Calvin Jones makes the case for a Welsh stock-market as a furnace to promote co-cooperatives and mutuals
The transformation we need in Welsh life is not happening quickly enough. The economy stagnates. Businesses and households continue to be vulnerable to environmental change. Government wavers over what conversations can be had with voters about tough choices. We carry on riding the handcart.
Frustratingly, we know the solutions – or some of them at least:
- Decarbonising electricity, the economy and transport.
- Making poor communities more resilient and engaged, and rich ones less damaging.
- Re-localising production and consumption.
We also have some inkling of the interventions, approaches and vehicles that can make a real difference. But nothing happens, or if it does, with agonising slowness. Part of that is down to the complexity of our interlinked problems. But part is also down, more simply, to money. Or Kapital as us economists would have it. And specifically, a lack of it.
It is this uneven access to money that has seen government-sponsored regeneration and development programmes spend hundreds of millions to arguably limited effect. It has seen multinational energy companies almost completely monopolise renewable installation in the UK, at the same time as communities have done very little to increase their own energy resilience.
Talk to anyone from either community enterprise or the financial sector and it becomes clear that this lack of money arises yes, in part from a lack of coherence or interest from community, but also from a lack of engagement from finance. Banks are unwilling to lend to established ‘for profit’ businesses let alone in tiny tranches to unproven hicks from the back of beyond with novel legal structures, little collateral and, um, interesting, ideas on the notions of wealth, returns and development. It is perfectly rational on the part of the bank, and a perfect example of an enduring market failure that does society a disservice.
So how can we solve this problem? The banks, as Project Merlin and Funding for Lending have shown, are un-persuadable, even on ‘core’ lending. The government is strapped. What money is available, the surpluses of nice, middle class people, is invested either directly in low return savings and assets or indirectly, via pensions and other funds, in Tesco and BP. Neither does Wales much good.
Squaring the circle between what money there is, and the communities and people that need money for worthwhile purposes, is key. And here, a Welsh stock market can only help. The idea has been raised before, but never gained purchase due to a perceived lack of demand, or overlap with existing structures such as the AIM market in London or Finance Wales. But these earlier suggestions never included the key element: the exclusion of companies that are owned for shareholder profit.
By excluding organisations solely purposed at enriching shareholders, a Welsh stockmarket could be specifically aimed at linking quality projects with a social return with interested potential investors. The opportunity is significant:
- Community share offers in energy projects.
- New classes of municipal, social impact and housing bonds.
- Finance capital for entrepreneurs with socially relevant bright ideas.
The list goes on. There is also the potential for developing new ways of investing, new vehicles for spreading risk, and new business models and investor-relationships. It is an area where Wales could steal a real march on the rest of the world.
Of course, this would be complicated. It wouldn’t be just a scaled down London Stock Exchange. We would need the best brains in our own finance, academic, public and third sectors, plus help from interested global partners. We would need to work out how to fashion an exchange to generate capital driven by social and ecological return rather than privatised profit.
And whilst the actual trading could no doubt be virtual, this market would benefit from a home in an actual, iconic place. Perhaps it could be the Coal Exchange, where the first ever £1m cheque was written, or at the heart of a truly distinct financial district in Cardiff’s city centre. It would be a place where investors, individual and organisational, could meet with the best creative and enterprising brains in Wales under the benign, enabling care of a truly locally embedded group of engaged exchange facilitators. This place could quickly become a bubbling stew of money, ideas and new high value relationships.
It could be a cauldron of social and economic rebirth for Wales – Y Pair.
“By excluding organisations solely purposed at enriching shareholders” means excluding all significant non government investors. Where would the money come from?
A company like Goldman’s would have the expertise to extract a significant amount of capital from such a market. If they are excluded, then capital external to Wales would also be excluded – some EU competition rules would also come into play – and the exchange would struggle to take off. An investor will only invest if they stand to enrich themselves.
I would be interested in how “benign, enabling care of a truly locally embedded group of engaged exchange facilitators” would be implemented as it is worlds away from any stock exchange I have come across. Stock exchanges are by their natural capitalist structures.
You don’t get much space in these articles to flesh out the ideas and close off the gaps. Has this proposal been fleshed out properly anywhere else I could read ?
There was some mooting about a Welsh Social Stock Exchange a couple of years ago, but this got held back due to delays in developing the Social Stock Exchange in London. The latter is now getting going (see http://www.socialstockexchange.com) and is designed to link investors seeking a return with companies that are forces of social or environmental change.
The challenge here lies in what appears to be an implied discomfort with the idea of private enterprise as well as a question about what an acceptable return could be.
For debt finance, this is relatively straightforward. A sensible risk-adjusted coupon is offered (fixed rate or at a premium either to LIBOR or RPI) which would encourage investors to buy a product with a five, ten or even thirty year tenure. A secondary market would then trade the bonds.
For equity finance this is more problematic. How do you limit a share from performing strongly if a company does particularly well? You can certainly prevent a reductionist approach to shareholder value (if you remember Hyder in 1997-2000, this approach can backfire quite dramatically) by for example employing golden shares to prevent aggressive take-overs and covenants and voting restrictions (Class A and B shares for example) to prevent ‘activist’ investors from pursuing a short term agenda. Here there is a tension between shareholder’s rights and their responsibilities.
Another element could be that inventive packages for directors would have to meet criteria set by the Exchange. In other words, they would be incentivised to create real long-term value growth and could have to satisfy certain social and environmental performance criteria. This is a Triple Bottom Line approach, which has some credibility amongst institutional investors.
As an individual who has been involved with environmental investing at the institutional level for 25 years, there would be a lot of goodwill towards a move such as this. For this well principled idea to work, it needs to have some practical elements to make it attractive for people and sympathetic institutions to invest in.
Rather agree with Clive King. Why would I buy shares in an enterprise which is guaranteed to give me no return? Mutuals and co-ops are owned by their customers or workers who therefore can extract any surplus the business produces. A stock market implies another group of interested parties – shareholders. If they don’t get their share of the surplus they won’t play. You could have a secondary market in bonds or loans though I don’t know if that would add much to the flow of capital to co-operative enterprises. Anyway Calvin Jones is calling for big changes and this would not be one. Any such secondary market would have the same scale as the co-op sector itself – a tiddler.
Clive King
I’m assuming that “excluding organisations solely purposed at enriching shareholders” refers to those companies listed on the exchange, not those investing through the exchange. In essence, therefore, just the creation of a new product type and market where those products are traded?
R. Tredwyn
I’m not sure that institutional investors always invest for purely cash returns (or dividends) but are often looking to grow asset value or protect asset value or even maintain asset value at very low risk in a mixed portfolio. Extremely low risk, low reward assets can be as attractive as the opposite depending on your portfolio objectives.
I need someone more informed of these things than myself to explain the investor attraction in these particular asset types but I assume the crux is in determining and maintaining value over the long term at very low risk.
I’m not sure that Calvin Jones is suggesting this is a new FTSE or anything like it, rather a small niche market that is not currently served that could be devised and hosted in Wales if an appropriate development team were to look at the idea. It could presumably start with Welsh assets and then expand. This could of course be hosted anywhere in the world I suppose, and may even be developed in London over time. I think Prof. Jones is simply saying that it’s a sort of sectoral opportunity that a Welsh development team could lead on if the will were there.
I’d really appreciate a follow-up from Prof. Jones or anyone to just explain this further and answer some of the questions posed above.
This is an idea worth exploring, in spite of the valid points raised by commentators above. My other concern is the question of long-term development. Stock Exchanges tend to look for a quick return and when a business starts to have difficulties, shareholders can easily jump ship just when a company is most in need of support and assistance.
I have recently been reading an article by Sigurt Vitols, admittedlly some 13 years old now, where he discusses the role of German banks in industrial development. He states that:
“German universal banks’ dominant equity stakes in and representation on the boards of industrial companies are a key institutional feature supporting the ‘German model’ of long-term investments in skills, new technology, and R & D for high quality, internationally competitive manufacturing.”
It’s unlikely that a bank of this nature will emerge indigenously in Wales but might it be possible for the Government to invite the Germans to open such a bank in Cardiff? And to what extent could an alternative stock exchange provide such finance and expertise for the co-operative and mutual sectors?
Whilst the market remains nascent and there does exist a ‘lending-gap’, the provision of traditional debt finance for charities and social enterprises is catered for. For instance Welsh Government has provided funding aimed at the sector, which is separately managed. The pioneers of this type of finance though are Unity Trust and Charity Bank, both of which are sector specialist regulated banking entities, which largely draw their deposits from the retail capital markets. The trade-off depositors willingly accept takes the form of lower financial yields in return for a social dividend or community impact.
An additional fiscal incentive to deposit takes the form of Community Investment Tax Relief. The scheme encourages investment in disadvantaged communities by giving tax relief to investors who back businesses and other enterprises in less advantaged areas by investing in accredited Community Development Finance Institutions (CDFIs). The tax relief is available to individuals and companies and is worth up to 25% of the value of the investment in the CDFI. The relief is spread over five years.
Finally the Treasury is currently consulting over proposals to extend the personal tax reliefs operating under the Enterprise Investment Scheme and Venture Capital Trusts, which largely apply to privately held early stage businesses, to investment in social enterprises.
Dear All
Thank you for your constructive comments.
As an economist I have, of course, zero practical experience or understanding in the realities of exchange systems’ operations ‘on the ground’ (money & the finance sector is effectively economically neutral dontchaknow. You must read more Friedman) but think I can see a market failure here that could do with addressing.
I will take some of the excellent and detailed comments on board and go in search of suitable people who can help me understand whether this is actually possible & desirable…
If you do, could you share your findings on this website? I’d be interested to know how things develop.
There is another related agenda which is the development of Cardiff as a financial services centre. I seem to remember a report by Cardiff University produced many moons ago on this theme. Apart from the establishment of Admiral in the city centre, have there been any further thoughts or developments on this?