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ESG – the basis of sustainable investment

At responsAbility, we differentiate between two key aspects of our portfolio companies: ‘Impact’ and ‘ESG’. ‘Impact’ refers to the activities or services provided by our investees that create positive outcomes such as access to financial services for low-income populations. ‘ESG’, which stands for Environmental, Social & Governance, is an assessment, a process to also avoid negative effects. By applying these two approaches (Impact and ESG), responsAbility applies a holistic approach to ensure that all our investments generate both positive impact and do no harm.

Pedro Fernandez Diaz
Pedro Fernandez,
Head of Sustainability

ESG: Fully embedded into our investments

For some investors, ESG is just a simple exclusion exercise (i.e. not investing in certain harmful sectors such as fossil fuels or tobacco). However, at responsAbility, ESG goes far beyond this: It is a systematic process that ensures that investments don’t have negative issues associated with them. Our ESG criteria are then fully embedded in our investment process, and our ESG due diligence allows us to identify potential negative practices or issues that might contradict universal human rights principles of a potential portfolio company (i.e. a microfinance institution that has no formal complaint process to enable employees to raise concerns). By identifying these issues and then engaging with the company to address them, responsAbility ensures that all its investments only have positive consequences.

ESG in the financial sector: Outperforming conventional funds also during the Covid-19 lock-down

The integration of a proper ESG framework has been proven to be beneficial, not only at responsAbility but also in the wider financial sector. Research shows that funds with a proper ESG framework tend to outperform non-ESG funds – both in the short-term and the long-term. Companies that are performing well on ESG factors tend to be more resilient, avoid financial penalties and legal actions, and have a better reputation. These are some of the many ESG factors that contribute positively to the growth of the company and its financial results.

Even during the global coronavirus lockdown in 2020, ESG funds have shown statistically better performance compared to non-ESG focused funds (see Figure 1).

ESG outperformance amid COVID-19 crisis

67 stocks of European members are more resilient in the view of investors Significant better performance in the bearish market: reflecting investor confidence in European members WBCSD Europe Portfolio Performance YTP

graph_002/01-40-30-20-1001002/0301/0201/0112/0112/0111/0211/0122/0122/0121/0117/01EuroStoxx 50 BenchmarkWBCSD Index
Figure 1: WBCSD index funds -all with integrated ESG frameworksoutperform conventional funds and indexes during the COVID-19 crisis. Case study from WBCSD index and Euro Stoxx 50 Benchmark between 1/1-2020 and 17/4-2020. Data source: WBCSD (link).

This trend can be explained by the fact that companies with good labour practices are protecting their workforce during the challenging Covid-19 crisis, and are therefore more capable ensuring additional support from its customers and the broader community around it.

ESG process and performance at responsAbility

Our ESG framework is aligned with the Performance Standards developed by the International Finance Corporation (IFC), the private sector arm of the World Bank Group. The framework consists of a set of indicators to screen potential investments for labour practices, environmental risks, community impacts, client protection, governance, etc.

After screening and due diligence, we either:

  • Engage with the portfolio companies and help them to improve over time. In these cases, we develop an ESG Action Plan, which we regularly monitor, to ensure that the portfolio companies improve. For instance, if we invest in a company that has no formal Human Resources policies, we will help them to develop and apply HR policies to protect its workforce.
  • If we identify more severe aspects, e.g. child labour, we will immediately stop the investment process and divest from such issues.

Because of our extensive work on helping our portfolio companies to improve on ESG related aspects, 70% of all investments within the responsAbility portfolio are considered low ESG risk according to IFC’s risk categorization definition. The remaining 30% is classified as ‘medium’ ESG risk.

Managing environmental and social risks

An example of a company where responsAbility’s ESG framework has had a substantial positive impact is Pan Asia Banking Corporation in Sri Lanka. Within the last year, the bank has significantly improved from an unsatisfactory ESG performance in 2018 to a current satisfactory performance. With our support, the bank has been able to develop and implement a fully-fledged environmental and social management system (ESMS). Their ESMS helps them to manage and mitigate environmental and social issues that might occur as a part of their investments as well as within their own operations.

At a fund level, the ESG performance for one of our climate finance funds has, during the last year, improved by more than 40% for financial institutions. As these companies are taking into account our recommendations, feedback, help and requests, we are positively contributing to the improvement of their ESG processes.

There will always be space for further improvement, and responsAbility will therefore continuously strengthening its ESG framework. This will be done by expanding the list of indicators that we screen our investees against as well as aligning with the upcoming EU Action Plan on Sustainable Finance, among other initiatives.

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Impact Framework

In 2020, responsAbility released its first disclosure statement for the Operating Principles for Impact Management1, and with it, we introduced new tools to better integrate impact into our investment selection and monitoring processes. The basis of our impact management is the data gathered annually from our portfolio companies, which includes about 200 indicators. Industry-standard definitions (IRIS2, GOGLA3) are applied where available.

Scoring impact is a difficult task. How do we compare the impact of a microfinance institution in Tanzania with that of a coffee cooperative in Costa Rica? So we decided to develop a framework based on different impact strategies. An impact strategy starts with an objective that is linked to a Sustainable Development Goal, e.g. provide access to financial services for low-income households. We then calculate a score for each investee company for the relevant strategy and use it as a basis for selection. We can then identify the impact of companies in their operating context.

Investment SectorsImpact Strategies AppliedPrimary SDGs reached
Financial Inclusion
  • Provide access to financial services for low-income households
  • Create jobs by supporting small businesses
  • Support gender equality via women’s economic empowerment
SDG 01SDG 05SDG 08SDG 09
Sustainable Food
  • Improve rural livelihoods
  • Promote sustainable agriculture
  • Strengthen agricultural value chains
SDG 02SDG 09SDG 12
Climate Finance – Green Lending
  • Promote clean energy and efficient use of resources
  • Reduce CO2 emissions
  • Create technical capacity and support industry innovation
SDG 07SDG 09SDG 13
Climate Finance – Off-Grid Energy
  • Provide access to clean & affordable energy for low-income households
  • Boost economic development by providing reliable electricity
  • Invest and catalyse investment in CO2 reduction
Climate Finance – On-Grid Energy
  • Improve reliability of electricity supply and boost economic development
  • Reduce CO2 emissions
  • Build electricity infrastructure and add to local technical expertise
1 The Operating Principles for Impact Management were launched by IFC and provide a framework for investors to ensure that impact considerations are purposefully integrated throughout the investment life cycle.
2 IRIS is a well-accepted system for measuring, managing, and optimizing impact developed by the Global Impact Investing Network.
3 GOGLA is the global association for the off-grid solar energy industry. It also creates an promotes standardized metrics for the measurement of impact.

Example of a strategy:Increase Financial ­Inclusion

Access to financial services (loans, deposits, insurance, payments/remittances) for low-income households is essential to boost development and reduce poverty. Financial inclusion helps to expand businesses, to support long-term household investment through spending in home improvement, health and education, as well as to build resilience to economic shocks such as job loss, crop failures or sickness that could push households further into poverty. Financial inclusion can also improve women’s economic empowerment by giving them greater control over financial decisions within the household, a shift that often leads to increased spending on basic needs such as nutrition, health and children’s education.

As of 2017, 1.7 billion people remain unbanked due to lack of collateral, geographical isolation or the high costs of local financial services. Microfinance institutions continue to innovate through digital solutions, FinTech and other channels to improve services, affordability and access for historically underserved populations. The goal of this strategy - Increase Financial Inclusion - is to reduce the gap in access to finance.

Asking the right questions: our impact assessment for accessbank nigeria

  • What problem does the investment aim to address and how important is it?

    This investment targets SDG 1 “No Poverty” and goal 1.4 “ensure that […] the poor and the vulnerable, have equal right to economic resources […] including microfinance.” AccessBank is based in Nigeria where poverty remains rampant and thus investments have high impact potential.
  • Who is targeted by the investments?

    The main target are those with low income and the financially excluded, who are often women. In 2019, 62% of AccessBank’s clients were women, 3% fell below the national poverty line and its average loan size was only USD 772 in a country where 60% of the ­population does not have access to an account.
  • How much change can ­beneficiaries experience and how many are impacted?

    Impact is achieved through a mix of scale and intensity. ­AccessBank serves 240,000 customers which clearly achieves the scale. On the intensity front, AccessBank always aimed to reduce its pricing, which is proven by its net margin ­below 5%, and offers a number of products with a proven impact such as deposits, insurance, and mobile payments.
  • What is responsAbility’s contribution?

    responsAbility is a long-time and important partner of ­AccessBank Nigeria. It gave its first loan in 2014 and offered flexible capital including local currency in a country where domestic credit to the private sector only represents 11%.
  • What is the risk of not ­achieving impact or having ­negative ­impact?

    The main risk regarding microfinance is ­over-indebtedness due to transparency issues or predatory practices. ­AccessBank Nigeria is an endorser of the Smart Campaign and passed all eligibility criteria concerning client protection.
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Reporting: Our Impact in Numbers

Sustainable investing means not only screening for ESG criteria, but also measuring the positive impact created by investments. Here, we reveal our impact in numbers, aligned with the relevant Sustainable Development Goals (SDGs). Data is gathered on an annual basis from every portfolio company and analyzed by our Sustainability Team.

SDG 01
Number of clients / smallholders82.1 m86,7 m6%
Average loan size to microenterprisesUSD 499USD 69539%
Remittances receivedUSD 19.8 bnUSD 28,9 bn46%
Customers for insurance products*2.6 m5.3 m47%
SDG 02
Rural customers of financial institutions35.2 m35,2 m 0%
Gross loan portfolio to agricultureUSD 11.6bnUSD 12,3 bn 5%
Number of smallholders financed571,467677.61019%
Payments made to smallholdersUSD 2.3 bnUSD 3,2 bn39%
SDG 03Gross loan portfolio in healthUSD 880.2 mUSD 604,4 m-31%
SDG 04
Gross loan portfolio in educationUSD 311.4 mUSD 411,1 m32%
Staff trained*201,019279.55839%
Microfinance clients that received financial literacy or business courses in 2018*6.4 m7,4 m16%
Clients trained in business education169.861
SDG 05
Number of female clients44 m46,9 m6%
Number of female staff201,019279.55839%
Share of female senior managers26%29%4%
Share of female board members18%18%0%
SDG 07
Number of people provided with access to energy21.6 m24,9 m15%
Total clean energy capacity installed487 MW811 MW67%
SDG 08
Number of staff278,719328.00718%
Number of SME clients1.4 m1.4 m -4%
Average loan size to SMEsUSD 22.412USD 27.25822%
SDG 09
Average number of products introduced in the past 3 years by FIs2,98
Processing units built/expanded82842%
SDG 12
Certified investees6964-7%
Hectares under sustainable management1.2 m1.4 m16%
Certified hectares625.505783.32125%
SDG 13
Energy savings per year594 GWh641 GWh8%
Clean energy generated1,024 GWh1.919 GWh87%
Annual CO2 emission reductions0,6 mt CO2/year1,4 mt CO2/year145%
Gross loan portfolio in energy efficiency and renewable energyUSD 2.5 bnUSD 2.5 bn3%
*Indicators are either collected for the first time in 2018 or the definition was changed in 2018

Loans financed by responsAbility since inception

Loans financed by responsAbility since inception
*Includes Eastern Europe, MENA and microfinance holdings based in the developed world

Loans financed by region

Loans financed by region

responsAbility: Living Our Values

Sustainable investing means not only screening for ESG criteria, but also measuring the positive impact created by investments. Here, we reveal our impact in numbers, aligned with the relevant Sustainable Development Goals (SDGs). Data is gathered on an annual basis from every portfolio company and analyzed by our Sustainability Team.

SDG 01
Share of female staff147%42%5% pts
Share of female managers132%32%0% pts
Share of female board members113%29%-17% pts
SDG 08
Number of staff2245248-3
Number of nationalities36342
SDG 13
Emissions created1.661 t1.948 t-287 t
Emissions offset1.571 t1.851 t-280 t
SDG 15
Emissions offset via reforestation1.571 t1.814 t-243 t
SDG 17
Total assets under management3USD 3,4 bnUSD 3,0 bnUSD 440 m
Products managed15141
Portfolio companies444942524
1SDG 5 indicators calculated on the basis of FTEs.
2Number of staff shown as total number employed full-time and part-time.
3Includes capital committed for certain products.
4Includes direct and indirect investments.

“Covid-19 has shed a glaring light on the gender ­economic gap. More needs to be done as improving gender equality is not only the right thing to do, it also boosts performance, and improves decision making and employee engagement.”

Marie-Anna Benard
Marie-Anna Benard,
Technical Assistance Officer and Chair of responsAbility’s Gender and Diversity Advisory Group
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Technical Assistance: Making It Possible

Technical Assistance (TA) at responsAbility

responsAbility strategically combines the provision of finance with advisory support to leverage development impacts. Thanks to the thorough understanding of the business context and models of the companies for which responsAbility provides access to finance, a team of professional project managers structures tailored advisory support (technical assistance – TA). TA projects aim to enhance the investment readiness of companies, improve their institutional capacities to manage operational risks and increase their development impact. These projects are typically carried out by the best qualified subject matter experts who are mandated by responsAbility and funded with capital from grants provided by public and private donors.

responsAbility values the trust and support provided by donors in creating broader and deeper levels of impact. Projects benefit company staff, clients, local communities and the environment. Some projects also aim to raise the awareness and equip companies to better manage environmental and social risks related to their business operations to ensure that the surrounding community or the local biodiversity is not negatively impacted.

How TA Helps to Save the Climate

CIFI (Corporación Interamericana para el Financiamiento de Infraestructura), a Panama-based commercial bank, has been a long-time partner of responsAbility. Convinced that climate finance is good business, CIFI has been a strong advocate of energy efficiency and renewable energy financing. As part of several climate finance initiatives, CIFI has recently engaged in a strategy to decarbonize its portfolio in line with a 1.5°climate scenario. With support from responsAbility, a TA project was launched and through a competitive process, South Pole was mandated to analyze CIFI’s exposure to carbon-intensive activities and climate-related risks. As a result of the project, science-based targets have been set to support CIFI in adapting its portfolio allocation strategy and breach the gap between CIFI’s current exposure and a 1.5° scenario. In a next phase, the project’s aim is to develop key indicators, a roadmap and a communication plan to sustain CIFI’s decarbonization efforts on the long run.

TA: Saving the Sustainable Food Supply Chain in a Crisis

In Latin America, where responsAbility provides financing to agricultural cooperatives, Peru has been hit particularly hard by the Covid-19 pandemic. Specifically, farmers and workers upstream in the agricultural supply chains, who play a pivotal role in producing most of the food supply, are particularly vulnerable. Because they often cannot rely on financial safety nets, the livelihoods of these communities, mostly represented by women, rural, aging and migrant workers, depend on established linkages with cooperatives involved in the production and post-harvesting/processing segments of the food value chains. Considering the unprecedented nature and magnitude of the Covid-19 crisis, an emergency TA program was launched to support cooperatives to cope with the operational struggles caused by the effects of the crisis, safeguard producers and workers' income and health, while ensuring business continuation and early recovery of businesses. Related interventions are expected to benefit around 15’000 smallholder farmers and their communities.

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