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Impact Investing

Adopting the London Principles

A new report shows how innovative impact investing policies are helping Hong Kong tackle its social problems.

Pope Francis in his discourse during a two-day impact investing symposium at the Vatican urged governments to “commit themselves to developing an international framework capable of promoting a market of high impact investments, and thus to combating an economy which excludes and discards.” Such a framework to promote impact investing to serve the common good of humanity already exists: The London Principles for impact investing—detailed below and developed with participation from our organization, Asia Community Ventures —were informed by the experiences of 120 delegates representing nearly 30 countries, and provide a set of guidelines for governments considering market-led approaches to address social objectives.

In the first report of its kind, “Adopting the London Principles: Policy Considerations to Grow Impact investing in Hong Kong,” we analyze the government policies behind Hong Kong’s existing social funds, including a deep dive into the city’s latest HK$500 million (US$65 million) Social Innovation and Entrepreneurship Development Fund (SIE Fund). While our report focuses on Hong Kong, we hope its recommendations will resonate with other cities seeking to attract private capital to help tackle social problems. If Hong Kong succeeds in its current efforts, we believe it would pave the way for other Chinese cities to follow.

We derived three observations from our analyses of Hong Kong’s five existing social funds:

Different approaches, one shared goal: Although every social fund has its own objectives in terms of targeted groups (for example, socially disadvantaged groups), themes (social innovation, cross-sector collaboration), and strategies (immediate relief vs. long-term support), they share the same underlying goal: to springboard those trapped in poverty toward self-sufficiency. Unfortunately, these funds remain largely disconnected and lack a coherent narrative on how their effectiveness contributes to Hong Kong’s longer-term social well-being.

Variations of government subventions: Hong Kong’s social funds are variations of conventional government subventions, or grants. As such, though the government claims they support social enterprises, they generally restrict applicants to nonprofit organizations. The new SIE Fund’s willingness to embrace new ways of funding may catalyze cross-sector collaboration toward a target social issue or group.

Lack of sustainability and scalability: Relying solely on the public sector to solve Hong Kong’s poverty issue is neither sustainable nor scalable. The Hong Kong government needs to go beyond providing grant funding and take steps to bring together private capital, networks, and ideas for addressing social issues. Given its objectives, the SIE Fund has the potential to attract resources and funding from other players, including corporations and institutional investors, high net-worth investors and foundations, philanthropists, and impact investors, thereby multiplying its impact.

We believe the SIE Fund presents a window of opportunity to introduce impact investing as an important, additional tool to leverage government social funding with private capital and resources. Its merits include:

  • Private sector engagement
  • Attracting fresh capital to complement government funding
  • Use of business approaches and impact measurement
  • Introducing of new and different kinds of talent
  • Provision of growth capital to allow scaling
  • Capital recycling for future investments

The London Principles, launched in July 2013 by the Impact Investing Policy Collaborative (IIPC), provide a policy framework for governments to develop the impact investing market in collaboration with the other sectors in the social ecosystem. Here is a look at how we think Hong Kong might adopt and apply each principle.

Clarity of Purpose

The government has historically taken a cautious role in policymaking, often resulting in spending resources to tackle immediate symptoms of social problems instead of the root causes. It has yet to articulate a longer-term social vision to guide policy formulation.

Our suggestions for the government include:

a) Creating an impact investing agenda to address longer-term social challenges, particularly economic inequality.
b) Establishing a separate Office of Social Innovation (OSI) to promote social innovation within government and across sectors through funding, regulation, and convening.
c) Conducting a holistic review and needs-based assessment of existing and new social funds, and how they address current and long-term social issues.

Stakeholder Engagement

Our earlier EngageHK report indicates a lack of cross-sector collaboration and knowledge sharing. Many of the social funds emerged from the clamor of community interest groups, without the benefit of adequate stakeholder engagement.

Our suggestions for the government include:

a) Providing a platform for people to express their views, and creating a fair and transparent process for policy review and setting.
b) Using its power thoughtfully to fund, regulate, or incentivize other groups to engage with its social funds, either as recipients or as social innovation and impact investing advisors.
c) Engaging with the global impact investing community, such as the International Social Impact Investment Taskforce, established by the G8 or the Global Learning Exchange on Social Impact Investing convened by the UK Cabinet Office, Impact Investing Policy Collaborative (IIPC) and the World Economic Forum.

Market Stewardship

Broadly speaking, the lack of an enabling environment and ambiguous definitions of social enterprises hinder the development of impact investing in Hong Kong. There is a need for idea exchange and capacity building in the social ecosystem, as well as policies that promote the development of both the demand and supply of capital.

Our suggestions for the government include:

a) On the demand side, partnering with InvestHK and others to attract individuals and organizations to establish their presence in Hong Kong and collaborate with local players. Also: leveraging the SIE Fund to encourage social entrepreneurship, and incubate and accelerate social enterprises as they scale.
b) On the supply side, funding research initiatives such as the feasibility of crowdfunding as impact investing tools, and devising policy ideas that encourage the private sector and foundations to fund more innovatively through tax and procurement incentives.
c) On intermediary development, leveraging SIE Fund to support intermediaries across the spectrum of social incubators and accelerators, as well as related service providers. Furthermore, resisting the temptation to spread out funding support in favor of providing targeted funding at scale.
d) On policy and legal infrastructure, commissioning research through SIE Fund on the viability of hybrid legal structures and pay for success programs to prepare the groundwork for impact investing.

Institutional Capacity

The government created social funds to address specific community needs or social issues related to poverty alleviation. For example, one of Hong Kong’s social funds, which promotes the social enterprise approach to job creation for disadvantaged groups, is actually just another variation of social welfare funding. As a result of this narrow and somewhat outdated mandate, institutional capacity to foster social innovation is at best limited.

Our suggestions for the government include:

a) Shifting its departmental and policy focus so that it is responsive to structural social challenges, not just immediate social welfare goals.
b) Commissioning an internal review of existing institutional capacities and policies beyond social funds to determine if it should make changes informed by overseas experiences.

Universal Transparency

There is a notable lack of perceived leadership on transparency and accountability. The current political environment in Hong Kong is such that government officials’ wariness of media scrutiny hinders its ability to make bold, long-term decisions. Until the government can reclaim public trust through transparency, any new policies it introduces will face significant public scrutiny.

Our suggestions for the government include:

a) As a funder, promoting competition for funding based on the merit of ideas and how well they address structural issues.
b) As a regulator, foster trust and confidence by providing policy transparency and consistency in relation to impact investing.
c) As an enabler, support open data initiatives within and across sectors to facilitate cross-sector social innovation through technology.

By embracing the London Principles for impact investing in its policy design and leveraging its financial hub status, Hong Kong will be well placed to establish itself as an international social finance and innovation hub for China and the rest of Asia. In doing so, Hong Kong has the opportunity to tap into fresh global resources and attract new talent pools to build a better and more sustainable future for the city and the region.

The IIPC (and its project, the Global Learning Exchange) has engaged individuals across 125 countries through a web platform, as well as virtual and in-person meetings. We look forward to seeing how this report and its application of the London Principles will inspire new ideas, actions, and policies—in Hong Kong and in the many countries where IIPC members are working to develop markets.

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COMMENTS

  • We are keen to hear from organizations and governments, especially those doing policy work relating to impact investing in Asia, to explore ways to collaborate, help one another and grow the ecosystem together. As a major financial center and regional private banking hub, we believe Hong Kong has lots to offer entrepreneurs seeking funding for their startups and investors seeking a less risky way to enter China.

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