Dialogue with LGT VP (China): A pioneer institutional impact investor

Interviewee: Crystal Ding, LGT, VP (China)

CASVI: Why did you join LGT and devote yourself to impact investing?

Crystal Ding: Before joining LGT, I have been doing mainstream investing, including private equity, venture capital, investment banking, and corporate mergers and acquisitions. When looking for career opportunities in Shanghai, I got exposed to a new field, venture philanthropy. For me, there were some personal and family reasons behind this seemingly natural transition. More than a century ago, the ancestors of parents’ families founded companies and social organizations and participated in the industrial rejuvenation – while engaging in public causes like healthcare, education, and philanthropy. Philanthropy has always been at the heart of our family’s spiritual inheritance, which also inspired me to volunteer in CSR activities throughout my career. Yet, I had always thought about how much value could be created through traditional philanthropic engagement, including one-time donations and visits to disadvantaged groups. Until I joined LGT, it became apparent to me that venture philanthropy is a brand-new concept where we could use commercial methods to solve social problems on a large scale. And I could also make full use of my previous experience and connections in the investment field. Therefore, this great opportunity allows the ideal combination of my lasting interest in philanthropy and investment experiences.

CASVI: Could you tell us about the changes in the understanding of impact investing over the past decade in China from the perspective of LGT?

Crystal Ding: LGT is one of the first batches of organizations to promote venture philanthropy and impact investing in China. When I first heard about the concept of venture philanthropy from LGT in 2010, it was still a brand-new field in China. Therefore, I spent a big chunk of my time advocating and promoting this concept, like “what is venture philanthropy” and “what is social enterprise”. While traditional charitable foundations were the mainstream, we promoted, advocated, and incubated the concept of venture philanthropy through entrepreneurial competitions, social entrepreneur skills training programs, and venture philanthropy funds.

During the 10 years of working in LGT, I was very fortunate to have witnessed the huge development of venture philanthropy in China from the very start. Therefore, I’d like to share some observations based on LGT’s experiences in China.

In the first stage, from 2010 to 2013, domestic venture philanthropy was mainly driven by charitable funds, and the invested organizations were mostly well-run early-stage social enterprises. At that time, LGT went by the name of LGT Ventures Philanthropy Foundation, and most of our investment targets were start-up social enterprises or projects at the initial stage. In fact, some limitations emerged as a result of charitable foundations piloting venture philanthropy. First, the charitable nature of foundations could hardly accommodate adequate professional due diligence. Second, they were not professional investment institutions and lacked professional investment capabilities. In addition, most start-up management teams at that time came from the field of philanthropy, and they were dedicated to solve social problems through commercial means with their pure enthusiasm. Between 2010 to 2013, we supported China Foundation Center (CFC), Shangri-La Farms, and other market-building projects in China, as well as launched the Smiling World Accelerator Program (SWAP), which provided USD 50,000 financial support and a variety of professional/intellectual/market resources needed to fuel the next stage of development.

In the second stage, from 2014 to 2018, we saw some local and international investment institutions gradually entering this field. For the industry as a whole, this period marked the transition from venture philanthropy to impact investing. LGT also started transformation and changed its name to LGT Impact Ventures. We believed that it was less efficient to invest in small-scale well-run social enterprises, as the overall time and resources spent in the due diligence on projects of varying scale were roughly the same. LGT could hardly meet the goal of generating scalable social benefits simply by investing in early-stage social enterprises. Therefore, the firm shifted to focus more on financial sustainability and impact scalability. In 2016, we invested in Mama+, an e-commerce platform committed to the development of mothers in China, bringing them quality products at a fair price and providing them with opportunities to earn complementary revenues. We hoped to achieve scalable social impact by influencing this for-profit company towards an impact-oriented path. In terms of financial performance, the valuation of this project doubled one year later. This was our first attempt at transformation, a different approach from the investment portfolio of small-scale well-run social enterprises. For most mainstream investing funds, Mama+ is a pure e-commerce start-up targeting mothers and infants. But LGT instead attempted to apply impact investment principles to this for-profit start-up, especially at the post-investment stage. We have specially recruited a senior consultant to work on social impact integration, such as incorporating social impact indicators into the core KPIs, which was not a key focus for pure financial investors.

The third stage started in 2019 when some mainstream investment institutions got attracted to impact investing, such as TPG's Rise Fund, Bain Capital's Double Impact Fund, Blackrock, KKR, etc. They began to establish impact investment funds and invest in larger-scale projects. For instance, Sequoia and Ant Financial co-invested in CD Finance in China. In the meantime, academia chose to add ESG investing into impact investing. Initially, it was generally believed that impact investing referred to investments in the primary market, while ESG-related investment referred to those in the secondary market. That said, these two concepts are not in contradiction neither. ESG investing has always been an important part of the sustainable initiatives of LGT. For instance, LGT Capital Partners, a global fund of funds, uses an ESG checklist to evaluate the ESG performance of invested organizations. The impact investing and venture philanthropy, that LGT has been promoting for years also aim to tackle social issues with business solutions, which are totally aligned with ESG goals.

CASVI: What were the attitudes and opinions of companies and traditional VC co-investors when LGT started to invest in commercial companies and integrate impact?

Crystal Ding: In fact, many founders and management teams have the intention of “helping more people” as stated in their mission statement, but they may not know the concept of social enterprises. For example, the vision of Mama+ is “helping mothers to be better", which means empowering women. The initial targets were full-time mothers from first and second-tier cities. After successfully carrying out the plan, we helped the store integrate impact and sink their business to third and fourth-tier cities or even rural areas, making it readily accessible to more people in need. During the process, we did extensive in-depth research on the business model of Mama+ by benchmarking it against domestic and international peers. Then we guided companies on how to better integrate and embed impact into the core values and business models, rather than treating impact as a separate component like CSR. Two years after its establishment, Mama+ has set up the largest mother community in China, benefiting millions of families. In 2016, Mama+ signed the “Women’s Empowerment Principles” (WEPs) issued by UN Women, becoming the 24th Chinese company to be added to the WEPs’ list.

For traditional mainstream investors, they did not know what impact investing was at first. Therefore, we explained and advocated related concepts to co-investors in the process of co-investing, including setting some impact KPIs. At the early stage of the collaboration, every small change, however trivial, to the investment process took a lot more effort because co-investors didn't comprehend the significance. For example, we hoped to add some clauses related to impact management to standardized legal documents, which the lawyers could hardly see the reasons behind such a change. To our great relief, with impact-related discussions constantly being discussed at the quarterly most investors eventually came to a shared understanding of the philosophy behind impact investing. And the communication between other investors and us became smoother.

It is our understanding that financial returns, social and mission realization are not in contradiction but complementary to each other and that the impact investment model does not sacrifice financial returns to gain social benefits.

In the post-investment management, we recruited impact fellows for Mama+ to specifically strengthen impact integration. For any commercial player-facing fierce market competition, survival comes first. Therefore, when prioritizing resources allocation, we always make it an open and candid conversation with the management while keeping impact KPIs on track. “We are excited to collaborate with LGT VP, which will bring in its impact investing experience and help us shape and strengthen our social impact mission," says Wu Fanghua, Founder and CEO of Mama+.

How does LGT measure and manage impact investments in the Chinese market?

Crystal Ding: LGT adopts impact measurement tools for quantitative and qualitative analyses, as developed by our colleagues in the Swiss headquarters referencing from prevailing impact measurement tools like IRIS. The quantitative analysis is mainly based on a set of indicators, some of which are operational KPIs, such as monthly sales, number of users, revenue growth, etc. These impact indicators overlap with key business indicators, so there won’t be an additional burden on the enterprises. For the qualitative analysis, it is reflected more at the initial stage of investment. We will use a diagram of impact measurement that reflects the logical process of impact generation as business activities are rolled out from input to output. This impact generation process is usually under close scrutiny at the investment committee when making investment decisions: why investing in this project, what is the intended social impact, and how is it created. Compared with some standardized methods of impact management, such as filling out forms and taking scores, we place a greater emphasis on the essence of impact management and analyze it from a practical perspective.

CASVI: What do you think will be the opportunities and challenges faced by foreign institutions participating in impact investments in China?

Crystal Ding: I think it is a good thing if international mainstream investment institutions and impact investment institutions can enter the Chinese market. In fact, before LGT was founded, some institutions did enter but quitted later. They might lack local teams and an in-depth understanding of the Chinese market. In the long run, I think China will still be a growing market for foreign capital. As the interest rate is generally low worldwide, the market rate of return in China is attractive in a sense.

In my opinion, if there are more domestic capital or funds participating in impact investing, they will be an important driving force because domestic players do understand the overall environment in China. International institutions investing in China, need to build independent local teams to carry out their work.

CASVI: What do you think will be the focus of impact investing in China in the next few years?

Crystal Ding: Firstly, I believe that the healthcare industry and high-tech industry will be two focuses where impact can be better integrated into the mainstream business. Especially after the pandemic, people are more concerned about their health and impact investing. If we have a broader definition of impact investing, the healthcare industry is definitely part of it. To be fair, patients are also a relatively vulnerable group. The development of healthcare technology can overcome major diseases and help patients ease their pain. The innovation of healthcare technology is a real solution to improve the quality of human life. How to make the public health system and medical research more inclusive will be very meaningful for impact investing. If healthcare is a vertical dimension, high-tech is a horizontal dimension. Because technology can empower many different industries. Both education and environmental protection industries that LGT focuses on can be empowered by technology.

Secondly, I think the general direction of impact investing in the future is to pursue inclusiveness. Whether in the healthcare, education, or environmental protection industry, high-end services have been provided.

We need to think about how to lower the cost, such as sacrificing marginal benefits, changing the business model, or subsidizing the low-end from the high-end. If we can truly achieve inclusiveness and benefit more people, it could be regarded as impact investing.

CASVI: From the perspective of cultivating the ecosystem of impact investing in China, do you have any expectations for participants such as the government?

Crystal Ding: If the government can vigorously promote the development of domestic impact investing, such as launching social enterprise certification and introducing more supportive policies for social enterprises, the overall development of impact investing will be faster. My first recommendation is to establish a certification system for social enterprises. First, set identification standards of social enterprises which include the industry sector, income source, income distribution, employment structure, and social benefits. Second, establish corresponding identification and evaluation systems, and introduce relevant policies and legal frameworks to support the development of social enterprises. Third, establish a supportive supply chain to provide support and guidance for social enterprises and start-ups. Next, implement pilot projects and help promote social enterprises. For example, pilot projects can be carried out in the healthcare and elderly care sectors first and then promoted to other industries such as education and environmental protection, which can help control the risk. Considering social enterprises and impact investing in China is at an early stage, I hope the government can collaborate with market participants to promote the industry through continuous innovations across the systematic arrangement, operation model, service offering, and advanced governance.