As part of our efforts to increase understanding of shared value, SVPHK recently hosted our first public talk on the topic of impact investing, green finance and ethical screening in partnership with The Executive Centre, to illustrate examples of and opportunities for shared value in financial services and the investment arena.

21 October 2018

By Martina Mok, Shared Value Project Hong Kong.

Our guest panelists included Emily Woodland, Investment Advisor at ADM Capital, a Hong Kong-headquartered responsible investment firm; Anne Copeland, Sustainability Advisor and Founding Director of Copeland & Partners; and Peter Yates AM, Director of SVPHK, Chair of Shared Value Project (Australia) and Director of AIA Australia, among other leadership roles. We were thrilled to draw an audience of about 40 guests representing financial services, diverse corporates, consultancies, non-profits and individuals passionate about sustainable development.

Why is this topic relevant today? Early this year, BlackRock CEO Larry Fink’s letter to corporate CEOs worldwide demanded that in line with its responsible investment philosophy, the world’s largest asset manager expects public companies to demonstrate how their business serves a greater social purpose in the long-term, or risk scrutiny and divestment. Hong Kong also announced in September the ambition to become a global hub for green finance, with the launch of the Hong Kong Green Finance Association endorsed by the HKSAR Government, Hong Kong Exchange and other partners.

In our discussion, we explored definitions of the many terms used in the industry – responsible investing, impact investing, green finance, ESG screening and SRI, just to name a few. While interpretations vary in the industry as to expected return, we established that impact investing differs from other forms of investing in the intention and requirement to create measurable, positive social or environmental impact alongside a financial return.

ESG screening and ethical investing, on the other hand, can refer to removing investments in “sin industries” – tobacco, weapons, coal, etc. The aim is to “do no harm,” at a minimum, while maintaining the same return on investment. ESG investing can also involve the assessment of ESG-related risks and opportunities in the evaluation process. Overlapping with these are green finance and shared value, where it is possible to generate market rate of return or higher while creating social or environmental impact. To illustrate generally, each category has areas of overlap, depending on the case and interpretations:

 

impact investing

If impact investing might risk a tradeoff of return for social impact, then why should investors consider this against traditional investments? Emily Woodland explained ADM Capital’s responsible investment philosophy and the view that making investment decisions based on ESG performance actually generates long-term value. Peter Yates AM shared how different models of blended finance and creative structuring can also achieve market rates of return while meeting ESG objectives, such as reducing carbon impact. Interestingly, as SCMP reported in September:

“Globally, investors do not associate sustainable investing with a trade-off of financial returns. Fifty per cent of the investors surveyed expect sustainable investing to outperform financial investment,” said Amy Lo, chairman and head of Greater China at UBS Wealth Management.” […] “In Hong Kong, half of those surveyed expected sustainable investments to outperform traditional alternatives.”

It became clear in our discussion that investing for impact, in its various forms, has gained traction in the last few years, even if assets under management have yet to catch up, especially in Asia Pacific. Less than 1% of AUM in Asia ex-Japan is tied to ESG, according to McKinsey’s study in 2017. Our panelists agreed that Hong Kong lags behind, for being an international finance hub, though recent developments are encouraging.

Emily Woodland pointed out that while ADM Capital was the first signatory in Hong Kong to the UN Principles for Responsible Investment in 2008, Hong Kong only has 24 other PRI signatories to date. However, she highlighted that the conversation on green finance locally has “gone from zero to one hundred in a year,” thanks to recent moves such as the Green Finance Association and the Sustainable Finance Initiative by the likes of the Securities and Futures Commission, HKEX, Monetary Authority and major financial institutions.

Anne Copeland also reflected on the evolution of ESG, corporate social responsibility and sustainable development in Hong Kong, sharing that Hong Kong’s focus on these areas has grown significantly over the years. Companies are facing more pressure today from investors and regulatory bodies on ESG reporting and responsible business performance, not least from new HKEX ESG disclosure requirements.

Furthermore, Emily shared how ADM Capital pioneered an innovative “shared value” model by launching in 2016 the Tropical Landscapes Finance Facility (“TLFF”), a partnership between ADM Capital and its Foundation, BNP Paribas, UN Environment Program and World Agroforestry Centre (“ICRAF”) to provide long-term finance at scale to commercial projects with measurable environmental and social benefit. While most impact investing and related products are based on equities, mutual funds or indices, ADM Capital specialises in private debt and used this new model to finance an Indonesian sustainable rubber plantation in two heavily degraded landscapes, its first transaction under TLFF.

What is needed in Hong Kong to increase the appetite around investing for impact and move it into the mainstream? Based on her Master’s thesis at the University of Hong Kong, including an audit of major industry players, Emily found that Hong Kong needs major asset managers and regulatory bodies such as MPF and HKMA to step up, but also for business leaders and investors to break out of a short-term profit mindset, among other factors. Audience members also raised the idea of companies and investors being more proactive versus reactive toward impact investing opportunities, in order to gain competitive advantage. Anne Copeland reiterated the importance of ESG considerations at the management and board level, as ESG performance increasingly affects investment decisions and valuation.

Our panel concluded that in a year’s time, we expect “impact investing” in Hong Kong to have progressed significantly, such that we predict a very different discussion at that time. That said, our experts highlighted that each of us can play a role in promoting responsible investment, whether as a company, an asset manager or an individual retail investor.

Last month, the Global Impact Investing Network (GIIN) published a reportrevealing that in order to achieve the Sustainable Development Goals by 2030, impact investors must step up to raise and redirect new capital in the amount of US$5-7 trillion annually. As a participant at the UN SDG Business Forum in 2017, I vividly recall financial institutions pointing out that there is no shortage of money in the world, only a lack of compelling business cases and impact measurementto attract and justify investment in the many worthwhile causes and sustainability initiatives worldwide.

It’s time for business to step up, and as they say, put your money where your mouth is, because the world depends on it.