Social Performance Infrastructure’s Big Barriers

A recent CFI blog by Gail Buyske, What’s Going On with Microfinance’s Information Infrastructure? Should We Care?, and stakeholder meetings in Washington and Europe are focusing attention on the under-utilization of data platforms and ratings and the threat this poses to maintaining transparency and continuing progress in standard setting and benchmarking, particularly in the area of social performance. This increased attention is especially pertinent as a couple initiatives wind down, most notably MFTransparency. The team at Grassroots Capital, as a very active supplier of data to multiple initiatives, a user of their outputs, and a heavy user of “in-house” data, sees the challenges from multiple perspectives.   

The industry clearly needs reliable, timely data and in particular, improved data and accepted frameworks and conventions in the area of social performance. Significant strides have been made in recent years thanks to MFT, SPTF and many other efforts. But at the same time it is essential to consolidate initiatives and promote the widest possible buy in by the broadest possible group of investors, regulators, standard setters and other industry participants. We believe that one of the major issues is that social reporting and ratings are under-enforced by investors, leading to a lack of incentives for MFIs to devote the time and resources to report social data and become rated. Simultaneously, multiple microfinance-specific initiatives are not viable given that impact investors’ interest is shifting and broadening into other sectors such as affordable housing and SME lending. In addition, MFIs’ own business models are becoming more complex. Investors, practitioners, and industry experts all need to work together at this crucial juncture to consolidate and rationalize frameworks with broader impact investment initiatives to reduce reporting burden, engage the wider impact investor community, and allow more time for what matters – improving service and benefits to poor and low income clients.

While providing benchmarks and setting goals can help MFIs improve their own performance, reporting was and still is largely investor-driven. Investors, fund managers and competitive pressure play a large and very important role in promoting social performance monitoring and reporting requirements. Transparency is encouraged if it leads to funding. The underutilization / under-compensation of data platforms and ratings reflects in part the sub-viable scale of an overly fragmented infrastructure.

The proliferation of initiatives over the years have undoubtedly advanced our ability to meaningfully report, but have also given stakeholders a pretext to hold back and "wait and see" which initiatives the industry will coalesce around as the standard. In the impact investing space, microfinance has enjoyed particular focus and support over the past twenty years and in many respects has a much more developed infrastructure than newer impact sectors. But this privileged position has its downside: our initiatives are sector specific, while many impact investors are sector agnostic and do not have the time or patience to delve into a single sector framework.

As Gail noted in her blog, microfinance has only been able to achieve success as the most mature and established business model in the impact space due to the support of this infrastructure. Grassroots believes that efforts to encourage broad agreement on a core set of microfinance social indicators is a step in the right direction. At the same time, Grassroots has also actively supported B Corp and GIIRS since their inception, because they aim to engage a broad range of impact investors. Everyone, both in the microfinance community and the broader impact community, cannot afford to take the essential infrastructure for granted. Rather we will need to make some choices and compromises to rationalize the infrastructure to reflect the evolving composition and focus of the investor community and engage the broadest possible financial support and mandate reporting requirements.

Time to Move on from Microfinance or Re-engage? Part II

The conversation around the future role of microfinance has gained significant momentum in 2015.  Through this blog, we want to continue to participate in the conversation, especially in relation to our blog from last March 2014.

Challenges are nothing new to the microfinance industry; however the effort to maintain the confidence of funders and investors may become more difficult with the release of recent publications.  At a meeting hosted by the World Bank in early March, two articles addressed this challenge in response to the Poverty Action Lab’s report, “Where Credit Is Due.” A particularly critical spin was put on that discussion in a March 3^rd  Washington Post article by Chris Blattman, which concluded that microfinance can be compared to the microwave oven; it doesn't make people better off in ways that are easy to measure, but makes life a bit more convenient, and it certainly doesn't warrant a Nobel Prize.  A somewhat more constructive consideration of the World Bank discussion came in a March 16^th Devex article by Claire Luke. Luke reports reactions to the recent publications and research from a range of practitioners, including Grassroots’ Paul DiLeo, which generally suggest that since microfinance offers an unrivaled, self-sustaining platform for reaching hundreds of millions of poor families, there is a need for research that helps practitioners improve their products and services rather than studies seeking to generate eye-catching headlines that microcredit “doesn't work.” 

This reaction was anticipated in a thoughtful March 3^rd article by Alex Counts of the Grameen Foundation, which systematically extracted lessons gleaned from the last 30 years of the development of the microfinance industry to help guide the recent surge of interest in “impact investing.”  One of Counts’ points, which resonates in the context of the Poverty Action Lab’s report, is that “it is important to remember that few if any social innovations besides microfinance have proven capable of reaching large scale and generating consistent profits.” Large scale and reliable profitability should appeal to philanthropies and impact investors alike, and should ensure a place in impact portfolios.

Other such platforms will likely emerge in the future -- mobile technologies are garnering lots of enthusiasm at the moment -- but for now Grassroots believes that the practical challenge for those wanting to deliver effective anti-poverty products and services is to combine the microfinance experience, and the unique platform it has created at great cost and effort, with the latest research to improve the efficacy and scale of efforts to address the causes and consequences of poverty.  We can use the experiences of the past 30 years in order to evaluate the best way forward, rather than allowing a focus on what hasn't worked to lead us to a dead end. 

One way that Grassroots is actively supporting this approach is through its collaboration with Freedom from Hunger that utilizes MFIs as platforms with the aim of improving women’s access to health services.  Grassroots’ Impact First equity fund is another initiative which aims to support MFIs that are using the latest research to deliver meaningful results on both bottom lines. These engagements are among a newly flourishing cohort of efforts that build on the unique accomplishments and capabilities of microfinance rather than putting the majority of emphasis on the shortcomings with the dead-end conclusion that microfinance simply doesn't work. The original objective of alleviating poverty has not changed, but the methodology needs to expand beyond microcredit to integrate health services and access to energy among many others, and to increase the likelihood of success, this agenda needs both the support and constructive engagement of researchers and investors as well as practitioners. 

The Millennium Development Goals, Grassroots Capital Management, and GIFI

Beyond 2015 – the Next Steps for the MDGs

The United Nations Millennium Development Campaign came together in 2002 and promoted the Millennium Development Goals (MDGs) in a concerted effort to mobilize global partnerships to reduce extreme poverty by 2015.  It is now the beginning of that target year and, while there has been significant progress towards the goals, poverty continues to be a major global issue. At Grassroots, we think that access to financial services can be part of a package of tools that can help people raise themselves out of poverty and our approach is designed to ensure that the potential of microfinance to benefit poor clients is, in fact, realized.   With the approach of 2015, the UN drafted a new agenda which will be officially adopted at the Special Summit on Sustainable Development in September.  The goal is to learn from the past 15 years, benchmark where we are now in relation to the goals that were set for 2015, and adopt a new agenda from now until 2030.  The new, post-2015 agenda is ‘buttressed by science and evidence” and is “built on principles of human rights, the rule of law, equality and sustainability”.  Grassroots believes that this is an opportunity for the microfinance community to recommit to its core mission of poverty reduction and align and coordinate itself with the other initiatives in support of the post-2015 MDG agenda.

Emphasis on Analysis and Improving Operations, not just Collection and Reporting

Collecting social data is not the objective; rather it is selecting those metrics that best support the Board's ability to design and oversee social strategy and management's efforts to execute that strategy in progressively more efficient and effective ways.

 Studies, surveys, institution data, client data… there is a lot of data being collected.

The financial industry is constructed around data and the availability of data.  The information that this data provides allows financial institutions to scale, increase outreach, manage risks and enhance profitability.  Although MFIs have multiple bottom lines, their approach to data should be no different than a purely profit-maximizing institution. This importance of data in enhancing performance in each bottom line has been acknowledged in microfinance and motivates, in part, the significant time and effort expended to develop the social performance data collection tools that have launched over the past few years.  The MIX Market plays a large role in increasing the transparency of the industry and other initiatives like the forthcoming SPI4 self-assessment and the GIIRS Rating will continue to provide platforms which support social data collection.  These platforms, plus companies’ proprietary collection methods, provide the means for gathering comparable data suitable for bench-marking in a relatively efficient way. BUT in many cases, the data are not being used to manage and improve social performance, but almost exclusively for communication with external stakeholders.

Regulatory Threats to Microfinance Plus in Latin America

“Microfinance Plus,” the integration of financial and non-financial services such as health, education and savings, can help the client holistically, leading to improvements in the lives and livelihoods of clients and their families. However, MFIs offering Microfinance Plus have been facing increasingly challenging regulatory environments in a number of countries. Increased regulations will have significant consequences on MFIs and the end-clients if MFIs are forced to stop these offerings. Grassroots is dedicated to supporting the mission-driven MFIs that are working to continue offering these much-needed integrated non-financial services despite regulatory setbacks.

SPM Management and Metrics: Time to Choose

Grassroots has been very active in recent years in supporting initiatives intended to improve SPM and metrics in microfinance and the broader impact industry.  While no standardized system will meet all the needs of management and directors, there should be one solution that can largely meet their needs and also provide a framework for communicating with investors and the larger audience. Grassroots believes it is time to begin to choose which of the various tools is currently able to best fill these roles. This post shares Grassroots’ view of the current status of the SP management, metrics and ratings landscape.  An upcoming post will expand on Grassroots’ rationale for the initiatives it will choose to continue to participate in and support going forward.

Is the impact first / financial first distinction useful?

We wanted to share this post, Impact Investing: Can We Pay Her Less?, as it frames the issue of Impact First/ Financial First quite well. We find these kinds of profit vs impact choices arise constantly when managing a "social" business, particularly one with the poor or vulnerable people as the primary or sole clients or suppliers. In these cases, there is no opportunity for cross subsidy, or extracting higher margins from the relatively well-off. Decisions such as paying your suppliers less, charging your customers more, pulling the plug on a socially promising but low margin pilot, abandoning provision of services in remote or otherwise more costly areas - these choices affecting both bottom lines are faced by managers of double bottom line companies on a daily basis.
Unless managers, board members and shareholders are aligned around a clearly articulated set of social and financial priorities to guide these decisions, they will face constant battles and generate sub-optimal social (and perhaps even financial) performance.
Enabling investors to understand their own priorities and self-select for the investments that fit them best is what (albeit imperfect) labels like "Impact First" can help with. That is why Grassroots calls its most recent microfinance fund an "Impact First" fund: we want investors to understand that so long as the businesses run a healthy and sustainable profit, and the fund itself is managed to meet investors' more modest profit expectations, the priority will be on maximizing social value, whether that is incomes of suppliers, outreach of women's health services, providing low balance savings accounts, or other social objectives. For more on Grassroots' Impact First initiative, please check back with us here or on our website.

Time to Move on from Microfinance or Re-engage?

Over the past 18 months we have been noticing a growing tendency to declare microfinance either an outright failure (on social or financial grounds, or both), insufficiently “innovative”, or slipping into irrelevance in the face of new technologies and opportunities.  We’ve heard these sentiments from both industry outsiders – aspiring impact investors – and insiders, in recent industry meetings and panel discussions, both in the US and abroad. While the motives may vary, the trend is the same - investors seem to be losing interest in microfinance. 

As was the case with Mark Twain, we believe that the reports of the death of microfinance are greatly exaggerated, so we’re going to stick around.  Before explaining our continued commitment to microfinance, though, we explore some of the reasons for the apparent disillusionment and waning interest and offer our own interpretations…

Impact Investing: the need for companies and governance to manage both bottom lines

A recent MSDF blog post examines the role of impact investing in financing lower margin businesses that generate significant social value but may be transitionally or permanently "non-commercial". We believe this is a critical issue that does not receive enough attention in discussions about impact investing. The financial characteristics of different types of initiatives are instead lumped under one broad, vague "impact investing" label rather than recognizing that some initiatives may not yield commercially attractive returns but are nonetheless essential in meeting the basic needs of the underserved.  

This topic is neglected in MFI board discussions as well, where we often see a disconnect between the MFI's stated objective or mission and what the board actually focuses on. We agree with a 2012 MSDF blog post that good governance is good governance. A MFI or any double bottom line (DBL) institution shouldn't in principle require any different governance approach than a conventional company:  the board's responsibilities are to make sure the company's objectives and strategy are clear, the right senior management is in place to undertake that strategy, and excessive risks are avoided or mitigated. 

In a DBL institution, one would expect a board to spend as much time on the social bottom line as on the financial bottom line.  But in fact, in our experience on MFI boards, that is not usually the case.  Often, the explanation is "the social bottom line is too hard or expensive to measure, so we'll just skip it and assume that an un-coerced purchase equals social benefit."  But it's hard to imagine a board accepting management's contention that market share is too hard to measure, so we'll just assume that so long as we're selling product, everything must be fine.

This neglect reflects in part the actual or presumed priorities of investors and board members and an overemphasis on the financial bottom line driven by the desire to draw in a broader range of investors over the past ten years. This effort has been quite successful, so this is a good time for a course correction:  rebalance the DBL, ensure different investors' objectives are aligned with the companies in which they invest, and direct capital to where it fits best and can do the most good. Grassroots' new "impact first" fund and governance work are doing just that by supporting "impact first" MFIs through fully aligned capital and targeted assistance to improve governance, metrics, and social programs and developing the pool of "impact first" investors.

The Mission First. And Last. And In Between.

"Impact Investing 2.0", new paper by Cathy Clark, Director of CASE at Duke University, Jed Emerson of ImpactAssets, and Ben Thornley, Director of Insight at Pacific Community Ventures heralds in the 2.0 era when the debate about whether companies and funds can achieve their mission and financial success is over.  “We should now focus on these emerging best practices and work to bring the field to scale based on HOW they have actually done it.” (click here for the full post).

In Impact Investing 2.0, the authors profile twelve funds that work in different sectors and pursue different investment strategies and approaches to social impact. The paper outlines four key concepts in their analysis of how these funds have achieved success. One of these is “Mission first and last”, meaning the funds and investors are clear about the mission strategy at the time of investment, allowing them to apply financial discipline and focus on the financial return throughout the investment period, secure that the mission will be achieved because the strategy was defined at inception. Then at the end of the investment period the investors and fund managers can go back and see what impact was achieved.

In microfinance, we have seen that funds can achieve their financial goals while maintaining a dedicated focus on microfinance institutions (MFIs) serving low-income people, and we have seen positive “output” data – for example, more low-income people now have access to financial services than before and sometimes percentage of clients in lesser served rural communities and/or female clients has increased. But the industry still has work to do as far as the “outcome” data – are these people better off? This is a crucial question at this stage of the microfinance industry's development. MFIs have shown they can be commercially relevant and reach more people, but to determine whether clients are better off, MFIs and the funds investing in them need more than a mission strategy that is articulated at the time of the investment and is then revisited at the end. We agree with Paul Brest and Kelly Born's views in their thoughtful piece in the Stanford Social Innovation Review (SSIR) that “in business, as in philanthropy and all other spheres of life, people are more likely to achieve results that they intentionally seek.”

Dismissing the “financial first”/ “impact first” debate leaves management, board, and investors unprepared for myriad situations that will arise during the term of an investment in the normal course of business that require a decision between maximizing profits or maximizing positive benefit to the clients, such as:

• Entering new markets that are higher cost/ lower profit but enable expanded access to the target population;
• Taking advantage of market conditions to raise interest rates to enhance profitability at the expense of client income / asset growth;
• Supporting nascent products and programs like savings linkages or low balance savings accounts which may be marginally profitable within the medium term and provide social benefits even though the immediate or medium term profitability might be limited.  Health and educational services often fall into this same high social value and limited financial return bucket.

Furthermore, measuring impact in itself is costly. Methods such as randomized controlled trials or econometric analysis that are typically used by social scientists to assess outcomes are expensive and time consuming; but even quicker, less rigorous approaches to market research like client surveys require resources to implement the studies and analyze the data. While some investors and companies don’t see the need for measuring non-financial performance, these data and analysis are invaluable to enable MFIs, their boards and investors to make difficult choices like those outlined above and better informed decisions regarding allocation of capital.

Grassroots’ new "Impact First” initiative will be first and foremost financially sustainable. Our investment strategy will apply the same level of financial discipline as profit-maximizing funds while also employing an explicit impact strategy and monitoring system from the fund's inception throughout the investment period. We won't assume that impact is a foregone conclusion just because it's been defined or even agreed at the onset. Just like with financial returns, to create the social impacts that are measurable and long-lived, social performance must also be actively managed and measured throughout the investment.

Caspian Companies in Top Quintiles in GIIRS Annual Update

Caspian Advisors is pleased to announce that its portfolio companies are among the first to update their annual ratings by GIIRS (Global Impact Investment Rating System). All nine companies participated in the GIIRS rating process, and the average score is 123 – in the top 2 quintiles of GIIRS rated companies – with five companies scoring in the top quintile. The score of 123 compares to an average score of 100 (4 stars) for all GIIRS rated companies operating in emerging markets (n=293).

Caspian’s portfolio companies have been key throughout the GIIRS process. We are very impressed by their dedication to transparency in social performance reporting and are proud to have them as partners.

For the full press release, please visit: http://www.csrwire.com/press_releases/36421-Caspian-Companies-in-Top-Quintiles-in-GIIRS-Annual-Update.

For the third consecutive year, Grassroots Capital Management PBC has been selected for the ImpactAssets 50 2013 (IA50). In its third year, the IA50 is an annually updated list of experienced private debt and equity impact investment fund managers.  The IA 50 serves as a gateway for those interested in achieving social and/or environmental, as well as financial, returns on their investments.  Fund managers included in the IA 50 2013 manage a combined $10.8 billion in assets within the impact investing market. Firms were chosen based on experience, impact, and with an eye toward reflecting the diversity of impact investment opportunities.

For Grassroots' profile, click here

 

The Critical Role of Non-Commercial Capital in Funding of Impact Investments

On September 19^th, the World Economic Forum hosted a panel discussion in New York to introduce its just-published report, “Fromthe Margins to the Mainstream – Assessment of the Impact Investment Sector andOpportunities to Engage Mainstream Investors”.  The panel included Goldman Sachs, Morgan Stanley, Equilibrium Capital and Social Finance USA.  The discussion and the report itself made a number of points of relevance to microfinance and other impact sectors targeting low income populations.

Among the good news:  a survey of the “millennial generation” finds them most often identifying  the purpose of business as “improving society”, albeit followed closely by generating profit; both financial intermediaries, like those represented on the panel, and advisors like Cambridge Associates appear to increasingly incorporate impact sectors into their portfolio constructs for clients. 

Among the challenges:  family offices / HNWIs and Development Finance Institutions continue to be the leading source of capital for impact investments, but these sources represent just a small proportion of total global asset ownership:  2.5% compared with 48% and 39% held by pension funds and insurance companies, respectively.  And these institutional investors continue to find impact investments challenging, due to scale, standardization and in some cases, risk adjusted return mismatches. 

Evolution of Pricing Transparency in Microfinance

For the fifth anniversary of its founding, MFTransparency traces the evolution of the pricing transparency movement in microfinance with the help of four industry leaders: Chuck Waterfield – CEO of MFTransparency, Mårten Leijon – CEO of  Microfinance Information eXchange (MIX), Paul DiLeo – Founder and Managing Partner of Grassroots Capital Management PBC, and Rupert Scofield – CEO of FINCA.

A turning point for pricing transparency in the industry, according to Chuck Waterfield, was the Compartamos IPO in April 2007, which called attention to the high profits possible from small loans to the poor. In early 2008, MFTransparency was established as a facilitator for the industry to collect and process data on pricing in a standardized way and report them transparently to help the industry mature and evolve.

For Paul DiLeo, more than just a natural evolution of a maturing industry, the focus on pricing transparency goes beyond information and consumer education to what differentiates microfinance from other industries: microfinance not only realizes a latent market opportunity, it looks to generate some improvement in the conditions, products and prospects of clients. MFTransparency, and the whole pricing transparency effort, has become part of a larger effort to examine microfinance and whether it is indeed providing benefit to clients.

Please click the following link for more on the points of view of these four industry experts: http://vimeo.com/74194251. 

What to Expect When Impact Investing (by Paul DiLeo)

This past Thursday, September 5, I attended a panel discussion on Impact Investing organized by CGAP in Paris.  Unfortunately, I arrived late, left early, and didn't catch all the discussion in French. With those caveats, though, I did find a few interesting themes in the discussion I did catch.

At various points during the discussion, the moderator posed questions that attendees could vote on using individual clickers that had been distributed.  In response to one question, 67% of participants either agreed or strongly agreed that “expectations for impact in impact investing are too high.”

While there was no opportunity for respondents to specify how exactly their expectations had been disappointed, one reasonable inference in light of critiques of recent years is that the ability of impact investing to achieve impact had been oversold and it was necessary for us to moderate our expectations with respect to possible impact on poverty, gender equality, and other social ills.

If correct, this conclusion would seem to raise an obvious question:  why would we not have high and indeed, rising expectations for impact investing?  In other businesses we expect continuous quality improvement.  Road builders need to build safer, more durable roads; appliance makers more efficient, useful appliances.  Why for a business where “impact” is the product do we seem to be lowering rather than continuously raising expectations?

Divesting from global fossil fuel companies

Anders Ferguson, Partner at Veris Wealth Partners, discusses the broadening debate over the movement to divest from fossil fuel companies, Veris’ approach and the broader implications for impact investors and their portfolios. Read more here:  http://www.veriswp.com/2013/08/23/all-in-the-family-fossil-fuel-divestment/

Manager's Reflections on Ten Years of the Gray Ghost Microfinance Fund

Gray Ghost, Since conceiving of and launching their pioneering microfinance fund-of-funds a decade ago, Gray Ghost and Paul DiLeo have played a critical role in shaping the microfinance landscape and expanding the pool of private investors providing liquidity to the microfinance industry.  Now that the Gray Ghost portfolio has exited more than half its investments, Paul DiLeo reflects on the successes and challenges of their groundbreaking work and the implications for the industry going forward. The paper is available here. Click "Read more" below for the manager's comments.

Grassroots Is Delaware's First Public Benefit Corporation

On August 1st, Grassroots joined 16 other leaders (listed below) who registered as the first Delaware benefit corporations. In addition to these forerunners, more than 600 companies celebrated this big day by signing an Open Letter to Fellow Business Leaders. Links to the Open Letter and other information on this inspiring event are provided below. . .

Here’s the Open Letter inviting business leaders to join the movement redefining success in business

Here's a Conversation with the Early Adopters published on CSRNewsWire

An article by Chrystia Freeland 'Capitalism, but With a Little Heart' from The New York Times

Governor Markell's Press Release and OpEd 'A New Kind of Corporation'

Registering Companies: Alter Eco, American Prison Data Systems, Better Than We Found It, Exemplar Companies, Fair Parenting Project, Farmigo, Grassroots Capital Management, Ian Martin Group, Imani Energy, Method, New Leaf Paper, Plexx, Plum Organics, Profile Health Systems, RSF Social Finance, Socratic Labs, Venture Pilot 

Companies Committed to Register:  Performance Management, GOOD Worldwide, Honest Company, Roozt, SustainAbility

Grassroots is becoming a Public Benefit Corporation!

On July 17th, Grassroots attended the signing of Public Benefit Corporation (PBC) legislation by Delaware Governor Jack Markell in Wilmington.  Delaware is the 18th state to create a PBC form, and by far the most important given Delaware's unique position as a leading state for incorporations and leadership in corporate law. Grassroots is among the first companies that will convert to the new structure and has changed its name to Grassroots Capital Management, PBC, effective August 1. Grassroots has been a certified B Corporation since 2008 and our funds are GIIRS Pioneer Fund Managers. Becoming a PBC helps Grassroots preserve its mission and ensure that the interests and rights of all our stakeholders are protected, contributing to a better, more just world.  

Grassroots is looking for a Summer Intern

Grassroots Capital Management makes social investments globally that have both a financial and social return. Currently, Grassroots and its partners manage/advise five impact investment funds covering predominantly microfinance as well as small medium enterprise, affordable housing, and sustainable agriculture sectors.  Grassroots is looking for a short term intern to help develop pipelines of MFIs and investors. In undertaking this research, the intern can expect to develop a good familiarity with MFIs around the world with varying degrees of financial and social performance, the networks and resources that support them, and the investor communities that are engaging with the microfinance industry.