True democracy means the greatest good for the greatest number with equitable access to all. No one would claim that today’s global finance is democratic. In reality, markets are networks that tend to concentrate to an extent never seen before. Google has 4.3 billion users, or more than 90% of internet users, with a market value of $1.7 trillion. Facebook (now Meta) has 2.9 billion users and a market value of $590 billion. The top 30 banks accounted for 62% of the top 100 banks’ total assets of $110.3 trillion at the end of 2021.
The two major stock exchanges (NYSE and Nasdaq) account for 43% of the total market capitalization of the world’s top 30 stock exchanges ($121.4 trillion). In half of the listed companies in the world, the first three shareholders hold more than 50% of the capital. The impacts on people are clear. Credit Suisse reports that 2.9 billion people have less than $10,000 in family wealth while the richest 1.1% of the world’s population hold 45.8% of global household wealth.
The reality is that financial inclusion is an outcome that financial markets, as they are currently structured, can only dream of. Whether you are one of the nearly 2 billion people who are unbanked or one of the 131 million small businesses on the wrong side of the $5 trillion global MSME financing gap, you are likely to pay more for financial services or simply going without, affecting your ability to grow or seize new opportunities. And since SMEs drive job creation and emissions reductions in many economies, it affects growth, wealth, and our ability to reach net zero, at scale.
Even the World Federation of Exchanges recognizes that SME access to public procurement is key to future inclusiveness. There are only 59,400 companies listed on global stock exchanges, but more than 400 million SMEs worldwide (according to the World Bank) have a variety of financing needs that are currently not met by financial markets or big banks.
Could crowdfunding help?
Crowdfunding is not new. Kickstarter has funded more than 218,000 projects for startups totaling $6.5 billion from 21 million backers since 2009. GofundMe is one year younger, having raised $13 billion in charitable donations for investment at impact. They are largely open access – anyone can list a project and anyone can fund it. In theory, platforms could scale quickly if the market demand is there, but there are still barriers to scale.
But this is only one type of crowdfunding. Crowdfunding could also be used by companies seeking capital from investors in exchange for future profits or through peer-to-peer (P2P) lending programs, where lenders are willing to earn interest. higher by taking equity stakes in unsecured loans for borrowers.
In each of these cases, investors bear risks that are broadly similar to those of public fundraising – fraud, compliance, delivery and operations. Public stock exchanges manage these risks through a rigorous IPO (IPO) process with additional regulatory, cost and disclosure support. In other words, the stock exchange or regulator chooses who
is eligible for the list and under what conditions, then the applicant must be screened through a range of reputable intermediaries (such as sponsors, accountants and lawyers). With these boundaries in place to control access, along with the technology to increase efficiency, the process is highly profitable for all parties involved, even if it excludes all but the largest and best-connected businesses.
This exclusivity has consequences not only for companies seeking financing, but also for investors, especially as interest in investing in companies with good ESG (environmental, social and governance) credentials reaches unprecedented levels.
A November 2021 Gallup poll of several thousand American investors found that more than 48% of them are very or somewhat interested in investing in sustainable businesses, although only 10% do so. And 63% would invest in fund stocks that reflect their values, indicating the rise of goals-based investing.
Can this interest be satisfied by public procurement? As long as government markets are big and well-funded, it’s hard to believe the answer is yes. Green bonds may be an answer, but currently they are the only real options for large institutional buyers. It is even more difficult to understand whether its investment – via stocks or bonds – will lead to more pro-ESG behavior on the part of the company concerned.
With large stock markets and the asset management industry on the one hand, and smaller crowdfunding and P2P networks on the other, the choices for investors looking to make a visible impact seem slim. This has given rise to the field of impact investing, where networks have sprung up to share knowledge about projects and deals, due diligence tactics and ways to assess impact. They attempt to build trust and transparency through age-old methods of conversation, networking, and reputation. It works and is rewarding for everyone involved, but it’s still slow, localized, and time-consuming.
We believe that blockchain-backed digital platforms can significantly improve the choices available to retail and small institutional investors when it comes to investing in ESG. The idea is to allow projects and companies to self-report using blockchain-verified data, disclosures, and credentials, with open data so the public can actually “do the police”, as well as new types of performance auditors, such as verification of carbon credits and delivery performance, to ensure that the risks of scams and fraud are minimized. Payments and dividends could easily be routed through the many two-way payment exchanges.
An open platform that provides access to projects and companies for ESG economics, using standardized and verified credentials and disclosures, would provide market transparency for ESG causes. In essence, this broadens the base of access to a wider network of ESG projects to a wider network of investors, operating in the same way as existing stock exchanges, but with much lower and more of transparency.
The technology to democratize access to finance is already here. What’s missing is the political will to cut vested interests to truly democratize investing and funding the causes that really matter. Watch this space for more concrete ideas on how this can be done.
(The authors are, respectively, Distinguished Fellow, Asia Global Institute, University of Hong Kong and Executive Vice President, Knowledge and Applications, Fung Group. Opinions are personal.)