Asia | June 8, 2017

Q & A with Annie Chen: The path to a 100% sustainable and mission-aligned portfolio

Michael Standaert
Guest Author

Michael Standaert

Born and raised in a wealthy family in Hong Kong, Annie Chen went to college and law school in the U.S. After a decade as a tax lawyer in San Francisco and Hong Kong, Annie Chen took over management of her three-generation family office in 2008, and founded RS Group to manage her own wealth.

Her investment experience in the decade since has tracked the development of sustainable and impact investing. The RS Group says it has achieved “a 100% sustainable mission-aligned portfolio that generates both financial and impact returns.” The portfolio includes impact investments in a range of funds and, increasingly, direct investments. Impact areas include climate solutions, livelihoods for underserved communities, sustainable food and agriculture and infrastructure for the impact investing market itself. (RS Group says the portfolio has returned an average of 5% per year for the past five years, compared to 5.2% for a custom benchmark.)

ImpactAlpha caught up with Chen at the Asian Venture Philanthropy Forum this week in Bangkok.

ImpactAlpha: Can you describe your approach to impact investing and your aim to have 100% of your investments sustainable and mission-aligned?

Annie Chen: We are a little bit different than your usual impact investor in that we started at the portfolio level. Unlike a typical impact investor, we don’t start with “Oh, we want to make a difference in education, so how do we find projects or enterprises or businesses to invest in?”

In building a portfolio, one of our mantra is diversification. We invest mostly through funds, rather than specific investments, because that calls for very different capacity that we don’t have at the moment. We are trying to really choose fund managers.

Q. How are you working with fund managers? What are you looking for in terms of understanding about the kind of investments you are targeting?

A. When you are managing a pool of assets, how do you invest in a diversified way across different geographies, across different asset classes, in order to meet your return objectives and your risk return? In each of those pockets, we look for strong performers, we look for best in class, even in global equities.

People argue, How can you have impact if you invest in everything? The impact, or the lens that we put toward that, is that we will only seek out managers that integrate, truly integrate, ESG (for environmental, social and governance) considerations into how they pick what they invest in. More importantly we look for managers who use ESG to identify good corporate citizens, best in class, but also to find hidden value in those areas.

Private equity tends to be more thematic so we have concerns about climate change, so clean energy becomes an obvious theme for us. We look for managers who are then focusing on funds working around energy related issues. They still have to have a strong ESG mandate when screening what they invest in.

There have been cases where we identify a fund manager and maybe it is their first fund, and they don’t have much of a track record. We feel it is important to build the field and add players.

Q. I’m curious about what kind of evaluation criteria you use to find out whether those investments have been impactful, responsible. I’m thinking of cases like China’s investment in clean energy, where a lot of solar, wind, and even hydropower is not being utilized. Is it possible to track down to a project level?

A. That is why our manager selection process is a rigorous one. It is not simply due diligence at the outset. We will conduct a full review annually, usually at the beginning of the year when the previous year financial year is closed. We send out questionnaires and then we develop our own set of questions around, not just financial performance, but all of the related issues concerning impact. We will push our managers to explain if they have not performed as well as they had promised, whether on the financial side or on the impact side, to find where the issues are. We don’t reach over them into the project level because we do not have the capacity to do so.

Q. If you found out there were issues with projects you are invested in, would you raise that issue?

A. We would. We would.

Q. Has that happened?

Yes. In one early case we invested in a fixed income fund where the manager said they integrate ESG. Over time we discovered what they were doing was more of a currency play. We asked them about it and basically that is what they were doing. It may have been performing within expectations financially, but we don’t think currency plays add anything to the real economy.

Even though we try to select managers with the idea of investing for no less than three years, because we are looking for long term partnerships, we don’t want to jump from one to another. We invested all that upfront effort to invest in the right manager. We want to believe in them, we want to stay with them. In that instance, we felt what they did was not for us so we exited that fund. So it does happen.

Q. What are your key issues and challenges now as you try to expand your investments?

A. Our goal is not to expand. We take an approach where as close to 100 percent as possible is invested sustainably.

We have a few direct investments where the expectation is more on the impact side, though the financial piece is not irrelevant. We are looking at the portfolio level where we have objectives for the financial level and at a broad level for impact.

We are trying to demonstrate a particular way of managing our entire capital base. In light of where the world is, with climate change and other issues, we feel that other asset owners, other wealth owners should do the same thing. Of course being a family office, we feel the most relevant target audience would be our peers. So the report that we put out last year was very directed at that audience and that is why were are at AVPN. We want more asset managers to take that approach.

Going forward, we will be backtracking to be doing what people think impact investors should be doing. We are identifying a few themes we believe are highly important and of interest to us and figuring out how to deploy capital to really focus on generating the change or impact we want to see.

We have to figure out how to build capacity for that. We’ve always relied on fund managers. Going forward we may still want to invest in some funds, but in order to invest in certain issues more deeply, you have to go directly to the projects themselves. How you manage those? How you find those? Can we find platforms where we don’t need to do everything ourselves, but find shared platforms with other investors who are interested in the same issues?

Q. How are your peers in Asia reacting?

It is still slow. I think it is true that Millennials are much more cognizant of these global issues. There is more of a drive in them to be dealing with these issues. But they may not be in the position of authority to deploy capital.

In terms of immediate pick up, Asia is hampered by the relatively slow development of the sustainable finance side. We’ve really seen, particularly only in the last year or two, ESG investing take off in a big way. Talking about impact investing, there is sort of a spillover effect. Banks are starting to jump on the bandwagon. Their high net worth clients are all trying to do impact investments. So how can they find products for them? They start acquiring these other asset managers that have been doing it for a while. That generates a lot of news and of course other people say, oh, there’s a market there.

I think there are a number of reasons why it has not taken off the same way as it has in North America or Europe. We’ve seen the most rapid development in other places when there are sustainable finance pieces, communities and organizations. They are relatively lacking in Asia, I don’t know why, whether it is because the geography is so diverse, country priorities are too different. There have been attempts, but they’ve not been particularly successful. The [Hong Kong] Mandatory Provident Fund provides almost no sustainable products. They don’t talk about it. There’s no investor education.

We are very concerned about the pace, so much so that rather than complaining about Hong Kong is lagging behind, we decided to put resources into building that public capacity. So we’ve created something we are calling a Sustainable Finance Initiative. We are at the very early stages of figuring out what this initiative going to do, how is it going to build the market, what are some of the entry points. Rather than just picking a consultant, we issued a [request for proposal] to a number of consulting firms in a way to signal, “There’s a need here. There’s a gap here. Is anyone looking at this?”