This article is sponsored by Asia Green Fund.
What is Asia Green Fund and why have you decided to take an impact approach?
Asia Green Fund is a green impact private equity firm based in China, with operations across the Asia-Pacific region and broad international collaboration. I am the founder and chairman of the firm. Launching AGF was a natural progression in my career. I have been working in the sustainability area for the past 25 years, starting with research on nuclear fusion at MIT.
After MIT, I joined Goldman Sachs in the US and began my career in energy investment. Later, I joined First Reserve Corporation and then Warburg Pincus. Prior to founding AGF, I was a partner at Warburg Pincus, responsible for investments in energy, industrials and business services sectors across Asia.
In 2016, my partner and I launched AGF with a dedicated focus on green impact investing because we believed capital should be invested to generate not only financial returns but also measurable ESG impact in order to address all the challenges we faced in the world. We also believed the macro-economic environment and technological advancements created an ideal time for us to pursue an impact investment strategy.
To build a green impact fund, we fully integrated impact investment principles into the entire investment process, from fundraising to the selection of subsectors and targets, due diligence, financial and environmental modelling and post-investment management.
How is impact investment evolving in China and Asia more broadly?
Impact investing has been around for more than a decade in Western countries, but it is still emerging in Asia. AGF is a pioneer in China. In recent months, we have seen many investment firms begin to embrace ESG and impact investing, which is great for China. However, we have noticed that many are in the early stages of adoption with a focus on ESG PR. AGF is at an advanced stage. We took a purposeful approach with a clear impact strategy and well-defined impact investment processes. Every AGF investment has a clear demonstration of the ‘additionality’ of our capital and measurable environmental impact in quantitative terms.
As investment professionals, we always remember that fiduciary duty is the first and foremost duty of a fund manager, which means our impact investing strategy starts with building an aligned vision and commitment with our LPs. We made it clear to prospective LPs at the time of fundraising that every investment we make is designed to achieve both a financial return and a quantifiable environmental return. We believe it is important to align impact goals with our fiduciary duty. It is also critical to build the necessary infrastructure and processes to support the execution of our impact strategy.
What reaction have you received from investors?
When we first started fundraising in 2016, there was a broad lack of understanding of impact investing within investment communities in China. Some investors were intrigued by our ambition but it took effort and patience to explain to and educate prospective investors about how we could achieve both financial and environmental returns. We were pleased to receive strong support from a dozen LPs at a time when most people didn’t understand or believe in impact investing. Five years later, we are able to demonstrate real results.
President Xi Jinping’s pledge to the world about China’s commitment to carbon reduction last September has propelled ESG and impact investing in China on to the fast track. We have seen rapid adoption of ESG and impact investing across broad investment asset classes. Years ago, we saw ESG demand from European investors and some from the US. Now, I am pleased to see more and more China-based LPs moving in this direction.
What types of impact are you looking to achieve?
As a green impact fund, first and foremost we quantify environmental impact. We also consider social impact and governance based on negative screening criteria. When we identify a subsector, we ask ourselves whether we can leverage our capital, together with the products and services provided by the target company, to drive environmental impact. We evaluate how much carbon emission reduction, hazardous waste reduction and wastewater reduction, for example, can be achieved before we make an investment decision.
Post-investment, we monitor the impact metrics of each portfolio company using our proprietary methodology, third-party data and independent certification. We report back to our LPs both the financial returns and environmental impact. From our report, our LPs will know the environmental impact, in quantitative terms, achieved for every 100 million yuan they invested in an AGF-managed fund.
What kinds of investment has this approach led to?
We focus primarily on the industrials and business services sectors, and we look for target companies with the right technology, the right business model and entrepreneurship. We believe companies that are good at applying digital technologies and advanced materials to make an impact will have vast opportunities in the future.
For example, we formed an acquisition consortium with BroadPeak Global and the Saudi Arabian Industrial Investments Company to buy out DuPont Clean Technology. The Clean Technology business uses advanced materials to create solutions to make chemical processes related to metals and fertilisers more environmentally friendly and energy-efficient.
We also invested in two industrial biotech companies in China that apply biosynthesis technologies to manufacture materials that are traditionally produced through fossil-based chemical manufacturing processes. These revolutionary bioprocesses are not only environmentally friendly, but also more cost-effective. AGF is the lead investor in Series A funding in one of them, called Mojia Biotech, and Hillhouse and Bits x Bites co-invested with us.
On the digital side, we have invested in Horen Group, a 20-year-old company that applies Internet of Things technology and a novel business model to transform the traditional logistic packaging industry so that it is more efficient and environmentally friendly. We have also invested in AIPark, a company that uses artificial intelligence and image recognition technology to solve roadside parking issues in cities and reduce traffic congestion, which, in turn, reduces automobiles’ idle times and, therefore, emissions.
How do you support these firms post-investment?
The real work begins once a deal is closed. We support our portfolio companies on many fronts, from business strategy, which is often directly linked to emissions reduction and other environmental impacts, to leadership and talent, financing and marketing needs.
My co-founder, who was a partner and deputy country head at executive search firm Russell Reynolds Associates, helps portfolio companies with talent acquisition and leadership upgrades. We use our LP network to help portfolio companies connect with the largest companies across industrial sectors. Our capital markets team helps introduce banks for debt financing, connects new investors and assists in IPOs. We also assist with PR and branding campaigns. Our Green Technology Institute provides hands-on help with establishing and quantifying green impact metrics.
What have you been able to achieve to date?
Our first RMB fund, a 2017-18 vintage, is performing very well. We have achieved 0.38 DPI and 21 percent IRR on the book. Our LPs are pleased with the fund’s financial performance, and they are even more pleased with the environmental impact we are delivering. In 2020, assets under AGF’s RMB fund achieved 2.64 million tCO2e in carbon emissions reduction, nearly 800 tons in air pollution reduction (excluding CO2), 1.64 million tons in water pollution reduction, and 45,000 tons in hazardous waste reduction.
These impact metrics imply that AGF has achieved 173,000 tCO2e reduction for every 100 million yuan invested and saved 0.36 yuan in environmental remediation on every one yuan invested. We report those results to our investors in our annual report. This year we have disclosed the information to the public.
What do you believe the future holds for impact in Asia?
The estimate of the capital required to achieve China’s carbon-neutrality goals is as high as $20 trillion. This will require the participation and contribution of a whole range of players, including private equity and dedicated impact firms. The potential for impact investing in China is huge and we are seeing new entrants move into the space rapidly. Private equity and venture capital firms are important, but they are still a very small portion of that universe.
We welcome new players in impact investing and are open in sharing our experiences and lessons learned with people who reach out to us. The reason I left Warburg Pincus to start AGF was to be a pioneer and build a successful model to encourage more impact investment. We went through a hard five years to get to where we are today – with a system that has been proven to work from both an impact and financial returns perspective. If we can encourage others to join impact investing through our own success, that, by itself, is a demonstration of the positive impact we are generating.
Investing behind rural communities in China
Asia Green Fund is one of the investors in Huitongda, a leading Chinese e-commerce platform serving rural markets by connecting manufacturers with family-run retailers.
In providing supply chain services to its customers, Huitongda has developed software-as-a-service solutions to help the retailers enhance their operational efficiency in areas from marketing to inventory management and distribution.
Following its investment, Asia Green Fund worked with the company to support its market expansion and business development efforts, including making introductions to strategic partners and introducing green products such as rooftop photovoltaic systems and electric pickup trucks for rural families.
By sitting on the board, AGF also made a positive influence in the boardroom on the company’s strategic issues, from recruiting senior executive talent to designing company-wide development strategies. AGF also provided strong PR support to help Huitongda gain market exposure. AGF helped the company recognise the important role the e-commerce platform could play in rural development, which is a high priority for the Chinese government.
AGF made a partial exit from its investment in the company in early 2021, generating a 2x money multiple. In addition to generating a financial return, however, AGF’s investment has also created a positive social impact within China’s rural communities, and environmental impact, by promoting the use of green vehicles and technologies in these rural regions.
Since AGF’s investment, the number of employees at Huitongda has grown from approximately 2,000 to more than 5,000. The company has expanded its footprint in Chinese rural markets, with its initial presence in 17 provinces rising to 21 provinces and its network of family retail stores increasing from 58,000 to 140,000. Between 2018 and 2020, the company’s revenue grew at an approximate rate of 20 percent CAGR.
Huitongda is in the process of filing for an IPO and AGF continues to provide support to the company.