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Social impact investment: China is making a breakthrough

:2018/01/10


In the nearly past 20 years, technological revolution, financial innovation, capital markets, and globalization has given fresh impetus to the development of the global economy, resulting in the accumulation of mankind's social wealth and the listed companies climbing in value to one record high after another. Social problems, however, have become more and more prominent, including the gap between the rich and the poor, social inequity, and environmental pollution. According to an estimate by the United Nations Commission on Sustainable Development, it takes about 3.5 trillion US dollars a year to solve all the current social problems. As an important party to the effort to solve these social problems, the government faces quite a daunting challenge, which makes it necessary for philanthropic organizations to take part in the effort even though they themselves come under pressure from the need to achieve sustainable development.


At present, social impact investment, which involves solving social problems in an innovative way, is becoming increasingly popular around the world, and China, as the world's largest developing country, is now also taking an active part.


At the 1stGlobal Philanthropic Financial Forum and the 2017 Social Impact Investment Summit, which took place in Futian District, Shenzhen, in December 2017, Ma Weihua, Chairman of the Board of China Global Philanthropy Institute, Former President of China Merchants Bank, pointed out that it is necessary to introduce the philanthropic concept into business organizations (by making them assume social responsibility), apply commercial means to the field of philanthropy, and turn investment to a philanthropic force by giving a philanthropic element to business and financial services.



What is social impact investment?


The phrase "impact investment" was first put forward by the Rockefeller Foundation in 2008. On June 6, 2013, David Cameron, the then Prime Minister of the United Kingdom, delivered a keynote speech titled "the power of impact investment" at the G8 meeting on social impact investment in London, pointing out that impact investment may solve hard social problems that even government may find powerless to solve. Peter Ferdinand Drucker, an American management theorist, once stated that only by changing them into lucrative business opportunities can social problems be eventually solved.


Over the past 10 years, impact investment has gradually become a hot topic all over the world.


The essence of impact investment lies in using capital to achieve the expected financial return; whether investment is deemed a success or not depends on whether the social problem has been successfully solved or the need met as expected. If it fails to achieve the aforementioned two goals, the investment cannot be deemed a successful investment project. First, impact investment focuses on business matters that are feasible. Second, impact investment must get ready to bring about social impact. That is to say, impact investment is designed to solve social problems or meet some social needs. Third, impact investment has to take responsibility for finances and social impact.


As Ma Weihua points out, excellent financial statements and significant social impact are two prerequisites to the success of impact investment. At present, there have already been a set of strict rules about how business organizations should disclose their financial statements; while how their social impact should be evaluated remain to be developed.


Striking a balance between risk and profit


At present, managing and innovating using business and financial means have already become the latest trends in innovation in China's philanthropic sector. Ma Weihua believes that philanthropic organizations bear a close resemblance to their business counterparts. First, the cost of running a philanthropic organization must be minimized; second, the efficiency with which it uses funds must be maximized; third, it must be subjected to examinations by external auditors; fourth, information must be disclosed in a public, transparent way; fifth, financing must be maximized.


The largest difference between philanthropic and business organizations is that philanthropic organizations are nonprofit while the latter are for profit; philanthropic organizations aim to maximize social benefits while business organizations seek to maximize their profits, because they have different exciting mechanisms. The growth of the business organization and its internal stimulation can normally be achieved by earning profits, while the growth and internal stimulation of the philanthropic organization has to depend on striving for lofty ideals, which in turn makes it difficult to promote sustainable development.


According to Ma Weihua, outstanding management professionals need to strike a balance between risk and profit. Investment cannot be avoided simply because of the existence of risk. The important thing is to control the return and risk at the same time. At the current stage, philanthropic organizations face risks even if they deposit all their money in banks, because the banks as businesses face the threat of bankruptcy.


Ma Weihua believes that the "philanthropic + financial + technological + humanistic" approach is not only the best approach to sustainable development an organization may use but also the best approach to solving social problems, because it may easily win the favor of social impact investment.


If philanthropic organizations seek no return on investment but only social benefits, their development will face a big bottleneck because the mechanism driven by lofty ideals they rely on cannot sustain their development for extended periods. Technological means are equally important, and business organizations often prevail over philanthropic organizations in this respect.


In December 2014 for business opened WeBank, approved by the Shenzhen branch of China Banking Regulatory Commission as China's first private bank to be oriented toward the general public and small businesses and provide differentiated, specialized, and quality and convenient financial services. In fact, WeBank focuses on low-class customers the traditional banks are reluctant to serve, which account for 80% of all the customers. Over the few years, WeBank has been using the Internet and the so-called big data to serve those low-class customers. By September 2017, it had granted about over RMB 600 billion in about 10 million loans.


"At traditional banks, 80% of the profits come from 20% of their high-class customers; the inclusive financial services we offer are meant to benefit those 'low-class customers' the traditional banks are reluctant to serve, which account for 80% of all the customers. We are definitely helping solve some of the social problems and making a social impact," said Qin Hui, Deputy Director of WeBank.


According to Qin Hui, solving social problems is one of the byproducts of social impact investment, and technology is also an important means; robotic learning, block chain finances, cloud service, and big data are important means of inclusive financial services. At present, WeBank is alleviating poverty with precision in Guizhou by extending inclusive financial services to where they are most needed.


In addition to financial and technological ones, humanistic factors also play an important role in promoting social impact investment.


"The traditional concept of philanthropy believes that social assistance is the only meaningful form of philanthropy; it should be changed. Philanthropy needs innovation and needs to be developed in a businesslike fashion," said Ma Weihua.


According to Wang Zhenyao, President of China Global Philanthropy Institute, the best example of impact investment is Grameen Bank, a microcredit organization established in Bangladesh by Muhammad Yunus which grants small loans to the impoverished without requiring collaterals so that they may have opportunities to get rich. Grameen Bank turns its customers to shareholders, heightening the effect of impact investment in the process.



Overseas performance


In July 2017, Ma Weihua noticed the trends of impact investment in the United States while going on a tour of investigation there.


"Impact investment is growing rapidly in the United States, very rapidly indeed," said Ma Weihua, "Investors on Wall Street are gradually beginning to divert capital to impact investment areas. Although the return on investment still needs to be improved in such areas, it will soon catch up or even exceed other areas of investment. In fact, these areas are beginning to find favor with more and more investors."


According to reporters ofChina Philanthropy Times, a "6E" model has already emerged concerning impact investment in the United States, using 6 methods to evaluate the profits and social impact generated by impact investment.


The "6E" model stands for 6 words beginning with "e", which are "economics," "employment," "empowerment," "education," "ethics," and "environment."


In the model, the "economics" is related to the value of the company's stock; the "employment" has something to do with the employment opportunities directly or indirectly created by the company; the "empowerment" is related to the diversity of the company's interested parties; the "education" is related to the cost the company pays to ensure compliance and achieve improvement; the "ethics" is related to the company's code of conduct, which helps people determine what is right and wrong; the "environment" is related to the impact of the company on the earth.


Since 2014, the United Nations Development Programme (UNDP) has tried to establish the "Impact Investment Fund," and caused its internal departments like legal, finance, operations, and others to communicate with each other over the three years. In 2016, the "Impact Fund" was established that is intended solely for impact investment.  In 2017, to improve its cooperation with other financial institutions and the outside capital, the "Impact Fund" was renamed the "Impact Finance."


According to Li Nan, a UNDP official, the biggest problem in the construction of a philanthropic financial ecosystem is the lack of a good business model. Some investors believe that this needs investment objectives on a certain scale. In the philanthropic financial ecosystem, the business is an important party and may play a wide range of important roles, from incubator to accelerator.


Li Nan says that the UNDP collaborates with various countries in the Asia-Pacific region in forming a series of incubator alliances. The first of such incubator alliances will focus on generating employment for the youth. Then the accelerator alliances will be formed to promote sustainable development.


In recent years, Li Nan has shuttled back and forth between the governments of various countries, trying to popularize his organization's policy with a view to stimulating impact investments. Li Nan collaborated with the deputy minister of finance of Thailand in introducing legislation, and as a result, a law was adopted governing the running of philanthropic organizations; the Malaysian government is considering giving businesses bringing social or environmental benefits greater access to the government's procurement system; the Bangladeshi Stock Exchange says that it will treat impact investments as a kind of investment and place them in a separate registration system, just as private equity (PE) and venture capital (VC) are placed in their respective systems.


"The Chinese market has two million high-value people, whose assets add up to 28 trillion US dollars. It is vital to find a way to mobilize the enormous financial resources so as to convert them into impact investments and make research organizations, investment banks, and private banks to play a bigger role," says Li Nan.


And all the three major stock indices in the United States treat social impact investment in a way that shows its importance.


In 1884, the Dow Jones Industrial Average was introduced as an arithmetic mean stock index. The Dow Jones Industrial Average is the world's oldest stock index, also known as the average stock price index.


In 1957, the S&P 500 Index was introduced. It is a stock price index that gages the performance of 500 publicly-held companies on the US stock exchanges. The S&P 500 Index includes more companies than the Dow Jones Industrial Average does. As a result, the S&P 500 Index has risks distributed over a larger number of stocks and therefore reflects changes in the market more accurately.


The Domini 400 Social Index, introduced in May 1990, is the United States' first index to be based on standards of social and environmental excellence. The index serves to provide a reference point for social responsibility-conscious investors and helps investors learn the impact of the social responsibility standards on the company's financial performance.


According to an analysis of data on return on investment over a period of nearly 10 years, the listed companies included in the Domini 400 Social Index have a far higher return on investment rate than those included in the Dow Jones Industrial Average or the S&P 500 Index, which provides sufficient proof that impact investment has an impact on the financial performance of a listed company, thereby presenting an ability to attract capital to the solution of social problems.


Ma Weihua believes that a standard needs to be established in China for social impact investment because social impact investment will not be incomplete without China's involvement. Judging from the Chinese market, business organizations engaged in impact investment still enjoy substantial space for development.



Futian experiment


One year ago, He Jie became deputy director of Futian District, Shenzhen, after working 25 years at Shenzhen Stock Exchange. As He Jie recalls, since 2006, Shenzhen Stock Exchange has begun to promote such things as socially responsible investment, carbon emissions trading, green architecture, and green China; in recent years, legislation on social responsibility has been proposed with a view to encouraging listed companies to disclose their social responsibility reports, which are indeed meaningful measures even though no punitive measures have been introduced against failure to disclose such reports.


According to Wang Jianjun, General Manager of Shenzhen Stock Exchange, there are over 2000 listed companies on Shenzhen Stock Exchange, of which there are 62 investment funds focusing on responsible and green investment areas. The net value of the assets involved is over RMB 53 billion.


Shenzhen Stock Exchange implements three major measures in promoting impact investment, including "encouraging information disclosure." Encourage listed companies to fulfill their social responsibility; "actively support green businesses in their efforts to get listed and raise funds." Expand green financial product lines; "use stock index construction as a basis for promoting the concept of social responsibility investment."


"Investment should pay attention to both righteousness and profitability, always placing righteousness before profitability. The righteousness here refers to social responsibility," says Wang Jianjun.


On December 1, 2017, the government of Futian District, Shenzhen, released the reportSpecial Policy on Social Impact Investment, thereby becoming the first local government in China to release such a policy. He Jie says that the goal of the policy is to build Futian District into a beachhead in the field of social impact investment in the next five years and promote the development of five types of operation.


The five types of operation to be started in the district are "social impact bonds" (businesses in Futian District may receive a 2% government subsidy for 3 consecutive years if they issue impact bonds), "social impact government guidance funds," "social philanthropic trusts," "support for the development of social business organizations," and "social responsibility investment."


At the same time, support will be given in the following 4 respects: 1) strengthening financial support, including RMB 30 million earmarked for 2018; 2) increasing professional training and supporting social and financial organizations in introducing talents and developing relevant courses; 3) promoting the construction of social investment subjects, encouraging overseas social and family businesses to enter Futian District, giving support to businesses with brand impact, and simplifying the registration procedure; and 4) encouraging innovation in types of operation with great social impact, including block chains, big data, cloud computing, artificial intelligence, and the Internet of Things.


He Jie reveals that Futian District plans to build "one circle, two platforms, and three zones." The "one circle" refers to the ecosphere of social impact investment; the "two platforms" are the social impact international exchange platform and the social impact investment information gathering and trading platform; the "three zones" are the social impact investment innovation policy test zone, the headquarters zone, and the research and development zone.



China is making a breakthrough


Ma Weihua believes that at the current stage, China faces difficulties in four respects when it comes to impact investment, a problem that needs to be addressed step by step.


First, the public does not know much about the concept of impact investment, which causes the capital made available to social impact investment rather limited; second, traditional philanthropic ideas are deep-rooted and hold that philanthropy exists only as social assistance; third, philanthropy and business diverge rather significantly, and there are those who support combining them together and those who say that they shall be managed separately from each other; fourth, at the current stage there are no effective method for evaluating impact investments.


China Alliance of Social Value Investment is China's first philanthropic organization designed to run like a social alliance. It is an investment platform that supports the idea of "paying attention to righteousness and profitability."


On December 15, 2017, the alliance released theReport on the Evaluation of the Social Value of Listed Companies on the Section A of the Stock Market (2017) and the First "Righteousness and Profitability 99" Rankingsin Beijing. This represents the world's first system for evaluating listed companies' comprehensive economic, social and environmental benefits. A total of 99 Chinese businesses, including China State Construction Engineering Corporation, China Yangtze Power Co., Ltd., and CHINT Group, appeared on the list as those which excelled in paying attention to righteousness and profitability.


In an interview given toChina Philanthropy Times, Bai Hong, Secretary General of the alliance, says that impact investment experiences three pains in China, namely "lack of a universal language," "lack of quality objectives," and "lack of patient capital."


Bai Hong says that the first thing to do is to create a universal language. Social impact investment needs coordination between government, society, and market; once a universal language is available, tools for evaluating impact investments can be built to quantify such investments; if such investments cannot be evaluated or quantified, it is difficult to divert capital to them. Second, attention should be paid to cultivating cross-boundary talents and finding first-class talents who not only espouse lofty ideals but know how the market runs, with a view to creating first-class investment objectives. Finally, themed funds like those for education, medical care, health, livelihood, and environmental protection should be established under the action of patient capital, with a view to fostering development.


Bai Hong reveals that in January 2018, Unicorn, a social innovation program in China aimed at achieving exponential growth so as to attract mainstream capital, will be launched soon and will attract a great deal of social impact capital.




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