Posted by: Katherine Oglietti and Taea Calcut
Over the past three weeks, the Social Performance Indicators Blog has presented guest posts and interviews from socially responsible investors who spoke about the relationship between financial and social performance and how their companies promote social returns on investment. But what is the MFI perspective on socially responsible investments? To answer this question, we recently asked five MFIs from around the world that work with our featured investors and other socially-oriented firms to discuss their own experiences with the due diligence process. Specifically, what aspects of social performance do MFIs find investors to be most interested in assessing? Do investors’ priorities align with the MFIs' missions? Do MFIs see socially responsible investing as a means to contribute to the achievement of their social goals?
The majority of the MFIs interviewed affirmed that investors evaluate social performance as part of the due diligence process, but one mentioned that some investors took social performance as a given and did not evaluate it. When asked which social performance indicators the investors were most interested in assessing, MFIs gave a variety of answers, demonstrating, as one MFI put it, that “investors generally look at the majority of the indicators, since ultimately they are looking for a balance between financial, social, and environmental parameters.” They did, however, state that indicators of interest to the investors were among the 22 core indicators standardized by the Social Performance Task Force (SPTF) and captured within the MIX Social Performance Report.
Over the past three weeks, the Social Performance Indicators Blog has presented guest posts and interviews from socially responsible investors who spoke about the relationship between financial and social performance and how their companies promote social returns on investment. But what is the MFI perspective on socially responsible investments? To answer this question, we recently asked five MFIs from around the world that work with our featured investors and other socially-oriented firms to discuss their own experiences with the due diligence process. Specifically, what aspects of social performance do MFIs find investors to be most interested in assessing? Do investors’ priorities align with the MFIs' missions? Do MFIs see socially responsible investing as a means to contribute to the achievement of their social goals?
The majority of the MFIs interviewed affirmed that investors evaluate social performance as part of the due diligence process, but one mentioned that some investors took social performance as a given and did not evaluate it. When asked which social performance indicators the investors were most interested in assessing, MFIs gave a variety of answers, demonstrating, as one MFI put it, that “investors generally look at the majority of the indicators, since ultimately they are looking for a balance between financial, social, and environmental parameters.” They did, however, state that indicators of interest to the investors were among the 22 core indicators standardized by the Social Performance Task Force (SPTF) and captured within the MIX Social Performance Report.
Yet, while different investors prefer different indicators, the MFIs noted that there was a greater likelihood that they would be asked for information on several indicators in particular. For example, the MFIs said that investors put a strong emphasis on social responsibility to the clients, looking at client overindebtedness, transparency of information to clients, risk assessment, clients' financial needs, and financial education. This point is reflected in the Social Performance Indicators Blog's recent interviews with investors, who asserted that client protection measures have a high degree of importance.
According to the MFIs, investors also often investigated indicators related to client outreach, especially women and poverty outreach. This included reviewing information regarding the percent of clients below the poverty line, the number of female clients, client education levels, and the percent of loans used for microenterprise. This further portrays an investor emphasis on ensuring that the financial products reach the intended target market in a fair and transparent manner, and reflects the idea that client satisfaction leads to higher retention rates that can translate into lower costs and stronger financial returns.
When asked which of the social performance indicators they consider to be the most important, the MFIs, like investors, prioritized social responsibility to the client. However, the general consensus was that all of the SPTF indicators are important and should be managed accordingly. In contrast, some MFIs felt that investors did not pay enough attention to social responsibility to the environment, community, and staff. Likewise, none of the MFIs mentioned that investors reviewed whether MFIs track clients' progress out of poverty, despite the MFIs' belief that helping clients move above the poverty line is among the most important aspects of social performance. The MFIs interviewed also mentioned that some investors did not evaluate the coherency of their social missions and whether those missions were reflected in its programming, which they consider to be another important aspect of social performance.
When asked the question of whether socially responsible investing ultimately contributes to the social performance of an MFI, some MFIs made a direct connection between these investments and the programs related to social performance that they are able to incorporate into their operations. Others stated that the demands of socially responsible investors encouraged them to invest time, funds, and energy into social performance ratings, reporting, and management. As one MFI explained, “The Social Performance [Reporting] Award for transparency in reporting on the SPTF Indicators to MIX has been very beneficial for the organization in attracting socially responsible investment.” Another MFI stated its new focus on social performance management has "attracted international investment." It could be inferred from their statements that MFIs have found that social performance reporting positively impacts both their social and financial bottom lines, providing dual incentives for MFIs' continued commitment to their social missions through ongoing social performance management.
However, some MFIs mentioned drawbacks to working with investors. According to one MFI, “The positive aspect is that [investors] distribute funding that allows microenterprises to grow. However, despite being called 'socially responsible' funds, they are the most expensive on the market, which impedes MFIs from offering clients interest-bearing savings accounts.” Some of the investors interviewed touched on this point, speaking about maintaining a difficult balance between attracting individuals by offering a return on their investment and providing low-cost financing to MFIs. Ultimately, to mitigate this tension, both investors and MFIs must work to increase the social return on investments to continue attracting socially responsible investments at lower rates of financial return while seeking ways to increase institutional efficiency to reduce the cost of funds for microfinance clients.
After all, on this last point, socially responsible investors and MFIs are in clear agreement: microfinance must maintain a focus on its clients.
According to the MFIs, investors also often investigated indicators related to client outreach, especially women and poverty outreach. This included reviewing information regarding the percent of clients below the poverty line, the number of female clients, client education levels, and the percent of loans used for microenterprise. This further portrays an investor emphasis on ensuring that the financial products reach the intended target market in a fair and transparent manner, and reflects the idea that client satisfaction leads to higher retention rates that can translate into lower costs and stronger financial returns.
When asked which of the social performance indicators they consider to be the most important, the MFIs, like investors, prioritized social responsibility to the client. However, the general consensus was that all of the SPTF indicators are important and should be managed accordingly. In contrast, some MFIs felt that investors did not pay enough attention to social responsibility to the environment, community, and staff. Likewise, none of the MFIs mentioned that investors reviewed whether MFIs track clients' progress out of poverty, despite the MFIs' belief that helping clients move above the poverty line is among the most important aspects of social performance. The MFIs interviewed also mentioned that some investors did not evaluate the coherency of their social missions and whether those missions were reflected in its programming, which they consider to be another important aspect of social performance.
When asked the question of whether socially responsible investing ultimately contributes to the social performance of an MFI, some MFIs made a direct connection between these investments and the programs related to social performance that they are able to incorporate into their operations. Others stated that the demands of socially responsible investors encouraged them to invest time, funds, and energy into social performance ratings, reporting, and management. As one MFI explained, “The Social Performance [Reporting] Award for transparency in reporting on the SPTF Indicators to MIX has been very beneficial for the organization in attracting socially responsible investment.” Another MFI stated its new focus on social performance management has "attracted international investment." It could be inferred from their statements that MFIs have found that social performance reporting positively impacts both their social and financial bottom lines, providing dual incentives for MFIs' continued commitment to their social missions through ongoing social performance management.
However, some MFIs mentioned drawbacks to working with investors. According to one MFI, “The positive aspect is that [investors] distribute funding that allows microenterprises to grow. However, despite being called 'socially responsible' funds, they are the most expensive on the market, which impedes MFIs from offering clients interest-bearing savings accounts.” Some of the investors interviewed touched on this point, speaking about maintaining a difficult balance between attracting individuals by offering a return on their investment and providing low-cost financing to MFIs. Ultimately, to mitigate this tension, both investors and MFIs must work to increase the social return on investments to continue attracting socially responsible investments at lower rates of financial return while seeking ways to increase institutional efficiency to reduce the cost of funds for microfinance clients.
After all, on this last point, socially responsible investors and MFIs are in clear agreement: microfinance must maintain a focus on its clients.
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For more detailed discussions of some of the indicators discussed in this post, please visit the Social Performance Indicators Blog archives for social responsibility to the community, consumer protection, financial services, poverty measurement and outreach, women's empowerment, and social responsibility to the environment. Also be sure to stay tuned for our upcoming discussions on geographic outreach. A full list of the Social Performance Task Force indicators can be viewed on the first page of the MIX Social Performance report, available here.
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