Friday 21 Jun 2024
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This article first appeared in Wealth, The Edge Malaysia Weekly on September 27, 2021 - October 3, 2021

The tremendous toll that the Covid-19 crisis has taken on the world has triggered a re-evaluation of the way we live. While the economic and health crisis has exacerbated existing inequalities, it has cast light on the unequal impact across society and fuelled the demand for impact investing.

The pandemic has reminded us as individuals and investors of how the biggest crises, whether medical or environmental, demand a global and ambitious response, says Eric Rice, head of impact investing at BlackRock. “Impact investing enables investors to directly contribute to positive environmental or social outcomes by financing organisations that are working to solve some of the world’s greatest challenges,” he adds.

The growing resilience of impact investing has much to do with the fact that the pandemic has reinforced the importance of environmental, social and governance (ESG) issues and accelerated the transition to more inclusive capitalism.

S&P Global Market Intelligence analysed 17 ESG-themed exchange-traded funds and unit trusts (with assets under management of more than US$250 million) and found that 14 had outperformed the Standard & Poor’s 500 index in the first seven months of 2020. 

This is because corporate leaders are recognising that ESG performance, in addition to financial performance, is an important measure of organisational success, says Roshini Prakash, product director (knowledge and insights) at the Asian Venture Philanthropy Network (AVPN) in Singapore.

The pandemic, for one, has accelerated the issuance of bonds related to the UN Sustainable Development Goals (SDGs), in particular SDG 3, which refers to good health and well-being. By mid-April 2020, the total value of social bonds issued had swelled to US$55 billion, swiftly surpassing the total value of bonds in the whole of 2019.

The growth of the segment, which is often regarded as an extension of philanthropic initiatives, is such that in April 2020, BlackRock — the world’s biggest asset manager — launched its Global Impact Fund. The fund is distributed locally by RHB Asset Management Sdn Bhd (RHBAM) to sophisticated investors.

Covid-19 has created a sense of urgency and increased motivation to achieve international ESG targets, asserts Yew Jian Li, founder and managing director of Citrine Capital Sdn Bhd. “Although sustainable and impact investing are not new, the growing realisation of their necessity is new.”

“ESG issues, which were perhaps considered a ‘luxury’ in the past, have become crucial business continuity mechanisms during the pandemic and lockdowns. Recognising this, I believe managers and investors, impact or otherwise, will aim to do minimal or no harm going forward.”

Malaysia-based Citrine invests in for-profit start-ups that aim to have a positive impact on society.

The positive sentiment in impact investing — which is commonly directed at projects in the renewable energy, housing, healthcare and education sectors — appears to be more resilient than in conventional themes, says Tan Jee Toon, chief investment officer (Asia-Pacific equities) at RHB Asset Management Singapore (RHBAMS).

“This social awakening [caused by the pandemic] has led to the growth of ESG funds in the asset management industry. Investors are now actively seeking ways to explore how they can utilise their investments and how to work with fund managers to create a positive impact on society,” he adds.

“The rise of the ‘social’ factor within ESG in the past year has resulted in increased scrutiny on corporate sustainability practices. The pandemic has ultimately amplified the correlation of financial returns with ESG practices. In Asia, the awakening has just started and will take off from here.”

Companies rising to the challenge

Social enterprises have risen to alleviate these inequalities, notes Roshini. Those that have stood the test of time have shown remarkable agility and resilience in pivoting their business or service delivery models to ensure continuity in their programmes and services.

“They have demonstrated their role by tapping into new markets and meeting the needs of underserved communities and, in some cases, attracted more impact/sustainable investing interest as a result,” she says.

A report by the British Council in December 2020, based on a global survey of social enterprises’ response to Covid-19, notes that only 1% of social enterprises have shut down as a result of the pandemic, while 7% had to close their services or provisions temporarily.

According to a report published by the Global Impact Investing Network (GIIN) last year, 57% of 294 impact investors said they would maintain their 2020 investment plans, while 16% even expected to increase the amount of capital invested.

Even so, the UN has estimated that at end-2019, there was a shortfall of US$2.5 trillion in developing markets alone required to address the issues identified in the UN SDGs, says BlackRock’s Rice.

“This worsened in 2020 due to the pandemic as the need for solutions increased. In short, the demand for solutions to the world’s most pressing problems far outstripped the current supply. Moreover, existing contributions from companies, governments and other organisations are not nearly enough to meet this need,” he says.

The Global Impact Fund does this by focusing on companies that are agents of change, bringing new technologies and providing services to underserved populations.

“Now more than ever, we can harness the power of public equities to orient capital towards helping close the gap. Specifically, public equities offer the potential to put capital to work toward social and environmental progress at an unprecedented pace,” says Rice, who is based in San Francisco, California.

“As at the end of 2019, the total assets in private market impact investing worldwide were estimated at US$502 billion, with non-impact private equity amounting to another US$5.3 trillion, as stated in a study by McKinsey & Co. By comparison, the market value of public equities totals US$93 trillion. Of course, only a fraction of private or public market investing will shift toward impact, but it is easy to see that the deployment of only a fraction of the public markets’ US$93 trillion into impact investing could readily create systemic change.”

Pivotal moment to rebuild society

The awareness of ethical investing — which includes both ESG and impact strategies — is necessary to rebuild economies and societies on stronger foundations, says Citrine’s Yew.

Roshini concurs. “Whether one chooses to give a grant, provide debt, take an equity position or even a blended finance approach, impact investing is the choice for positive change.”

This can be seen in the number of impact funds that have mushroomed since the pandemic hit last year. 

Vietnam-based Patamar Capital, for example, launched the Beacon Fund in September 2020, focusing on debt products for moderate growth and cash flow for women-led businesses, which saw an 87% drop in business during the pandemic, compared with their male counterparts.

“Patamar realised there was a vastly underserved segment of businesses whose growth profile did not match the expectations of venture capital and private equity firms. But these businesses are creating considerable value for their customers and stakeholders,” says Roshini.

“With an initial target of US$50 million, the fund will support women-led businesses and businesses that impact women through the value chain with working capital. The investment vehicle’s cheque sizes will range from US$500,000 to US$2 million, though it said this could be smaller if it spots businesses that contribute to Covid-19 recovery measures.”

Singapore-headquartered private equity fund provider Quadria Capital, on the other hand, has launched a US$595 million fund to address the shortcomings of public health infrastructure. The Quadria Capital Fund II, which was launched in March last year, invests in leading Asian healthcare companies to generate returns and create a positive social impact. “It capitalises on the rising demand for infrastructure such as hospitals, and high-quality products and services in underserved markets,” says Roshini.

Although the perception that impact investing requires a profit “haircut” still exists, the younger generation of investors is looking beyond pure profit maximisation strategies and they are embracing the power of capital as a force for good, says Yew.

“They [millennials] demonstrate great interest in aligning all aspects of their lives, including financial management and investments, with their values and principles. As such, when this generation begins to achieve and inherit wealth, their investment decisions will likely adapt to these interests,” she adds.

RHBAMS’ Tan believes that investors no longer have to sacrifice financial returns to achieve social or environmental returns. “But rather, responsible investing can yield potentially more benefits. As such, impact investing has gone from an initial niche area of focus to the centre of the spotlight,” he says.

Food, green energy, healthcare and financial inclusion

Apart from Covid-19-related inequalities, impact funds are crucial to address challenges such as climate change, food scarcity and clean energy.

“A key trend is sustainable food and agriculture. By 2050, the global food system will need to double food production to meet the population growth expectations while adopting more sustainable and lower carbon intensive methods to produce the food on our plates,” says BlackRock’s Rice.

This is essential to decouple food sector growth from global carbon dioxide emissions, he says. “We believe that innovative sustainable food companies within these themes are positioned for growth in 2021 and beyond.”

The ultimatum for some of the world’s largest economies such as China for cleaner energy is also accelerating renewable energy adoption.

“We see increased room for growth, disruption and innovation as China, among others, moves towards a ‘net zero’ future. Economic stimulus is likely to be focused on green industries, such as the EU’s Green Deal and the US administration’s Green New Deal. These, in combination with improving cost competitiveness of renewable energy and technologies, should continue to drive adoption and demand,” says Rice.

In Southeast Asia, BlackRock sees opportunities in public healthcare and financial inclusion, he adds. “Specific to public healthcare, the trends we observed in 2020 are set to continue, and in some cases accelerate, in 2021. These include a continued transition towards value-based care, increased traction and interest in precision medicine and targeted therapies and a general focus on increasing the quality of care while decreasing costs.”

Within financial inclusion, there are opportunities in financial technology companies that have benefitted from Covid-19, he points out.

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