Truth in Advertising
How far do microfinance funds expect their investments to go in changing lives? Are microfinance funds looking for specific changes in the lives of poor people or increased access to finance in a responsible way? And can we tell from the information they provide? These questions were central to an investor meeting CGAP co-organized with the Investor Group of the Social Performance Task Force in Bern this week. More than 40 investors gathered, including many microfinance investment vehicles (MIVs), banks, a pension fund, and development finance institutions. Together they represented more than half of assets under management in the microfinance sector.
The good news is that microfinance investors are increasingly committed to disclosure on their environmental, social, and governance (ESG) performance. Seventy-one MIVs reporting to CGAP’s annual survey submitted ESG data in line with the CGAP MIV Disclosure Guidelines which now includes 24 ESG indicators—including client protection practices and client outreach numbers. More than 70% of the funds share ESG data with their investors. Also 85% endorsed the Client Protection Principles and many have taken actions to implement these principles in their investment processes. Ensuring that investees are treating clients fairly is considered the minimum standard for socially responsible investment.
But is the information disclosed sufficient to support many of the claims funds are making? In the debate, it was clear that microfinance funds don’t all share the same objectives: some focus on achieving financial inclusion in a responsible manner, while more socially-oriented investors focus on making a change in the welfare of clients or even alleviating poverty. Since both aims are about improving lives, the rhetoric surrounding these two quite different driving approaches and the marketing—particularly in fundraising prospectuses—often blur the lines. Investors are understandably confused. MIVs need “truth in advertising” around both goals and results. Those focusing on financial inclusion should not market themselves as poverty reduction instruments—or at least need to make the link more clearly about what kinds of impacts can be reasonably claimed from their investments. Funds claiming positive change in people’s lives should be held to higher accountability standards and track microfinance client level data.
There are still challenges in collecting and validating meaningful data on the change microfinance brings about, but progress is being made as we heard this week at the meeting of the Social Performance Task Force. Investors, such as Oikocredit, are actively supporting their investees implementing measurement tools to allow better tracking.
The SPTF Investor working group and CGAP agreed to better identify the different objectives and performance metrics of the 110 Microfinance Investment Vehicles.
While we have more or less accepted irresponsible marketing practices by conventional businesses, microfinance practitioners need to be more strict for obvious reasons. However, this duty also falls on investors and donors because by virtue of their concern for social welfare, they ought to take greater interest in the appropriation of their funds by MFIs.