The Rise Of Impact Investing In Asia

The concept of impact investing has existed since it was first coined in 2007. Today, impact investing is steadily becoming a recognised and legitimate investment practice, with over 3,349 organisations managing $1.164 trillion in impact investing assets under management (AUM) worldwide.

The potential for impact investing in Asia is particularly significant. While 42 percent of the global wealth resides in this region, there is a stark contrast in terms of inequality and poverty. The region witnesses the largest transfer of capital between first- and second-generation wealth holders.

The rapid economic development in the region coincides with increasing inequality and multidimensional poverty, with vast market gaps in areas such as renewable energy and healthcare. Despite representing 60 percent of the world's population and accounting for 45 percent of the world's GDP, Asia receives only 14 percent of global impact investment.

With the rich cultural heritage, diverse economies, and entrepreneurial spirit across Asia, it is crucial to deploy capital towards sustainable solutions in the region. Given the gamut of cultural, economic, and social nuances, we strongly believe that Asia-driven and Asia-focused impact investing is needed in the current landscape to centre the voices of Asian stakeholders and investors and unpack impact investment from a truly Asian lens.

The Current Disparity in Impact Investing

The potential for impact investing in Asia is particularly significant. Asia has gained traction as an economic hotspot in the past decade. Many countries are transitioning from frontier to emerging market status, offering increased opportunity for new industries, further fuelled by the rise of digital connectivity and e-commerce.

Affluence in Asia has also been increasing rapidly, and the region is predicted to be the third largest growth market in terms of ultra-high net worth individuals between 2019 and 2023. This suggests that more capital is going to be allocated to private investments in Asia.

Yet, the impact of investing in Asia remains less developed compared to the rest of the world. Investors who are keen to make impact investments in Asia face many challenges: a lack of awareness and familiarity with impact investing and impact measurement and management, a limited regulatory foundation, the absence of an efficient marketplace, and a nascent support ecosystem. Regulators’ unfamiliarity with impact investing often ended up creating complex, inefficient, and restrictive policies.

There is also a need to balance the demands of investors and impact organisations to ensure both a mutually beneficial outcome for both parties, i.e., a return on investors’ capital, both financial and impact, and sufficient autonomy for impact organisations to focus on their impact mandate.

Impact investments emphasise generating positive and measurable social and environmental impact through the financial investments made. There are numerous challenges in India and overall in Asia; lack of awareness about impact investment is a primary challenge.

Limited regulatory foundations and a nascent support ecosystem are other areas of concern. It is necessary that impact investors leverage their existing networks and work with relevant stakeholders and ecosystem builders. While the social investment landscape in Asia is uneven, impact investment remains underdeveloped and less understood than other global counterparts.

Impact investing opportunities are primarily in private markets, and they are characterised by investment in the MSME segment, the backbone of any developing economy, with the ability to create positive social and environmental outcomes alongside economic ones. Countries like India have a vibrant entrepreneurial culture, and the venture capital and private equity industries have identified the opportunity and the scale that are feasible and embraced this.

Similarly, investors need to embrace this momentum, channel their capital and support towards these entrepreneurs making a difference, drive growth in this sector, and help create the lacking infrastructure and ecosystem necessary for this growth.

Increasingly, the rise of stakeholder capitalism and the various government commitments to Net Zero have put sustainability at the top of the global agenda. Publicly listed companies, even in emerging markets, are looking at the inherent risks and opportunities that climate change poses while analysing their ESG performance, considering the deeper impact that can be generated.

Profit with a purpose has entered boardroom conversations and strategy. Investing with an impact lens is being considered by numerous asset managers, and impact investing is being used by many to distinguish themselves and help create a new asset class for their investor base.

In recent years, global leaders and countries have recognised the importance of addressing challenges related to climate, gender, and healthcare. While all countries contribute to greenhouse gas emissions and feel the consequences of climate change, those with vulnerable developing economies and limited resources to adapt are burdened in a disproportionate manner.  

An effective way to change the situation is by investing in these priority areas, accelerating innovation, and encouraging investments. Ensuring impact investments in these sectors would also help advance the United Nations’ 2030 Agenda, a global initiative comprising the Sustainable Development Goals (SDGs) aimed at addressing various critical challenges facing the planet.

In South Asia, the themes that are going to be topical will revolve around climate, which is an overarching global exigency covering topics such as renewables, electric vehicles (EVs), regenerative agriculture, and nature-based solutions.

A reduction in economic inequalities is a prerequisite, as a developing economy seeks balanced economic growth and the empowerment of the previously disenfranchised.  Hence, access and inclusion will continue to be the other emerging trend and will include a gamut of themes such as health, education, gender, and financial.

Participation in capital markets is necessary, and potential investors can be encouraged by highlighting past positive experiences and learnings. Positive impact stories will help broaden the horizons of the investor community and demonstrate the success of impact investments and the economic and development impact generated.

Partnering with regional and local players will help make an impact locally and monitor the returns. These local players can also help in matching individual or organisational impact objectives with the availability of capital. Investing with ecosystem builders will provide capacity-building support for social enterprises and allow greater clarity in the classification of impact funds and capital.

Proactively collaborating with prominent platforms will help in the easy sharing of knowledge and local databases. Creating a customised strategy will require efforts and inputs from all; leveraging existing resources, changing mindsets to tackle various socio-economic challenges, education, reducing market inefficiencies, and greater collaboration between all stakeholders are key.

(Lavanya Jayaram, Regional Director, South Asia, AVPN)