Our Approach to Sustainability

Our mission for a sustainable future

As an impact investor, we are guided by the firm belief that societies and companies can experience positive impact through investments. Our commitment to social and environmental responsibility is deeply embedded in our corporate philosophy, and we are proud to make a positive contribution to the global sustainability agenda.

As a pioneer in the field of impact investment, we are committed to the 17 Sustainable Development Goals of the United Nations. In particular, we want to contribute to sustainable development at the business level.

With the investments of the funds we manage, in particular via the IIV Mikrofinanzfonds, we aim to contribute to the achievement of several Sustainable Development Goals in the area of financial inclusion.

Our Impact Logic

Through our investments via the IIV Mikrofinanzfonds, we pursue the following impact logic:

We mobilise financial resources from institutional and private investors. Through the investments of the funds we manage, loans are granted to microfinance institutions in developing and emerging countries. In this way, they expand their portfolio for lending to micro-entrepreneurs. This gives micro-entrepreneurs access to financial services that they do not receive from conventional commercial banks. With the help of loans and other financial services, micro-entrepreneurs can build up an economic existence or maintain or expand existing businesses.

Throughout the term of the loans, in our role as outsourced financial portfolio manager of the fund, we also stay in close contact with the parties involved in order to increase the impact (stakeholder engagement). For example, we monitor whether the respective financial institutions follow the additional steps of the Client Protection Pathway, the market standard for client protection in the microfinance sector.

This impact logic can be illustrated using a theory of change. A theory of change is helpful in identifying measures to solve societal challenges and deciding which approach should be taken. In addition, it is an important guide throughout the entire investment process, from due diligence and investment decision to impact monitoring and the final evaluation of the investment. Further information on the theory of change can be found in issue 1/2023 of Impulse (only available in German).

In our investment process, we have defined several steps for selecting and analysing microfinance institutions for refinancing to ensure that the investments of the funds we manage contribute to this impact logic.

Exclusion criteria

The investment strategy of the IIV Mikrofinanzfonds requires that certain sectors and activities are excluded from investment. This is the industry standard in the field of sustainable investing. The following sectors are covered by the exclusion criteria of the IIV Mikrofinanzfonds:

  • Trade in and/or production of weapons and ammunition (in the case of transactions carried out in cooperation with a development bank, this exclusion criterion does not apply to companies that do not have a significant stake in these activities; “not substantially involved” means that the activity in question is ancillary to the main activity of the company)
  • Operation of nuclear facilities or manufacture of components
  • Manufacture, trade in and/or storage of agrochemicals (pesticides) or PCB or CFC products
  • Use of toxic substances and substances that are hazardous to health (pesticides, biocides, herbicides) according to the WHO
  • Gambling operation and / or management (except non-profit lotteries)
  • Illicit drug production trade and/or storage
  • Trade in or production of spirits / tobacco products (tolerance limit of ten percent)
  • Trade in wild animals or wild animal products within the meaning of the Convention on International Trade in Endangered Species of Wild Fauna and Flora (CITES regulation)
  • Drift net fishing in the marine environment using nets in excess of 2.5 km in length
  • Cross-border trade or transport of waste (prohibited by international law)
  • Pornography, prostitution
  • Violation of the 10 Principles of the UN Global Compact network (in a serious manner and, in the opinion of the fund management, with no prospect of improvement). This exclusion criterion is checked by us as part of the due diligence process, the standards-based screening and our AML/KYC screening.
  • Non-sustainable management of forests, trade in tropical timber or deforestation for land reclamation for farming or housing construction. Non-sustainable management of forests means of forest management without recognized certifications (FSC, PEFC), labels or equivalent regulations designed to guarantee sustainable management.
  • Sectors with a demonstrable negative impact on environment, people and society (indigenous nations and communities and their habitats, activities like mining, non-sustainable forest management, violation of protected areas / reserves according to International Union for Conservation of Nature (IUCN), use of generally accessible water sources)
  • Promotion, trade and financing of conflict commodities
  • Extraction of or energy generation from fossil fuels. These include the extraction and/or processing of oil sands and oil shalesand related services.

The loans are granted for a specific purpose and may only be used to finance microcredits or loans to SME sub-borrowers. The financial institutions agree not to violate the exclusion criteria and, in turn, not to finance sub-borrowers, who violate these criteria. If the refinanced institution cannot rule out the possibility that a business activity excluded by application of the exclusion criteria is part of its portfolio, it must be agreed in the loan agreement for the refinancing that the institution may only use the loan for purposes other than the excluded business activity.

Sustainability risks

Sustainability risks can have a negative impact on the funds’ investments, which can result in earnings risks. The following sustainability risks may occur, among others:

  • Environmental risks such as physical risks (e.g. drought, extreme weather and pandemics) or transition risks in connection with the shift to a low-carbon economy (e.g. due to the impact of political changes)
  • Social risks such as social upheaval, hunger, over-indebtedness of sub-borrowers of credit funds, ineffective measures to combat fraud or corruption
  • Governance risks such as regulation, legal uncertainty, lack of political stability.

In addition, there is a possibility that the investment made may have an unintended negative impact on ESG factors, which is contrary to the defined objectives of the funds we manage.

Sustainability risks are integrated into the entire investment process. In order to ensure the broadest possible analysis of sustainability risks in the phase leading up to any investment decision, a risk inventory was carried out. The resulting risk inventory list provides the basis for the identification and assessment of sustainability risks. The indicators defined according to the risk inventory are transferred to an internal ESG risk scoring tool, which evaluates the indicators on a 5-point scale.

Norm-based screening

The investment strategy of the IIV Mikrofinanzfonds provide that, in addition to the exclusion criteria, environmental and social standards (norm-based screening) are applied to investments. The IIV Mikrofinanzfonds invests in unsecuritised loan receivables against to microfinance institutions. The environmental and social standards include a written commitment by the selected microfinance institutions to the core labour standards of the International Labour Organisation (ILO), the UN Global Compact and the Client Protection Principles, the applicable principles in the area of microfinance. Whenever we work with other investment companies within the framework of syndications, they must be signatories to the Principles for Reponsible Investment of the United Nations.

Positive criteria

Furthermore, the investment guidelines of the IIV Mikrofinanzfonds define a number of positive criteria on the basis of which microfinance institutions are selected for refinancing.

Investments are selected and analysed on the basis of operational, financial and sustainability criteria. These points are verified by the investment managers in charge as part of the due diligence process. To assess the sustainability performance of the investment, the fund management uses the ESG analysis tool ALINUS, an industry-recognized scoring tool. This also provides information on the social and environmental performance as well as the governance structure of investments. The institute’s ALINUS score must be at least 55 percent. If the requirements are met, the investment can be made. The processes described are part of the internal ESG policy, the implementation of which is essentially the responsibility of our impact and sustainability team and the portfolio management team.

Impact Measurement

Following the investment decision, we measure the social reach of the investments beyond the term of the loans. We report these in various Publications. In particular, these include the monthly factsheets and the Impact Report issued annually. For each SDG, we have chosen the following indicators, which provide an indication whether the target group has been reached:

  • Average outstanding loan amount per sub-borrower
  • Share of lending in rural areas

  • Gender distribution at sub-borrower level (at portfolio level and per capita share)
  • Gender distribution of employees at microfinance institution level

  • Number of sub-borrowers reached
  • Type of activities supported by sector
  • Volume of outstanding loans

  • Share of loan receivables acquired in low-income countries

By collecting further indicators directly from the microfinance institutions, which are refinanced through the IIV Mikrofinanzfonds, we would like to evaluate in the future as to whether there has been a change in the skills and life situation of the target group. This can be done, for example, based on the change in business income, the share of borrowers from low-income households, or the share of young borrowers. Currently, the majority of refinanced financial institutions are not yet able to provide this data.

PAI Reporting

As an impact investor and portfolio manager, we always strive to ensure that the investments of the funds we manage are not only financially sustainable, but also contribute to solving socio-economic problems. The focus of the funds we manage is on microfinance and SME financing in developing and emerging countries, i.e. the refinancing of non-EU financial institutions in the realm of financial inclusion.

In connection with the funds we manage, we take into account the 14 mandatory PAIs and two optional PAIs in the areas of environment and the combat against corruption and bribery. Further information can be found here.