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Impact investing – what does it mean for Hong Kong?

Fiona Donnelly and Siân Wynn-Jones give the low-down on what impact investing is and what it means for Hong Kong.

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What is impacting investing?

Impact investing concerns investments that seek social as well as financial returns. Also called ‘social finance’, Dr Alex Nicholls, Professor of Social Entrepreneurship at the University of Oxford, explained at a recent BritCham event, that impact investing includes both socially motivated investment and investment into social organisations.

Impact investing has been around for a long time but has seen rapid growth globally since the year 2000, due to a new wave of institutions and instruments.  Drivers for growth have been seen across all sectors and have included:

  • In the private sector, for example, there is a growth in socially responsible investing due, in part, to investor pressures.
  • In the public sector, drivers can include the need to be more efficient with the allocation of capital due to austerity measures, and the need to be more effective and operate in partnerships across boundaries.
  • In the third sector, they are suffering from a shortage in grants/donations while benefitting from an increase in social enterprises.

And the Global Impacting Investment Network 2017 report notes whilst investments with primarily social impact objectives are four times as common as environmental, investments that target both social and environmental impact objectives are popular with half of respondents.

Whilst various measures remain to curtail truly free flows of capital (from country level controls down to individual fund mandates), it is evident that is a global play: billions move internationally if the optimal time, risk or return profile is found in an investment in a different jurisdiction.

 

Why is impacting investing important to Hong Kong?

Hong Kong continues to be a leading international financial centre according to many measures – the that “overseas investors remained a major source of funding for the fund management business, accounting for 66.3%”; the Hong Kong Exchange is ranked fourth in world for HK$ raised in new IPOs in the first half of 2017; and Hong Kong Exchange’s maturing and growing role as an “offshore RMB product trading and risk management centre for global investors”.

So given this, and recognising investor/investee needs are changing globally, if Hong Kong wants to remain a leading international financial centre, the territory will have to evolve to stay relevant and have a role in the financial markets of the future.

And this isn’t a whimsical tweak in market supply and demand… the market opportunity presented by the need for all enterprises to contribute to and play a role in combatting climate change and making development sustainable is enormous – as well as urgent.

A recent report by the Business & Sustainable Development Commission estimates that achieving the SDGs could open up $12 trillion of market opportunities in food and agriculture, cities, energy and materials, and health and well-being alone and create 380 million new jobs by 2030.

In September, Hong Kong joined other global financial centres at the first-ever international meeting of financial centres and backed the Casablanca statement, agreeing to harness their expertise to drive action on climate change and sustainable development.

Hong Kong SAR has committed to issuing a green bond next year which is commendable to lead by example, even if, as the Chief Executive has said openly, that the Government and thereby encourage others with RMB, or on the Belt, Road or beyond to do same. Perhaps what is more interesting from the new Chief Executive’s policy address is her plans to promote the establishment of green bond certification schemes and to allocate more resources to the Financial Services Development Council, which has a broader reach beyond impact investing.

 

What does this mean for Hong Kong business?

Interest is already picking up, and there does seem to be a sense that if Hong Kong doesn’t change and carve out a ‘green finance’ role in the region and with Mainland China soon, then someone else will.  In addition to Government groups, there is activity in private cross-sector advocacy groups like the Green Finance Task Force, which is leading on educating and galvanising interested stakeholders.

But issues remain.
Issues such as lack of impact investing deals and opportunities; the design of business models and packaging of impact investing opportunities to align to their needs; missing soft infrastructure like advisors and client managers who can speak to this agenda; and lack of data at a meaningful level, especially that which is comparable and can quantify social impacts.

Businesses in Hong Kong clearly need to be ready to take advantage of impacting investing.  Global studies show that more than 75% of investors already consider ESG criteria, so how do you get your or understand how your investments are delivering on sustainability?

A sound strategy for a better business will always consider the risks and opportunities of the future, yet many boards are discovering that new skills and advisors are needed to realise these opportunities. Whether it’s setting strategy, reviewing materiality, engaging with stakeholders, reporting or anything else on the ESG spectrum, working with sustainability specialists can really help give your board the tools they need to lead your business and thrive in this new business normal.

For an introduction to the work of The Purpose Business please email Fiona at info@thepurposebusiness.com.

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