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2023 SFi Investment Outlook for Impact

Updated: Mar 6, 2023

Emergence of CVCs with impact or sustainable interests

Since 2020, there’s been a rise in Corporate Venture Capital (CVCs) activity in Asia. In 2022, SFi saw a real emergence of CVCs in the impact space, such as Eureka Nova, Qonvolv Ventures (formerly Esquel Ventures), and Li & Fung.

Our observation is that regional CVCs’ interest

in impact is mainly driven by 2 factors: firstly, Covid highlighted societal and environmental issues and forced corporates back to the drawing board to address them. Secondly, the global push to transition to a more just world (once again accelerated by the pandemic) prompted CVCs to start looking into more sustainable avenues of value creation.

Based on our conversations with various local players, we expect CVCs’ interest in impact to gain more momentum in 2023.

Private credit and sustainability-linked loans continues to be relevant

Asia private credit has proven adaptable to the difficult macro environment of 2022, thanks to the flexibility it provides to investors when selecting suitable opportunities. Throughout 2022, the SFi circle has looked at various private debt opportunities across sectors such as financial inclusion and climate.

In 2023, anticipating even greater uncertainty in the economy, investors still consider private debt attractive. Though direct lending in various forms will continue, we foresee more incoming B2B lending platforms, applying ESG screening criteria to provide flexible financing to impact-aligned ventures (e.g. small female-led enterprises) to navigate the 2023 difficult market conditions. These platforms consider adverse market conditions as a growth opportunity, as banks will reduce lending given the increased risk and borrowers will look for alternatives. Though expecting more provisioning and non-performing loans compared to 2022, these platforms believe that private credit is largely uncorrelated to traditional asset classes and represents a good investment opportunity.

Valuations adjustment continues in 2023

2022 saw a drop in VC/PE activity, and valuations came down quite drastically compared to the previous year (and in turn so did VC/PE returns). This was mainly due to inflationary pressures (resulting in higher operating costs and lower margins for businesses) and the high interest rate environment (investors’ focus shifted to fixed income/credit and away from VC/PE, negatively affecting valuations). On the flip side, this type of environment benefitted VC/PE players looking for undervalued assets.

In 2023, SFi expects VC/PE activity in Asia to remain slow, with valuations remaining weak for the time being (trailing public markets) as fund managers delay exits to time better valuations. The environment remains interesting for managers looking to buy undervalued assets. As China ha

s experienced a drop in VC/PE activity during 2022, investors’ interest has been shifting to South and Southeast Asia (SA and SEA). As in 2022, investors will continue to be cautious, making follow-on investments in their existing portfolio companies/funds, and keeping some dry powder to deploy into selected impactful opportunities. Investments in impact funds have also proven a good strategy to access carefully sourced and vetted co-investment opportunities in an environment where difficult market conditions make direct venture investments particularly risky. In terms of themes, a couple of trends we have identified are the following ones: riding on the COP-27 momentum, and as the European energy crisis continues, climate and the energy transition remain high on the agenda. As the Russian-Ukrainian war continues, more emphasis will be put on social issues in 2023 (see section below for more details). The war also exposed the weakness of global food systems, and with global food prices spiraling out of control, agri investors' focus will shift on more upstream solutions.

ESG and greenwashing

2022 has been the year of greenwashing (i.e. making misleading claims about environmental credentials) and anti-ESG sentiment. Scandals, whistleblowing, and false pledges dominated the sustainability news cycle across industries (finance, fashion, big oil, consumer goods, to name a few).

What to expect from 2023 then? According to many sources, more of the same. The trend of 2023 will be greenhushing, which is when organizations appear to be fighting the good fight but remain vague about it, giving the impression of being greener than they actually are to evade scrutiny. This can take many (innovative) forms, from greenrinsing (regularly changing ESG targets before they are achieved), to greenshifting (subtly shifting blame for climate chang

e to the consumers). So the question is: what will regulators do to address greenhushing? According to ESG Clarity, 2023 will see a combination of increased regulatory focus (for Hong Kong specifically, the common ground taxonomy could potentially be extended to ESG funds) with a united investment industry creating the necessary pressure.

Social aspects taking center-stage

Social issues are expected to take a more prominent role in 2023, driven by rising costs of living and poverty across the globe. The global crises of 2022 (namely Russia’s invasion of Ukraine and COVID-19’s long tail) left almost no one untouched, and they will shape the world in 2023. A big social theme this year will be “Leaving No One Behind in an Aging World”. Population aging is a defining global trend of our time, which shows advances in healthcare and living standards, but also comes with substantial challenges. On a more corporate level, other key social issues high on the agenda this year will be human capital management and diversity and inclusion.

Summing it all up

Overall, we expect impact investors to continue to be cautious in 2023, keeping dry powder ready to deploy into carefully selected opportunities (if valuations are sensible). We believe climate, food and agriculture, and social issues to be front and center on their thematic agendas, mainly driven by macro events. Because of the interest rate policy environment, credit and fixed income will be asset classes to watch, and in which we see interesting opportunities in the impact space. Greenwashing, fueled by the news cycle, will morph into a variety of creative approaches that corporations will cook up to appear more palatable to investors.

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