Impact investing a world of opportunities

Luo Weiteng, Zhou Mo and Chai Hua

Impact investing a world of opportunities

HONG KONG - As the coronavirus pandemic reinforces the need to address social and environmental challenges, the trend of impact investing has gained ground worldwide, offering potentially huge opportunities for those with the foresight to jump on the bandwagon.

Experts also told the China Daily Asia Leadership Roundtable in Hong Kong on Monday that although major developed economies are leading the charge into socially responsible and purpose-driven finance, the global investment community is betting big that emerging markets like China and the entire Asian continent have their fingers on the pulse of the big trend.

Themed “Impact Investing and ESG in Post-COVID Economic Recovery”, the webinar was co-organized by Hong Kong-based AvantFaire Investment Management.

Hester Marie DeCasper, regional head of operations of East Asia and Pacific, and Hong Kong-based head of office at International Finance Corporation, said she believes that “the unprecedented public-health crisis has really reinforced and accelerated trends in the market that were already there”.

Emerging potential

Impact investing is built on the notion that market-rate financial returns and positive social and environmental impacts can and should coexist. At its core, the practice is an emerging field of asset management in which environmental and social outcomes are valued as highly as financial returns.

The size of global impact investments increased by about 40 percent from 2019 to 2020, and was estimated at $715 billion in April last year, according to the Global Impact Investing Network.

Citing the projection from the IFC, DeCasper said that investors’ appetite for impact investing could total as much as $26 trillion, the equivalent of approximately 10 percent of the financial assets held by institutions and households worldwide.

On a global level, there has been a significant transition to embedding environmental, social and governance (ESG) criteria into everyday investment decisions. But in Asia, “the overall size of impact investing remains fairly modest, partially due to some unique challenges there,” DeCasper said.

To bridge the gap, DeCasper said, participants of the ecosystem have to take action on different levels. At a basic level, there is a pressing need for ongoing education, she said.

For sustainable investment-hungry markets like China and Asia, the potential is always there, she added.

Thomas Kwan, chief investment officer of Harvest Global Investments Ltd, said China’s decarbonization drive will bring ample investment opportunities, pushing ESG development to a higher level.

ESG funds have grown significantly in the country in the past few years, along with the global market, he said.

“Renewable energy, electrification, environmental protection, … all these aspects present opportunities,” he said. “But what’s more important is that we should look for companies whose business models could help address environmental and social issues because investors and regulations are now demanding it.”

Companies with high ESG scores not only mean they are doing well in such specific aspects, it is also an indication of high-quality management with a long-term view of their businesses, he said.

China has announced the goal to maximize its carbon emissions by 2030 before achieving carbon neutrality by 2060. Kwan believes the country’s push for green development will benefit market players in the entire industrial chain.

“If you look at the renewable energy space, not many investors have realized that China is already leading in this space. If you look at the global wind and solar energy installations, China is indeed way ahead of the rest of the world. That means many of the upstream players will benefit from global demand for their products,” he said.

On the downstream side, meanwhile, China’s sales of electric vehicles accounted for 44 percent of the world’s total, Kwan said. “From upstream all the way to downstream, there will be tremendous growth for Chinese companies in the years ahead,” he said.

However, Kwan added, multiple challenges still exist in ESG investment in China.

Difficulties in collecting and processing ESG data is one of the major challenges, as different countries have different disclosure requirements. The ESG disclosure ratio among Chinese listed companies has been relatively low, Kwan said. Only 26 percent of A-share companies issued corporate social responsibility reports in 2019.

Differences in methodology are another obstacle. Many investors rely on data from global providers, the methodology of which may not be applicable to the Chinese market, and methodology among domestic data providers also varies, he said.

In addition to the data challenge, which Kwan called “a hard issue”, he also pointed out the problem on the soft side — limited awareness of ESG and the lack of an ESG investment culture.

Fundamental change

Andrew Weir, the regional senior partner at KPMG Hong Kong and vice-chairman of KPMG China, advocated that all investors seriously consider the sustainable investment world or be left behind.

“Sustainable investment now is fundamental and mainstream as opposed to being a niche before,” he said, adding that 25 percent of global assets under management now are such investments.

He predicted the proportion will surge to 50 percent within three years and 100 percent within 10 years or certainly within a lifetime. “Our children will be asking us how we ever had a world where investment wasn’t seen from a sustainability lens,” he said.

He reiterated the fundamental change is that sustainability is moved from nice-to-have into core mainstream, from “If we want to do it” to “We all have to do it”.

Weir also found the trend has started to show economic benefits. He found companies’ commitment to ESG and sustainability has a strong positive influence on their share prices.

After seeing how impact investing is intertwined with their share scores or ratings, some of his clients, who expressed interest only two years ago, finally made up their minds to follow through. “It’s a real wake-up call,” he said.

As to challenges, the first he mentioned is measuring all-around societal values. He raised a series of questions for organizations: How do you measure the cumulative effect of the good things you’ve done for 50 years? How do you measure the platforms you helped to sponsor?

Even more important is: How do you guide companies to voluntarily disclose when they haven’t got things right, such as when their impact investment practices fail to meet their goals or some of their core businesses are having a negative social impact? He believes these are the ultimate test for governments.

Another challenge is forming a new definition of “profit”, which is more of a social well-being type of figure, according to the executive. He stressed the new definition should include a financial profit plus a social dividend to get the all-around contribution of an organization.

In summary, he believes the opportunities for impact investing are huge, and Hong Kong, in particular, is a center of excellence. To people who don’t think it’s been happening in Asia, he said that many large family groups have been doing this, but they possibly don’t describe it as sustainable investment and impact investment.