The rise of impact investing in Asia

Impact investing is slowly becoming mainstream as the switch to a green economy creates opportunities aplenty, but the lack of overarching standards remains a cause for concern

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The growth of impact investing has accelerated in recent years, with much of the momentum coming from Europe. However, while other regions have lagged in uptake, my trip to Asia at the end of 2018 confirmed my belief that change there is afoot. Impact investing is investment into a company creating products or services that are addressing the unmet needs of the world. While it remains in its infancy in this part of the world, we are starting to see the same drivers for this type of investment in Europe take a hold of the Asian market.

A turn in the tide

From a bottom-up perspective in Asia, there has been a maturing of the average millennial in the investor space, a group that has traditionally been more conscious of the needs of the world and more attuned to sustainability and strategies that take advantage of the solutions to global problems. This is also reflected from a geographical standpoint, where we are seeing a much stronger understanding and awareness of impact investing from the younger demographic of investors in Hong Kong and Singapore, markets that are leading the way for this type of investment in Asia.

We are also seeing a turn in the tide for regulation in Asia, which has contributed to an uptake in impact and other types of sustainable investing. This is a combination of end market regulation, such as the latest wave of environmental regulation that has been rolled out in China’s Five-Year Plan, as well as an increase in investment requirements for institutional investors to have exposure to sustainable investments and products that have environmental, social and environmental (ESG) factors integrated.

The force of impact

However, as these requirements come into force, my conversations with investors during my trip revealed there is still some confusion about the lines that separate this space. Investors are being told to invest in more sustainable products, without having a broad understanding of the different types of investment that can be made. As in other markets, there is still a lack of clarity for many Asian investors on the different definitions around sustainable investments in general, as well as those found within impact investing. 

Despite these obstacles, this trip also highlighted that there is increasing awareness of the opportunities that can arise when positive impacts are aligned with the growth drivers of tomorrow. We found that the themes resonating most highly with investors tend to be centred on issues that affect their day to day lives. For example, water is a big theme in Singapore, an island that is facing a growing water security problem, while future mobility and electric vehicles resonated more highly with investors in China, a leader in both the supply and demand of this technology. That being said, what was appreciated the most was the diversification of the investment themes, which fall across a broad range of sectors and industries.

The future of impact investing in Asia

The Global Impact Investing Network’s Annual Impact Investor Survey for 2018 showed that the impact investing industry continues to grow on a global basis and we expect to see this trajectory continue as investors increasingly see the UN’s Sustainable Development Goals as a lens through which to find growth opportunities.

However, this growth has stimulated a proliferation of products that are being labelled as “impact” and an increase in the risk of “impact washing”. Just as “greenwashing” has infiltrated parts of the market, the lack of universal measurement standards and debate around definition has enabled some more unscrupulous companies to use the impact label to conceal projects with more nefarious effects.

Our approach to impact investing requires active management and we believe investors should be wary of anything taking a passive approach. Unlike ESG, impact investing is not a data-driven exercise and requires structure and qualitative analysis. Active and collaborative corporate engagement is also an essential part of the investment process and results in better alignment between all stakeholders in a business, encouraging investors to take a truly long-term perspective.

I believe we are reaching a tipping point for impact investing in Asia, which is slowly but surely establishing itself into the investment mainstream. The investors I spoke with are becoming increasingly savvy about the financial opportunities that can be generated through companies addressing the unmet needs of the world.

By Tim Crockford, portfolio manager, Hermes Investment Management

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Date

8 Mar 2019

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