Impact investments are made to generate positive, measurable social and environmental effect, alongside a financial return, according to the Global Impact Investing Network (GIIN).

The focus is on providing capital to address the world’s most pressing challenges in areas such as sustainable agriculture, renewable energy, conservation and microfinance.

Most themes are interlinked with the UN’s Sustainable Development Goals (SDGs) and include wiping out poverty, enjoying a quality education and having clean water and sanitation. Building sustainable cities, responsible consumption and production, affordable and clean energy, good health and decent economic growth are among the others.

Such themes are now being replicated within investment portfolios, according to Victoria Leggett, head of impact investing and portfolio manager at UBP.

‘Many funds aim to address a number of these goals, but some have a narrower focus, such as climate change, education or biodiversity restoration,’ she said.

Asia impact investment landscape

Leggett believes it’s also important to recognise that many countries in Asia are heterogeneous, which makes it difficult to employ broad approaches.

‘Environmental regulation and required disclosure for companies around ESG issues varies a lot, although there are some common themes,’ she said.

A key difference between Asia and Europe, for example – and one that has a bearing on impact investing – is the fact that engagement between investors and companies is less common.

On the other hand, ‘in terms of access to impact, there are certain opportunities in Asia that investors outside the region don’t have access to’, she added. ‘For example, the leading players in solar panels, battery technology, the electric vehicle value chain and micro-finance are predominantly Asia based.’

UBP assesses the ‘impact intensity’ of a company before investing, based on its revenue profile, how it allocates capex and research and development and the ambition of its environmental and social targets. 

‘We then regularly engage with the management throughout the holding period, with an aim to support the company to improve on both impact and ESG metrics,’ explained Leggett. 

In addition, certain non-financial key performance indicators, along with the results of its engagement activity, will be reported in its annual impact report.

Wide range of opportunities

According to Yvonne Leung, Asia head of managed solutions at JP Morgan Private Bank, impact investing now consists of extremely diverse opportunities. 

She said it could be categorised by geographic focus on regions, markets in which investors wanted to make an impact or thematically on issues they wanted to address. 

‘The advice we give clients that garners most interest is related to climate technology, transition sectors, education, health and wellness and nature-based solutions such as forestry management,’ she added.

Linked to impact investing is the concept of sustainable fund flows, which is holding up comparatively well in the context of how investors have withdrawn from stock markets this year.

Global sustainable funds attracted $32.6bn of net new money in the second quarter of 2022, according to data compiled by Morningstar. 

However, this represented a 62% fall relative to the $87bn of inflows in the first quarter, reflecting investor concerns over a global recession, inflationary pressures, and rising interest rates.

Asia, excluding China and Japan region, recorded net onflows of $929m into sustainable funds in the second quarter, although this trailed the $1.27bn of net inflows in the first quarter of the year.

Product development also slowed. There were 16 newsustainable fund launches in Asia ex-Japan in the second quarter, including 11in China, two in Malaysia, two in Taiwan, and one in Thailand. 

Limitations of conventional ESG investing

Yet, according to James Yardley, senior research analyst at Chelsea Financial Services, people have started to become aware there are problems with more traditional ESG sustainable investing. 

‘There isn’t really empirical evidence that divesting certain types of businesses, such as tobacco, while buying more sustainable businesses benefits society or the environment,’ he said.

Yardley believes investors are aware of the ‘potential hypocrisy’ with sustainable investing, due to the fact the many ostensibly attractive companies from an ESG perspective may have excessive pricing power and be difficult to disrupt.

‘The issue with these businesses is that they’re not good for society; they’re quite the opposite,’ he said. ‘For capitalism to work best it needs to destroy supernormal returns through competition.’

Yardley also pointed out that both ESG and impact investing have been struggling recently in terms of performance numbers generated.

‘The trouble with impact investing is it typically has a heavy growth bias, which has been difficult in the current rising rate environment,’ he added. ‘The question is, have we seen peak ESG and impact investing as investors focus more on returns, or is this just a temporary blip?’

But impact investing is still a developing asset class so it doesn’t benefit from an established set of principles and standardised definitions, according to UBP’s Leggett.

A lot of progress had been made but there was still some confusion around what impact investments look like and this could potentially lead to clients owning securities they wouldn’t expect to, she said.

‘That’s why the entire investment industry has to play its part.’

Finally, as Leggett stressed, more needed to be done to improve transparency and reduce jargon in the sustainability space, to ensure the constituents of impact funds meet the expectations of clients.