How Impact Investing in Asia Is Bringing Non-profits, Governments And Startups Together
Bowen Khong November 30, 2020
Impact investing arose in 2007 just as a global recession was on the anvil. Thirteen years later, it continues to grow and evolve in a world wracked by the twin threats of economic crisis and a viral pandemic.
The social and economic challenges created by COVID-19 will only further enhance the demand for impact investing opportunities. After all, it was born out of a realization that if we don’t change the status quo, humanity does not have a sustainable future.
Impact Investing – A Quick Primer
In traditional investing, the focus is almost entirely on ensuring financial returns. The earliest challenge/alternative to this was in the 1960s, with the rise of Socially Responsible Investing (SRI). It involved avoiding potentially “harmful” businesses, like the so-called "sin stocks” of liquor, tobacco, and gambling.
Environmental, Social, and Governance (ESG) investing is a continuation of this avoidance principle into the present era. Investors try to avoid stocks that rate poorly on metrics of ecological impact and social justice.
Impact investing takes a more proactive approach – instead of avoiding certain businesses or sectors, investors are encouraged to channel money into those that can deliver demonstrable positive change on environmental, social, or economic issues, while at the same time delivering ROI.
The Global And Asian Context Of Impact Investing
Impact investing has shown tremendous growth in the last decade. From a market size in the $25 billion range in 2013, it has grown to $715 billion in 2020 according to the GIIN annual surveys. A CAGR of 27.5% across seven years is truly phenomenal indeed.
According to Morgan Stanley, millennials are a key driving force behind this change, with their concern for issues like climate change and economic inequality. Home to more than 60% of the global population of Millennials, the Asian region has massive potential for impact investing.
And the recent trends bear this out – while the West has the bigger investment markets, impact investment allocations in Asia are keeping pace. Even as Europe leads the pack with a CAGR of 25% in impact investment allocations between 2015 and 2019, Asia is just a few percentage points behind at 23%, according to GIIN.
Within Asia, East and Southeast Asian regions are considered as the main hotspots of impact investing initiatives, followed closely by the South Asian region. The latter has shown an increased appetite for this kind of investment, with a CAGR of 24% compared to 21%
The Role Of Development Finance Institutions
Institutional investors and funds play a huge role in impact investing in the West. The situation is not too dissimilar in Asia – between 2007 and 2017, institutional investors deployed approximately $16.3 billion across South and Southeast Asia.
India accounted for $5 billion, while major economies in the ASEAN region like Indonesia, Cambodia, Vietnam, and The Philippines witnessed inflows of around $11.3 billion, as per GIIN estimates. The conduit for the vast majority of these investments was Development Finance Institutions or DFIs.
Emerging markets in Asia and Africa represent significant challenges for investors, with liquidity issues, political instability and market volatility. In this context, I find the reliance on DFIs for impact investments to be quite revealing.
Writing for an OECD initiative, Jean-Philippe de Schrevel, Founder of Bamboo Capital, highlighted the importance of “blended finance” in linking impact investors with sustainable development goals. DFIs can reduce the risk potential by bringing together impact investors and philanthropic investors.
While both parties share the same investment portfolio, they are assigned different layers of risk. Losses are borne by the philanthropic investors in a "first loss layer," which provides cover to impact investors in a "senior layer" – an elegant yet pragmatic solution indeed!
Funds, Startups, And Institutions In Asian Impact Investment
The impact investment scene in Asia brings together institutional investors, non-profit foundations, government-backed DFIs, and startups on a common platform. In recent years Japanese and South Koran non-profits like the Nippon Foundation, the Narada Foundation, and SK Happiness Foundation have all played leading roles in promoting impact investment, says the Asian Venture Philanthropy Network.
Governments in the region have also introduced various funds with an impact investment focus. The Green Bank Development Scheme (Vietnam), Social Outcome Fund (Malaysia), Growth Ladder Fund (South Korea) are all examples of such initiatives aimed to encourage impact investor funding in segments like microfinance, women and sustainable living, renewable energy, and other green projects.
The Asian Development Bank’s ADB Ventures is a platform launched in January 2020 to support startups that contribute to sustainable development goals. The $1 billion VC-arm of ADB will provide both investment and technical assistance through a Seed Program and Venture Labs.
Despite the pandemic, the program has already provided technical assistance to over 50 different startups working on clean energy, water, and waste management. Startups that have already received grants include Pinatex – a Phillippines company developing an eco-friendly leather substitute, and Good Brick System – a Nepalese program developing a carbon-neutral brick manufacturing process.
Final Thoughts
Impact investing in Asia is not without its fair share of challenges. But the potential for transformative change far exceeds those hurdles. I feel that COVID 19 could be a game-changer in some ways here, creating a pressing need for investments in SDGs in the immediate future. With Asian economies displaying far more vibrancy than their western counterparts, impact investors should retain a significant appetite for opportunities in the region.
Bowen Khong November 30, 2020
Impact investing arose in 2007 just as a global recession was on the anvil. Thirteen years later, it continues to grow and evolve in a world wracked by the twin threats of economic crisis and a viral pandemic.
The social and economic challenges created by COVID-19 will only further enhance the demand for impact investing opportunities. After all, it was born out of a realization that if we don’t change the status quo, humanity does not have a sustainable future.
Impact Investing – A Quick Primer
In traditional investing, the focus is almost entirely on ensuring financial returns. The earliest challenge/alternative to this was in the 1960s, with the rise of Socially Responsible Investing (SRI). It involved avoiding potentially “harmful” businesses, like the so-called "sin stocks” of liquor, tobacco, and gambling.
Environmental, Social, and Governance (ESG) investing is a continuation of this avoidance principle into the present era. Investors try to avoid stocks that rate poorly on metrics of ecological impact and social justice.
Impact investing takes a more proactive approach – instead of avoiding certain businesses or sectors, investors are encouraged to channel money into those that can deliver demonstrable positive change on environmental, social, or economic issues, while at the same time delivering ROI.
The Global And Asian Context Of Impact Investing
Impact investing has shown tremendous growth in the last decade. From a market size in the $25 billion range in 2013, it has grown to $715 billion in 2020 according to the GIIN annual surveys. A CAGR of 27.5% across seven years is truly phenomenal indeed.
According to Morgan Stanley, millennials are a key driving force behind this change, with their concern for issues like climate change and economic inequality. Home to more than 60% of the global population of Millennials, the Asian region has massive potential for impact investing.
And the recent trends bear this out – while the West has the bigger investment markets, impact investment allocations in Asia are keeping pace. Even as Europe leads the pack with a CAGR of 25% in impact investment allocations between 2015 and 2019, Asia is just a few percentage points behind at 23%, according to GIIN.
Within Asia, East and Southeast Asian regions are considered as the main hotspots of impact investing initiatives, followed closely by the South Asian region. The latter has shown an increased appetite for this kind of investment, with a CAGR of 24% compared to 21%
The Role Of Development Finance Institutions
Institutional investors and funds play a huge role in impact investing in the West. The situation is not too dissimilar in Asia – between 2007 and 2017, institutional investors deployed approximately $16.3 billion across South and Southeast Asia.
India accounted for $5 billion, while major economies in the ASEAN region like Indonesia, Cambodia, Vietnam, and The Philippines witnessed inflows of around $11.3 billion, as per GIIN estimates. The conduit for the vast majority of these investments was Development Finance Institutions or DFIs.
Emerging markets in Asia and Africa represent significant challenges for investors, with liquidity issues, political instability and market volatility. In this context, I find the reliance on DFIs for impact investments to be quite revealing.
Writing for an OECD initiative, Jean-Philippe de Schrevel, Founder of Bamboo Capital, highlighted the importance of “blended finance” in linking impact investors with sustainable development goals. DFIs can reduce the risk potential by bringing together impact investors and philanthropic investors.
While both parties share the same investment portfolio, they are assigned different layers of risk. Losses are borne by the philanthropic investors in a "first loss layer," which provides cover to impact investors in a "senior layer" – an elegant yet pragmatic solution indeed!
Funds, Startups, And Institutions In Asian Impact Investment
The impact investment scene in Asia brings together institutional investors, non-profit foundations, government-backed DFIs, and startups on a common platform. In recent years Japanese and South Koran non-profits like the Nippon Foundation, the Narada Foundation, and SK Happiness Foundation have all played leading roles in promoting impact investment, says the Asian Venture Philanthropy Network.
Governments in the region have also introduced various funds with an impact investment focus. The Green Bank Development Scheme (Vietnam), Social Outcome Fund (Malaysia), Growth Ladder Fund (South Korea) are all examples of such initiatives aimed to encourage impact investor funding in segments like microfinance, women and sustainable living, renewable energy, and other green projects.
The Asian Development Bank’s ADB Ventures is a platform launched in January 2020 to support startups that contribute to sustainable development goals. The $1 billion VC-arm of ADB will provide both investment and technical assistance through a Seed Program and Venture Labs.
Despite the pandemic, the program has already provided technical assistance to over 50 different startups working on clean energy, water, and waste management. Startups that have already received grants include Pinatex – a Phillippines company developing an eco-friendly leather substitute, and Good Brick System – a Nepalese program developing a carbon-neutral brick manufacturing process.
Final Thoughts
Impact investing in Asia is not without its fair share of challenges. But the potential for transformative change far exceeds those hurdles. I feel that COVID 19 could be a game-changer in some ways here, creating a pressing need for investments in SDGs in the immediate future. With Asian economies displaying far more vibrancy than their western counterparts, impact investors should retain a significant appetite for opportunities in the region.
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