Impact investors can play a vital role in supporting the APAC region's social and environmental development, though some challenges remain as the sector becomes increasingly mainstream.

Impact investing may be a small part of the market, but it is becoming increasingly important to the Asia-Pacific (APAC) region. According to one asset management study, over 70% of both central banks and sovereign wealth funds in Asia increased their deployment of impact investing across 2021.¹ Other figures suggest that as many as 92% of Asian investors plan to allocate to impact investing via private markets, while 72% will do the same via public markets.²

Impact investing - making allocations to generate measurable social or environmental benefits alongside financial returns - has the potential to make a real difference in Asia.

Data from the World Meteorological Organization has revealed that the Asian continent is warming faster than the global average. The warming trend in Asia between 1991-2022 was almost double the warming trend of the 1961-1990 period.³ Last year, extreme weather and climate impacts increased, as droughts and floods affected a large number of people. There were 81 weather, climate and water-related disasters in the region in 2022, of which 83% were flood and storm events.⁴

Allocations that focus on climate change, mitigation or adaption can play a part in supporting Asian economies as they transition to net zero. Asia is home to many of the world's leading climate transition industries, from electronic vehicle (EV) batteries to solar manufacturing, for example. Moreover, investment allocations can help bolster Asia's socioeconomic development more broadly. South Asia, East Asia and the Pacific account for 58% of the world's poor, people living on $3.2 a day or lower.⁵ Access to healthcare, education, social welfare and affordable housing, all of which are part of the impact investment universe, can make a vital difference.

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Measuring impact

However, the space is not without its complexities. One challenge lies around regulatory clarity and standardisation. As Reuters points out, regulators in Asia and Europe have taken divergent approaches towards environmental, social, and governance (ESG) factors, with one commentator suggesting that the European Union is focused on promoting sustainable investment, while Asian regulators are more concerned with risk management.⁵

Another challenge exists around the availability and measurability of impact data. How do you assess whether an impact allocation is successful? What parameters are being analysed, over what time frames? Who is responsible for providing investors with relevant data, and what governance processes are in place to ensure that data is robust?

Then there is the issue of standardisation. Different companies use different standards and principles to adhere to investment decision-making and funding. Investors themselves have different guidelines and governance structures. There remains a lack of agreed upon metrics for measurement and reporting, and a limited number of benchmarks on impact investing.

Meanwhile, the diverse range of structures and investment opportunities that fall within the impact space makes it even more of a challenge to build broader frameworks. Transparency is also key, but can be hard to achieve in practice.

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In practice

That said, impact investing can make a vital contribution to resolving social and environmental problems. It allows investors to allocate to specific projects that meet the most urgent sustainable development needs, and to invest in companies that are transforming their business models to really support these goals, as well as in companies which are fostering in new technologies and innovations that can change the landscape. By allocating to poor, vulnerable populations who are often excluded from the traditional financial system, investors can then truly making an impact.

Although the impact investment space is still a burgeoning industry in Asia, it is believed that the area possess the power to be truly transformational. While the challenges are still substantial, the potential for impact investing to make a difference is huge. Investors and investment organisations can play a vital part in bringing forward that transformation.

¹ https://www.invesco.com/apac/en/institutional/insights/esg/esg-and-impact-investing-in-asia.html

² https://fundsglobalasia.com/news/asia-investors-embracing-impact-funds

³ https://public.wmo.int/en/media/press-release/climate-change-impacts-increase-asia#:~:text=In%202022%2C%20many%20areas%20in,were%20over%20US%24%207.6%20billion.

⁴ https://www.invesco.com/apac/en/institutional/insights/esg/esg-and-impact-investing-in-asia.html

⁵ https://www.thomsonreuters.com/en-us/posts/esg/esg-regulatory-approaches-europe-asia/