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Rotman Insights Hub | University of Toronto - Rotman School of Management

Unveiling impact investing: Investing with purpose for social and environmental change

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Catherine Chen

For those who aren’t familiar with the term, what is impact investing?

Impact investing means investing in funds or organizations with the intention of generating a measurable social or environmental return alongside financial returns. Some of the areas where impact investing is most active include climate change, education, renewable energy and healthcare. The objective is to assemble capital to help lift ambitious projects off the ground that otherwise wouldn’t have attracted big investors.

These are investors who embrace the theory of change identified by the 2017 United Nations Sustainable Development Goals, the Paris Agreement and similar initiatives. The project selected for funding must have measurable and effective outcomes that reach a critical mass. In short, this is a rigorous scientific approach to investment.

While some investors have been making impact investments for decades, a collaborative global effort has recently emerged to accelerate the development of a high-functioning market for it. In 2009, the Rockefeller Foundation funded and became one of the founding members of the trade group Global Impact Investing Network (GIIN), helping to create impact-investing performance metrics supported by 29 impact investors including JPMorgan Chase, the Bill and Melinda Gates Foundation and Calvert Foundation. Its slogan is simple but powerful: What world are you investing in? GIIN estimates that over 1,340 organizations currently manage US$ 502 billion in impact investing assets worldwide.

Other big-name philanthropists have started separate initiatives to pursue impact investing. The Chan Zuckerberg Initiative, the philanthropic arm of Facebook Inc. founder and chief executive Mark Zuckerberg and his wife, Priscilla Chan, was formed in 2015 to give it the flexibility to dictate where and how funds are directed. And last August, Forbes published an article titled, Why You Should Move Your Money to Impact Investing.

More recently impact investing has involved more private assets than institutional capital. There are more individual investors starting to make sustainable decisions, because studies show no statistically-significant difference in the adjusted return between non-impact and impact investments across asset classes. The idea of making a risk-adjusted return while investing for a better world is being embraced by more and more investors.

You have said that one salient feature of impact investing is that it is more tangible than traditional investing. How so?

When you own a percentage or a share of a great company, you can’t touch or see the impact you are making. All you get is a piece of paper showing the return on a bank statement. But with impact investing, you can actually see social impact and change being created. Our investors get both a financial and an impact report, and we include photos and videos to help them understand how they are making an impact. For example, they can see that their investment is helping to produce solar panels and that more people are now starting to generate electricity in this way, or that children in a remote area are now able to go to school. Such positive change is not possible to demonstrate with traditional asset classes.

Why did you decide to start up your impact investment firm in Hong Kong SAR?

At Rotman, I learned about business design as a useful tool for business model and strategy design. After working in the impact investment and sustainability field for many years, I realized that there are many social issues yet to get the attention from people who can provide funding. There is no clear alignment of interest between social projects and investors because investors cannot see the financial and social returns in these projects. Moreover, there are very few financial intermediaries facilitating this alignment or studying impact investment and educating investors about it as an alternative approach. This phenomenon is particularly salient in Asia.

Seeing so many pain points in our society ignited my empathy and led me to formulate my dream: To use finance as a tool to make the world a better place. It is particularly challenging to establish an asset management firm in North America because of the high entry barriers in terms of capital requirements and asset management experience. Those with such capital and experience tend not to spend time and effort in impact investment — which means it will take much longer for impact investing to become mainstream.

I chose Hong Kong SAR, not because I have ever lived here, but as a strategic decision. Hong Kong SAR is a connector between the east and the west, and it has sound regulation and transparency in its financial industry. The timing was also great: there were market opportunities and support from regulators and the government. Since our establishment in May 2017, we have had a lot of help from investors, local market practitioners and InvestHK — the government agency that assists overseas businesses in establishing firms in Hong Kong.

Do you consider impact investing to be disruptive in comparison to traditional investment products?

Yes and no. We are disruptive in the sense that we are small company with fewer resources that is trying to challenge the status quo in the asset management industry. However, we are not true disruptors. At a global level, many more assets are expected to be pooled into impact investment due to the UN’s Sustainable Development Goals, and global warming is now widely recognized. We are a small company, so we do not intend to eat the whole pie, but rather, to invite larger asset managers to work with us in collaboration. The world needs everyone’s contribution.

Talk a bit about how you integrate innovation into your work as an impact investment manager.

Design thinking is a creative approach to problem solving that involves understanding a given problem from the perspective of the person you are attempting to solve it for. The key is to put your own assumptions aside and observe or talk directly to people to get insight into their needs. In my experience, it is not possible to design a great solution without focusing on the human beings involved—their perceptions, their experiences and their pain-points. In every business, it’s really important to understand your customers as individuals, and to take concrete steps to solve the trade-offs they are facing.

In my experience, the biggest issue with impact investing is the perceived trade-off that exists in many peoples minds between financial and social returns. Economics 101 taught us that the valuation of an asset is a representation of how, on average, society prices that asset. But what the market is just starting to realize is that all human beings, wherever they are located, actually value the same things: better living, happiness, peace, empathy and compassion, to name a few. As a result, we should be able to recognize the long-term value of products and services that reflect such social values.

Also, as a small company, we pivot a lot. That means that whenever new studies come out that could improve our approach, we immediately prototype and adopt.

Despite the growing acceptance of this approach, Asia still lags behind Europe and North America in the realm of impact investing. Why is that?

Asian investors have three particular characteristics. Firstly, asset allocation theory is still at the theoretical level for them. They tend to invest in particular industries and risk profiles like real estate, which they believe to have unstoppable price appreciation. Secondly, many of them struggle to understand how investments can positively influence social good. This is why we are focusing on market education — to familiarize them with our approach and provide tangible examples of how it works. The third characteristic is that there is insufficient data collected and provided in Asia, and thus, inadequate familiarity with benchmarks, measurement metrics, research and statistical relations — all of which makes investment decisions harder to make.

Having said that, my team and I are expecting an impact investing boom in the Asia Pacific region, because the economies in many ASEAN countries are booming, while ESG [Environmental, Social and Governance] principles are increasingly being discussed and are getting closer to Asian investors hearts.

How do you actually measure social impact?

It’s not easy. Measuring financial return is much more straightforward. Also, there is always a chance that we might deliver the wrong impact with the right intention — or deliver a positive impact without any intention. I would say that a successful impact investment project is one where both the impact and the intention are well-defined, and the trial-and-error period is shortened to identify the right approach to deliver the intended impact.

The way we define social impact also varies depending on the industry. For instance, the measurement matrix for an educational program will be very different from a program concerned with improving water quality or hygiene. It is important to spend time understanding every business and its priorities. For example, in terms of education, we might look at whether a child’s vocabulary has increased, or whether we have helped them get into university.

Are you confident that the future of impact investing will be bright in Asia?

Definitely. As indicated, there is growing acceptance that social values and business values are positively correlated. From what I see day to day, millennial investors and next-generation family business managers have already begun to redefine the concept of investing. The younger generation is starting to take social, environmental and other nonfinancial values into consideration and is forming a more comprehensive definition of what it means to get a return on investment.

Catherine Chen (Rotman MBA 17) is the founder and managing partner of AvantFaire Investment Management, based in Hong Kong SAR and Canada.