impact notes and score the enterprises according to their findings in the notes, but also on users which critically review the notes and score them according to objectivity, relevance and insightfulness. The impact notes also provide the ground for users to rate companies according to the findings from the notes. Impact notes with good ratings from other users are promoted and their author rewarded financially by Impaakt. The on-going rating system allows Impaakt to publish real-time impact measurement ratings, mostly

265 ENEA (2018): About 266 B Lab (2018): What is a GIIRS Impact Rating? 267 B Lab (2018): Approach to Impact Assessment 268 B Corporation (2018): Certification 269 B Corporation (2018): Certification Requirements 270 IRIS (2018): B Impact Assessment (and GIIRS Rating) 271 Impaakt (2018): Main site

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like financial quotes from a stock exchange. Furthermore, Impaakt aggregates the produced analysis and ratings and sells quality impact data to its clients (e.g. asset managers). A provider, which relies on IRIS metrics, but produces aggregates and visualizes them for impact in-vestments, is iPAR272 (which stands for “Impact Portfolio Allocation Review”). The tool was launched by the Caprock Group, an American multi-family office with about USD 3 billion assets under manage-ment, about 30 employees and five offices, and was intended to provide their own clients with visu-alized impact reports273. In the meantime, the tool is freely available to everyone and allows impact investors to evaluate the impact of their own investments. The tool is built around four themes: cli-mate, people, public and resources. Within the software, these themes look like colorful building blocks. These building blocks categorize a set of over 600 of IRIS’s measurement metrics. Investors can click on these blocks and navigate through pages that explain the performance of the investments. The subpages for the blocks show quantitative, detailed measurements of progress — including quar-terly reports. In addition, iPAR impact reporting tracks the on-going impact performance of selected impact investments, relying on the scores from the metrics and impact reports published by the in-vestees. Impact Finance, a small Swiss-based investment advisor founded in 2010, developed Kharmax to measure and monitor impact. It defines seven categories of impact (economic, environmental, gov-ernance, human rights, labor practices, product responsibility and society) and attempts to evaluate it along the whole value chain of an investment. Amongst other, it also relies on the IRIS metrics and allows for sector-specific aggregates and comparisons.274 4.7.4. Evaluation of existing impact assessment tools

This section will evaluate the identified impact assessment tools / providers portrayed in section 4.7.3. The rating criteria are:

▪ Analysis function: Does the tool offer a proper qualitative and quantitative analysis function? What is the extent of the analysis? How transparent is the methodology?

▪ Rating function: Does the tool offer a rating output? How is the rating determined? What are potential caveats?

▪ Reporting function: Does the tool offer an impact reporting function? How extensive is the offering? In which regularity are reports produced and what are the main sources for them?

▪ Look & feel: How user-friendly is the tool? Is it online-based? What are the exporting possibilities? ▪ General: How widespread is the use of the tool? Are there any general restrictions or caveats? Is the

tool customisable?

In accordance with other evaluations made in this study, the criteria are rated from 1 to 3, according to the following interpretation:

▪ Rating of 1: The tool does not offer the described function at all. ▪ Rating of 2: Tool offers the described service, but only in a limited way (e.g. not customizable) or shows

some gaps regarding the needs for SwiSOX. ▪ Rating of 3: Tool offers the service in a comprehensive and extensive way.

Half points are used to acknowledge small differences in the compared categories. The overall score is calculated by taking the simple average of all aggregated individual ratings. The results of our eval-uation are shown on the following pages. At this point it is important to note that this assessment is based on limited desktop research. Publicly available information was used to analyze the different criteria. In a next step it I suggested for SwiSOX to validate the preferred tool as well as looking at the potential costs and pricing model. Table 27 presents the results by showing the provider with the highest score (whereas 3 would be the maximum) at the top:

272 iPAR (2018): Main site 273 Forbes (2016): CAPROCK Group Launches Impact Assessment Visualization Tool 274 Impact Finance (2018): Our monitoring tool

Tool Qualitative assessmentQuantitative

assessmentQualitative assessment

Quantitative

assessmentQualitative assessment

Quantitative

assessmentQualitative assessment

Quantitative

assessmentQualitative assessment

Quantitative

assessmentQualitative summary Score

iPAR

iPAR offers a mix between

qualitative and quantitative

assessment, however the

distribution is not visible at first

glance. Where applicable, iPAR

defaults to IRIS for metric

definitions, which supports the

establishment of common metrics.

However, the produced analysis as

of today are restricted to investment

funds only, which will only be a part

of SwiSOXs offering. The potential

assessment of enterprises would

need to be discussed with iPAR.

1.5

iPAR uses a broad assessment

framework, which mainly contains

an impact strategy score and a score

for execution risk, but lacks an

overall rating. Nevertheless, this

should be implementable, as the

underlying data and assessments

are available

2.0

iPAR tracks the ongoing impact

performance of selected impact

investments in a single composite

level view. Furthermore, the tool

shows recent impact updates on a

quarterly basis, rating changes and

metrics update. iPar is a clear

frontrunner regarding transparent

impact preparation and reporting.

2.5

iPAR is a great example how to

display data in an user-friendly and

vivid way. Dynamic blocks,

geographical and heat maps as well

as personalized user views are just a

few examples how the tool

impresses with its design.

2.5

Clearly iPAR is not yet very well

known. The database contains 150

funds from around 50 managers.

Nevertheless, the framework is

robust and seems scalable. Further

questions need to be clarified

directly with the owner of iPAR,

CAPROCK.

2.0

iPAR is a great example how with

little expenditure impact

measurement can be streamlined

and illustrated vividly. However, how

strong iPAR could support SwiSOX in

its core business (impact analysis of

medium sized enterprises) needs to

be further clarified .

2.10

B Impact Assessment

BIA works with a self-evaluation of

enterprises, but confidential

information to validate responses

have to be submitted to achieve a

final BIA score. BIA uses IRIS

metrics in conjunction with

additional criteria. The framework

builds up strongly on the ESG

methodology but the methodology is

not disclosed. However, the process

is very comprehensive with 200

questions .

2.0

The produced rating ranges from 0-

200, in which a rating of 80 is

considered to be enough to become

a B certified company. The analysis

and ratings are used to produce the

GIIRS, which allows impact

investors to customize their

financial portfolio according to

impact scores. Ratings are

compared against all businesses

that have completed the BIA.

2.0

Public available reports of B

corporations only contain final score

and sub-ratings (incl. an archive

function), which is clearly too little

information. It would be needed to

discuss the reporting details with B

Corp in further detail.

1.5

As the elements are distributed over

various sites, it is difficult to make

an opinion about the overall look &

feel. However, the client account

seems intuitive and offers a lot of

filter, comparison and extraction

possibilities.

2.0

Over 2,500 enterprises in 150

industries and 60 countries have

been labelled as B-Corps,

increasingly also large enterprises

such as Danone. This indicates, that

the tool and certification process is

very well known in the industry and

wouldn't need lot of introduction

work if the tool would be chosen for

SwiSOX.

2.5

BIA and other B Corp tools are

certainly well-known in the market.

They rely mostly on the IRIS metrics,

which are used by many impact

investors and enterprises already

today. However, one of the biggest

drawbacks is that the offering is

divided in many sub-offerings: The

BIA as the core does only produce

the assessment, while the rating

and the full database is stored in B

Analytics and the reporting is

produced by B Corp itself.

2.00

Impaakt

Impaakt outsources the analysis to

users, which are not required to

fulfill any specific education

standards. The assessments contain

a qualitative and quantitative part,

which are kept at a minimal level. A

clear assessment methodology is

lacking, which results in very

different approaches in assessing

enterprises and their impact, which

makes it hard to compare findings

and scores

1.5

Ratings range from -5 to 5 (for the

value) and from 0 to 5 for the scale.

Scores submitted by users are

immediately reflected in the overall

score (which seems to be a simple

average). This allows for real-time

quotes, but contains a certain risk of

abuse. Nevertheless, the real-time

quotation is a strong innovation in

the field of impact measurement

and is rewarded in this section.

2.5

Being founded only recently,

Impaakt does not have sufficient

data and analysis to produce a

decent reporting offering. Therefore,

this section is not rated for Impaakt.

n/a

The main assessment tool is divided

in the analysis and score sections,

which are designed very lean and

user friendly. The filter and

comparison methods are still

limited, however the tool is still at

early stage. The information panel is

very well structured and user-

friendly.

2.0

Even though Impaakt hasn't' been

online for a long time, it has

attracted the interest of many users

already. The tool wants to use the

knowledge power of the mass and

not rely on a few experts, a laudable

attempt. However, this is were we

see the biggest challenge: even with

severe protection and incentive

mechanisms, the tool and its reports

could be influenced and ratings may

be biased excessively by short-term

incidents and not reflect long-term

development of enterprises

2.0

Impaakt introduces a brand new

concept to the world of impact

assessments and publishes real-

time impact quotes of well-known

enterprises. However, this

innovation contains severe risks as

pointed out in this short evaluation.

It would take a more serious,

detailed evaluation to see if the

founders are applying serious

backstop mechanisms to avoid fraud

or misuse of the platform.

Furthermore, this approach might

work with enterprises, which are

2.00

How user-friendly is the tool?

Look & feel General

How widespread is the use of the tool? Are there

any general restrictions or caveats? Is the tool

customizable?

Analysis

Does the tool offer own analysis? What is the

extent of the analysis (ESG vs. Impact)?

Does the tool offer a rating systematic? How is it

produced? What are potential caveats?

Rating

Does the tool offer a regular impact reporting

possibility? How extensive is the offering?

Reporting

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Table 27: Evaluation of potential impact assessment providers for SwiSOX. Own illustration.

Tool Qualitative assessmentQuantitative

assessmentQualitative assessment

Quantitative

assessmentQualitative assessment

Quantitative

assessmentQualitative assessment

Quantitative

assessmentQualitative assessment

Quantitative

assessmentQualitative summary Score

ENEA

While ENEAs main business

focusses on environmental issues,

they also offer assessments of

impact along social metrics. Their

methodology is aligned with the

SDGs and the metrics they use are

mostly industry standard metrics

(IRIS, GRI etc.) Methodology is very

transparent.

2.0

Scoring is based on benchmarks,

which is created from own and

outside data (World Bank etc.). The

result is a scorecard, which can be

easily adapted to show an overall

score if needed.

2.0

Reports are tailor-made, based on

the needs of each client. The reports

contain information about the room

for improvement for the clients.

Reports are published on an annual

basis, but the tool can be adapted

for other intervals.

2.0

The tool is excel-based at the

moment. A web-based platform is

in development and expected to be

released in February 2019. A

comparison possibility is foreseen.

2.0

ENEAs references are widespread

(from public to private sector),

however the main work seems to

have been measuring the impact

resulting from energy or energy

related projects. There is a certain

lack of experience dealing with a

comprehensive impact assessment

of enterprises.

1.5

ENEAs main business is not

assessing impact, but rather advise

different actor in the energy

transition. Furthermore, their

research capacity seems to be more

on the macro- than micro-level.

Therefore, for the specific needs of

SwiSOX, their impact assessment

services would not fulfill the main

requirements.

1.88

Kharmax

Kharmax uses 380 metrics to

evaluate the impact distributed over

16 sectors (13 metrics in average

per sector), whereas 115 are IRIS

compatible. The methodology is

disclosed publicly in detail and

contains an extensive evaluation

enterprises along the whole value

chain conducted by the internal

analysis team.

2.0

The output produced is a scorecard

along the 7 defined categories, but

without an overall rating.

Nevertheless, this should be

implementable, as the underlying

data and assessments are available

2.0

Kharmax does not disclose any

reports and contact requests were

unsuccessful. Therefore this section

cannot be rated for Kharmax

n/a

Unfortunately Kharmax's monitoring

system is not online based and

therefore not publicly available. It is

unclear, if there are plans to launch

an online version, as Impact Finance

has not reacted to contact requests.

1.0

First and foremost Kharmax was

developed as an assessment tool for

the investment advisor Impact

Finance, which is relatively small

compared to other players like

Symbiotics or responsibility. Even

though contact was made with the

advisor, no reaction came. Therefore

it is unclear to which extent Impact

Finance would be ready to share the

tool with SwiSOX.

1.5

Kharmax simply does not fulfill

enough prerequisites to be

considered a reasonable alternative

for the impact assessment at

SwiSOX. Lacking a proper reporting

function and online availability with

the low familiarity lead to a very

low end score.

1.50

How user-friendly is the tool?

Look & feel General

How widespread is the use of the tool? Are there

any general restrictions or caveats? Is the tool

customizable?

Analysis

Does the tool offer own analysis? What is the

extent of the analysis (ESG vs. Impact)?

Does the tool offer a rating systematic? How is it

produced? What are potential caveats?

Rating

Does the tool offer a regular impact reporting

possibility? How extensive is the offering?

Reporting

As shown by the final score, we consider that BIA, iPAR and IMPAAKT could be the best suited impact assessment tools for the needs of SwiSOX. However, both providers have their individual strengths and weaknesses:

▪ The BIA is without doubt one of the most well-known assessment standards in the industry. It uses a comprehensive self-assessment, which is verified with confidential information from the enterprises. Their survey is adapted to the size of an enterprise and the scoring system is broad. However, the rep-resentation and disclosure of results as well as the impact reporting are relatively weak. Assessment possibilities are spread over various tools and lack a certain consistency and an intuitive layout.

▪ On the other hand, iPAR is very good at aggregating and presenting a comprehensive dataset. The monitoring and reporting tools are very intuitive and allow for several layout forms. iPAR uses mostly publicly available information, but complements it with in-house research. However, the exact distri-bution of the two research approaches are not very clear. Furthermore, iPAR mostly focusses on the assessment of impact investment funds. It needs to be clarified with the owner of the tool, if and how the expertise and framework can be extended to analysing (medium-sized) enterprises.

▪ Last but not least, IMPAAKT enriches the world of impact measurement with an innovative approach. By empowering ordinary people in the impact assessment and the assessment of impact notes, it cer-tainly creates a new pathway. However, it should be clarified in further discussions with the founders of the tool how exactly they prevent fraud and if there plans to introduce at least some methodology blocks to make the assessments more comparable.

Therefore, if SwiSOX decides to partner with an existing impact assessment provider, we recom-mend to talk to BIA, iPAR and IMPAAKT separately and further assess a potential collaboration as well as the scope. 4.7.5. Caveats regarding the development of a new impact assessment tool

The terms of service of this feasibility study also suggested to look at the option of developing an own impact assessment tool. After having examined existing solutions and several conversations with im-pact investors and practitioners, we have concluded that it does not necessarily make sense to de-velop an own internal assessment tool. Our reservations are mainly based on the following points:

▪ According to the latest annual impact investor survey of the GIIN275, most impact investors combine a variety of different measurement tools and establish their own measurement framework that fits their needs. This is line with the results from the interviews iGravity held with over 20 impact investors, described in section 1.2.5. of this study. The landscaping of existing solutions, that was observed in section 4.7.3, showed that the existence of many different impact assessment tools may be one crucial element of confusion in the market and hampering its growth. If SwiSOX would develop an additional impact assessment tool it would certainly increase and not reduce the complexity for investors.

▪ Developing a new impact assessment tool, as well as testing, publishing, and promoting the tool in the market including the acquisition of a sufficient number of enterprise data requires a high amount of resources and is therefore is associated with large costs. On the other side it is true that producing a new impact assessment tool could generate additional revenues by selling the results to the market. However, as seen in the section above, there are already many players in the field offering impact as-sessment metrics and tools, some of which have already an extensive user base. To conclude, we think that the potential savings which could be made as no external party need to be paid for impact as-sessment, would not be offset by the expenditures required to establish an own impact assessment framework. In addition, the establishment of an own impact framework is associated with a high risk regarding the market’s acceptance.

▪ To provide credible cross-sectional impact analysis, a lot of data are required, certainly more than just the datasets produced with the analysis of listed enterprises at SwiSOX. In practice, this means addi-tional expenditures or resources to collect data from external providers. The impact assessment can also only work with data generated from the SwiSOX enterprises, however information value, especially in the beginning of SwiSOX’s operations, would be doubtful.

▪ Separating the impact assessment and the listing at the stock exchange would follow a good govern-ance best practice of separating the evaluation decision and the actual listing. If this would not happen,

275 GIIN (2018): Annual Impact Investor Survey 2018

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there are considerable risks of potentially influencing the results of the impact evaluation. For example, conducting in-house impact assessments in times where the stock exchange would need more listings could be mis-used to lower the standards and to get additional listings and revenue on the stock ex-change.

Nevertheless, if after the evaluation of potential impact assessment partners, SwiSOXdecides to de-velop an own impact assessment tool, we would strongly recommend to use the IRIS metrics as main database. The Impact Reporting and Investing Standards (IRIS) metrics, managed by the GIIN, is a comprehensive catalog of performance indicators that provides organizations with a standardized vo-cabulary in form of definitions and metrics to measure their environmental and social performance. Furthermore, it aims to establish benchmarks across the industry, to build a transparent and credible sector, and to enable comparison amid different impact investments. The primary objective is to cre-ate an easy-to-use measurement approach that is compatible with already existing standards from related sectors such as the microfinance industry. Therefore, the expert groups in charge of the de-velopment of the IRIS incorporates the progress of more than 40 sector-specific standards and report-ing schemes including the Global Reporting Initiative (GRI) and the International Financial Reporting Standards (IFRS). In addition to the provision of impact metrics and standardized definitions, the IRIS initiative has started to aggregate impact data on a company-level across the impact investing industry through strategic collaborations with organizations such as the Microfinance Information Exchange (MIX), the Aspen Network of Development Entrepreneurs (ANDE), and B Analytics. 276 Currently, the tool covers over 550 indicators277 across every relevant sector and allows for cross-sectional and cross-beneficiaries analyses. From our point of view, IRIS metrics are the most widely used and recognized impact measurement metrics in the financial industry. Furthermore, we would also recommend to await the results and next steps of the Impact Manage-ment Project (IMP), which is a network of leading organizations working together to mainstream im-pact measurement and management. Prominent industry organizations and initiatives such as the GIIN or PRI as well as global asset managers and think-tanks are part of the network. Its current main target is to centralize the norms regarding impact measurement. 278 The long-term goal is to create “an impact management approach that can ultimately become ‘generally accepted’ globally.”279 4.7.6. Investment case

This section aimed at exploring the vast universe of impact measurement and provide a decision basis on whether an impact measurement tool should be developed internally or work with an existing provider. As we have laid out in the section above, there are strong caveats regarding the ambition to build a new impact assessment tool, mainly the high costs associated with the set-up and the fact, that there exist already many providers. We therefore recommend to use the evaluation of the exist-ing providers and have a more in-depth analysis, to ensure that the provider really satisfies the frame-work proposed in section 4.7.2.

5. Discussion & recommendations This fifth and last section of this study considers the most relevant findings made so far, compares them and articulates two final recommendations regarding the preferred set-up of SwiSOX (partner-ship with existing stock exchange or partnership with existing platform) as well as regarding the impact assessment tool.

276 GIIN (2018): History 277 IRIS (2018): Metrics (registration needed) 278 IMP (2018): About 279 World Benchmarking Alliance (2018): The start of the Impact Management Project network

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5.1. Option A vs. Option B In section 4, two different implementation options were presented and discussed in detail: Option A would be a partnership with an existing, fully-fledged stock exchange, allowing for public listing and trading of different kinds of securities. Option B would be partnership with an existing platform, which would allow bilateral transactions between investors and investees. The section also examined, why for both options it is in our view not a good idea to develop something from scratch (meaning building up a completely new stock exchange or platform). To come up with a final recommendation regarding which option is best suited to become the central platform for both impact investors as well as social enterprises to connect and exchange, both options were neutrally assessed on a SWOT Analysis, summarizing strengths, weaknesses, opportunities and threats. The graph below shows our conclusions:

Figure 55: Comparison of SWOT analysis for both implementation scenarios. Own illustration. The analysis contains no new information as it was built on information derived from the previous sections. As already mentioned, option A has in our view the big advantage of offering a much broader scope including primary and secondary market activities that will be valued by investors and investees. Of course, this comes at a certain price as a stock exchange is highly regulated and requires significant resources. Whereas option B has the clear advantage of being more agile when it comes to adapt to new technologies or a different business model, as the underlying platform would be very lean. How-ever, there is limited value added of creating one additional impact transaction platform only match-ing investors with investees. Furthermore, as the financial forecast for option B showed, it would be quite challenging for such a platform to become financially viable. Taking this into account we conducted one last quantitative assessment for options A and B before concluding with a final recommendation. Both options were rated on a scale from ++ to -- to show a certain magnitude for a number of criteria. The selected criteria help to assess both options in a ho-listic way and to ensure a fair comparison even though the business models of the two options vary considerably. The selected criteria are:

▪ Additionality: How strong does the option add value to the existing world of impact investing and social enterprises?

▪ Relevance: What are the odds, that the option could become a relevant player in the world of impact investing and social enterprises?

▪ Scalability: How scalable is the business model under this option? ▪ Financial sustainability: How likely is it that the option will be financial sustainable overtime? ▪ Outreach: What is the potential outreach in terms of geographies and customer segment under this

option? ▪ Future viability: How future-ready is the option regarding its technology and how quickly can it adapt

to a changing framework?

Strengths Weaknesses

Opportunities Threats

Option A

§ Branding through partnership model

§ Plug-in under existing stock exchange

§ Basically no marginal costs for stock exchange to open a new /separate board

§ Limited choices of partners

§ No traction/not enough trades nor volume

§ High demand for secondary market for impact investments

§ High regulatory capital if building from scratch

§ High fix costs if building from scratch

§ Stricter listing requirements

Strengths Weaknesses

Opportunities Threats

Option B

§ Simple matching platform§ Lean structure leads to

lower fix costs

§ Broad universe of existing impact investment matching platforms

§ No added value through missing liquidity / secondary market

§ Technological advancements

§ Broader choice of potential partners

§ No secondary market§ No direct settlement on

platform§ No public investors§ Less sources of revenue

compared to option A

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The table below summarizes our final assessment regarding the implementation options A and B:

Table 28: Final assessment of the implementation options. Own illustration. As shown in the table above, option A rates better than option B overall and on each of the criteria, with one exception (the future viability). As we have already pointed out in the previous sections, only by choosing Option A SwiSOX has the potential to become a relevant and disruptive player in the world of social enterprises and impact investments. Partnering with an existing stock exchange would allow SwiSOX to offer primary and secondary market activities, services that at least in theory are highly demanded by investors and investees. On the other side, option B would just be another impact transaction platform, with limited value added and a high of not becoming financially sustain-able. Therefore, we conclude by recommending option A.

5.2. Impact Assessment tool: buy vs make internally vs make exter-nally

As findings from section 4 show, measuring the concrete impact along the impact value chain (see figure 53) is quite difficult. However, there are a number of existing initiatives and tools with attractive features for SwiSOX, some of which were portrayed and evaluated in the previous section. As already described in detail in section 4, we strongly discourage from developing a new impact measurement methodology or tool. The breadth of existing options is already confusing for impact investors (see section 1) and there is no need for SwiSOX to develop a new methodology, also given the fact that’s not where the organization’s core expertise lies. With regards to impact assessment we make three specific recommendations: First of all, there are a number of key criteria that the selected impact assessment tool should contain. It should offer comprehensive analytics with regards to the impact of the underlying company, com-bined with a rating function and the possibility to create and publish regular impact reports. Further-more, the tool should be cost efficient, transparent and it should allow for cross-sectional comparisons regarding the impact of social enterprises and impact investment funds. This requires access to a broad impact database. Second, we believe that a more stringent evaluation of existing impact assessment tools providers is necessary in the next stage. The evaluation undertaken in this study did not include yet interactions with the tool providers and was mainly based on desktop research. Furthermore, the future state of impact measurement might already look different in 6 or 12 months, reflecting the rapid evolution of the area and technological advancements which may also benefit the way impact data are collected, measured and analyzed.

Criteria Option A (Stock Exchange) Option B (Platform)

Additionality

Relevance

Scalability

Financial sustainability

Outreach

Future viability

Overall score

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Third, we would like to emphasize again that impact measurement plays a crucial role in the success of SwiSOX and the selection should follow a very rigorous process in order to avoid the mistakes past exchanges have made. The failed attempts of establishing a social stock exchange in London and Sin-gapore had in common, amongst other things, that they lacked a proper impact assessment of the listed enterprises. If SwiSOX wants to prove its additionality and become the one-stop-platform for impact investments a strong and credible impact assessment methodology needs to be established. This would allow SwiSOX to really become a disruptive player in the world of impact investments.

5.3. Concluding remarks and recommendations The goal of this study was to conduct an in-depth assessment of the market of social enterprises as well as impact investors, analyze existing offerings, look at gaps and opportunities as well as develop two implementation scenarios to connect impact investors and social enterprises in the global finan-cial world. The study is mostly based on desk research, quantitative survey with both investors and enterprises as well as several conversations with industry experts. Our findings suggest that there is a robust demand from both impact investors and social enterprises for a centralized platform allowing parties to connect, exchange and settle. However, the project remains challenging for a variety of reasons mentioned in the report and can only become successful if and when a number of pre-condi-tions are met. As such, we recommend entering into a second pilot phase which over the next 12-18 months shall design and make effective preparations for the launch of a social stock exchange. The impact investment market is growing steadily every year, signaling very strong interest from pri-vate and institutional investors and does not reflect a short-term trend or hype. On the other side, more and more private initiatives are being set-up and developed to solve social and environmental, issues. As these enterprises grow and become profitable they need more capital to sustain their op-erations and enter new markets. Bearing in mind failed attempts of social stock exchanges elsewhere and the key success criteria of any exchange platform (participants, volumes, trades), we identified ten points highly critical for a success of SwiSOX. Summarizing these recommendations, we believe that it is absolutely crucial to build a coalition of leading financial institutions including public authorities in the Geneva area and also elsewhere committed to the project and to transact on this platform. This group should be ready to capitalize SwiSOX and guarantee a certain amount of liquidity once the exchange is up and running. Furthermore, as we have learned from the other initiatives, a strong pipeline of enterprises and secu-rities for listing need to be in place before going live. An exchange without any activity in the very first day is doomed to fail and only by attracting enough issuers and investors SwiSOX can become successful. Last but not least, more work needs to be done on the implementation set-up incl. tech-nology and financial projections once a partner stock exchange has been selected. One last aspect which was not part of this study but needs to be carefully addressed in the next phase is the regulatory framework for establishing a social stock exchange. In the light of recent political developments (such as the stock exchange equivalence dispute with the European Union280) and other legal challenges, clarifying cross-border access for investors and potential hurdles for an international listing should be a top priority for the next phase.

280 NZZ (2018): Der Bundesrat schützt die Schweizer Börse vor Brüssel

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V. List of literature references European Commission, Directorate-General for Employment, Social Affairs and Inclusion (2016): A recipe book

for social finance – A practical guide on designing and implementing initiatives to develop social fi-nance instruments and markets. Luxembourg: Publications Office of the European Union.

Barraket, J. (2015). Challenges and Opportunities for Australian Social Enterprises. URL: https://www.swin-burne.edu.au/media/swinburneeduau/research/research-centres/csis/documents/challenges-and-opportunities-for-Australian-social-enterprises-brief.pdf [10.07.18]

Beck, T. & Ross, L. (2002). Stock markets, banks, and growth: Panel evidence. Journal of Banking & Finance, 28(3), p. 423-442.

Caporale, M. C. et al. (2004). Stock Market Development And Economic Growth: The Causal Linkage. Journal of Economic Development, 29(1), p. 33-50.

Chesini, G. (2001). Changes in the Ownership structure of Stock Exchanges: from demutualisation to self-list-ing.

Demiguc-Kunt, A & Vojislav, M, (1996). Financial Constraints, Use of Funds and Firm Growth: An International Comparison. Policy Research Working Paper, Washington D.C. (US): The World Bank.

Fleckner, A. M. (2006). Stock Exchanges at the Crossroads. Fordham Law Review, 74(5), p. 2541-2620. Gonin, M. & Gachet, N. (2014). Social Enterprise Models in Switzerland. An Overview of Existing Streams, Prac-

tices, and Institutional Structures. Working Paper. Hazam, D., Karimova, D. & Olsson, M. G. (2017). Crowdfunding As A Source For Social Enterprise Financing.

Jonkoping: Jonkoping University, International Business School. Hofer, E. (2017). Analysis of the Current State of Impact Measurement Practices in Impact Investing. Master

Thesis at University of St.Gallen School of Management, Economics, Law and Social Sciences. Mair, J. & Ignasi M. (2006). Social Entrepreneurship Research: A Source of Explanation, Prediction, and Delight.

Journal of World Business, 41(1), p. 36-44. McKinsey & Company (2016). Scaling the impact of the social enterprise sector. URL: https://www.social-en-

terprise.nl/files/9314/7809/5072/Scaling-the-impact-of-the-social-enterprise-sector.pdf [05.07.18]. Montgomery, D. B. & Ramus, C. A. (2003). Corporate Social Responsibility Reputation Effects on MBA Job

Choice. Stanford GSB Working Paper, 1805. Osterwalder, A. & Pigneur, Y. (2010). Business Model Generation. John Wiley & Sons, Inc., Hoboken, New Jer-

sey. Rose, P. & Solomon, S. D. (2016). Where Have All the IPOs Gone? The Hard Life of the Small IPO. Harvard Busi-

ness Law Review, 83(6). RippleWorks (2016). The Human Capital Crisis: How Social Enterprises Can Find The Talent to Scale. URL:

https://drive.google.com/file/d/0B9OdMupwlKRnUWVFR1pZWVd6ZkE/view [10.07.18] Sharma, V. (2015). Identifying Constraints in Social Entrepreneurship Ecosystem of India: A Developing Country

Context. Nottingham (UK): University of Nottingham. Smith, W. & Darko, E. (2014). Social enterprise: constraints and opportunities – evidence from Vietnam and

Kenya. URL: https://www.odi.org/sites/odi.org.uk/files/odi-assets/publications-opinion-files/8877.pdf [10.07.18]

So, I., & Staskevicius, A. (2015). Measuring the “impact” in impact investing. Harvard Business School. Verboven, H. & Vanherck, L. (2016). Sustainability management of SMEs and the UN Sustainable Development

Goals. uwf UmweltWirtschaftsForum, 24(2-3), p. 165–178. Young, D. R. & Lecy, J. D. (2014). Defining the Universe of Social Enterprise: Competing Metaphors. Voluntas:

International Journal of Voluntary and Nonprofit Organizations, 25(5), p. 1307-1332. Zahra, S. A., et al. (2009). A Typology of Social Entrepreneurs: Motives, Search Processes and Ethical Chal-

lenges. Journal of Business Venturing 24(5), p. 519-532.

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VI. Annex

Figure 56: Types of organizations and their aims. Source: McKinsey & Company (2016).

Figure 57: Social enterprises within the sustainability spectrum. Source: ATKearney (2015).

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Figure 58: Main impact themes of interviewed impact investors. Own illustration.

Figure 59: Expected development of share of impact investments over the next 3 years according to interviewed impact in-vestors. Own illustration.

Figure 60: Sources for impact investment possibilities / deals of interviewed impact investors. Own illustration.

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Figure 61: Classification of difficulty to source quality impact deals according to interviewed impact investors. Own illustra-tion.

Figure 62: Experience with existing social stock exchanges of interviewed impact investors. Own illustration.

Figure 63: Possible added value of a social stock exchange according to interviewed impact investors. Own illustration.

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Figure 64: Approach of assessing impact investments of interviewed impact investors. Own illustration.

Figure 65: Usage of SDGs in impact assessment of interviewed impact investors. Own illiustration.

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Figure 66: Desired usage of the rating at a social stock exchange according to interviewed impact investors. Own illustra-tion.

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Figure 67: Detailed SwiSOX income statement for option A based on own assumptions. Own illustration.

Q1 Q2 Q3 Q4 Y2 Y3 Y4 Y5

Variable Assumptions

New listings (IPO) 3 3 2 2 10 12 12 12

Total listings (enterprises) 0 0 0 10 20 32 44 56

New listings bonds 2 2 1 1 5 5 7 10

Total listed bonds 0 0 0 5 10 15 22 32

New listing funds 2 2 2 2 8 10 12 15

Total listed funds 0 0 0 8 16 26 38 53

Total listings (products) 0 0 0 13 26 41 60 85

New market participants 5 1 1 1 2 2 2 2

Total active market participants 0 0 0 8 10 12 14 16

Average nr of trades per quarter / year 30 60 90 120 600 1'000 2'000 3'000

Average nr of trades per day 0.48 0.96 1.44 1.92 2.40 4.00 8.00 12.00

Quarterly / yearly trading turnover 7'500'000 15'000'000 22'500'000 30'000'000 150'000'000 250'000'000 500'000'000 750'000'000

Impact agents accredited by SwiSOX 5 5 5 5 5 5 5 5

TOTAL REVENUES 586'000 553'500 413'500 460'000 2'245'000 2'878'000 3'481'000 4'201'000

Listed enterprises 382'500 382'500 255'000 255'000 1'375'000 1'730'000 1'850'000 1'970'000

IPO fix fee 45'000 45'000 30'000 30'000 150'000 180'000 180'000 180'000

IPO variable fee 337'500 337'500 225'000 225'000 1'125'000 1'350'000 1'350'000 1'350'000

On-going listing fee (p.a.) 0 0 0 0 100'000 200'000 320'000 440'000

Listed bonds 40'000 40'000 20'000 20'000 118'000 115'000 155'000 221'000

Listing fee bonds (one-off) 10'000 10'000 5'000 5'000 25'000 25'000 35'000 50'000

Listing variable fee bonds 30'000 30'000 15'000 15'000 75'000 75'000 105'000 150'000

Listing fee bonds (p.a.) 0 0 0 0 18'000 15'000 15'000 21'000

Listed funds 106'000 106'000 106'000 145'000 502'000 653'000 816'000 1'050'000

Listing fee funds (one-off) 6'000 6'000 6'000 6'000 24'000 30'000 36'000 45'000

Listing variable fee funds 100'000 100'000 100'000 100'000 400'000 500'000 600'000 750'000

Listing fee funds (p.a.) 0 0 0 39'000 78'000 123'000 180'000 255'000

Trading participants 57'500 25'000 32'500 40'000 250'000 370'000 640'000 910'000

Basic fee (one-off) 50'000 10'000 10'000 10'000 20'000 20'000 20'000 20'000

Access fee (p.a.) 0 0 0 0 80'000 100'000 120'000 140'000

Trading fee 7'500 15'000 22'500 30'000 150'000 250'000 500'000 750'000

Other 0 0 0 0 0 10'000 20'000 50'000

Data services 0 0 0 0 0 10'000 20'000 50'000

TOTAL COSTS 1'066'500 766'500 729'000 729'000 2'941'000 3'116'000 3'216'000 3'316'000

Total fix costs 505'000 205'000 205'000 205'000 1'070'000 1'170'000 1'270'000 1'370'000

Rental costs 30'000 30'000 30'000 30'000 120'000 120'000 120'000 120'000

Technology 200'000 0 0 0 50'000 50'000 50'000 50'000

Partner service fee 125'000 125'000 125'000 125'000 500'000 500'000 500'000 500'000

Set-up costs 100'000 0 0 0 0 0 0 0

Marketing 25'000 25'000 25'000 25'000 200'000 250'000 300'000 350'000

Other expenses 25'000 25'000 25'000 25'000 200'000 250'000 300'000 350'000

Total variable costs 561'500 561'500 524'000 524'000 1'871'000 1'946'000 1'946'000 1'946'000

Staff 264'000 264'000 264'000 264'000 1'056'000 1'056'000 1'056'000 1'056'000

Variable staff costs 25'000 25'000 25'000 25'000 100'000 100'000 100'000 100'000

Fix compensation for impact agents 100'000 100'000 100'000 100'000 100'000 100'000 100'000 100'000

Variable compensation for impact agents 67'500 67'500 45'000 45'000 225'000 270'000 270'000 270'000

Board members 60'000 60'000 60'000 60'000 240'000 240'000 240'000 240'000

Impact rating agency fee 45'000 45'000 30'000 30'000 150'000 180'000 180'000 180'000

PROFIT / LOSS PER QUARTER / YEAR -480'500 -213'000 -315'500 -269'000 -696'000 -238'000 265'000 885'000

PROFIT / LOSS ACCUMULATED -480'500 -693'500 -1'009'000 -1'278'000 -1'974'000 -2'212'000 -1'947'000 -1'062'000

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Figure 68: Detailed SwiSOX income statement for option B based on own assumptions. Own illustration.

Q1 Q2 Q3 Q4 Y2 Y3 Y4 Y5

Variable Assumptions

New enterprises capital raising 3 3 2 2 10 12 12 12

Total enterprises capital raising 0 0 0 10 20 32 44 56

New listings bonds 2 2 1 1 5 5 7 10

Total listed bonds 0 0 0 5 10 15 22 32

TOTAL REVENUES 310'000 310'000 200'000 200'000 1'000'000 1'190'000 1'240'000 1'330'000

Enterprises capital raising 270'000 270'000 180'000 180'000 900'000 1'080'000 1'080'000 1'080'000

Capital raising fix fee 30'000 30'000 20'000 20'000 100'000 120'000 120'000 120'000

Capital raising variable fee 240'000 240'000 160'000 160'000 800'000 960'000 960'000 960'000

Issuing bonds 40'000 40'000 20'000 20'000 100'000 100'000 140'000 200'000

Issuing fee bonds (one-off) 10'000 10'000 5'000 5'000 25'000 25'000 35'000 50'000

Issuing variable fee bonds 30'000 30'000 15'000 15'000 75'000 75'000 105'000 150'000

Other 0 0 0 0 0 10'000 20'000 50'000

Data services 0 0 0 0 0 10'000 20'000 50'000

TOTAL COSTS 721'000 421'000 418'500 406'000 1'804'000 1'934'000 2'034'000 2'034'000

Total fix costs 417'500 117'500 130'000 117'500 620'000 720'000 820'000 820'000

Rental costs 30'000 30'000 30'000 30'000 120'000 120'000 120'000 120'000

Technology 200'000 0 0 0 50'000 50'000 50'000 50'000

Partner service fee 62'500 62'500 62'500 62'500 250'000 250'000 250'000 250'000

Set-up costs 100'000 0 0 0 0 0 0 0

Marketing 12'500 12'500 25'000 12'500 100'000 150'000 200'000 200'000

Other expenses 12'500 12'500 12'500 12'500 100'000 150'000 200'000 200'000

Total variable costs 303'500 303'500 288'500 288'500 1'184'000 1'214'000 1'214'000 1'214'000

Staff 186'000 186'000 186'000 186'000 744'000 744'000 744'000 744'000

Variable staff costs 12'500 12'500 12'500 12'500 50'000 50'000 50'000 50'000

Board members 60'000 60'000 60'000 60'000 240'000 240'000 240'000 240'000

Impact rating agency fee 45'000 45'000 30'000 30'000 150'000 180'000 180'000 180'000

Accumulated profit / loss - - - - -946'500 -1'750'500 -2'494'500 -3'288'500

PROFIT / LOSS PER YEAR -411'000 -111'000 -218'500 -206'000 -804'000 -744'000 -794'000 -704'000

PROFIT / LOSS ACCUMULATED -411'000 -111'000 -218'500 -206'000 -1'750'500 -2'494'500 -3'288'500 -3'992'500