Positive impact finance in Asia: Poised for the mainstream?
Positive impact finance may put the common good before self-interest but it need not come at the expense of running a profitable enterprise or securing returns on investment – especially in Asia, which is set to be a wellspring of sustainable finance opportunity. These key tenets were driven home by panel experts at Societe Generale’s inaugural Asian Sustainable and Positive Impact Conference, held in Singapore on 5 July 2018.
With an estimated $7 trillion a year needed worldwide until 2030 to realise the Sustainable Development Goals laid down by the United Nations,[1] including investments in infrastructure, clean energy, water and agriculture, the business potential for sustainable finance is huge. And, a significant portion of those investments will be required in the region’s emerging markets. By some estimates, Association of Southeast Asian Nations (ASEAN) members alone will need to boost green investments by 400 percent each year to protect their citizens from negative environmental impacts.[2]
Faced with this reality and a yawning investment gap, many Asian governments, corporations and investors are becoming increasingly conscious of the business case for sustainable finance[3] and are working to secure a more sustainable future for a fast-growing, rapidly urbanising region.
Green bonds and smart cities
Several Asian countries have recognised the power of green bonds -- which fund projects linked to environmental goals -- in bridging the financing gap, and are helping finance the efforts of companies working to adopt environmentally friendly business practices and build sustainable infrastructure.
The use of green bonds for infrastructure projects -- for which there is massive demand across Asia -- is seen as a tremendous growth area. As a result, green bond issuances in the region are estimated to grow five-fold in five years as businesses turn their attention to addressing climate change and sustainable development.[4]
While markets like Singapore are leading the charge on green bonds, Malaysia and Indonesia are looking to green sukuks, or green Islamic bonds, which are compliant with shariah investment guidelines.
Several cities in Asia have also announced partnerships with the private sector to transform themselves into Smart Cities and address challenges such as congestion in transportation, housing and other public services.[5]
Regional challenges
Promoting sustainable finance in Asia, a region marked by economic and regulatory disparity, as well as cultural contrasts, comes with a unique set of challenges. Issues that need to be addressed range from the basic, such as better defining green investment standards and developing credible rating systems for Smart Cities, to macroeconomic factors that cloud the long-term outlook.
Political risk is a significant concern mainly because government support is key to promoting sustainable finance in Asia’s emerging markets, as proven by China’s experience, where the government has taken an active role in encouraging the green bond market.[6] This is in contrast to the green bond markets in the US and Europe, which have developed from the bottom-up, driven by demand from investors.
Asian markets also have to contend with operational challenges such as small ticket sizes, making it harder to pool together a critical mass of investors for green bond issuances.
New products, fresh attitudes
Where issues arise, so do solutions. For instance, transitional funding and blended finance can help connect investors with small-scale regional needs and bring together different players to create products that are not only bankable but also investible.
Even as new products and solutions are being developed, the region is witnessing a transformation of attitudes towards impact investing, with the perceived tension between impact and returns increasingly becoming a thing of the past. There is a greater embrace of and desire to integrate ESG (environmental, social and governance) considerations into the investment process – including among governments and sovereign wealth funds, which are beginning to take ESG investing more seriously.
Ultimately, the more flexible and accessible solutions are offered, the more traction positive impact finance will gain – and here, technology also has a role to play. Digital technology is a game-changer, helping lower distribution costs so companies can reach more people at lesser expense, and changing the economics of access. This is increasingly making projects more bankable and viable from a business perspective than ever before.
It is no surprise then that sustainable investments in Asia have increased over five times between 2014 and 2016 to more than $1 trillion. But, while this growth is impressive, overall investments are still a fraction of the investments seen in European and North American markets, which amounted to more than $21 trillion in 2016[7] – numbers that yet again highlight the potential for growth in Asia.
Retail investors too are doing their bit to close this gap, expressing a growing interest in impact investments. And this trend is only expected to grow as the next generation of investors, who are expected to drive growth in social impact investing,[8] stand to be the beneficiaries of a transfer of wealth worth trillions of dollars over the next two to three decades.[9]
Securing a green future
While part of the shift to sustainability may be altruistic or connected to the pursuit of different values, it is also based on more practical considerations. Longitudinal sustainability research studies by Societe Generale suggest that ESG-integrated portfolios consistently outperform regular portfolios.[10]
The research also shows that while sustainable investing has been around for years, investor sentiment has shifted only recently in its favour. There is no denying that investor interest has been driven by a demonstration of financial performance.
In order to further encourage the growth of positive impact finance in Asia, it will be important to foster innovative and practical sustainable investment solutions that are adaptable to a wide range of client needs while being capable of consistently delivering outperformance.
One example is using in-depth research and financial engineering tools to build various ESG indexes or baskets – focused, for instance, on a specific sector. This provides investors a dynamic solution to access the opportunity provided by developments in the space, while enjoying the outperformance offered by this asset class, as illustrated by Societe Generale research.[11]
Developing such solutions, however, requires both a global footprint and regional expertise – attributes closely associated with Societe Generale, thanks to its role as a pioneer in positive impact finance and in-depth knowledge of emerging markets. Societe Generale, a founding member of the United Nations Environment Finance Initiative and a pioneer of the positive impact finance concept, has channeled its resources accordingly. It has helped finance wind power projects in Australia; hydroelectric power grids across China, Thailand and Malaysia; as well as Taiwan’s largest offshore wind power project. Societe Generale and its subsidiaries have also structured new products and services for institutional and retail clients across Asia, including ETFs focused on UN Sustainable Development Goals.
Looking to the future, it’s clear that while Asia’s sustainable finance journey faces challenges, positive impact is increasingly front of mind for both regional institutions and investors, and can be further supported by innovative products and technologies – a fortunate convergence of events that is set to fuel the sector’s growth for years to come.