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.
Our initial vetting of any applicant includes both financial and developmental minimum criteria. One of our more important developmental criteria reads: “Desirable MFIs are those with an explicit development mission and business model that provide a range of essential, market-based and responsible financial and non-financial products and services to people living at the Bottom of the Pyramid.” Through conversations with MFI managers, reference checks, and reviews of rating reports and other third-party information, we look to validate that MFI applicants meet this minimum criterion and are evolving their products and services to meet the demands of their clients. MFI products should be “essential” from the client’s point of view and “responsible” in terms of transparent pricing and ethical collections procedures. We are starting to track MFI progress in implementing the client protection principles developed by the Center for Financial Inclusion and endorsed by a range of investors, including Calvert Foundation.
MIX: Have you observed any trade-off between financial and social performance among the MFIs that Calvert Foundation invests in?
Ms. Erikson: We have observed in some markets that MFIs lose sight of the accountability to their clients in favor of an exclusive focus on growth and profitability. Sometimes this happens in markets with little to no competition where clients have few options. Other times, it happens in markets with significant competition, where growth and profitability come at the expense of good, honest analysis of repayment capacity. However, I would not necessarily cite these examples as proof of the trade-off between financial and social performance. Rather, it is evidence of MFIs that do not see client orientation as critical to their success. Our experience is that these MFIs eventually suffer from portfolio quality deterioration or client desertion in more competitive markets. Where we have concerns that certain MFIs’ focus on their clients has weakened, we try to engage them in dialogue on this point, often in conjunction with other lenders.
MIX: What social performance indicators is the Calvert Foundation most interested in, and do you further investigate these indicators during your due diligence process?
Ms. Erikson: Due to our emphasis on an MFI’s client orientation, we are starting to push beyond our standard indicators around the gender breakdown and geographical reach of an MFI’s portfolio to tracking the evolving financial and non-financial product mix, the institution’s client protection measures, as well as the client retention rate and the institution’s methods for measuring client satisfaction. In defining these measures, we have benefited from the work that the MIX and the Social Performance Task Force has done in establishing industry best practice in this area. Certainly if these indicators look strange to us during due diligence, they do serve as “red flags” that the MFI may not be adequately focusing their energies on their clients and the fulfillment of their mission to serve those clients well.
I would be interested in seeing more research on those MFIs who are actively measuring client satisfaction and feedback and changing their financial and non-financial product mix in response to client demand. Do these practices foster greater client loyalty and higher rates of retention? Do they have any effect on portfolio quality and repayment rates?
MIX: From an investor's perspective, does a strong focus on social performance contribute to an MFI's financial performance and potential for development?
Ms. Erikson: As I mentioned previously, I think a strong focus on the client’s needs and demands at every level of an MFI is critical to their overall financial and organizational success. A good MFI targets a clientele that is either not served or underserved by other financial service providers, and then fights to keep their business through ongoing market research and client satisfaction surveys that lead to refinements in their product offerings or the launch of new products. I suppose one could label their focus on the “underserved” to be social in nature but, as many MFIs have proven, it’s also very good business.
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For more information on the Calvert Foundation, please visit: http://www.calvertfoundation.org/. You can also review their fund structure, performance, fund instruments, and partnerships on MIX Market: http://www.mixmarket.org/funders/calvert-foundation. Calvert Foundation’s social investments have also been described recent articles in the Christian Science Monitor, The Economist, and the Wall Street Journal.
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