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Wednesday, February 22, 2012

Impact Investing: Chinese Investors’ National Solution

Source: The Wall Street Journal (China)

 

Initially published in the Wall Street Journal (Chinese) on February 2, 2012, and translated from its original Chinese-language version
 

By Tao Zhang, Chief Operating Officer-New Ventures

A recent micro-blog[1] message from Kai-fu Lee, the serious-minded Chairman of Innovation Works[2], seemed to deliver some intentionally juicy gossip for a change.  According to this micro-blog, Lee and his well-known Chinese angel investor friend Xu Xiaoping were chatting, when suddenly Xu Xiaoping became emotional and said, "Whenever I think about the future of my motherland, I lose even the slightest interest in the opposite sex." In China’s micro-blog sphere, which is usually dominated by heavy topics, this remark taken out of context sounds almost like an insider’s joke.  It helped initiate a sense of humor from many fellow micro-bloggers - to no surprise, following the micro-blog, there was a virtual explosion of similar comments. 

Since my current work is primarily focused on entrepreneurship and ventures in emerging markets, I have been following quite a few Chinese investors on the micro-blog.  After Xu’s gaffe, I took some time to look through the micro-blog messages from the investors I have been following.  Interestingly, I found that their concern for the country’s future formed a large proportion of their micro-blog messages, particularly when compared with the amount of remarks related to their professional field of work.  When faced with all sorts of China’s problems, the investors seem to be at a loss in figuring out ways to contribute to development of the country, despite their prominent social status and influence.     


I often see a similar sentiment when chatting with my investor friends and contacts back in China.  What these folks have in common is that they have already made a fortune in the rising economy but plan to make more money, and with increasing of personal wealth, are also looking to move further up along the so-called Maslow’s hierarchy of needs.  Some of these investors are even on the verge of getting into the largely enclosed political system to fulfill their ambitions of creating impact. However, my humble opinion is that the realistic solution to their concerns is within sight, albeit far away: the so-called impact investing that originated in the US and Europe.      

Triple bottom line investing is another term people use interchangeably with impact investing, in which investors seek to create environmental and social benefits alongside profits from their investments.  As the name suggests, in addition to certain financial returns, investors are also looking for quantifiable social and environmental performance indicators to measure the success of their investments.  According to a 2010 J.P Morgan/Rockefeller Foundation report entitled Impact Investments: An emerging asset class, the size of impact investments worldwide could reach US$400 billion to one trillion in the next 10 years.  At the recent World Economic Forum in Davos, the organizers convened several important discussions among leading investors to look at the prospect of impact investing over the coming two decades. 

The chief objective of impact investing is to improve the livelihood of people at the bottom of society, primarily in developing countries, and/or to create positive environmental impacts through venture investments.  Therefore, one cannot bring up impact investing without mentioning another concept called BoP (base of the pyramid), an segment of the population that impact investors hope will ultimately benefit from their investments. According to the World Resources Institute, a US-based environmental think tank, the BoP is defined as the group of people earning less than $3,000 per annum per capita (in 2002 PPP).  Though there are impoverished people in developed countries who can also benefit from impact investments, the established definition of BoP normally applies to emerging markets. 

While the BoP is intended to be one of the key beneficiaries of impact investments, the target of these investments are typically for-profit enterprises that can bring about positive social and/or environmental impact via their products and services.  These enterprises, mostly small and medium-sized ones, understandably are concentrated in business sectors such as housing, education, environment and health that touch upon people’s daily lives. Impact investments still seek financial returns but, compared with mainstream venture capital, they tend to be more accommodating with investment yields as well as more flexible with payback period.  For this reason, this emerging asset class is also referred to as patient capital.  While the traditional investment community in the West is starting to pay more attention to impact investing, impact investment-focused organizations, such as New York-based Global Impact Investing Network, are also emerging on the horizon and have developed a toolkit that investors can use to quantify the social and environmental impact of their investments.        

Based on the definition of an annual income of less than $3,000, it stands to reason that if China is not the largest BoP country, it could easily be one of the largest.  However, having worked in this field for a while, I’ve come to feel that China is perceived as quite the opposite.  I’m not sure if the 2008 Beijing Olympics and China’s national image TV commercial at New York’s Times Square did the magic, but at least most of the impact investors I have worked with tend to think that China does not lack money and the BoP concept has little relevance to this seemingly prosperous country.  Instead their priority BoP countries are mostly from South Asia, Southeast Asia, Latin America and Africa.  NextBillion, co-managed by the World Resources Institute’s New Ventures initiative and the William Davidson Institute at the University of Michigan, is a blog web site that is focused on exploring enterprise solutions for the world’s BoP people.  So far, its articles and reports on China have been fairly limited.  Recently, NextBillion re-published an interview article where I talked about the need to scale up impact investing in China, after which, much to my relief, I received quite a bunch of emails expressing interest in knowing more about this.     

With an enlarging income gap between rich and poor and worsening environmental problems, China’s market appetite and need for impact investing should not be overlooked.  There is no denying that the government should shoulder the lion’s share of responsibility for improving the living standard of China’s BoP.  In the meantime, Chinese investors who themselves have declared a genuine concern for the country’s fate and its people, ought to think about how to bear some responsibility from the bottom up, as opposed to purely focusing their investments on serving the needs of China’s well-to-do middle class.  Under current circumstances, in my opinion, only those who are familiar with the country’s entrepreneurial culture, local operations and cost structure can really master the art of in-country impact investing.  Along this line, without a fully competent local arm, the chance of success for impact investing organizations from the West is really limited, irrespective of their will and strengths back home.         

One thing clearly distinguishing China’s successful investors from most of their counterparts in the US and Europe is that they are being touted and followed like movie stars in this country.  The positive side of this is that their impact could easily travel deeper and broader, if these investors find the right outlet for investing to create impact.  Inspirational remarks to budding entrepreneurs on micro-blog, which investors are currently making, are indeed a good thing.  However, it will be a great deed if these investors can fully utilize their professional skills to create longer-term, substantive opportunities for the bottom of China’s society. As an old Chinese saying goes, it is better to teach a man to fish than giving him the fish. Via impact investing, Chinese investors are not only well positioned to constitute part of a holistic national solution, but more importantly, become a blessing to those underprivileged people.     


 


[1] Micro-blog, also called Weibo in Chinese, is China’s equivalent of Twitter.  Sina.com is the micro-blog market leader in China who has more than 250 million registered users as of October 2011.  On Sina’s micro-blog, Kai-fu Lee has over 10 million followers and Xu Xiaoping has close to 4 million followers. 

[2] Innovation Works is an early-stage incubation and seed capital fund that aims to create successful Chinese start-ups in Internet and wireless sectors.  

 

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