MIVs Current Practices on Responsible Finance

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MIVs Current Practices on Responsible
Finance Sarah Forster Paris, 19 June 2008
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Outline

• Introduction
• Survey of MIV practices - findings
• Conclusions and questions for discussion

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I. Introduction
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Purpose of this session

• Take stock of current state of MIV practices and
  tools on responsible finance
• Identify gaps to meet investor demand
• Assess demand for standards

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Why this focus?

• Advances made by practitioners on social
  performance measurement, but many MIVs at margins
  of this work
• Client protection and transparency rising up
  agenda alongside ethical business practices and
  investing, yet awareness and implementation
  nascent
• CSR and environmental sustainability becoming
  more strategically important

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Responsible Finance Framework

• Responsible finance encompasses practices ranging
  from client protection (do no harm) to social
  performance (do good)

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II. Survey findings
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Survey design

• Use RF framework
• Taking a business process perspective

MFI oversight supervision role
Performance monitoring reporting
Investment decision
Exit
Due diligence
Screening
Pre-investment risk assessment
Post-investment risk management value creation
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Interviewees

• MIV
• Accion
• Blue Orchard
• Calvert Foundation
• EFSE
• Goodwell
• Grassroots Capital
• Incofin
• Oikocredit
• ResponsAbility
• Triodos

• DFI
• FMO
• KfW
• Member organisations
• CMEF
• IAMFI

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Screening

• RF issues integrated into decision-making not
  RF screen and then invest based on IRR
• Risk and return expectations vary financial and
  non-financial
• Screening criteria focused on financial
  soundness, ability to pay/generate target
  returns, outreach

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Due diligence - processes

• Some conduct in-house RF due diligence others
  use a combination of internal and external input
  (e.g. social ratings)
• Importance of relationship knowing your
  investee none rely wholly on external ratings
• RF assessment integral part of investment risk
  assessment

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Due diligence issues/indicators
Client Protection
CSR
Social performance
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Views on existing SPM tools
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Investment decision-making

• Majority make no trade-off between financial and
  social returns
• But 3 will discount cost of funds/target return
  for extraordinary social performance
• Will decide not to invest because of RF issue

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Monitoring and reporting

• MIVs
• Track core SP indicators on regular basis
• Annual reports have increasing focus on SP issues
• Investors in MIVs
• Social/public investors have clear demand for RF
  reporting by MIV, including impact e.g.
  Oikocredit rural outreach Calvert diversity
• Commercial investors care more about consumer
  protection, sustainability of the industry and
  reputational risk. Less about SP sustainable
  access is itself a social good.

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MFI oversight and supervision role

• Some MIVs are using their financing and ownership
  roles to improve RF practices within in MFIs.
  E.g.
• Oikocredit financial and technical assistance
  to MFIs to develop use of PPI
• EFSE paid for downscaling TA to address MFI
  mission drift
• Opportunity to do more but as partners not
  top-down

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Exit

• Legal documentation does not specifically address
  management of RF risk and practice (except envl
  exclusion lists)
• Growing awareness of issues related to divesting
  shares and maintaining RF focus

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III. Conclusions and questions
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Conclusions

• As MIVs compete for funds, investor interest is
  focusing MIV attention on RF issues
• MIVs have role in shaping industry performance
• Wide range in terms of depth and how
  systematically look at RF issues in practice

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Demand for common standards

• Clear demand for harmonization
• ?reduces reporting burden on MFIs
• ?increases transparency for investors so can
  focus where interests lie

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Common indicators

• Majority want minimum set of core dimensions or
  indicators (4-5) relevant to range of investors.
  E.g.
• Transparency in product pricing
• Policies against over-indebtedness
• Social mission
• Outreach breadth and depth
• Internal checks to protect against staff
  corruption
• Or comprehensive framework SP/CP indicators,
  GRI indicators, env. social risks

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Due diligence tools

• Interest in sharing due diligence tools and
  social rating approaches as input into own due
  diligence approaches
• Incofin social performance evaluation tool good
  example

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Questions for discussion

• What are the gaps between investor demand and MIV
  practice?
• How can RF evaluation be most effectively and
  efficiently managed by MIVs e.g. in-house or
  out-source?
• Given different goals of MIVs and their
  investors, how much standardisation of RF
  practice and disclosure is possible?
• What should those minimum standards be?
• How could a public platform advance
  standardisation?