A quick guide to "Impact investing"

  • Impact investing is an innovative investment approach of "does well by doing good"
  • Incorporating ESG factors into investment portfolios may lead to better potential performance
  • Impact bonds capture the opportunity to earn coupons and capital gains by investing in bonds that have a positive impact

What is Impact investing? How did it come about?

According to the Global Impact Investing Network (GIIN), impact investing is an investment that intentionally creates a positive, measurable impact on specific social or environmental issues, while generating a financial return.

In other words, impact investing is a two-in-one investment solution that brings together the prospects of investment returns and social/environmental improvements. It is an investment that "does well by doing good".

Is donating to charities a better way to improve social issues?

Contrary to this belief, impact investing was born out of philanthropic sector. As societal challenges grow in scale and complexity, the resources of governments or charitable organizations are insufficient to address them.

Through innovative solution like impact investing, private individuals and corporations have the opportunity to contribute their capital while also
reaping financial benefits. This helps to increase the resources available to tackle pressing environmental challenges and societal problems.

Of course, donations are unlikely to be completely replaced. In some cases, there is simply no room or value for investment.

Does participating in impact or ESG investing imply lower financial returns?

There is a common misconception that impact or ESG investments will yield lower long-term returns than traditional investment portfolios. This misunderstanding stems from the early primary investment strategy that largely excluded controversial industry, such as tobacco, alcohol, and gambling from the investment universe, which did indeed deliver strong returns in certain periods.

However, as companies enhance their ESG credentials, coupled with investment strategies evolve, the scope of impact or ESG investing has much aligned with traditional portfolios. Recent reports have shown that incorporating ESG factors can potentially enhance portfolio performance. Furthermore, companies' ESG credentials can also help assess their future profitability and business risks.

Why should corporations pay attention to environmental and social responsibilities

As society advances, companies' and investors' ESG awareness deepens. Nowadays, corporations recognize that embracing environmental and social responsibilities can garner societal acceptance and ultimately benefit their operations. Some companies may even enjoy advantages such as tax incentives, indirectly encouraging them to take positive social/environmental impacts into consideration in their decision making process.

If corporations can tackle environmental and social issues while making profits, their performance will naturally be superior.

What is noteworthy about the global impact investment market?

Private equity funds, sovereign wealth funds, and various other financial entities are actively championing impact investing, collaborating in the pursuit of implementing the United Nations' 17 Sustainable Development Goals (SDGs).

Increasing number of investors integrating impact criteria into their investment evaluations
  • According to a survey conducted by the Global Impact Investing Network (GIIN), the scale of impact investing reach $1.16 trillion in 2022, surpassing its 2018 size by more than threefold.
The incorporation of ESG factors into corporate development strategies continues unabated
  • ESG factors, including climate change and income inequality, have gained significant societal importance;
  • Companies have launched social bonds to support financing for diverse social initiatives. For example, a financial company in Korea has issued a total of 5.65 billion euros in social bonds since 2018, aiming to enhance the housing stability of vulnerable communities;
  • Companies realize the public's expectation for improvements in social and environmental issues. Companies that proactively address them may enjoy a substantial market advantage.
Governments are fostering related developments through diverse policy measures
  • Governments and regulatory bodies promote sustainable development through legislation or issuance of guidelines, encouraging all industries to actively consider non-financial factors in their investment decisions and require companies to disclose more environmental and social issues;
  • For instance, in Hong Kong, the Hong Kong Exchanges and Clearing (HKEX) has been revising its "Environmental, Social and Governance Reporting Guidelines" to provide guidance to issuers and initial public offering applicants on incorporating the principles of sustainable development. The Securities and Futures Commission (SFC) has set up the "Environmental, Social and Governance Fund List" to foster the growth of green and sustainable finance in Hong Kong.

Impact investing is an investment that "does well and doing good". However, it requires professional analysis and research. How can individual retail investors participate in impact investing?

Individual retail investors have the option to engage in impact investing through funds. Impact funds available in the market, managed by professional fund managers, carefully select bond investments that would provide both impactful outcomes and attractive returns for your investment portfolio.

What's appealing about investing in impact bonds (green bonds, social responsibility bonds,
and sustainable development bonds)?

Create a positive impact
Impact bonds address a wide range of social and environmental issues. Fixed income assets play an important role in realizing impact investing, as corporates tend to finance multiple times in the market. As participation in impact bond investing becomes more widespread, it would encourage companies to make ongoing commitments to sustainable development or issue sustainable bonds, thereby accelerating the positive transformations in society and the environment.

Pursue investment returns

As investors become more aware of impact investing, there is a rising desire for sustainable investment options. Investors who focus on sustainable development trends will have a broader investment scope, which is beneficial for improving medium and long-term investment performance.

Deposit rates are hovering at relatively high levels. What is the appeal of impact bonds?

Although rates are still on the rise, the US is approaching the end of its rate hike cycle, and the magnitude and frequency of future hikes should ease eventually. As rates peak, yields will likely edge lower, prompting bond prices to rise. Bank deposit rates may be attractive now, but when the rate hike cycle ends, interest rates will fall and so will bank deposit rates.

To issue an impact bond, the issuer needs to fulfill the requirements pertaining to impact investing. Hence, most of the impact bonds are issued by companies of Investment Grade. Their credit ratings are generally higher with relatively lower default risks.

Looking back at previous rate cycles, when rates peaked and plateaued, bond prices were already on their ascent, reflecting rate cut expectations. Between 2018 and 2019, when rates plateaued during those seven months, the cumulative gain of Asia Investment Grade bonds¹ was 9%. Bond prices extended their gains when rates subsequently trended lower.

When buying into bonds at this stage, one can lock in attractive yields, and benefit from the increase in bond prices when rates start to fall. Investors may keep an eye out for such investments opportunities or entrust their investments to professional fund managers to capture returns from both yield and capital appreciation.

1. Source: Bloomberg, peaking rates data sourced between 19 Dec, 2018 and 30 Jul, 2019. "Asian Investment Grade bonds" is referred to ICE BofA Asian Dollar IG Corporate Index.