Going the extra mile for greater impact

As impact investing gains traction on the Chinese mainland, experts are calling for more official backing and incentives to chart and sustain the sector's development.

The Chinese mainland has the historical foundation and growing enthusiasm for promoting impact investing, but infrastructure and government support need to be strengthened to allow its huge potential to be fully tapped, experts and industry insiders say.

With growing awareness of social sustainability, impact investing has been gaining attention worldwide. The practice is aimed at bringing about positive social outcomes along with financial returns.

According to the 2018 Annual Impact Investor Survey published by Global Impact Investing Network, 226 impact investing organizations were managing $228 billion in impact investing assets worldwide by the end of 2017. Of the 229 respondents surveyed, 82 percent said their investments had met their expectations for impact performance, and 76 percent for financial performance.

The market has grown more diverse with emerging markets taking up 56 percent of the total amount, the survey showed.

On the Chinese mainland, although the amount of impact investing is still small, diversified players have taken note of the concept, and have initiated, or are considering steps to participate, believing that it's an effective tool for addressing such social issues as education, medical services, elderly care, environmental pollution and food safety, without compromising financial returns.

From the early player of foundations, participants have now grown to include enterprises, investment institutions, government departments and high-net-worth individuals.

"There's voracious demand for impact investing in the Chinese market," said Xu Yongguang, president of Narada Foundation and an active player in promoting impact investing. "It is the largest impact investing market in the world."

He said impact investing is a new concept for most Chinese people at present, so, from the aspect of concept recognition, the country's development in this area is still in its infancy.

But, from the aspect of practice, the Chinese mainland has been working on it for 20 years.

Back in 1998, the Chinese mainland launched a regulation for private non-enterprise units that are defined as organizations offering non-profit social services with private capital.

In the past, public services, such as education, medical services and elderly care, had been provided by the government, without any form of participation by the private sector.

"Those public services were in severe shortage of supply at the time. It was against that backdrop that the government introduced the regulation. It's aimed at attracting private capital to invest in that sector. In this sense, we had already started impact investing from that time," Xu said.

Apart from the historical foundation, stakeholders' growing enthusiasm in the field also provides a solid foundation for the business to grow.

"The Chinese mainland is developing fast in impact investing. Although it was pioneered by the public-welfare sector, it's now dominated by enterprises and investment institutions. In other words, it has entered the mainstream market," said Xu.

Citing the China Social Enterprise and Investment Forum 2018 Conference as an example, he said: "More than half of the participants at the conference were either from enterprises or investment institutions. And, we expect the number to grow further this year."

Contrary to popular belief that investment in enterprises or projects dealing with social issues would have lower returns than others, Xu noted that the returns from impact investing could even be higher than the average market level.

"That's because impact investing normally goes to areas where products and services are in short supply, or we say impact investing is involved in a 'shortage economy'. Compared with business sectors that are grappling with excessive capacity, those areas have bigger demand and less competition, therefore, there's greater potential in making good results."

Ehong Capital - a Shanghai-based private equity management company specializing in impact investing - revealed at the China Social Enterprise and Investment Forum 2018 Conference that it had invested in 30 projects in the past decade, with an average investment cycle of 6.2 years and annual earnings yield reaching 25.6 percent.

"Judging from the rate of return, investment in social enterprises is not lower than that in other areas. And if you look at the investment cycle, it's not longer than other areas as well," said Tang Ronghan, founder of Ehong Capital.

Lvkang Medical Care Group, which secured 32 million yuan ($4.7 million) in funding from Ehong Capital in 2014, has become one of the largest-scale medical care and nursing institutions for the elderly on the mainland, helping to solve the nation's aging problem as it faces a severe shortage of elderly care services.

According to research by China Alliance of Social Value Investment last year, A share-listed companies that have been trying to promote social benefits have also performed well in the capital market, with their share prices growing more than the level of main benchmark indexes.

Named discovering "Social Value 99" in China, the research, which targets CSI 300 companies, singled out the top 99 companies based on the economic, social and environmental contributions they have made.

While average market capitalization of the 99 listed companies was 1.86 times that of the CSI 300's overall average, their average asset, revenue and tax contributions were more than twice the benchmark level, the research shows.

The study is considered a step forward in establishing a social impact evaluation system on the mainland - one of the most critical problems that need to be tackled.

The United States, which has been developing robustly in impact investing, launched the Domini 400 Social Index in 1990. The index provides a benchmark for impact investors by tracking the performance of 400 companies.

"Why is it difficult to build an evaluation system? It's because different enterprises deal with different social problems and investors have different focuses and expectations of their returns. So actually, it's a highly customized issue," said Ling Hui, secretary-general of the YouChange China Social Entrepreneur Foundation.

"But if there's not such a system, investors would not have a clear sense of how much value their investments have created. Their enthusiasm will decrease."

"Social impact evaluation is a major difficulty because it's not an economic indicator. The good thing is that efforts have been made on the issue and we're working toward the building of an index similar to the Domini 400 Social Index," Xu said.

But, infrastructure is not the only condition. Ling reckoned that for the sector to grow, the government should also play a more active role.

"More preferential policies should be provided to those investments that focus on creating social benefits, for example, in the form of tax subsidies, to create a pleasant business environment," she said.

"Moreover, to promote long-term and sustainable development of impact investing, a carefully designed development plan is also crucial. Just like the country's national strategy of reform and opening-up, we've worked out a long-term development route. In this case, we also need to come up with a top-level design."

Ling suggested that a guiding committee comprising representatives of both the government and the private sector be set up to chart the course for impact investing development.

sally@chinadailyhk.com

Named discovering "Social Value 99" in China, the research, which targets CSI 300 companies, singled out the top 99 companies based on the economic, social and environmental contributions they have made.

While average market capitalization of the 99 listed companies was 1.86 times that of the CSI 300's overall average, their average asset, revenue and tax contributions were more than twice the benchmark level, the research shows.

The study is considered a step forward in establishing a social impact evaluation system on the mainland - one of the most critical problems that need to be tackled.

The United States, which has been developing robustly in impact investing, launched the Domini 400 Social Index in 1990. The index provides a benchmark for impact investors by tracking the performance of 400 companies.

"Why is it difficult to build an evaluation system? It's because different enterprises deal with different social problems and investors have different focuses and expectations of their returns. So actually, it's a highly customized issue," said Ling Hui, secretary-general of the YouChange China Social Entrepreneur Foundation.

"But if there's not such a system, investors would not have a clear sense of how much value their investments have created. Their enthusiasm will decrease."

"Social impact evaluation is a major difficulty because it's not an economic indicator. The good thing is that efforts have been made on the issue and we're working toward the building of an index similar to the Domini 400 Social Index," Xu said.

But, infrastructure is not the only condition. Ling reckoned that for the sector to grow, the government should also play a more active role.

"More preferential policies should be provided to those investments that focus on creating social benefits, for example, in the form of tax subsidies, to create a pleasant business environment," she said.

"Moreover, to promote long-term and sustainable development of impact investing, a carefully designed development plan is also crucial. Just like the country's national strategy of reform and opening-up, we've worked out a long-term development route. In this case, we also need to come up with a top-level design."

Ling suggested that a guiding committee comprising representatives of both the government and the private sector be set up to chart the course for impact investing development.

sally@chinadailyhk.com

Investors at a securities company in Guangzhou, Guangdong province. In line with surging impact funding in emerging markets, investment companies on the Chinese mainland have increasingly taken into account social issues such as elderly care and medical services in their pursuit of financial gains. Parker zheng / China Daily

(HK Edition 02/22/2019 page9)

（This article is original from China Daily and reposted by CASVI）

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