Environmental impact, financial returns 'not mutually exclusive'

Zeng Xinlan

Environmental impact, financial returns 'not mutually exclusive'

With investment markets gradually emerging to provide capital to address the most pressing environmental challenges, one seasoned investor says that the social and environmental impact, and financial returns should not be mutually exclusive.

“We weigh both social and environmental impact and financial returns as equally important. They are not and should not be mutually exclusive,” said Catherine Chen, founder and CEO of AvantFaire Investment Management Ltd, a Hong Kong-based company that provides securities advisory and asset management services with a focus on impact investments.

Financial returns — the monetary outcome of impact investments — will help sustain capital in the market to fund more impact projects dedicated to solving problems in areas such as sustainable agriculture and renewable energy, Chen added.

Impact investments are those made with the intention of generating a positive, measurable social and environmental impact alongside financial returns. The term “impact investment” was coined in 2007, and the current emerging market size is estimated at US$715 billion, according to a survey published in 2020 by the Global Impact Investing Network, a nonprofit organization dedicated to the development of impact investment.

The financial returns range from below market to market-competitive and market-beating levels, depending on investors’ strategic goals and involving various asset classes, such as green bonds and fixed income products often with stable and lower returns, as well as private equity and venture capital with higher ones, Chen noted. Around 70 percent of investors surveyed by the GIIN pursue competitive, market-rate returns.

“We are not only taking financial risk into account, but also climate and social risks,” Chen said, adding that impact investment would have an extra benefit of providing a more stable performance and a more long-term return, as the underlying assets tend to be less cyclical with the economy, and the outcome is adjusted by environmental, social and corporate governance risks.

Amid the Hong Kong government’s commitment to achieve carbon neutrality by 2050, Chen underlined the sense of urgency and level of difficulties which require more synergy across public and private sectors. “This is not an easy task for Hong Kong as it requires a substantial change in the mix of the renewable energy in energy supply, in addition to other areas including waste management, green building, green transportation, cleaner production and green finance,” Chen said.

“The urgency is ‘code red’ and we believe that the 1.5 degree estimate is conservative,” Chen warned, referring to warnings that global temperatures are expected to increase by 1.5 degrees C or more in the next two decades from pre-industrial levels, unless “immediate, rapid and large-scale” reductions in greenhouse gases are achieved, according to the latest Intergovernmental Panel on Climate Change report published in August.

However, “it is never too late to take action,” Chen added, calling on the private sector to first understand and properly measure its carbon footprint to tackle climate change. She suggested transportation and logistics companies optimize transportation arrangements, and energy companies use better insulation materials and indoor temperature controls to reduce unnecessary energy losses.