International standards on sustainability and recent developments in the European Sustainable Finance Legal Framework (ESFLF) lead to a radical shift towards sustainability. How do regulatory developments and international standards relate to the current state of social and environmental performance evaluation of the inclusive finance sector?
This was the question posed for this session, and Jurgen HAMMER of the Social Performance Task Force (SPTF) opened the discussion by referring to the impressively strong increase, in recent years and even months, in regulatory efforts and harmonisation. What has caused the emergence and urgency in this field, and why are we concerned? The industry has worked for decades to improve and harmonise standards and work in Social Performance Management in a competitive environment. It has proven not easy to agree, but we are getting better at it by working together and learning from the past 15 years, leading to a common language, universal standards and a unique evaluation methodology.
Standards require regular review and update; much has been done since 2020, in practice and in digitisation, taxonomy and harmonisation. This has also led to the Client Protection Standards, and the Client Protection Pathway. Bottom-up approaches and self-regulation are vital for the future, and so is clarity in use of definitions, tools and regulations concerning the social taxonomy and harmonisation of the financial industry. This is in particular also most relevant for investment in the global South, for which there is much collaboration with the e-MFP and other European partners like the European Commission, OECD and ISO.
Marco BODELLINI of the University of Luxembourg reflected on the European context. Much work has been done to establish a new overall EU sustainable finance framework, with new rules for environmental and social sustainability. This framework comes with legislation, taxonomy of regulations, and relationships with and between different sets of standards. In addition, there is an increasing alignment of EU provisions for inclusive finance, financial disclosure (SFDR), social dimensions and human rights aspects, legal safeguards and sustainability factors. The Social Finance Disclosure Regulation (SFDR) requires actors to disclose any negative impacts of investment decisions, and make sure to assess environmental and social impacts with indicators to assure sustainability of the investments made. Bodellini then showed the list of adverse sustainability indicators for climate and other environment-related issues to take into account for any investment, and a similar list with social indicators. He continued with multiple examples how these regulations and indicators work out in the various frameworks of the UN, OECD, ILO, with main references to their international standards. Bodellini explained next how the different sets of standards and guidelines can be compared and translated to internal systems for social and environmental protection and human rights.
In conclusion, Bodellini remarked that the EU has made significant steps to improve the regulatory framework for the social and environmental dimensions of investments. This means that FSPs will need to take this into account when planning new activities, even if the complete taxonomy of the regulations is not yet in place.
Next to present from an investor’s point of view, Ariane SCHOEN of Invest in Visions first pointed to a question from Lucia Spaggiari, who mentioned not to lose sight of the essence of the microfinance sector, which is to work on the ground resolving critical issues for clients. Hammer answered that it is indeed important to work together on building capacities to deal with such critical topics and data generation on the ground.
Schoen then continued to explain how their investment process works, as a company having been active for 15 years. Their assets under management amount to almost EUR 1 billion, with an international team of 25 people working in emerging and developing countries, reaching almost 670,000 people with their investments. They invest through MFIs, due diligence being carried out by their advisers before taking decision to invest, based on Environmental, Social and Governance (ESG) assessment and scoring. As their main challenges, Schoen mentioned the lack of data providers, ratings and scoring for proper assessment, therefore having to rely on their own advisers. Although there is now an environmental taxonomy, this is not yet the case for a social taxonomy. They coordinate and harmonise with other actors in the field, but generally there is little guidance on the use of standards for financial inclusion and benchmarks defining the sustainability of the activity.
Cécile Lapenu posed a question regarding the applicability of the standards for risk management and decision-making, and addressing the University how the European Commission can help with a kind of reporting framework to help MFI investors in the South; is there room or margin for negotiation? Bodellini replied that the University with SPTF and the e-MFP may be well placed for stimulating the dialogue and collaboration in this respect, but probably more concerted effort is needed to be effective.
Hammer acknowledged the importance to act, not in a reactive way but more in an active way for the sector’s social performance. Sometimes it can be a bit discouraging when thinking about the sector’s challenges, but like Charles Lindbergh tried many times, we may stumble several times, but by collaborating and working together, we will make the sector strong and learn how to fly based on the experiences of the past 20 years.