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Introduction
Impact investments are financial investments made with the deliberate intention to generate positive, measurable social or environmental outcomes alongside a financial return.
Impact investing seeks to address specific societal challenges such as climate change, poverty alleviation, education access, and healthcare improvement while still aiming for a financial profit.
Key characteristics of impact investing include:
- Intentionality: Investors actively seek to create beneficial change through their capital allocation.
- Measurability: The social or environmental benefits generated are quantifiable and transparent.
- Financial return: Impact investments aim to produce financial returns, differentiating them from pure philanthropy.
- Additionality: The investment contributes directly to positive outcomes that would not have occurred without the investment.
Impact investments often focus on sectors like renewable energy, social enterprises, microfinance, and sustainable agriculture. The approach is gaining momentum globally as investors increasingly seek to align financial goals with broader societal values.
The global impact investing market has seen remarkable growth, surging from US$715 billion in 2020 to over US$1.57 trillion in 2024.
Examples of impact investments in emerging markets
The following examples show how impact investors deploy capital across sectors targeting critical needs with measurable positive effects in emerging economies:
- Microfinance: Providing underserved populations access to credit, savings, and insurance to reduce poverty and promote inclusive growth, such as region-wide microfinance initiatives supported by the Asian Development Bank, a regional development bank established to promote social and economic development in Asia.
- Clean energy: Financing renewable energy projects to reduce carbon emissions and promote sustainable development, such as investments led by the Climate Investment Funds, a multilateral climate fund established at the request of the G8 and G20 with a view of helping nations to fight the impacts of climate change and accelerate their shift to a low-carbon economy.
- Financial inclusion: Investing in fintech startups and digital payment systems to expand access to financial services and empower low-income communities, such as actively developed by the Mastercard Foundation, a foundation primarily focused on reducing gender and economic inequality, expanding access to quality education, increasing the opportunities for decent work, and supporting overall economic growth.
- Education: Funding schools, teacher training, and education technologies to improve learning outcomes and drive socioeconomic progress, such as projects supported by some education development impact bonds. Development impact bond is a type of outcomes-based contracting, whereby a contractor typically attempts to effect a policy of government but does not get paid by the government unless specified goals are achieved.
- Clean water and sanitation: Financing water infrastructure to provide safe water access and improve health outcomes, such as initiated by Water.org, an international non-profit organization that helps people living in poverty to get access to safe water and improved sanitation through affordable financing.
- Affordable housing and infrastructure: Private equity funds investing in housing and infrastructure projects in Africa and South Asia to meet rising demand and improve living conditions.
Examples of impact investments in Hong Kong
- The Hong Kong Stock Exchange (HKEX) has set up the HKEX Impact Funding Scheme in 2021 to support recognized social enterprises to develop innovative, vital and scalable solutions based on 4 focus areas: financial literacy, social empowerment, talent development, and environmental sustainability aiming to serve wide spectrum of people in need and address various social and environmental challenges. The Scheme has financed 76 such projects since its inauguration in 2021.
- Dream Impact, a social enterprise network in Hong Kong, has helped ventures in areas tackling housing affordability, mental health stigma, ocean quality, and financial inclusion for vulnerable communities.
- Recent impact investment projects in Hong Kong focused on green transition include a diverse set of initiatives supported by government funds aimed at reducing carbon emissions and promoting sustainability:
- The Green Tech Fund (GTF) set up by the Hong Kong Government has approved multiple projects in Hong Kong to support decarbonization and environmental protection. These projects encompass development of new energy technologies such as hydrogen storage and fuel cells for electric vehicles, promotion of transport electrification with innovations like smart energy storage and second-life EV batteries, smart waste management systems utilizing AI, and real-time portable air quality sensors to monitor and reduce pollutants.
- Green bond issuance under the Government Sustainable Bond Programme (GSBP) of the Hong Kong Government, overseen by the Financial Secretary and implemented with support from the Hong Kong Monetary Authority ("HKMA"), has funded 116 local green projects such as green buildings, green transport, waste reduction, renewable energy, and pollution prevention as of August 2025. By 2025, green bonds worth approximately HK$240 billion have been issued to support these efforts.
- HKEX hosts Core Climate, an international carbon marketplace for facilitating carbon credit trading to aid global net-zero goals.
Risks and unintended harms linked to impact funds
Impact funds, while aimed at generating positive social and environmental outcomes alongside financial returns, may carry several risks and potential unintended harms that investors and stakeholders should be aware of:
- Greenwashing and misleading claims
One of the risks is greenwashing, where funds exaggerate or misrepresent their impact credentials. This can mislead investors, dilute market trust, and divert capital from genuinely impactful projects. Complex or vague impact methodologies and ambiguous fund labelling can contribute to this issue.
- Insufficient impact measurement and accountability
Many impact funds struggle with rigorous and consistent measurement of their social or environmental outcomes. Lack of transparency and robust accountability mechanisms can result in overestimations of impact or the inability to identify negative or unintended consequences. Without proper monitoring, poor outcomes can go unnoticed, unchecked or uncorrected.
- Unintended negative effects
Impact investments can inadvertently cause harm to communities or ecosystems if poorly designed or implemented. For example, a clean energy project displacing local populations or failing to consider social trade-offs might harm vulnerable groups rather than help them. Impact investors need to carefully manage and mitigate such risks.
- Reliance on storytelling more than on evidence
Studies have found that impact investors sometimes rely more on compelling narratives than rigorous data, leading to "wishful illusion". This can result in ineffective investments that fail to deliver promised outcomes, undermining the sector's legitimacy.
- Regulatory and standards gaps
The impact investing market is still maturing, and regulatory frameworks or standardized definitions are often lacking. This can create loopholes and inconsistencies in how impact is defined, tracked, and enforced, complicating investor decision-making and increasing reputational risks.
- Financial risk and trade-offs
Balancing financial returns with social/environmental impact can be challenging. Some investments might sacrifice financial performance for impact or vice versa, and inadequate risk management can lead to financial losses for investors.
In response, global initiatives are increasingly emphasizing transparency, measurable standards, and accountability mechanisms to manage these risks and ensure that impact investing fulfils its promise of creating genuine positive change while generating financial return.
Regulatory regime on impact investments in Hong Kong
The regulatory regime on impact investments in Hong Kong is evolving within the broader context of green, sustainable, and ESG finance regulations, devised aiming for promotion of transparency, integrity, and investor protection while supporting growth of impact finance as a key pillar of the financial ecosystem.
Key features of Hong Kong's regulatory regime on impact investing include:
- Sustainability and climate disclosure requirements
HKEX requires all listed companies to publish annual ESG reports aligned with their financial reporting cycles. HKEX's ESG Reporting Guide (Appendix 27 of the Main Board Listing Rules and Appendix 20 to the GEM Listing Rules) mandates specified mandatory disclosures, including governance oversight of ESG issues, strategies, risks, and measurable targets.
In April 2024, HKEX has published the Implementation Guidance for Climate Disclosures under HKEX ESG Reporting Framework mandating climate-related and ESG disclosures by listed companies to align with the IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information (IFRS S1) and the IFRS S2 Climate-related Disclosures (IFRS S2) published by the IFRS Foundation's International Sustainability Standards Board (ISSB) (such standards, ISSB's IFRS S1 & S2). This includes reporting on environmental impacts, governance of sustainability risks, and social factors critical to assessing impact investment targets.
- Enhanced transparency and standards
Regulators including the Securities and Futures Commission of Hong Kong ("SFC") emphasize the need to prevent greenwashing and promote accountability by requiring transparent and comparable ESG disclosures, management of climate risks, and enhanced reporting to improve investor trust and reduce greenwashing risks for sustainable and impact products. The SFC issued a Strategic Framework for Green Finance in 2018 and subsequently developed rules and circulars governing ESG-related funds licensed by the SFC, such as the Circular to management companies of SFC-authorized unit trusts and mutual funds - ESG funds issued on 29 June 2021.
- Sector-specific guidance
HKMA is working on sector-specific approaches to integrate sustainability and impact considerations into risk management and investment decision-making for banks. It has issued a Supervisory Policy Manual (SPM) Module GS-1 on climate risk management in December 2021, which sets supervisory expectations for integrating climate risks into banks' strategic planning and risk frameworks. HKMA has introduced an industry-wide enhanced competency framework (ECF) for banking practitioners involved in green and sustainable finance, designed to elevate professional standards and capacity.
As a member of the Central Banks and Supervisors Network for Greening the Financial System (NGFS), HKMA participates in the Network's working groups to explore how to incorporate climate risk and other green and sustainable factors in the supervisory framework and macro surveillance work.
What penalties exist for impact-washing under HK regulations
Under Hong Kong regulations, explicit penalties specifically for "impact-washing" - the practice of misleading or exaggerating the social or environmental benefits of impact investments - are not clearly codified as a standalone offence.
Regulators approach impact-washing through general market conduct, and securities laws that address misrepresentation and false claims, particularly by the SFC and HKEX.
Penalties for misleading or deceptive practices related to impact claims could include:
- Securities and Futures Ordinance ("SFO") sanctions
Under the SFO, making false or misleading statements in investment products or marketing materials is prohibited. Breaches can lead to fines, suspension or revocation of licenses, and possible criminal prosecution depending on severity. This applies to impact funds and products that falsely advertise their impact credentials.
- Market Misconduct Tribunal and civil proceedings
The Market Misconduct Tribunal can impose sanctions, and affected investors may bring civil claims for damages if misled by false impact claims. Market participants making false or misleading representations about the environmental or social impact of products may face penalties such as fines and corrective advertising requirements.
- HKEX Listing Rules
Listed companies must comply with stringent ESG disclosure rules and may be sanctioned for misleading statements about sustainability or impact-related disclosures, including public reprimands and fines.
- Potential reputational and regulatory risks
Even absent specific statutory penalties for impact-washing, firms may face regulatory investigations, business sanctions, or damaged investor trust, which are significant deterrents.
Readers may refer to ourother green and sustainable series articles for additional information related to green financing and banking: "Green and sustainable debt financing" (September 2024); "Green and sustainable banking" (September 2024); and "Environmental litigation and risk mitigation measures for financial institutions" (May 2025).
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
