“A Guide to Responsible Investing,” published by MicroRate, December 2013, 7 pages, available at http://www.microrate.com/a-guide-to-responsible-investing-a-microrate-white-paper
MicroRate, a US-based for-profit microfinance rating agency, has published a primer introducing the terminology and practices used by the “responsible” investing community. The report delineates three approaches to investing: financial investment, socially responsible investment (SRI) and impact investment.
Investing is the practice of maximizing financial returns on capital while limiting risk. While financial investing is focused on the “bottom line,” responsible investing, which includes SRI and impact investing, is different because it also seeks positive nonfinancial returns called “social returns.” These are “side effects” that contribute toward improving the societal and environmental health of the community where the investment is placed. This can include contributing to the economic, social and educational health of a society as well as making eco-friendly improvements.
SRI seeks to maximize financial returns while avoiding investments that may have a harmful impact on society. As of 2012, SRI assets account for USD 13.5 trillion worldwide, with USD 4 trillion from the US and USD 8.1 trillion from Europe. SRI operations often run a screening process that filters out investments deemed detrimental to public well being, such as those that do not comply with religious doctrines. Examples include gambling and the production of weapons. This strategy is called negative screening and makes up USD 8.3 trillion in assets as of 2012. Conversely, positive screening seeks out organizations with strong environmental, social and corporate governance (ESG) characteristics. This method accounts for USD 1 trillion in assets. SRI can also take the form of shareholder activism, which includes purchasing stock with the aim of using stockholder voting rights to direct corporate behavior towards more socially responsible investment practices. Investments using shareholder activism account for USD 4.7 trillion in assets as of 2012.
Impact investing pursues financial returns alongside supporting community development. As of 2012, impact investing comprises assets of USD 89 billion, of which 85 percent is classified as microfinance. Microfinance institutions (MFIs) provide financial services, including loans and insurance, to low-income individuals for entrepreneurial activities. Much of the industry is funded by investors’ capital via microfinance investment vehicles (MIVs), which channel funds to MFIs, which in turn provide retail financial services. Globally, USD 8.5 billion in private assets is placed in microfinance as of 2012.
MFIs have faced problems stemming from irresponsible lending and a lack of expertise in business standards. The industry is seeking to rectify its behavior by employing client protection practices like those promoted by the Smart Campaign, which was launched by US-based nonprofit Accion in 2008. Challenges in impact investing include a glut of capital, exceeding demand, and a lack of information that can be relied upon to identify sound investment options.
By Meraj Husain, Research Associate
About MicroRate
MicroRate is a for-profit microfinance rating agency formally approved by CGAP (Consultative Group to Assist the Poor); the Inter-American Development Bank; and Peru’s Superintendency of Banking, Insurance and Pension Fund Managers (SBS). It was founded in the US in 1997 with the intent of objectively evaluating microfinance institutions (MFIs), thereby increasing transparency and driving additional funding into microfinance. MicroRate has completed approximately 750 ratings of approximately 200 MFIs worldwide as of 2013 and claims to perform its evaluations not through “rigid rating formulas,” but through the “evaluation of critical risk.” A private company, MicroRate is based in Washington, DC, with offices in Peru and Morocco.
About Accion
Accion is a private, US-based nonprofit organization with the mission of alleviating poverty by offering financial products such as microenterprise loans and business training. Accion was founded in 1961 and issued its first microloan in 1973 in Brazil. Accion’s partner microfinance institutions provide loans to men and women entrepreneurs through 62 microfinance institutions (MFIs) in 31 countries in the Americas, Asia and Africa. As of 2012, Accion reports total assets USD 326 million and, in association with its partner MFIs, has an active loan portfolio of USD 7.1 billion serving 6 million borrowers.
About Smart Campaign
The Smart Campaign, which was founded by US-based nonprofit Accion and is located at Accion’s Center for Financial Inclusion in the US city of Washington, is an “effort to unite microfinance leaders around a common goal: to keep clients as the driving force of the industry.” It promotes seven core consumer protection principles including: “appropriate” product design and delivery, prevention of over-indebtedness, transparency, responsible pricing, fair and respectful treatment of clients, privacy of client data and mechanisms for complaint resolution. As of 2013, The Smart Campaign is endorsed by approximately 3,348 microfinance institutions (MFIs), microfinance support organizations, investors, donors and individual industry professionals.
Sources and Additional Information
MicroRate: A Guide to Responsible Investing, December 2013, http://www.microrate.com/a-guide-to-responsible-investing-a-microrate-white-paper
MicroCapital, “The State of Microfinance Investment 2013, Published by MicroRate,” https://www.microcapital.org/microfinance-paper-wrap-up-the-state-of-microfinance-investment-2013-published-by-microrate/
MicroCapital Special Report, “Disrupt this Old Model to Unlock the Potential of Microfinance,” https://www.microcapital.org/special-report-emw2013-michael-chu-disrupt-this-old-model-to-unlock-the-potential-of-microfinance/
MicroCapital, “Thirty-Five Organizations Sign Client Protection Principles to Ensure Fair Treatment and Financial Protection of Low-Income Microfinance Clients,” https://www.microcapital.org/microcapital-story-thirty-five-organizations-sign-client-protection-principles-to-ensure-fair-treatment-and-financial-protection-of-low-income-microfinance-clients/
MicroCapital Universe Profile, MicroRate, https://www.microcapital.org/microfinanceuniverse/tiki-index.php?page=MicroRate
MicroCapital Universe Profile, Accion, https://www.microcapital.org/microfinanceuniverse/tiki-index.php?page=Accion
MicroCapital Universe Profile, Smart Campaign, https://www.microcapital.org/microfinanceuniverse/tiki-index.php?page=SMART+Campaign
Do you know that MicroCapital publishes the MicroCapital Monitor newspaper each month? Find out more at https://www.microcapital.org/products-page/
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