RS Group is a Hong Kong-based family office that fosters multi-sector collaboration and investment in for-profit businesses, social enterprises, not-for-profit organizations and initiatives, to advance human development and environmental sustainability in Asia. In 2019, in addition to becoming a Convergence member, RS Group also funded the Asia Natural Capital Design Funding Window, managed by Convergence, to demonstrate how flexible capital can help boost investable deals for nature-based solutions.
As the family office accelerates its efforts to advance nature-based solutions in mitigating climate change in the region, Convergence connected with Ronie Mak, Managing Director at RS Group, to learn more about their experience in blended finance and their efforts to bring capital to projects aiming to protect the planet’s natural resources.
How has RS Group approached building a sustainable portfolio?
RS Group’s return objectives are more on a needs basis rather than market driven. We calculate the financial return we need to meet our grant and operational objectives, and our principal’s personal needs. Then, based on that, we ask ourselves, “Is that an appropriate level of financial return for this capital strategy, and are we aligned to meet our targeted needs?”
In 2016, we launched an Impact Report to share our journey in building a 100% sustainable investing portfolio. This report shares why we chose a total portfolio approach—managing the investment and philanthropic capital in our portfolio as a whole—how we went about it, what we learned, and what advice we have for others. For us, it took about 5 years to transition from a traditional portfolio in 2010, into one that is 100% sustainably invested across asset classes by 2015.
Can you tell us why the RS Group finds blended finance to be a compelling approach?
We know that in order to solve the world’s biggest problems, philanthropy alone is not enough. The power of capital markets must be harnessed. This thinking is what drives our total portfolio approach, rooted in the concept of blended value–investing through a values-based lens to create environmental value, social value and financial value–and our flexible deployment of capital (i.e. the use of the right type or mix of capital for the given situation to generate the intended impact, whether it’s grant, concessionary, or for-profit capital.)
Blended finance is therefore well-aligned with this spirit. Especially in frontier or emerging markets, or in sectors that are perceived to have higher risks and/or lower returns, we see blended finance as an important approach to channel private and commercial capital to SDG-aligned projects. The development and impact community for years have talked about the importance of public private partnerships (PPPs). Blended finance exists in the same vein. When it comes to climate change and specifically nature-based solutions, the need for blended finance, and the role we can play to provide the catalytic capital needed to attract mainstream capital, is critical.
What contributes to RS Group’s risk appetite and ability to create additional investment opportunity?
Our total portfolio approach has truly allowed us to take higher risks in some parts of our portfolio (e.g. in the direct investment space or private equity space), because we can balance the risk out by safer investments, in say the listed fixed income or listed equity space, where risk is generally lower and returns relatively more stable. Currently, we are also in an accelerated capital deployment phase given the current climate crisis and are expediting our capital to be invested flexibly across various programs. This mainly includes grant and concessionary type capital; typically, with higher risk appetite, and intended for deeper impact.
What are some lessons and insights gained over the years, including from the Sustainable Finance Initiative?
When we began our work, sustainable investing was not really talked about in Asia. However, as we continued to share our work and demonstrate a demand for sustainable investments, we began to see a gradual uptick in interest from fellow asset owners to explore sustainable investments, talk of ESG inclusion into regulations, and offerings of sustainable products in the region.
However, in launching our impact report, we realized one report from one family office was far from enough. To effectively help our peers mobilize their capital, much more was required, and that is what drove RS Group to incubate the Sustainable Finance Initiative (SFi), to mobilize capital for positive impact, and accelerate Asia’s transition towards a sustainable finance hub. Today, SFi has been spun off from RS Group as a separate legal entity and now acts as a community-based platform for private investors to learn, connect and co-invest. Through its four pillars of empowering people, policy, practice and product, SFi’s vision is to create a sustainable finance hub for Hong Kong/Asia.
What were RS Group’s motivations behind funding the Asia Natural Capital Window, and how does this decision align within the company’s broader efforts?
The Asia Natural Capital Design Funding Window is part of RS Group’s broader natural capital initiative around climate change, given the role of nature-based solutions in reducing greenhouse gases and mitigating climate change. Nature-based solutions account for 10 of the top 20 most effective emissions reduction solutions to achieve climate drawdowns—the future point when greenhouse gases in the atmosphere stop climbing and start to steadily decline.
Funding the Asia Natural Capital Design Funding Window is the first intentional step we have taken as part of our natural capital initiative. Since we are new to blended finance, we looked for a partner that was experienced in this field, with the expertise, knowledge and capabilities to develop such a window. By partnering with Convergence, we have been able to reach a broader audience and find opportunities more systemically, allowing us to be more catalytic and impactful with our limited amount of capital. Even in the face of the COVID-19 pandemic, our partnership with Convergence kept the Window moving forward; with the recent awarding of its first design-stage grants, targeting SDG 14–Life below Water, to Blue Finance and Ocean Outcomes
We would love others to join us, as we must have all hands on deck if we are to succeed in protecting natural capital in Asia. The gap is enormous, and we can all play a role in catalyzing more capital into the sector to fight the climate crisis.
What insights do you have for other family offices interested in entering the blended finance space?
We are still very new to blended finance. Our partnership with Convergence is reaching its half year mark, so we are still learning. With that said, here are some thoughts:
1. Blend for the right reasons; blend responsibly: Blended finance structures can be complicated, costly and timely, so avoid blending structures that are there simply to make an investment more attractive. Ensure the blended structure is there for the right reason and would have otherwise not been viable.
2. Be clear on your position within the blended finance structure: Blended finance can have many different layers. Know which type of capital, and what role it plays within the structure, and ensure that it fits within your investment mandate, amidst your own risk return appetite and impact intentions.
3. Leverage the power of private capital: Whilst it may be more attractive to go in on the safer tranches within a blended finance structure, one should keep in mind the unique role that a private investor can play in concessionary type capital structures. For RS Group, we are fortunate to be able to be flexible in our capital allocation, allowing us to provide concessionary capital (e.g. grant capital, design funding window, subordinated debt, etc.) to support impactful projects that require such investments. Concessional capital can be hugely catalytic in blended structures, as it triggers larger amounts of capital and attracts private investors through demonstration.
Looking ahead, where does RS Group see the greatest opportunity for blended finance to advance nature-based solutions in the region?
Currently, only a limited number of natural capital projects meet the return requirements and risk appetite of commercial investors in Asia, largely because of how undervalued these ecosystem services remain, and a lack of supportive policies and regulations in the region. We see blended finance structures not merely as an investment option, but as a critical enabler in attracting private capital in nature-based solutions in Asia. Given the early stage of development, we believe more design funding and early-stage concessionary capital is essential to develop the field.
We remain committed to build a more credible and viable pipeline for nature-based solution projects in Asia. Whether that means developing more incubator facilities, more venture-builders in Asia, or supporting certain fund managers willing to take on more risk and come in at the early-stage to invest in nature-based ventures, we are still figuring it out. We are in the process of identifying where our expertise and capital would work best and look forward to creating more successful partnerships and initiatives down the road. We have no time to waste as the climate crisis is here. We hope more members of the Convergence network will join us on this journey.
The Asia Natural Capital Design Funding Window is open to co-funding. Organizations interested in supporting this window and the design and launch of new blended finance vehicles that aim to catalyze private investment for natural capital are encouraged to contact Convergence at: [email protected]