Scaling Up Impact Investing In China
UPDATE: NextBillion was mentioned in this post by Tao Zhang, which appeared in the Chinese Wall Street Journal.
Opportunities in China for impact investing are growing, where investors look to create positive social and environmental benefits alongside returns. Impact investors actively choose to put their money into companies that address social and environmental issues through their business models. Tao Zhang, the Chief Operating Officer of New Ventures, WRI’s center for environmental entrepreneurship with local operations in China and five other high growth markets, answers questions on the country’s current investment climate for environmentally-focused small and medium enterprises (SMEs).
Is there a culture of impact investing and impact-focused companies in China?
Zhang: Impact investing is a very new concept in China and most companies remain very commercially focused. Many companies with environmental and social benefits inherent in their business models are not yet familiar with the impact investing concept, and thus are not in a position to present themselves as “impact” companies. At New Ventures, which is led in China by Country Director Walter Ge, we have worked with companies that have only realized the environmental impact they create after they have gone through an exercise to help them manage their environmental performance. In this exercise, New Ventures helps companies to quantify the positive impacts of their products and services, such as reductions in greenhouse gas emissions.
However, on the other hand, there are many companies that provide real environmental solutions in China, such as those that we work with in the energy efficiency, water quality, and recycling sectors.
How big is the impact investing opportunity in China?
Zhang: There is abundant opportunity in China for impact investing, particularly relating to the environment. A lot of the big business decisions in China are driven by government, not by the private sector. However, there is a huge demand and room for the private sector and investment, particularly SMEs, to help implement the government’s goals for environmental protection and poverty reduction. The government has a “top down” approach, and it makes sense to add in a “bottom up” approach, which is where SMEs and their investors can play a significant role.
Who are the investors in China right now putting money into companies creating impact?
Zhang: Right now it is very much commercial capital, as I don’t think there are many self-declared impact investors. There are a few trying to gain traction, but they face challenges building capacity on the ground to source deals and interact with entrepreneurs. These developments will require significant time commitment from investors. Impact investors from more mature markets in the U.S. or Europe do not have enough resources to set up an office or hire staff on the ground in China. And it’s hard to find and hire the right type of people in China because qualified investment professionals tend to choose to work for more traditional investors.
What needs to take place in China for impact investing to grow?
Zhang: Given the need for China to create sustainable economic growth over the decades to come, impact investing has an important role to play and should gain traction in the country.
The government has an opportunity to develop policies that encourage more investment into Chinese impact companies both internationally and domestically. Specifically, policies relating to foreign investments in Chinese start-ups need further clarity. Investors have been finding it challenging to convert their money into local currency upon entry and vice versa when they repatriate the capital upon a successful exit.
Meanwhile, organizations that promote impact investing can do a better job marketing its potential benefits. When one talks to different stakeholders in China, including government officials, about impact investing, time and energy is required to explain to them what it is all about.
The good news is that some Chinese cities, like Shanghai, are starting to pilot foreign limited partner-friendly policies to improve the investment climate for international investors. This growing trend in China will potentially make international investors feel increasingly comfortable investing in local companies.
The government is also starting to take notice of impact companies. At the recent China New Industrial Development Forum in Shenzhen, China’s Ministry of Industry and Information Technology (MIIT) announced a report on the “Green Impact of Chinese SMEs”, which is scheduled to come out in March 2012. The report, which makes extensive use of the environmental performance indicators that New Ventures uses, will collect and analyze the financial, environmental, and social performance of Chinese green SMEs, highlighting their environmental and social contributions to the economy.
What is New Ventures planning to do in China to grow the impacts of the environmental companies it works with?
Zhang: New Ventures China recently received funding from a Hong Kong-based foundation to look into the feasibility of creating China’s first genuine environmental impact fund. The objective of the study is to look at the macro picture and figure out how to take advantage of New Ventures China’s portfolio of environmental enterprises to either set up or help facilitate a fund.
Hopefully, New Ventures can help provide these companies not only with technical assistance but also the necessary financing to help them scale up to the point where they are sufficiently attractive to traditional venture investors.
We will also work with the Information Centre of MIIT to tackle the barriers to the growth of environmental entrepreneurship in the country. By sharing best practices from New Ventures China’s high-impact environmental SMEs, we are well placed to develop recommendations for policy-makers and investors to accelerate environmental entrepreneurship and green investment in China.