Ideas: Tech powers new era of impact investing

Ideas: Tech powers new era of impact investing

Written by
Azuar Zainuddin
Impact investing, which involves making investments to generate positive, measurable social and environmental impacts alongside financial returns, is rapidly gaining traction worldwide. In 2020, the Global Impact Investing Network (GIIN) reported that impact investments reached about US$2.281 trillion, accounting for about 2% of global assets under management.

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Around US$1.615 trillion came from public investors, including governments, development finance institutions and organisations, and US$666 billion originated from private investors, such as high-net-worth individuals, family offices, venture-capital firms and institutional investors. This growth signifies a broader shift towards integrating environmental, social and governance (ESG) considerations into investment decisions.

In Malaysia, investor corporations and government agencies drive impact investing. Government initiatives such as the Green Investment Tax Allowance, Green Technology Financing Scheme and Principles-Based Sustainable and Responsible Investment Taxonomy support sustainable growth. The government aims to reduce emissions by 45% by 2030, promoting low-carbon industries, decarbonisation, the circular economy and clean energy in the 12th Malaysia Plan.

Government-linked investment companies also drive Malaysia’s sustainability agenda. Khazanah Nasional Bhd, through its Dana Impak programme, for example, has allocated RM6 billion over five years across six key sustainability themes. The Employees Provident Fund, on the other hand, aims for full ESG compliance by 2030. The FTSE4Good Bursa Malaysia Index promotes ESG investments by highlighting Malaysia’s commitment to sustainable finance.

Now, digital innovation is rapidly transforming impact investing. The convergence of technology and financial capital for social and environmental good is redefining problem-solving approaches. How has impact investing changed in the digital age?

With new tools, impact investors can quickly test and scale new ideas. Digital technology is a game changer when it comes to impact measurement and management. Examples of these are the Global Impact Investing Rating System, Impact Reporting and Investment Standards and B Impact Assessment. Facilitated by data analytics, artificial intelligence and cloud computing, these tools standardise the reporting and evaluation of impact, ensuring consistency and comparability across different investments.

By leveraging these advanced technologies, impact investors can build confidence, enhance efficiency and ensure their funds are used as intended.

Meanwhile, start-ups and social enterprises are leveraging technology to develop innovative solutions for societal and environmental impact, from energy transition and food security to the circular economy.

Financial technology is democratising access to impact investing, making it more accessible to a broader range of investors. Robo-adviser platforms such as Swell Investing focus exclusively on impact investing, while crowdfunding platforms such as Kiva connect lenders and borrowers in underserved communities around the world. These platforms empower individual investors to participate in impact investing, breaking down barriers that once restricted this field to institutional investors and high-net-worth individuals.

Crowdfunding, too, has evolved into a great funding option for early-stage, impact-driven start-ups and social enterprises, as venture capital tends to focus more on later-stage investments. According to GIIN’s 2020 Annual Impact Investor Survey, 68% of impact capital is allocated to later-stage businesses, while only 32% is directed towards early-stage ventures.

Malaysia-based start-up Materials in Works, which addresses environmental pollution by recycling residual paper liner from the label packaging industry into recovered cellulose pulp, successfully raised more than RM2 million from 30 investors via crowdfunding platform pitchIN, highlighting the potential of digital platforms in mobilising impact capital.

Digital technology has enabled global collaboration among impact investors, philanthropists and social entrepreneurs through digital platforms and communication tools. This enhances transparency, democratises access and fosters networking. Consequently, impact investors today are better equipped to address global challenges, drive sustainable development and create a more equitable world.

Malaysia is in a great position to leverage impact investing in the digital age, with growing awareness and adoption of ESG principles and a supportive regulatory climate. Corporations, government and investors must collaborate to support impact-driven start-ups and social enterprises, ensuring that financial returns align with positive social and environmental outcomes. By working together, we can foster an ecosystem in which impact investing thrives and contributes to a sustainable and equitable future.

This article first appeared in Digital Edge, The Edge Malaysia Weekly on June 10, 2024 - June 16, 2024

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Azuar Zainuddin
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