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Sustainability and Inclusiveness Primer: Challenges of Impact Investing in China

by Anson Wong

September 9, 2013

Impact Investing
Doing proper corporate philanthropy is far from easy for most Chinese enterprises; impact Investing would be a step in the right direction

Impact investing, or investments that try to create quantifiable positive social and environmental impact alongside a financial return to any organization or entity, also falls under the big umbrella of strategic philanthropy (See ‘Sustainability and Inclusiveness Primer: Doing Good through Strategic Philanthropy’). Impact investing is not about simply writing a check and making a donation to a charity of choice. Instead, impact investing seeks to make an impact or change that will enhance the sustainable development of the society. According to the Global Impact Investing Network (GIIN), a non-profit that tries to further the cause of impact investing, the idea is to generate measurable and positive social and environmental impacts alongside financial return through investment into any organization and fund.

Strategic investments made by corporations can also be interpreted as voluntary contributions or actions that aim to address the development priorities of a society and take advantage of opportunities created by private investment to optimize social and environmental returns on investment (SROIs and EROIs). More importantly, such actions or initiatives should be carried out in ways that are sustainable and connect to the core business of the company. Still doing proper corporate philanthropy is far from easy for most Chinese enterprises.

Findings of the China Social Entrepreneur Foundation and observations of most of businesses in China for the past few years, reveal that they lack the following three core elements for the successful execution of impact investing:

  • The lack of systematic and organization-wide management: Although social responsibility or strategic philanthropy takes place in most corporations in China, the majority of them do not have a designated full-time department within the organization to conduct impact investing. Even for those companies that have such a function, the management of impact investing programs is usually considered as a part-time responsibility that will be shared by a range of departments within the companies. More seriously, these companies would not even have specific policies or procedures in place for the management of impact investing programs.
  • Most corporations do not have a strategic plan: For the most part, impact investing has not been managed systematically, and hence, it doesn’t play a key role across the whole organization for most companies in China (such programs are usually short-term or very narrowly focused and so they don’t make any positive social or environmental impact). Due to a lack of internally-driven plans or strategies, most businesses commit money or resources to areas identified by government directives or priorities. Most corporations fall short of a more nuanced strategy that is based on the returns to the company or linked to the needs of its stakeholders in society.
  • The lack of balance and focus: Resulting from a lack of a strategic plan, they lack balance and focus of what and who to target and how much they should invest. A majority of the corporations still will not set an annual budget for impact investing programs. They would only hand out money whenever disasters, such as earthquakes of floods, strike. Their actions are sporadic and spontaneous. Furthermore, if the companies do invest, they concentrate solely on poverty alleviation, education and disaster relief with zero regard to the actual needs. Very few corporations systematically identify their key stakeholders and map their social or environmental concerns before making any ‘impact investing’ that are pertinent to the stakeholders’ needs.

Having said that, some Chinese companies have actually done a good job in impact investing. One such example is the China Vanke group, a real estate company founded by legendary entrepreneur Wang Shi. As the largest residential real estate developer in Mainland China, Vanke has been a pioneer in being a socially responsible corporation in China through impact investing. Based on its 2012 CSR report released in April this year, here are some of the highlights of its impact investing programs:

  • Cooperation with the World Wide Fund for Nature (WWF) to ensure the conservation of forests by eliminating illegal logging and improving forest management.
  • Funding and setting up the Vanke Research Center on Architecture in 2007 to increase public awareness of zero emission buildings and green building design for future communities. Vanke has invested RMB 600 million on this center and a total of 25,000 people have visited it, according to its report.
  • The Vanke Foundation has sponsored a local environmental organization in Shanghai, which ran a program involving 200 local families. The project helped to raise public awareness on preserving the local habitat and improve biodiversity management. Nearly 200 local families gained firsthand experience in urban conservation.
  • Strategically investing in various non-profit organizations in China that create both social and environmental values through impact investing.

Other businesses that are also performing impact investing in China include the China Overseas Group. As a leading property developer and construction contractor in Mainland China and Hong Kong SAR, the company has been exploring new business models to better balance urban and rural development. For example, the group, leveraging on its core business and operations, builds quality housing for local farmers, develops infrastructure such as schools, medical facilities and roads for the local residents, and provides career options and training for unemployed farmers to be involved in property management-related jobs. Closing the gap and enhancing the development between rural and urban areas has become one of the group’s driving forces and key business activities which has proven to be profitable for the company and beneficial for raising the living standards of rural residents.

These examples show how impact investing can generate positive social changes. In addition, drawing on the success and experiences from the Bill and Melinda Gates Foundation, here are some of the practices that Chinese companies can apply when carrying out impact investing programs:

  • Set aside a budget for such procedures and evaluation
  • Frame expected results with clarity and logic
  • Acknowledge inherent biases and be pragmatic about using existing data sources
  • Reduce reporting burdens on the recipient organizations or projects
  • Support feasibility and methodological appropriateness
  • Assure propriety
  • Compare results to a baseline
  • Seek information on unintended consequences—positive and negative
  • Reach out and listen to dissenting voices
  • Don’t rely on star players from outside, let the local shine
  • Share results

It is essential to keep the impact measurement in mind when planning for impact investing activities. Combined with the practices detailed above and some recommendations from Credit Suisse, I would like to suggest the following ways in which one can measure the outcomes of impact investing:

  1. There is no one-size-fits-all solution, and there are many measurement tools that fit different purposes: screening, on-going performance tracking and periodic in-depth assessments.
  2. When selecting and developing a measurement tool, keep in mind that it should be simple but meaningful. It should fit the audience and it should capture system change.
  3. Measure the impact that links to results, ensure relevance and effective allocation of resources and be accountable.
  4. Impact measurement tools help you to identify and describe the impact value chain and ultimately describe the positive and negative changes in the society and the environment.
  5. Impact measurement indicators should be easily understood, manageable, based on accessible information, cost effective and developed with investor and investee.

The inclination to improve human and social harmony in China has a long history because it is rooted in Confucianism. The notion of “it is more blessed to give than to receive” is a custom widely practiced by Chinese. Yet, Chinese businesses should now think more strategically about how to contribute to society in a way that is long lasting and entails substantial positive social and environmental impacts whilst creating financial benefits.

Having strategic impact investing programs gives a company a unique competitive advantage and helps it to identify potential risks and capture potential business opportunities. Being a good corporate citizen or socially responsible business is, again, not about how a company which hands out money, but more significantly, about how a business generates profits in a socially responsible way. As the cases above and numerous examples globally show, one of the keys to success in social responsibility or CSR is to ensure decent treatment to one’s workforce by providing the employees a better livelihood from fair compensations and working conditions, or, simply not to cause any negative impact to the community and the environment.

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