leverage investment to create real impact

The Chinese University of Hong Kong Master of Business Administration QIN KONG

Leverage Investment to Create Real Impact –

An Analysis of Impact Investing in the U.S and

Suggestions for Hong Kong and Mainland China


Executive Summary

The United States is a pioneer in impact investing, comparatively, Hong Kong and

Mainland China are still in an initial stage. This report discusses the impact investing

in the United States, Hong Kong and Mainland China. Then, conducts a case study of

one U.S impact investing firm, and interviews their chairman to understand how to

generates social impact and financial return sustainably. Finally, the report provides

recommendations about how to develop and promote impact investing in Hong Kong

and Mainland China as below.

As an MBA candidate at CUHK, I had a great opportunity to take an exchange study

at the Kellogg School of Management, Northwestern University in the U.S. During

the exchange study, I joined the Net Impact student club, went to a national social

impact conference, and more importantly, experience the U.S culture and business

environment to know reasons behind the impact investing. I would express my sincere

appreciation to Ms. Elsie Tsui, Project Director of CUHK Center for Entrepreneurship,

and the CUHK Business School CSR Center, without their support, I cannot finish

this CSR project report.

Remove regulatory barriers to unlock private

impact investment

Increase the effectiveness of government programs

Provide incentives for private impact

investment

Encourage innovative impact-oriented

organizations and opportunities

Standardize and improve measurements


Research background

I have actively led many Corporate Social Responsibility projects, including

improving environmental awareness with World Wildlife Fund in China, initiating

cultural and educational exchange program with AIESEC in India, facilitating China’s

foreign sustainable investment in Kenya, and in May 2016, my team organized the

10th annual CUHK MBA CSR conference in Hong Kong. Throughout these

experiences, I gain a lot of CSR insights, and I am keen on nurturing more impactful

projects in an effective and sustainable way.

Impact investing is an investment with the specific objective of achieving positive

social and/or environmental impact as well as financial return. It covers many areas

such as agriculture, education and energy. Therefore, impact investment can help

encourage more people to involve in socially responsible projects.

Impact Investing and Its Ecosystem

Impact investing (Exhibit.1) can be defined as investments that create social and/or

environmental impact while being financially sustainable. These impact investors

believe in “doing well by doing good”. Historically, governments and philanthropic

organizations have played a key role in improving the lives of the poorest populations

and although both of them play critical roles in providing basic human services

(feeding the homeless, helping earthquake victims etc.), these efforts are not

sustainable. Alternatively, impact investors help enterprises scale with seed/growth


capital and managerial assistance. Furthermore, impact investing has a conscious

focus on social and/or environmental impact unlike private corporations that might

create hundreds of thousands of jobs and thus create a significant social impact. For

such enterprises, financial returns to their shareholders are the key driver.

The Impact Investing Ecosystem includes venture funds, philanthropic organizations

with program-related investments, organizations providing platform for investors and

social entrepreneurs and professional associations.

Analysis of Impact Investing in the United States

Since the 1950s, the country has been involved in nurturing many impactful investors

and social entrepreneurs, and established related regulating and civil systems

(Appendix 1: A Brief History of Impact Investing in the U.S.). For example, in 1968,

the Ford Foundation began experimenting with Program-Related Investments that

offered the potential for social change. In the 1980s and 1990s, socially responsible

investors diverted capital from South Africa to pressure leaders to end apartheid. In

2007, the Rockefeller Foundation convened a meeting in which several leaders in

finance and philanthropy coined the term “impact investing.” By 2016, The Forum

for Sustainable and Responsible Investment reported that the total US-domiciled

assets under management using SRI (Sustainable, Responsible and Impact Investing)


strategies grew to $8.72 trillion, an increase

of 33% since 2014. (Exhibit.2 and

Appendix.2)

Recently, leaders in the social and financial sectors have demonstrated a growing

commitment to impact investing. Businesses, from startups to multinationals,

increasingly see opportunities to serve new markets with products and services that

have explicit social impact. Investors began to work in concert to build industry

infrastructure and centers of investment activity, such as the Global Impact Investing

Network (GIIN) and the Global Impact Investing Rating System (GIIRS).

High-net-worth individuals have shown tremendous interest in impact investing.

Entrepreneurs and investors, have made significant commitments to impact investing

to unleash the power of entrepreneurship to solve significant social and environmental

problems. Private foundations increasingly see impact investing as an important

complement to grant making. Finally, social service providers have been helped by

philanthropy to test and refine ideas.

Numerous trends have shaped the evolution and growth of SRI within US financial

markets. Money managers increasingly are incorporating ESG (Environmental, Social

and Governance) factors into their investment analysis and portfolio construction,

driven by the demand for ESG investing products from institutional and individual


investors. Climate change remains the most significant overall environmental factor in

terms of assets. At the same time, transparency, anti-corruption, gender lens investing

and community investing are growing fast.

Case study of Equilibrium Capital Group and Its Impact Investment

Equilibrium Capital Group is an impact

investing firm based in California, U.S. It

innovates and manages sustainability-driven real asset investment strategies and

products for institutional investors1. It builds proprietary real asset strategies in three

sectors: Agriculture & Food, Renewable Resources and Sustainable Real Estate. It

delivers institutional quality returns and sustainable alpha through investment

manager-operator portfolio teams.

I had an opportunity to interview David Chen, an adjunct professor of finance and

program director of impact investing at the Kellogg School and chairman of

Equilibrium Capital Group, to discuss impact investing and the Equilibrium Capital

Group. According to David, the firm invests into Asia and emerging markets,

especially the Agricultural sector, with average 12% annual financial return, which

was approximately similar to the 12.25% return from S&P 500 in 20162. For

Equilibrium Capital, it invests in a company for its good performance, solid growth,

profitability, and the ability to sustain growth.

1 Our firm, http://eq-cap.com/equilibrium-firm/

2 2016 S&P 500 Return, https://dqydj.com/2016-sp-500-return/


Impact investing has changes over years. A lot of the first-generation impact products

were venture capital funds that targeted developing countries. But in the last few years,

impact investing expands beyond the venture capital model into instruments across

the entire asset allocation, including private equities, public equities, fixed income and

debt offerings and real assets. Their clients are looking for impact-investing strategies,

asking for impact products, “my money should do more than bring returns.” And

institutional investors are thinking about sustainability as affected by global

demographics, resource consumption, asset productivity and climate change.

Analysis of Impact Investing in Hong Kong and Mainland China

From 2007, the Hong Kong Social Enterprise Challenge (HKSEC), a social venture

plans competition organized by the Center for Entrepreneurship of The Chinese

University of Hong Kong, has been at the frontier in educating students and the public

about social enterprises in Hong Kong3. And starting from January 1st 2016, the Hong

Kong Stock Exchange requires HK-listed companies publish annual ESG report

(Environmental, Social and Governance), as one of the investment evaluation criteria.

Comparably, Impact investing is a very new concept in mainland China that is

unfamiliar to majority of local investors. Aside from development focused

organizations such as IFC and the Asian Development Bank, there are only few social

and environmental impact investors in China (Appendix. 3).

3 About HKSEC, https://www.hksec.hk/page/about-hksec


Although impact investing is currently a new concept in Hong Kong and mainland

China, it should be recognized that the philosophy embodied by impact investing is

deeply rooted in our traditional culture. The spirit of impact investing could actually

be traced back to China’s traditional cultural concepts, such as “while an

underprivileged person should maintain his own integrity, a wealthy person should

contribute to the welfare of the society (穷则独善其身，达则兼济天下)”. From this

perspective, the impact investing concept could resonate with local business

community and the report is going to present recommendations.

Recommendations to Hong Kong and Mainland China

Hong Kong as a financial hub in Asia and gateway to China put it in a unique position

to serve as a social finance hub for the region. At the same time, Mainland China can

also take a leadership in the social impact sector to develop its sustainable economy in

a better-balanced society, in other words, to achieve the Modern China Dream. I

believe both Hong Kong and Mainland China have advantages to lead and success in

the impact investing. The first is the emergence of a global movement for impact

investing seeking the most effective ways to generate social impact. The second is the

growing demand from youth for careers providing both money and meaning as well

as from professionals who are eager to add value to society. The third is the demand

for new organizational structures that pursue dual financial and social objectives. The

fourth is a broadening discussion around cross sectoral as well as cross-economy

partnerships.


To take these advantages, the Governments need to advocate below five strategies

within their leadership and policy formulation, and by embracing the Impact Investing,

Hong Kong and Mainland China are well placed to be an international social finance

and innovation hub.

Remove regulatory barriers to unlock private

impact investment

Increase the effectiveness of government programs

Provide incentives for private impact

investment

Encourage innovative impact-oriented

organizations and opportunities

Standardize and improve measurements


Appendix 1 A Brief History of Impact Investing in the U.S.4

4 US National Advisory Board on Impact Investing, PRIVATE CAPITAL, PUBLIC GOOD, June 2014


Appendix 2 Sustainable Investing Growth in the U.S (Billions), 2005-20165

5 USSIF Foundation, Sustainable and Impact Investing In the United States Overview, 2016


Appendix 3 Selected impact investors in Hong Kong and Mainland China6

6 Tao Zhang, Yong Ge and Ruxian Zhao, Creating the Chinese Dream, Nov 2012


References

Kellogg Insight, What Is the Future of Impact Investing?, December 2, 2016

US National Advisory Board on Impact Investing, PRIVATE CAPITAL, PUBLIC

GOOD, June 2014

Tao Zhang, Yong Ge and Ruxian Zhao, Creating the Chinese Dream, Nov 2012

Philo Alto and P. Ming Wong, ADOPTING THE LONDON PRINCIPLES: Policy

Considerations to Grow Impact Investing in Hong Kong, July 2014

Monitor Institute, Investing for Social & Environmental Impact, Jan 2009

The Case Foundation, A Short Guide to Impact Investing, Oct 2015

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