Creating Change in Southeast Asia: Sustainability is the Focus of Private Equity Investment in the Region

SINGAPORE, Nov. 12, 2019 /PRNewswire/ -- Socially responsible investing is on the rise globally, fueled by public concern about global challenges such as climate change, pollution, deforestation and social inequality. Today, more than 50 percent of private equity deals in Southeast Asia now back innovative business models that contribute to environmental and social progress, according to new research from Bain & Company, SUSTAINABILITY WINS AS INVESTORS IN SOUTHEAST ASIA SHIFT FOCUS.

Based on a definition adapted to developing countries, sustainability investing in Southeast Asia has rapidly gone mainstream. Of all private equity deals in Southeast Asia in the first half of 2019, 56 percent involved companies that met Bain & Company's sustainability criteria for developing countries, up from 30 percent in 2017.

Investors are realizing that it may cost them more to ignore environmental and social criteria in their investments, and limited partners are putting pressure on global fund managers to incorporate environmental, social and governance (ESG) criteria into their investment processes. As a result, a growing number of funds are building portfolios of companies that meet Principles for Responsible Investment (PRI), supported by the United Nations -- and developing the in-house capabilities to help them grow.

"Consumers and shareholders are increasingly demanding that companies expose ethical issues linked to their investments," said Suvir Varma, a senior advisor with Bain & Company's Global Private Equity practice and the report's co-author. "That concern sparked the first wave of sustainability investing a decade or more ago as funds sought to mitigate financial and reputational risks."

At that time, most large investors in Southeast Asia targeted investments in primary industries such as oil and gas, mining and agricultural commodities. Today, many are funding innovative business models that address environmental and social needs. These include companies developing renewable energy projects, platforms that provide microbusinesses with access to financing and markets, and for-profit hospital networks that offer underserved populations better access to healthcare.

Sustainable investment fuels growth, as opposed to a mere change in financial ownership, and meets at least one of three criteria:

• Improves the environment: Includes investments in clean energy, water purification, pollution controls, waste reduction, low-carbon transportation, sustainability fisheries and energy from waste.
• Increases access to basic resources or services: Encompasses investments in platforms to expand and improve access to vital services that often are lacking in developing countries.
• Provides microbusinesses access to finance and markets and promotes social mobility: Includes microfinancing or digital sales platforms for small businesses that help reduce poverty and promote upward economic mobility of business owners.

"The range of potential sustainability investments in developing countries is arguably broader than in developed countries," explained Alex Boulton, a principal with Bain & Company's Global Private Equity practice and report co-author, based in Singapore. "We have seen the total deal value of sustainability investments reach US$3.2 billion for the first half of 2019, which is up 60 percent over the first half of 2018, and on track to surpass the previous years' total."

With Southeast Asia delivering total private equity deal value in excess of US$10 billion in 2018 for the second year in a row, rising sharply in Vietnam and Indonesia, this market continues to go from strength to strength. As sustainable investment becomes increasingly integral here, the outlook looks good for social change across the region.