Social Performance Indicators Blog

Calvert Foundation: A Social Perspective for “Good Business”

Posted by: Katherine Oglietti

Interview with: Eliza M. Erikson

Portfolio Manager, Calvert Foundation

 

The Calvert Foundation is a nonprofit organization that, according to its website, uses “investment capital, rather than conventional philanthropy, to create a sustainable, scalable model that enables nonprofit organizations and social enterprises to address critical social problems.” The Calvert Foundation offers a Community Investment Note, where individuals have the option to target their investment in different nonprofit sectors. Investors choose a 0-3% interest rate on this managed bond, opting at times for a 0% financial return in order to maximize their investments’ social returns in areas such as affordable housing, microcredit, small business development, community facilities, and social innovations. In the following interview, Eliza Erikson, who manages the Calvert Foundation’s international microfinance portfolio, describes the link between strong social performance, healthy portfolio quality, and client satisfaction.

MIX:  Does social performance reporting influence Calvert Foundation's choice to invest in a given MFI? If so, in what way?

Ms. Erikson: I would not say that social performance reporting alone influences our choice to invest in a given MFI. From the outset, we want to be sure that the MFIs accessing our loan capital have a strong focus on delivering essential products and services that are affordable, accessible, and appropriate for lower-income clients living at the “Bottom of the Pyramid.”  That strong client orientation should not only be the foundation of an MFI’s social mission, but at the heart of its business model and financial performance. It keeps their clients coming back for more and attracts new clients, sometimes away from the competition. This strong focus on the lower-income client and their perspective is not necessarily “social” in nature. I would argue that it is good business, especially if you are in the microfinance business.

BlueOrchard’s Initiatives in Social Performance

Guest Post by: Sarah Leshner
Senior Investment Analyst, BlueOrchard

BlueOrchard has, since inception, consistently used widely understood and accepted tools and benchmarks for analyzing the financial and operational performance of the MFIs in our portfolios.  In January 2009, the CEOs of BlueOrchard Finance and BlueOrchard Investments jointly proclaimed the firm’s ambition “to improve our capacity to collect quantitative and qualitative data on the social performance of our lending activities.” We are proud that in the past year we have indeed begun developing similarly rigorous systems and tools to assess, monitor, and articulate the social performance of our investments.

The mission statements of MFIs that BlueOrchard works with typically include a core objective to provide financial products to low-income clients that will help them grow their businesses, thereby improving the quality of life for themselves and their families. They often include as well the specific objectives of empowering excluded segments of the population and contributing to the socio-economic development of the community. BlueOrchard recognizes that in the context of MFIs’ tremendous growth around the world over the last several years, and the associated need for increased efficiency, scale, and profit, it has become ever more critical to ensure that institutions remain true to their mission, tailor products to meet their clients’ needs, and lend responsibly by fully disclosing all costs and properly assessing appropriate debt levels for their clients. This is at the heart of an MFI’s social performance.

Hand in Hand: Financial and Social Performance

Guest Post by: Cécile Koller
Head of Research, responsAbility Social Investments AG

 

The 2009 Microfinance Banana Skins Report identified credit risk as the number one threat to the microfinance market, while only one year earlier credit risk ranked tenth on the list. What does this change in perceived risk have to do with social performance? The seemingly purely financial risk is putting microfinance’s core mission at stake, which is to lift people out of poverty by providing access to financial services. Credit risk thus is of equal importance for an MFI’s financial as well as social performance.

 

Photo credit: responsAbility Social Investments AG 

The sharply increased awareness for credit risk is due to real effects of the economic crisis on MFIs. However, the crisis only uncovered what has already been inherent in the market: a growing risk of over-indebtedness. Thus implicitly, the results of the report call upon the social responsibility of both funders and MFIs by stating that the increase in credit risk is a “self-inflicted risk, caused both by the sharp growth in microfinance lending in recent years due to rising competition, and poor management of credit risk such as inadequate credit assessment (and) multiple borrowing.”

MicroVest: Focusing on Financial Inclusion

Posted by: Katherine Oglietti

Interview with: Michael A. Edberg

Director of Investments, MicroVest Capital Management

 

MicroVest is a capital-mobilizing intermediary that facilitates the flow of private capital to microfinance institutions across the globe. It lends at market rates with the belief that a commercial approach to investment encourages MFIs to become more efficient and ultimately provide a better service to clients. MicroVest assesses an MFI’s social performance during its due diligence process before investments are made, such as client outreach and providing financial services designed to reach the poorest of the poor. It recently began a focus on how an MFI protects against client and systemic over-indebtedness. In the following interview, Michael Edberg explains the relationship between social performance and socially responsible investment.

MIX: Does social performance reporting influence MicroVest's choice to invest in a given MFI? If so, in what way?

Mr. Edberg: Social performance reporting does not directly influence MicroVest's choice of investments.  However, we do target our investments to financial institutions that provide financial services to the bottom of the pyramid for productive purposes.  We do not look favorably upon intuitions that claim to do micro lending, but in fact are low touch, high cost consumer lenders.  Our assessment of an institution’s focus and lending practices occurs as part of the due diligence process and is not necessarily driven by specific metrics reported by the MFI, but by our assessment of how market focus and lending practices are reflected at all levels within the institution (from senior management to the branch loan officer).

Interests and Roles of Investors in Social Performance Measurement and Management

Posted by: Taea Calcut

Site of one of BlueOrchard’s Social Performance Due Diligence pilot tests
Photo © BlueOrchard, Bosnia and Herzegovina 

As microfinance extends its reach worldwide, it increasingly attracts the attention of "socially responsible" investors. But how important really are social performance indicators such as client protection and outreach to the poor respective to financial returns in the eyes of investors?

Over the coming weeks, the Social Performance Indicators Blog will focus on the interest and role of investors in social performance measurement and management. Using guest posts by microfinance investment vehicles such as MicroVest, ResponsAbility, and BlueOrchard, we will explore issues such as what social performance indicators are of interest to investors, what roles those indicators play in investors’ due-diligence processes, and the extent to which MFIs’ social performance reporting influences investment decisions. We will also consult microfinance institutions to gain investee perspectives on investors' expectations for social performance. Given the growing influence of investors in microfinance, we expect these issues and others will fuel lively debates – be sure to stay tuned and join the discussion!