Impact investing has emerged as a mega-trend in global financial markets, but research indicates that a lack of awareness about its commercial and strategic value is limiting investment.
Impact investing, whereby an investor expects a financial return while also making a positive environmental and/or social contribution, works best when a government sponsors and facilitates impact investing practices and initiatives.
While the research focused on the Hong Kong financial system, additional key success attributes such as an appropriate institutional framework, the need for sophisticated intermediaries to help with structured financing, and high-quality disclosure are common to all successful impact investing efforts around the globe.
Globally, regions such as Europe, the US and, to a lesser but increasing extent, Japan, have made the most progress.
ESG: fiduciary duty or essential risk management?
When asked broadly about their approach to responsible investment, most investors believed considering sustainability was integral to the investment process. Some went further to argue that it was a core element of maximising financial returns on the basis that sustainability ensured that a company maintained a social license to operate. The majority of institutions interviewed said their investment mandate required sustainability to be considered.
Impact investors are more likely to view environmental, social and governance (ESG) issues as an ethical obligation, while institutional investors and intermediaries perceive it as core to the risk analysis and management process.
Of those surveyed, the majority of institutional investors have received some form of enquiry from their asset owners as to the availability of sustainable investment products, and those enquiries had increased during the past two years. Significantly, the Asian investor base was less likely to ask, though the pace of enquires had started to accelerate.
The research asked institutional investors about impact investing and whether the returns were adequate in both financial and impact terms.
Almost all respondents to the survey believed it possible to consistently produce both positive financial and environmental and/or social returns through investing. The question of whether there was a trade-off between the two was less clear cut.
Around half of the respondents deemed that there was no reason to expect a trade-off between impact and financial returns, assuming a robust asset allocation was in place. The other half believed a trade-off may be necessary in certain scenarios, such as earlier stages of a business, or during short-term market fluctuations.
Education, timing and disclosure
While the return trade-off was top of mind for most investors, other factors playing a role in investment decisions included:
- That underlying projects, especially those addressing climate change, were inherently long-dated and complex, yet the financial system was structurally skewed towards short-termism;
- That definitions and terminology around impact investing were inconsistent, causing confusion among asset owners and asset managers;
- That education and awareness remained a challenge, with many ESG issues still debated; and
- That a lack of – or inconsistency in – information was seen to add to the cost of doing due diligence, particularly with regard to disclosure of impact metrics.
An increase in the uptake of impact investing would benefit from greater education and awareness-raising of the commercial and strategic value of opportunities in this area.
Less short-termism in investment horizons, stronger leadership by major asset owners, policy support in the real economy by governments, better institutional expertise and capacity, and improved reporting of impact measurement would all also better enable success of the field.
The Opportunity for Impact Investment Among the Hong Kong Institutional Investor Base was part of Ms Woodlands’ Master of Social Sciences from the University of Hong Kong, completed in June 2018. Ms Woodland interviewed 20 Hong Kong based individuals across 18 organisations, including large institutional investment firms, smaller impact investment firms and intermediaries and service providers.
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