Adam Lane, Manager, Advisory Services, BSR

At BSR's recent forum in Beijing—cohosted by the UN-backed Principles for Responsible Investment (PRI), Beijing Private Equity Association, and Magic Stone Investment, and attended by 60 investment professionals—the focus was on the overall context in China for responsible investment and how private equity in China is investing responsibly. This is the second blog in a two-part series. 

In China, where there are numerous environmental, social, and governance (ESG) risks and sustainability challenges, responsible investment is both necessary and common sense, as PRI’s James Gifford explained at the forum. PRI signatories Lunar Capital and Orchid Capital, along with Tsing Capital and Hui Nong Capital, agreed with this statement and outlined how they integrate responsible investment throughout their investment processes, from analysis to audits and due diligence to engagement and management of portfolio companies.

Both Lunar Capital and Tsing Capital focused on the importance of being an active investor (the second principle of the PRI), though this looks very different for each of them: Lunar Capital takes majority investments and Tsing Capital takes minority investments. The funds  also emphasized the importance of influencing the management of their companies to focus more broadly on sustainability as part of demonstrating good management.

However, there were clear differences in approaches among the different investors. Tsing Capital intentionally invests with the aim of positive, quantifiable environmental impact—and therefore only invests in specific industries such as sustainable agriculture, energy efficiency and clean energy. However, Orchid Capital takes a different approach and invests in companies in any industry, as long as these companies understand and manage well the economic and social issues within their respective sectors.

The two different approaches are not necessarily conflicting but rather represent two current modes of thinking:

1. Risk Management: The “we have to manage ESG if we want to make money” approach focuses on integrating ESG into investments and reducing ESG risks while viewing good management of ESG issues at a company as a proxy for good management overall.
2. Impact Investment: The “we want to make an impact while also making money” approach places a greater focus on the external environment, and investment decisions are made specifically for measurable social or environmental impact, while also being profitable.

Both approaches are necessary to responsible investment. With such dramatic ESG risks in China, the first approach may look at ESG through more of a risk management and competitive advantage lens, whereas the second may focus more on business opportunities and social/environmental impact, because of the tremendous need to help address social and environmental challenges in China. As the field evolves, the crucial question is how to drive investors in China to take one (or both) of these approaches.

The forum concluded with perspectives from LGT Venture Philanthropy, New Quest Capital, and Harvest Fund, who discussed how to move forward successfully with fostering responsible investment in China. They agreed that the major challenge is not to demonstrate the business case for responsible investment, but rather to raise awareness of the business case and to work on the “how”: how to implement responsible investment effectively throughout investment processes and to support companies with implementation of responsible business practices.