This article first appeared in Personal Wealth, The Edge Malaysia Weekly on May 27, 2019 - June 2, 2019

High-net-worth individuals (HNWIs) should begin their sustainable investing journey by identifying the cause they want to tackle and then deciding whether to draw the funds from their philanthropic or investing pot. This will help guide their expectations of returns from the investments, says Eugenia Koh, head of sustainable investing and engagement strategy (private banking) at Standard Chartered Bank in Singapore.

“If you take the funds from the philanthropic pot, then you could have a wider play and be all right with trading off some returns because you are unlocking funding for a greater cause. But if you are taking it from the investment pot, then I think you need to be a lot clearer about some of the performance metrics and look at the returns. You cannot flip-flop between the two,” she says.

Koh was speaking at the recent TBN Asia Conference 2019 in Kuala Lumpur, themed “Fighting poverty through enterprise”. The event was organised by the Transformational Business Network, a global network of impact investors founded in 2003.

Sustainable investing covers the full spectrum of investing strategies, from exclusions and environmental, social and governance (ESG) integration to thematic impact and impact-first investing. This includes ESG funds, impact private equity funds and bespoke direct investments.

Once the HNWIs have identified their area of interest, they can look at the options available and which model can address the issue best. This will help them filter the investment opportunities and align their expectations.

“If the client is very passionate about the ‘bottom-of-the-pyramid’ kind of solutions, then impact investing may not always be an area that meets the impact outcomes they want. That is because for a certain segment of the population, no matter how innovative or how low the cost of a solution, the end consumer will not be able to pay for it,” says Koh.

For this segment, grants and donations from the philanthropic pot may make more sense.

“However, there are other solutions that target the segments that have some ability to pay, but not in the form at which the solutions are currently being delivered. That is best targeted by impact investing and could come from either their philanthropic or investment pot of capital,” she says.

“For example, it could be the hospital groups in India that offer cataract surgery for US$30, compared with the market rate of US$2,000, and still operate profitably and can scale and drive impact in a sustainable way.”

Sustainable investing that can draw from the investing pot include those based on long-term trends such as climate change. “There are some investments that make sense if you are thinking about future-proofing your portfolios. If you know that the big trends are in providing clean water, sanitation and [addressing] climate change, and you are starting to shift some of your investments into those themes, it could be beneficial to you as an investor. It helps you in either risk mitigation or when you are looking to use some of these opportunities to outperform the market,” says Koh.

The range of returns that can be expected from sustainable investing via either pots depends on the industry. It should be benchmarked against the performance of other players investing in the same market. “For example, investors in the healthcare sector are used to double-digit returns. So, it needs to be benchmarked accordingly,” says Koh.

Making philanthropic dollars count

According to Koh, Standard Chartered Private Bank has been looking into sustainable and impact investing solutions for the past three years. Last year, it began engaging in more holistic conversations with clients about how it can drive the effectiveness of their capital.

“Most clients in the high-net-worth space will start thinking about doing charity at some point. What they tend to do is donate an amount of money to build a school [for example],” says Koh.

“With our impact philosophy, we are able to engage them a bit deeper and ask them, ‘What are you trying to solve with the donation? Is it quality education?’ Then, we lead them to think about the outcomes or metrics they should be looking at as they make those donations, as well as whether they should look at making investments.”

According to an April 2018 survey by Standard Chartered Private Bank, HNWIs currently donate 8% of their assets to charity. Of the more than 50% of investors surveyed who are currently involved in philanthropic work, 82% said they would consider moving their allocations to sustainable investing.

The bank does not tell its clients to go straight into impact investing vehicles but instead, guides them to think about their goals while figuring out which instruments would help them achieve those goals, says Koh. She advises HNWIs to ask tough questions about their donations or sustainable investments.

“Sometimes, I think the Asian philanthropist feels almost apologetic to ask about the outcomes when they give away money. They feel it is not very nice to do so and that they should just donate the money,” she says.

“But sometimes, getting clarity on the outcomes will help with the effectiveness of the dollar given. It is the same when making an impact investment. Ask the same questions with the same rigour. The only difference is that you must be comfortable enough with the measurement and reporting of the impact. You must also make sure the burden of reporting is not so high that it overloads the organisation.”

The bank usually helps clients identify their passion points and end-objectives before introducing relevant products to them. “We do not actually call sustainable investing a separate asset class because we believe that if you want mainstream sustainable investing, you have to be able to work across all products,” says Koh.

Sustainable investing is still a fairly new concept in Asia. So, many investors are only beginning to add this perspective to their portfolios, she observes. This means investing in thematic funds, for example, instead of going directly to a pure impact fund.

“It could be in many forms. If they are more interested in de-risking their portfolios, it could be just choosing from ESG funds. If they are interested in some of the big themes, healthcare is a huge topic of interest, along with technology. Through that, you can have an impact conversation as well,” says Koh.

Typically, HNWIs who are more passionate about solving a problem closer to the ground will choose to invest directly in an impact private equity fund rather than through green bonds or ESG-focused funds.

“For an impact fund, you would talk about the end-beneficiary. So, the storytelling around that is quite compelling. When they invest in an ESG fund or green bond, they feel a bit more detached from it. When they invest in those, it makes their portfolios more sustainable. But I think the stories on that do not tug on the heartstrings as much,” says Koh.

“However, it is still powerful because you are using your capital to make a stand. You ensure that companies that want to be invested in have to step up in the way they do corporate governance or look at social and environmental outcomes.”

Regardless, the interest in impact investing is rising, particularly among the younger generation of HNWIs. From December last year to the first quarter of this year, Standard Chartered saw 25% growth in terms of sustainable assets under management for the private bank, according to Koh.

“We see a lot of opportunities for our clients. We are working across different teams to identify the opportunities in this space,” she says.

“We also launched our Impact Circle series to connect our clients. It provides them with a safe space to share. I think sustainable investing is new for a lot of investors. So, what is most important to them is to have that space to learn from each other and share their successes and failures.”

The bank also runs a Future Global Leader programme, she adds. “We reach out to the sons and daughters of our ultra-high-net-worth clients. One of the pillars of the programme is sustainability. We use that platform to engage with clients on key discussions in the space of sustainability and in so doing, have inspired them to think more deeply about driving impact.”

Impact investing trends in Asia

Standard Chartered Private Bank conducted a study in April last year that surveyed high-net-worth individuals (HNWIs) on their views on sustainable investments. The results showed that many of them lack a clear understanding of the topic and sustainable investments represented less than 20% of the total investment portfolio of active investors. However, the investors expected to increase their allocation by 2% to 3% in the next three years, underscoring the growing interest in sustainable investments.

The report defines sustainable investing as investing capital in businesses, funds or other financial vehicles that actively seek to generate social and/or environmental benefits and financial returns.

“We found that the top three themes that capture the interest of the investors include clean energy, water and sanitation, as well as healthcare,” says Eugenia Koh, head of sustainable investing and engagement strategy (private banking) at Standard Chartered Bank in Singapore.

In China and India, health is of higher priority while in Hong Kong, housing, community development and job creation are rated as more important target sectors. In India, education investments have the strongest support while water and waste management are expected to increase in importance in the next three years.

Not many HNWIs include impact investing as part of their legacy and succession planning, although some use it to engage the next generation, says Koh. “You find that some of the next generation are very passionate about impact investing and causes. Because of that, impact investing bridges the gap between the generations. It gets them to be more involved in the investment portfolio and some of the family decisions.”

However, some of the next-generation investors still struggle to get their parents and grandparents to see the importance of impact investing. That is why education is important, says Koh — so investors can have honest conversations on the risk and returns of impact investing. Bankers must also equip themselves with the relevant information.

“Sometimes, the client may not be aware because the banker does not know how to bring the proposition to them,” she says.

“For instance, we know of this next-generation investor who was looking to make her family portfolio a lot more sustainable. She told us that when she was searching in the market, none of her bankers could have the conversation with her and they assumed she was not interested.

“Bankers are our number one gatekeepers, so we need to really help them feel comfortable with the language on sustainable finance and with what it means to talk through impact outcomes. That is quite important.”

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