ESG & impact investing in financial inclusion

ESG & impact investing in financial inclusion

ESG & impact investing in financial inclusion – Faster, higher, stronger!

After an appealing introduction highlighting the existing confusion in the definitions of impact, the Frankfurt School ESG & Impact Investing course (1) invites us to consider differently impact investing. Not as an asset class but instead, as an approach to invest capital (like risk and return) that may vary depending on the various appetites and practices of different actors to pursue non-financial goals alongside financial ones.

After sharing key ideas of the course on the variety of actors and the history of ESG and Impact Investing, I put myself back into the shoes of a so-called impact investor[2] of the financial inclusion space and briefly question how the latest initiatives of the CERISE-SPTF Social Investor Working Group (SIWG)[3] and Financial Inclusion Equity Council (FIEC)[4] fit into this context.

Who are the actors pursuing non-financial goals in addition to financial goals?How flexible are they regarding each set of goals? Nowadays, these actors are many, rangingfrom institutional investors – looking for scale to achieve financial goals and much more flexible on non-financial goals – to private foundations and charity – with a strict mandate to achieve non-financial goals while sometimes ready to lose the money invested[5] if non-financial goals are achieved. In this spectrum, real economy companies, given their diversity (ranging from listed companies to social enterprises) may have more flexibility on financial goals than institutional investors while their pursuit of non-financial objectives depends on the motivation of their owners and/or marketing opportunities. Government donors and development aid agencies should implement their public mandate in priority and as such have little flexibility on non-financial goals. Accepting to cover first loss tranches, they aim at favouring catalytic approaches to help raise private capital and bridge the huge SDG financing gap.[6] In the middle of the spectrum, hybrid actors such as DFIs, social investors and MFIs pursue both sets of goals with some flexibility on their objectives and a clear mandate to provide additionality when compared with the traditional market. Finally, high net worth Individuals may have opposite profiles, as they may set vehicles with goals close to those of institutional investors as well as philanthropic vehicles that very actively pursue non-financial goals with little tolerance for deviation.

Depending on their mandate and context, all these actors are using a mix of ESG and impact approaches inherited from history. It all started with ethical investing promoted by religious groups and cooperative movements in the 1900s, then Socially Responsible Investments (SRIs) in the 1960s and 1970s (mostly to exclude investments in South Africa), and Environmental, Social and Governance (ESG) standards that came to life in the 1980s after the Exon Valdez oil spill in Alaska.[7] The 1990s saw the emergence of the Triple Bottom Line (TBL) approach for companies to manage their social, environmental and economic impacts but TBL has not succeeded in transforming capitalism as originally intended. In the 2000s, supranational bodies started to tackle the issue, with the UN Principles for Responsible Investments introduced in 2005 and designed for institutional investors to better take into account ESG issues. It is however a private Foundation, the Rockfeller Foundation, that coined in 2007 the term of impact investing, implying that investors could use their capital to generate social or environmental positive impacts, alongside commercial gains. In Europe, the term of social investments was used by institutions affiliated with the public sector, also known as the third sector and the social economy, while impact measurements of public projects have a longer history. In 2015, the UN launched the SDGs with the ambition to propose a common agenda for everybody.

 More recently, regulation came into the game, especially in Europe with the Non-Financial Reporting Directive in 2014 (reporting for companies of the real economy), followed in 2020 by the Sustainable Finance Taxonomy Regulation and in 2021 by the Sustainable Finance Disclosure Regulation (SFDR), both applicable to the financial sector. On June 8 and 9 in Luxembourg, 90 representatives of impact investors of the financial inclusion space (members of CERISE-SPTF SIWG and FIEC) met to exchange ideas and advance concretely on their ESG and impact approaches. The intervention of Jean-Michel Severino[8] reminded us that a new impact narrative is spreading also in the corporate world, as a result from the demand for meaning and an increasingly restrictive regulatory framework that will lead real economy companies to measure and report their impact. According to him, this new global trend could be a threat for impact investors, as their impact narrative could not be heard anymore if not significantly ahead of the game.

Impact investors of the financial inclusion space are working on promising initiatives. An important milestone reached in 2023 is the design of industry-accepted tools and approaches to help investors comply with the SFDR. This effort will certainly continue. In Luxembourg, the group of social investors has also made good progress on a commitment to minimum actions at the investor level to ensure client protection at the end-beneficiary level, as a way to implement their Joint Statement and in my view in line with the UN Principle for Responsible Investment.[9] Some results from the most recent initiatives to measure outcomes at the client level were shared by 60 decibels and MFR and should help investors engage with investees to improve practices. Last but not least, examples were shared on initiatives to better assess environmental risks and in particular help our investees and their clients adapt to climate change. Much more needs to be done on that front.

Hearing at Jean-Michel Severino, the impact investor community is on the right path but certainly still has a long way to go to remain relevant. Without underestimating the value of existing initiatives, this looks totally applicable to impact investor of the financial inclusion space.

This article was written by Edouard Sers, Head of Risk, Compliance and Impact at Fondation GCA – Grameen Crédit Agricole

Frankfurt School of Finance & Management campus The Luxembourg House of Financial Technology

[1] Unless otherwise stated, the content of this article related is derived from Frankfurt School (2023). Certified Expert in ESG & Impact Investing. Unit 2: 2. Who are the actors in ESG and Impact Investing (pages 10 to 32); 3. Historical context, evolution, and current trends (pages 33 to 42).

(2) https://thegiin.org/impact-investing/need-to-know/#who-is-making-impact-investments

[3] https://cerise-sptf.org/

[4] https://www.centerforfinancialinclusion.org/program_teams/financial-inclusion-equity-council

[5] This is however not always true as some foundations aim at preserving their donated equity.

[6] OECD (2022), Global Outlook on Financing for Sustainable Development 2023: No Sustainability Without Equity, OECD Publishing, Paris, https://doi.org/10.1787/fcbe6ce9-en.

[7] https://www.nationalgeographic.com/environment/article/oil-spills-30-years-after-exxon-valdez

[8] Severino, J-M. (2022) “Lost in impact: A new map for adventurers of meaning“, Ferdi WP302, March.

[9] https://www.unpri.org/about-us/what-are-the-principles-for-responsible-investment