Dialogue with SFi: Insights from Managing An Impact Investing Platform

Sustainable Finance Initiative (SFi) is a community of private investors who believe in Capital that Matters, supporting them in their vision of a world where Sustainability is synonymous with Finance. Its mission is to mobilize private capital for positive impact and accelerate Asia towards a sustainable finance hub by empowering People, Policy, Practice and Product. The initiative is incubated by RS Group, a family office based in Hong Kong. As an independent knowledge sharing platform，SFi is currently trying to absorb the diverse voices from the market, and provide investors with learning, sharing and practice opportunities related to sustainable finance. SFi serves as a platform to facilitate the communication between investors and broader stakeholders, adding vitality to the impact investment market in Hong Kong and Asia.                                                                                       

"Considering the differences in cultural philosophies such as Confucianism, collectivism and social harmony in Asia, whether we should develop a more suitable language and narrative system in the Asian market to talk about impact investments is a question worth pondering. "

Q: Why are you personally involved in impact investing?

A: When I was studying for a bachelor’s degree in the United States, I was very interested in various social issues like migrant labor, childhood literacy, sustainable agriculture etc.. At that time, I considered working for an NGO after graduation, but my professor suggested that I should work in a commercial for-profit organization first to learn practical financial knowledge, so I followed his advice.

While I was working in investment banking out of Hong Kong, I was focusing on commercial transactions like IPOs and M&As. During the process I found that the market seemed to pay very little attention to the environmental and social related issues which could be financially material in the longer term. These findings led me to question traditional financial models and to think about how to strike the right balance between profit and purpose.

In 2008, I was psychologically shaken by the Sichuan earthquake, and at that time the concept of impact investing was first conceived by organisations like Acumen founded in the United States, so I began to study and explore impact investing. At the same time, I also participated in some volunteer projects with   the philanthropy department of JP Morgan. In 2009, a friend introduced me to Annie Chen at RS Group who was migrating her portfolio to align with her sustainable and impact goals. After some interviews, I had the honor to join RS Group as their first full-time employee and eventually became their Director of Investment.

At that time, I made this career change without thinking too much, because I was not sure whether impact investing in Hong Kong could really scale up, but thought this way of investing should influence the future of the financial industry. After all, most investors and banks were not familiar with ESG and impact investing at that time. In hindsight, I still believe I have made the right choice.

Q: What was the biggest question you had when you first learned about the concept of impact investing? Did you have any observations about impact investing in Asian markets at that time?

A: One point I was most confused and concerned with impact investing was its financial return. At that time, I didn't see the opportunity in the market which not only created impact, but also achieved market-level financial returns. Admittedly, there were some social enterprises and microfinance companies in the market which could achieve these two goals, but there were still some controversies and questions around their efficacy -- and this was a big bottleneck in my opinion.

Despite these doubts, I still had faith in the development of this field. I saw that the world is moving towards extreme conditions, and the associated problems are getting worse, which required some fundamental solutions. Looking back at the past decade, that is exactly what has happened.

In my view, the concept of impact investing has changed over the past decade. In the early days, people focused more on social enterprises and microfinance projects, and the trade-offs of specific product types. There was also a debate about whether impact investing was a single asset class or an approach that covered all asset classes. At that time, there was only some superficial understanding of impact investing in the Asian market, which mainly referred to concepts and frameworks in European and American markets. Fast forward to today, we have 19 family offices and private investors on the SFi platform, and it’s encouraging to see that Asian investors are really thinking about how to take part in impact investing. In general, there are some people who would prefer to allocate their investments using a total portfolio management approach, while the majority still prefer to try on a small scale within a particular asset class. Some are more strategic, and others are opportunistic. We conducted an investor survey in 2019, which was also an attempt to look for the answers of these questions related to the Asian impact investors and understand their investment strategies, drivers and preferences when it comes to impact investing.

Q: Why did RS Group decide to set up SFi to continue to promote the work related to impact investing?

A: In 2016, RS Group released their impact report, which described in detail how RS Group had built its portfolio as an impact investing institution in Asia, what mistakes it had made, and what lessons it has learned. A number of Asian family offices and investors were attracted by this sharing and wanted to exchange experience with each other. In the process, RS Group realized that as a family office, it was not well equipped to host this conversation. The exchanges need to go deeper than simply one report and opportunistic conversations, and a more effective approach was needed. In order to allow more exchanges for investors in Hong Kong and the Asian market, RS group established a separate platform to continue to promote the development of impact investing in the Hong Kong market—this is the inception of Sustainable Finance Initiative.

We also noticed that many investors were hoping to learn from each other and exchange program experience, but through the investigation we found that not all investors had enough infrastructure or know-how to realize their plan. Therefore, by providing such a sharing platform, investors can study together, share experiences, learn while doing, which is exactly SFi’s vision.

Q: What categories of impact assets are the investors in the SFi most concerned about?

A: Through our survey, we found that the most preferred approach is a total portfolio management strategy, which may include multiple asset classes. Secondly, investors pay high attention to private equity investment (including venture capital, growth equity investment). The third category is equity investments in listed companies and early stage private equity (angel/pre-seed stage).

Interestingly and not surprisingly, we also found that the asset allocation preferences vary with the market environment. After the outbreak of COVID-19, investors reallocated assets to reduce risks, such as increasing their holdings to some high-yielding products (private debt and fixed income) and cash. The reason for this might be investors hope to reduce their risk exposure and increase their liquidity due to the uncertainty ahead.

Q: Has COVID-19 resulted in a fundamental impact on investors' investment preferences?

A: Absolutely. First of all, there is a much greater acceptance to ESG and impact investing in the market, and there are fewer questions about whether ESG or impact investing is necessary. For example, COVID-19 has enabled people to become more aware of the social and environmental impact of company supply chains, and recent fluctuations in oil prices and its climate impact. From the mainstream media news, it is obvious that sustainable development is inevitably taken into account for investment.

However, people have different choices to translate this perception into behavior. Some investors in industries such as real estate, hospitality and manufacturing, faced with a big external shock, have focused on managing the business and making sure it has enough operating liquidity and resilience. During these challenging times, some have turned to philanthropic giving to provide immediate relief to local communities. Some investors, given the uncertainty, are also less inclined to invest in long-term or high-risk impact opportunities, and are interested in assets with more liquidity, such as ESG ETFs (net inflows into ESG ETF increased about 30% in the first quarter in 2020) and private debt. Others are turning instead to sectors that are more resilient in the long run, such as healthcare and education in emerging economies, which will be needed on a large scale regardless of the external environment. Given the travel restrictions, we have also seen investors invest into entrepreneurs locally in Hong Kong at a venture stage.

In the face of these changes, SFi has focused on guiding investors on how to maximize the impact of their portfolios at their respective vantage points. What we believe to be important is to keep the momentum and continue the spirit of “learning by doing”.

Q:What do you think of the existence of impact products on the market?

A: From a positive perspective, if more institutions in the market advertise themselves with ESG and impact, there will be more product supply, thus providing investors with more choices. On the negative side, the risks of impact washing makes it more difficult to identify real impact products. We have seen increasing scrutiny from impact investors now looking for verification of impact data or ESG scoring.

What we are beginning to see is an increasing amount of efforts from large institutional players coming up with ESG and Impact investment products. A few trends we are excited about: early stage Asian entrepreneurs that have an impact mindset and are also leveraging technology to grow their businesses, product platforms that democratize access to impact opportunities to smaller investors and innovation of product structures (blended finance vehicles, SDGs or issue-linked instruments/REITs, evergreen ecosystem building focused funds).

Q: In the view of SFi, do investors in the Asian (Hong Kong) markets have different ideas about sustainable and impact investing from investors in the European and American markets?

A: This is what we've been trying to explore. Current terminology and culture of impact investing are primarily created by European and American markets, where there are cultural differences when it comes to attitudes towards wealth management. The history of Asian wealth is also relatively shorter, where family offices managing wealth for more than 2-3 generations is still less compared to say Europe and the US and new wealth is still being created. For example, given the cultural philosophies such as Confucianism, collectivism and social harmony, it is worth considering whether we should develop impact investing in some kind of language and narrative that is more appropriate for the Asian market. Within Asia, we are also dealing with many different countries with various sub-cultures, so it is hard to generalize.   

In addition, investors are at times overwhelmed or confused with the differences between the various impact standards and indicators, how to integrate different assets considering the overall impact, and how to apply the risk/reward/impact three-dimensional framework into their investment process.

We think this is a long journey, in which investors need to figure out what impact investing means specifically to them and what their investment philosophy is, and make them integrated and coherent.

Traditional philanthropy and investment methods are like some scattered points, and what SFi aims to do is to help investors connect the dots. We know that every investor chooses their investment strategy differently, and it's hard to say whether there will really be complete convergence in the future. But at least we can provide them with relevant methods and tools. They may already have a conceptual understanding of these tools, but it does take time to digest them and learn how to apply them.

Q: In the view of SFi, do investors in the Asian (Hong Kong) markets have different ideas about sustainable and impact investing from investors in the European and American markets?

A: This is what we've been trying to explore. Current terminology and culture of impact investing are primarily created by European and American markets, where there are cultural differences when it comes to attitudes towards wealth management. The history of Asian wealth is also relatively shorter, where family offices managing wealth for more than 2-3 generations is still less compared to say Europe and the US and new wealth is still being created. For example, given the cultural philosophies such as Confucianism, collectivism and social harmony, it is worth considering whether we should develop impact investing in some kind of language and narrative that is more appropriate for the Asian market. Within Asia, we are also dealing with many different countries with various sub-cultures, so it is hard to generalize.   

In addition, investors are at times overwhelmed or confused with the differences between the various impact standards and indicators, how to integrate different assets considering the overall impact, and how to apply the risk/reward/impact three-dimensional framework into their investment process.

We think this is a long journey, in which investors need to figure out what impact investing means specifically to them and what their investment philosophy is, and make them integrated and coherent.

Traditional philanthropy and investment methods are like some scattered points, and what SFi aims to do is to help investors connect the dots. We know that every investor chooses their investment strategy differently, and it's hard to say whether there will really be complete convergence in the future. But at least we can provide them with relevant methods and tools. They may already have a conceptual understanding of these tools, but it does take time to digest them and learn how to apply them.

Q: Investors have yet to fully embrace the concepts of ESG and impact investing. What do you think are the remaining obstacles?

A: As advised from the insights of our previous investor survey, we noted that the main obstacles were due to the insufficient support services throughout the impact investment process, namely deal sourcing, due diligence and impact measurement. Admittedly, more and more impact investing opportunities were introduced in Asia, however, investors are still searching for high-quality investment opportunities with good track record. On the other hand, some Asian impact investors do not have enough infrastructure to conduct in-depth analysis and monitoring investments in-house, and therefore need the help from external consultants.

With this in mind, SFi is trying to bridge this gap by being a sounding board and offering consultancy services to our community in impact diligence and impact measurement and monitoring.

Q: How to communicate with public policy and regulatory authorities to promote impact investing? What do you think of the role that Chinese government plays in the impact investing market?

A: As a natural consequence of the development of sustainable finance in Hong Kong, in the past two years we have seen the introduction of various regulations and initiatives revolving around the topic:

The Hong Kong government took the key steps needed to create a strong local market by committing to a green bond issuance program, and established the HK Green Bond Grant Scheme to subsidy the certification.

The Securities and Futures Commission (SFC) introduced its“Strategic Framework for Green Finance”, which raised the credibility of Hong Kong’s green finance product offerings. Moreover, The Financial Services Development Council (FSDC) released an ESG Strategy with key recommendations on how policymakers can support companies and investors to collectively develop a robust ESG investment ecosystem for Hong Kong. When relevant, the SFC also actively involves industry participants to provide views in consultations, to make sure that proposed regulations or initiatives actually reflect the needs of the Hong Kong market.

The Hong Kong Monetary Authority (HKMA) held its first conferences on green and social bonds in collaboration with the International Capital Market Association and the Peoples Bank of China.

The Hong Kong Exchanges and Clearing Limited (HKeX) issued a corporate governance code and related Listing Rules. HKeX also updated their ESG Reporting Guidance to account for international climate-related disclosure recommendations, and became a partner of the United Nations Sustainable Stock Exchanges Initiative (SSE). 2020 saw the launch of HKeX Sustainable and Green Exchange (STAGE), an online portal to provide greater information, access and transparency on a wide range of sustainable green and social investment products.

Another important development in the past couple of years was the launch of Hong Kong Green Finance Association (HKGFA), which aims to gather industry experts and provide policy suggestions to the HKSAR Government and other regulators in developing green finance in the city.

The HKMA and SFC initiated the establishment of the Green and Sustainable Finance Cross-Agency Steering Group, with the goal of coordinating the management of climate and environmental risks to the financial sector, accelerating the growth of green and sustainable finance in Hong Kong and supporting the Government’s climate strategies. This Steering Group shows how Hong Kong is taking a coordinated approach to promoting the industry and addressing the climate crisis.

SFi regularly engages with local policymakers on behalf of its investors to express collective views for positive policy development. For instance:

we produce policy spotlights to showcase how Hong Kong’s regulatory and policy landscape is changing to encourage and foster sustainable finance

We respond to policy consultations representing the views of our investor community

SFi plays an active advocacy role through various avenues:

As a member of various taskforces (e.g. HKGFA, SFC’s Technical Expert Group), SFi aims to strengthen the sustainable finance ecosystem in Hong Kong.

We engage private investors and other stakeholders by holding events and facilitating attendance to international events

We are also partnering with local and international groups to grow sustainable finance in Asia (e.g. Our Hong Kong Foundation and the Asian Venture Philanthropy Network).   

Q:What would you like to learn about the mainland China's impact investing market now?

A: We have seen a lot of momentum around impact investing in China. I am curious to learn whether China has found an effective way in building a common language with private investors and corporates on impact standards or frameworks.