Co-author: Kevin Teo
5 min read
This article was originally featured on Singapore Institute of Directors Bulletin.
In the last 50 years, many countries in Asia, including Singapore, have transitioned successfully to middle-income and advanced economy status. With market-oriented reforms, globalisation and technology, there have emerged a rising middle class, higher levels of education and improvements in life expectancy. Yet not everyone has benefited equally.
Analysis by the UN Economic and Social Commission for Asia and the Pacific shows that inequalities in Asia are widening in terms of income, opportunities and access to services. The region is home to half, or two billion out of the world’s four billion poorest people.
According to the Asian Development Bank, US$1.7 trillion (S$2.3 trillion) in infrastructure investments will be required annually until 2030 for developing Asia to maintain its growth momentum, tackle poverty, and respond to climate change. Government development budgets, even when combined with foreign aid and private philanthropic funds, will not be able to meet this need. Social investment through private capital and innovative financing mechanisms will be critical to close the gap.
What is social investment?
Social investment refers to the various ways of structuring capital for both financial performance and social value creation, ranging from the impact-only approaches such as traditional philanthropy to venture philanthropy, impact investment and socially responsible investing through environmental-social-governance (ESG) screens and integration. See chart on “Continuum of Capital”.
Financial, human and intellectual capital resources flow from social investors (foundations, impact funds, family offices, banks/wealth management, and private equity (PE)/venture capital (VC) funds) to their investee organisations – nonprofits, social enterprises and ESG-compliant businesses (collectively referred to as Social Purpose Organisations or SPOs).
They are invested with the expectation of measurable results across the entire spectrum of social investing.
Social investment landscape in Asia
The social investment landscape in Asia is highly fragmented. This is not only because of varying economic contexts and limited uptake of various investment approaches, but also the varying maturity of social economies in the region in terms of government development priorities, legislative environments, and the ecosystem for social impact.
According to the Global Impact Investing Network (GIIN), in the decade between 2007 and 2017, private investors deployed only around US$904 million towards impact investments in Southeast Asia. Impact investments are defined here as investments providing a financial return alongside impact on specific environmental and social outcomes. In contrast, development finance institutions deployed US$11.3 billion during the same period.
Investing in ESG assets has also been slow to pick up. A 2018 report by Oliver Wyman and AVPN showed that less than 1 per cent of total managed assets in Asia (ex-Japan) was deployed to ESG investing in 2016, in contrast to Europe and Australia/New Zealand (both over 50 per cent).
But the social consciousness of Asian investors has been steadily increasing. According to Standard Chartered Private Bank’s Asia Sustainable Investing Review 2018, 64 per cent of high net worth investors in Singapore who are involved in sustainable investing are motivated by helping create a better future and doing good while earning a profit.
Research by AVPN shows that funders here and across Asia support a range of social purpose organisations (SPOs) across business models and growth stages. Impact-financial expectations, ticket sizes, as well as the funding horizons also vary (see charts in “Behavior of Impact Investors in Asia”).
While some funders seek market-rate returns, others seek below-market returns if they choose to subsidise impact creation or a longer journey to scale. Long-term engagement also allows SPOs to choose the right funders and avoid mission drift.
As a thriving global financial hub with a liberal investment landscape, Singapore is well-poised to lead social investment in the region. Many development finance institutions and international nonprofit organisations run their regional operations from Singapore. It is also becoming a hub for impact funds such as Insitor Impact Asia Fund, Bamboo Capital and Blue Orchard which help investors channel resources to social businesses in the region. For example, from its base in Singapore, Insitor invests venture capital funds into early stage businesses looking to solve social issues and uplift low-income communities in Cambodia, India, Myanmar and Pakistan.
The Monetary Authority of Singapore (MAS) has put several structures in place to encourage deeper ESG integration within financial institutions as well as to grow the suite of ESG products to support different investment strategies. In 2015, the Association of Banks in Singapore introduced guidelines for responsible financing which require banks to assess their clients’ ESG risks as part of credit evaluation, and the Singapore Exchange (SGX) has a “comply or explain” regime for sustainability reporting for listed companies.
Increasingly, ESG is also being factored into insurance modelling, product development and underwriting processes.
Since March 2017, the Investment Management Association of Singapore has been working with the World Wildlife Fund (WWF) to build industry capacity in ESG and sustainable investing. In June 2018, with MAS’ support, WWF launched the Asia Sustainable Finance Initiative in Singapore, bringing together industry, government, the non-profit sector and academia to coordinate best practices in sustainable finance across the region.
Singapore is one of the market leaders in global green bond issuances in Asia, setting standards and providing incentives to spur its growth. The development of this green asset market serves as a good example of how Singapore has been able to mobilise social investment in the region.
Just a month after MAS introduced a Green Bond Grant Scheme in Singapore in March 2017, City Developments Limited issued the first green bond, followed by a US$500 million green bond by DBS Bank in July. These pioneering actions gave others in the region confidence of institutional demand for this asset class, and motivated them to list their own green bonds on SGX. For example, the Indian Renewable Energy Development Agency’s INR 19.5 billion green masala bond, Manulife Financial Corp’s US$500 million green bond and Star Energy Geothermal’s US$580 million amortising green project bond – the first corporate green bond from Indonesia.
While these are promising developments, the supply of private green finance will have to grow tenfold if it is to meet even 50 per cent of the green financing needs for ASEAN alone. In order to mobilise these resources, in June 2018, MAS signed a Memorandum of Understanding with the International Finance Corporation to jointly enhance financial institutions’ capacity around green finance and to promote the use of internationally recognised green bond standards and frameworks.
The fundamentals are already in place in Singapore – the strong market imperative, the enabling regulatory infrastructure, the ecosystem of financial institutions, enablers and intermediaries. But this is not enough. For these efforts to be truly transformational and to effect sustainable change in Asia, all actors will need to work together more effectively. By breaking down the silos and openly engaging and collaborating with each other, we will be able to maximise the social impact of our investments and make a tangible contribution towards overcoming the systemic challenges that plague the region.