An impact investment refers to any investment a fund or investor might provide to an organisation, aiming not just to create a financial return but also to aid a quantifiable and measurable social or environmental benefit. This form of funding is the next step in socially conscious investing. Considering the current ecological situation on the planet, companies must set aside focusing on the financial returns that are exclusively short-term and harm the environment and instead prioritise long-term investments that provide added value, not just to their bottom line but to society in general.
We look at the advantages and drawbacks impact investors in Southeast Asia are facing, examine some of the VC trends Southeast Asia is currently experiencing, and explore some recent developments that will positively affect green technology startups trying to establish a foothold in the region.
Fund negotiation tips and tricks for startup founders in Southeast Asia in 2023 and beyond
Impact investing: Pros and cons
Why choose impact investing? Traditional business models typically focus on short-term financial returns, making a profit, no matter what happens, without considering the world around us. On the other hand, impact investing opens the door to long-term sustainable growth that benefits not just the investor. The whole world also reaps the benefits of this investment, and society will be in a position to thrive.
Why should investors choose this long-term option instead of focusing on short-term returns? There are several reasons, some of them being:
An alignment of values: Investors want their investments to represent their values and personal beliefs by being a force for good.
Long-term sustainability: apart from being a force for good, investors want businesses that will last a long time, more so given the ups and downs of the market.
Diversifying portfolios: Finally, investors can diversify their portfolios and help minimise the risks that come with traditional investments when engaging in impact investments.
Some of the drawbacks of impact investing are:
Possibility of receiving lower returns vs traditional investments: While traditional investors might be making more money, impact investing could be a less effective way of investing one’s funds.
Difficulty measuring impact: Measuring the actual social or environmental impact is difficult. Profits and losses are easily distinguishable on a balance sheet, but it is more challenging to demonstrate carbon emissions or the prevention of plastics thrown into the ocean. The social and environmental impact is harder to measure, so unless very specific metrics are considered, the anticipated effect might not be as tangible as the investor might wish.
Exit strategy issues: Finally, since these investments focus on companies and firms that might need a longer time to yield profits, the investment’s exit strategy might take much longer than expected, if it will arrive at all, given the volatility behind early-stage startups.
Impact investing in the region
According to The Landscape for Impact Investing in Southeast Asia, a 2018 report launched by the Global Impact Investing Network, between 2007 and 2017, USD 904 Million were invested in Southeast Asia by private impact investors and USD 11.2 Billion were invested by development finance institutions. Given the region’s high population density, internet users and growth potential, the future surge of impact investment-based businesses is a certainty.
The study also points out that “entrepreneurship has gained momentum across most of Southeast Asia, partly due to increased government support for private-sector growth, integration with the global economy, a rising consumer base, and a young population.”
The region has become a startup incubator, with ASEAN governments taking a much more active role in generating businesses. Government initiatives have seen the evolution and growth of sustainable finance guidelines, renewable energy incentives, circular economy initiatives, and more. Examples of these are Singapore’s Zero Waste Master Plan, Malaysia’s Social Impact Exchange, and Thailand’s incentives for renewable energy, as shown in this report by the International Institute for Sustainable Development.
Finally, besides the economic growth and availability of natural resources, SE Asia has sustainable severe development needs. There are several opportunities in the region to create sustainable development initiatives that tackle deforestation, poverty, and inequality.
The latest development in green investments took place a few weeks ago. Capria Ventures, one of the most significant impact investors in Southeast Asia and the world, created a USD 100 million fund focusing specifically on the Global South. Headquartered in Seattle, WA, Capria Ventures has over 70 investments in the Southeast Asian region and aims to seek founders that focus on artificial intelligence but with a focus on green technology startups. This new fund will focus on 20-25 tech startups from different regions worldwide.
This move towards increased impact investment is only the start of the growth and evolution of the VC trends Southeast Asia is likely to witness in the coming years, and we expect to see even more moves towards this type of funding as time goes by.