OPINION: How Asian investors are saving impact investing from its worst tendencies

by Durreen Shahnaz | Impact Investment Exchange
Friday, 30 August 2019 08:30 GMT

ARCHIVE PHOTO: Commuters walk to the train station during evening rush hour in the financial district of Singapore March 9, 2015. REUTERS/Edgar Su

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From family and local businesses to the newfound wealth of successful entrepreneurs, investing for social impact is taking on dynamic forms across Asia

Durreen Shahnaz is the founder and CEO of Impact Investment Exchange (IIX)

As both the world’s fastest growing population of super wealthy and the home of some of the most challenging social and environmental problems, Asia is emerging as an impact investing powerhouse.

Impact investing– investments intended to create positive social impact alongside financial return – has been growing fast in Asia Pacific.  But in order to appreciate the movement’s rise in Asia, we must move beyond the notion that the region must “catch up” to its western counterparts in purely quantitative terms.

In fact, the view on the ground shows us that Asian investors may be saving the global movement from its own worst tendencies.

I am privileged to have been a part of impact investing since its beginning, a movement born out of meetings held ten years ago by the Rockefeller Foundation – a leader in using philanthropic dollars to create social and environmental impact.

I saw how the space grew rapidly in the United States by leveraging established habits of philanthropy and a Wall Street fervour to speculate and bet on the next big trend.

Yet as impact investing moves into the next decade, an over-reliance on these two behaviours now risks driving the movement to the ground.

Outside of these two traditions, Asian investors are showing us the way to a new era – one that uses myriad values, philosophies, and learnings to innovate and grow the impact investing sector.

From family and local businesses to the newfound wealth of successful entrepreneurs, impact investing is taking on dynamic forms across the region.

In Indonesia, investors are betting big on over 300,000 mission-focused, next-generation entrepreneurs who are growing their businesses fast and are ready to scale. In India, social innovation is driving a rush of funds to the space - an astounding $5.2 billion from 2010 to 2016, according to consultancy firm McKinsey.

In the Philippines, a vibrant social entrepreneurship ecosystem is maturing alongside a fast growing economy. And in China, the pressure is on for tech giants Baidu, Alibaba, and Tencent to spur financial inclusion and sustainable development.

Stifling innovation with good intentions

Yet before impact investing can scale in Asia, we need to address the issue of risk. In markets like the United States or Britain, impact investing has often relied on investors behaving like philanthropists – as in the case with Social Impact Bonds (SIBs), which offer investors or donors returns on social investments only if certain outcomes are met.

SIBs rose to prominence over the past decade as a way of leveraging private investment for services so that providers do not have to front the cost of delivery. Private investors bear the risk of the project, because they only receive returns from the government or another payer for their investment in social programs if specific outcomes are achieved.

While philanthropy has a powerful role to play in impact investing, traditional investors in Asia motivated by a return on investment will not be satisfied with instruments where they take on all the risk, and will likely receive no return.

The new wild west

At the other end of the impact investing spectrum, many investors in the United States have come to view the space as a new wild west – capturing the imaginations of Wall Street titans and rock stars alike.

With billion dollar funds cropping up daily, fund managers are faced with increasing pressure to invest in anything near or far – despite the ongoing shortage of high quality, high-impact investment opportunities.

For those of us in the field, we know that impact enterprises will take time and a lot of hard work to scale and become investment-ready.

In view of this gap, it is no surprise that several funds are now either struggling to get financial returns, or conveniently labelling traditional emerging market investments as “impact investing.”

Tempered by a commitment to causes close to home, Asian investors will ultimately look to impact investing opportunities that balance social and financial return.

Battling it out in Asia

Faced with these two dominant trends in the United States, Asian investors are forcing the movement back to its original proposition – how do we unlock large-scale private sector capital for good?

With Asian investors neither willing to give money away for free nor willing to participate in risky innovative experiments, at IIX, we have discovered the trick to unlocking their participation in social good is to appeal to them as private investors – not as philanthropists, and not as speculators. 

As impact investing enters a new decade, those who are up to the challenge and able to engage Asia’s traditional private investors with the right risk-return-impact profile stand to unlock billions.

 

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