Objective of the IIV Mikrofinanzfonds
The aim of the fund’s investment strategy is primarily to make a sustainable investment, i.e. an investment in economic activities that help achieve a social objective. In the field of microfinance, these are, in particular, investments that help combat inequalities, promote social integration or benefit economically or socially disadvantaged groups of the population. When making the investment decision, it is important to ensure the investments do not significantly impede any sustainability targets, and that the businesses being invested in apply sound management practices.
This aim is in keeping with the fund’s investment strategy in that it both grants poorer sections of the population in emerging markets access to the finance and credit market in accordance with the principle of risk-spreading, and also facilitates appropriate appreciation in the fund currency for investors through investments in diversified assets, particularly in the field of microfinance. Of central importance here is the fact that the sustainable investment supports specific United Nations goals for sustainable development, SDGs (particularly SDG End poverty, SDG 5 Achieve gender equality, SDG 8 Sustained economic growth and decent work for all and SDG 10 Reduce inequality), without impeding the others.
The fund investments can involve sustainability risks at a country or at an investment level.
Sustainability risks at a country level describe the risk of negative influences caused by ‘ESG’ factors, i.e. environmental, social and governance factors. The following risks may especially arise and negatively impact investments, resulting in risks to revenue:
- Environmental risks, such as drought, extreme weather and epidemics
- Social risks, such as social upheaval, hunger and corruption
- Governance risks, such as regulation, legal uncertainty, the health system and political stability
Sustainability risks at an investment level denote the possibility of the investment having a negative influence on environmental or social aspects, conflicting with the targets established by the IIV Mikrofinanzfonds. In addition, sustainability risks can arise at the level of the institution, which have a negative impact on the investment made. These include, for example, a lack of strategic development of the business model, as well as fraud and corruption. Both types of risks are incorporated in the investment decision based on quantitative assessment methods.
The strategy and processes existing at our company to factor in sustainability risks are, among other things integrated into our employees’ performance appraisals, and thus considerably influence future salary progression. In this respect, the remuneration policy is in line with our strategies to factor in sustainability risks.
Adverse impacts of investment decisions on sustainability factors
The IIV Mikrofinanzfonds’ investments are chosen as part of an extensive, three-stage assessment process. Firstly, certain sectors, activities or goods are excluded as investments, including at the level of the end borrowers. The investments also need to comply with specific standards (standard-based screening). Secondly, the investments are chosen and analysed using operational, financial and sustainable criteria (KPIs), which must be fulfilled. These points are checked by the responsible investment managers as part of due diligence. To evaluate the investment’s sustainability performance, the fund management uses an ESG analysis tool, which provides information on social and environmental performance, as well as the investment’s governance structure. This analysis also identifies and assesses sustainability criteria. Thirdly, the investments are verified in terms of the defined positive criteria. If the requirements have been met, the investment can be made.
Exclusion criteria of the IIV Mikrofinanzfonds
The investment policy of the IIV Mikrofinanzfonds provides for certain sectors and activities to be excluded from investment. This is the industry standard in the field of sustainable investments. The following sectors are covered by the exclusion criteria of the IIV Mikrofinanzfonds:1
- Weapons trade and production
- Operation of nuclear facilities or manufacture of components
- Use of, trade in, manufacture or storage of hazardous material such as chlorine and agrochemicals (biocides) as well as PCB or CFC products and other ozone-depleting substances
- Unsustainable management of forests / trade in tropical timber / deforestation for land reclamation for farming or housing construction
- Gambling (except for non-profit lotteries), pornography, prostitution, drug production and storage
- Sectors with a negative impact on environment, people and society (e.g. on indigenous people and communities and their habitat – 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
- Trade in wild animals or wild animal products within the meaning of CITES2 regulation
- Unsustainable fishing / use of trawls
Norm-based screening for investments of the IIV Mikrofinanzfonds
Furthermore, the investment policy of the IIV Mikrofinanzfonds provides for environmental and social standards (norm-based screening) to be applied to investments in addition to the exclusion criteria. The investments of the IIV Mikrofinanzfonds are unsecuritised loans to microfinance institutions (MFIs). Environmental and social standards include a written commitment by the selected MFIs to the International Labour Organisation (ILO) Core Labour Standards and the Client Protection Pathway. If we work with other investment companies in syndication, they have to be signatories to the United Nations Principles for Reponsible Investment.
1 Furthermore, the following exclusion criteria are analysed, which, however, are not applicable to the field of microfinance: Trade in or storage of production of spirits / tobacco products, Extraction, production and trading of fossil fuels, Cross-border trade in or transport of waste and waste products, Use and trade in genetically modified organisms.
2 Convention on International Trade in Endangered Species of Wild Fauna and Flora