Impact investing in Asia – latest trends and challenges
Investments made with the intention to generate positive, measurable social and environmental impact alongside a financial return is an emerging global trend.[1] This investment approach is known as impact investing.[2] It is popular in Asia, particularly Southeast Asia, where social and economic challenges present investors with unique opportunities to invest in companies and organisations that create positive impact while generating financial return.[3]
To learn more about the latest on impact investing in Asia, we interviewed Christine Yu, Founder and Managing Director of Lapidary Limited. Lapidary Limited is an impact investment firm based in Hong Kong that invests in for-profit, mission-focused companies and organisations with social mandates on poverty eradication, women’s empowerment, clean technology, healthcare, education, agriculture, financial inclusion and urban renewal.
Who is interested in impact investing? What types of investors are they?
Impact investing continues to grow in popularity as an investing strategy. Some trends that contribute to this include a new generation of ultra-high net worth individuals poised to inherit significant wealth, the rise in women’s wealth as a size of the total pie (the result of women in the workforce in increasingly greater numbers more than ever in history), as well as the rising anxiety amongst millennials and Gen Z about the world they are inheriting. As technology, innovation and strides in sustainable finance increase the opportunities for investing in the impact sector, the range of investors interested in this new investment focus continues to expand. Private wealth, family offices, pension funds, venture capital, private equity and, of course, dedicated impact funds are just some of the types of investors who see opportunities in this space.
What financial, social and environmental returns are investors looking for when making impact investing decisions?
As with any investor assessing investment decisions, the short answer is, it depends. In impact finance, where an investor sits in the investment spectrum is a key driver of their investment decisions. Are they impact-first, finance-first or adopt a blended finance approach? Financial return expectations will also vary given an investors’ geographic focus—for example, developed countries vs emerging markets. Return expectations range anywhere from below market-rate (capital preservation), to market-rate (risk-adjusted). Other factors include what social impact mandates do investors focus on in their investment decisions? Investment funds may choose to have a more specialized focus into areas such as renewable energy or adopt a broader approach with other investment priorities being taking into consideration (for example, the ability to deploy more capital across a broader range of impact themes). Investing directly into private socially impactful companies as equity investors typically involves a longer-term investment time horizon, where 5-7 years is probably the minimum investment horizon in my view.
What countries in Asia have the most impact investing opportunities?
India has always been viewed as the ‘Disneyland’ for impact investing. This stems from its long history in the microfinance space. However, my investing philosophy is that impact is everywhere, if one looks hard enough. I believe that Southeast Asia presents some interesting opportunities for impact investors, but it takes time and hard work to find the true gems. My investing mandate focuses on select Southeast Asia countries (Myanmar, Philippines and Thailand) as well as Hong Kong. I focus on geographies where attractive geographic fundamentals exist – such as promising economic growth, high potential for social innovation and wide range of social impact sectors.
What themes/topics are investors most interested investing in?
Every investor has specific social impact mandates that they focus on. In my experience, many funds tend to focus on climate change/renewable energy, poverty eradication, education and healthcare. Some criteria impact investors use to determine these social impact mandates could include, the funds’ own theory of change, fund managers’ expertise, and ease of capital deployment in these impact themes. Through the impact investing venture I founded, Lapidary, we focus on positive behavior change as our theory of change. Given our experience in both the consumer vertical as well as geographic focus on Southeast Asia and Hong Kong, we tend to focus on consumer targets which allow us to deliver on social impact mandates such as women’s empowerment, education, poverty eradication as well as climate change.
What are the challenges associated with impact investing? Are there are solutions or existing guidelines in place to address them?
Challenges are myriad in impact finance, but the opportunities for incredible social and environmental impact as well as sustainable profit are also great. When I founded Lapidary, I initially thought that the biggest challenge was the lack of capital investing in impactful businesses. Although increased capital into this sector is essential, I now believe that the greater challenge is the need to push the envelope on social innovation. As a society, we should develop social entrepreneurs who possess the ability to generate innovative solutions to address social and environmental issues which can also generate sustainable financial returns.
Another significant challenge is the ability to measure impact in a consistent, clear and comparable way across sectors and markets, and apply them across the investment process (identifying, evaluating, tracking and exiting opportunities). The UN Sustainable Development Goals (SDGs) have provided a good framework to align efforts to achieve impact in the sector. TPG’s Rise Fund has also done a tremendous amount of work in this space with its “Impact Multiple of Money” framework. However, many practitioners, including Lapidary, also focus on practical ways of measuring impact (leveraging on the many approaches in the market) in a way that investee companies are able to easily provide inputs for. I strongly believe that it is important for investees to focus on the impact they are creating rather than being saddled with complicated impact measurement frameworks.
Finally, I believe that the lack of investible, publicly listed ESG products in Asia is a barrier in seeing more investors in impact finance. Retail and institutional investors alike have very little choice to exercise ESG investing principles in the region. I do believe that having more liquid ESG products available for investment will dramatically expand the overall impact sector in Asia.
What recommendation do you have for people who want to start investing impactfully?
As an individual: learn about it. Ask a lot of questions. Look at your bond and equity portfolios. Look at the constituents of your Exchange Traded-Funds (ETFs). Do these ETFs invest in companies which support gender diversity in their leadership? Contribute to a carbon-free (or neutral) future? Are these companies you are investing in do anything to improve or conserve water quality, or empower underprivileged and marginalized populations?
If you aren’t a professional investor and therefore unable to access investing directly in impactful (private) companies, do the next best thing: buy consciously. If done right, in one purchase you can positively affect greenhouse gas emissions, support ethically paid and well-treated workers, reduce water usage, pollution and plastic use as well as promoting marine life and soil biodiversity. If you are a business or NGO: find ways to source your needs (office supplies, staffing needs etc.) from social businesses if you are not doing so already.
Finally, support social innovation. Learn about social businesses, support them or start them. As a society, we need to continue to push the envelope on what it means to “do well and do good”. Let’s develop the ecosystem, raise awareness and groom future social entrepreneurs. In doing so, everyone can be an impact investor.
To learn more from Christine Yu on how you can contribute to sustainable development with your investment decisions, feel free to contact her at cy@lapidarylimited.com.
[1] Impact Investing Surges in Southeast Asia. Published by Brink Asia on 23 August 2018. Accessed at: https://www.brinknews.com/asia/impact-investing-surges-in-southeast-asia/
[2] Defined by the Global Impact Investing Network (GIIN) https://thegiin.org/impact-investing/
[3] The Landscape for Impact Investing in Southeast Asia. Published by GIIN and Intellecap in August 2018. Accessed at: https://thegiin.org/assets/GIIN_SEAL_full_digital_webfile.pdf