Why Impact Investing Is Crucial, but a Challenge for Investors
Katy Yung, the managing partner of the Sustainable Finance Initiative, discusses why existing challenges such as quantifying effectiveness and fear of making a bad investment are hindering investors from backing impact-focused projects
A lot of people would like to get involved in impact investing, but not many of them actually do so.
There are several reasons for that, according to Katy Yung, managing partner of the Sustainable Finance Initiative, a Hong Kong-based community of impact investors: the off-putting level of complexity it often seems to involve; outdated mindsets among the investor community that view investment as a binary choice between doing good and making money; and the difficulty of matching investors with appropriate projects.
“There’s a perennial demand and supply question we keep talking about with impact investing,” says Yung, who previously worked as a banker and for the sustainability-focused family office RS Group, and who is a member of the Gen.T Tribe, the panel of experts who help to nominate and select honourees for the Gen.T List each year.
“On one side, investors are saying ‘I want to do it but I don’t see anything I like’, and on the other, entrepreneurs are asking ‘Where are the impact investors?’ We’ve worked on over 200 projects, so supply is not an issue. There are a lot of mismatches.”
Reliable data is the lifeblood of effective investment, and this provides another reason why people might hesitate to get involved. With all the non-financial metrics involved in impact investing, it can be hard to assess impact in a way that allows meaningful judgements to be made about effectiveness.
That’s particularly true when it comes to the “S” of ESG, with social outcomes often pretty close to unquantifiable. And it can be tough to compare the effectiveness of impact investments across classes—the amount of sustainable energy generated by one project, say, versus the number of children educated by another.
The challenge for rating agencies, then, is to assess companies on such a disparate range of indicators and arrive at scores that are meaningful and sufficiently detailed at the category-by-category level. How do they rate an organisation that employs lots of people on generous terms but also pollutes a lot for instance?
Katy says that coverage is also an issue. “Certain countries might not have regulations that are so vigorous, and there’s a lack of third-party assurance of non-financial data.”
In addition, there are numerous data providers out there, and the level of consistency among them is low. However, she argues, despite the confusing proliferation of different standards, methodologies and weightings, the number of providers shows that the ESG rating ecosystem is vibrant. It might not be perfect, but it’s improving constantly, and too often the shortcomings of data are used as an excuse, with companies insisting that everything should be perfect, rather than just diving in and getting involved.
“We’ve come a long way already,” she says. “We’ve got so much ESG data and so many ratings. Think about 20 years ago, when the stock exchanges weren’t asking companies to report any of this.
“Many people get cold feet when they think about making their first impact investment. But once you do it, you can refine your investment strategy. It’s okay to make mistakes. A lot of Asian investors don’t want to be seen as making bad investments, but you have to experiment.
“We have a front-row seat with family offices and high net-worth individuals, and they’re going from having cold feet to dipping their toes in the water to taking the plunge.”
The problem is that when a lot of investors actually do get involved, they only do so on certain levels—the ones that involve the least commitment. Part of the problem, she says, is that there’s still confusion with the terminology.
“I want to emphasise that sustainable investing is an umbrella term, covering everything between philanthropic giving and traditional investing—from expecting no financial returns to doing it only for the financial returns. As you can imagine, it’s a wide gamut. We’re at the stage where there’s a lot of blurring, and people don’t understand one slice of that spectrum.”
“ESG is more about risk filters: playing defence. It’s risk- and regulatory-driven. Impact is about a more intentional way to deploy capital. A lot of what we’re seeing in ESG now is, one, exclusionary, based on ethics; two, thematic investing; and, three, ESG integration. From a traditional portfolio perspective, if we think about diversification, there needs to be more spotlight on impact investing. It opens up more asset classes, like venture capital and private equity.”
Of course, asset classes like those are only available to wealthy investors. To really fulfil the potential of impact investing, says Katy, the sector needs to find a way to harness the investing power of the majority of people.
“There’s a challenge for retail investors: it’s really hard to invest sustainably. There needs to be some product innovation that makes impact investing more accessible. There’s a will; there should be a way.”