At responsAbility, we differentiate between two key aspects of our portfolio companies: ‘Impact’ and ‘ESG’. ‘Impact’ refers to the activities or services provided by our investees that create positive outcomes such as access to financial services for low-income populations. ‘ESG’, which stands for Environmental, Social & Governance, is an assessment, a process to also avoid negative effects. By applying these two approaches (Impact and ESG), responsAbility applies a holistic approach to ensure that all our investments generate both positive impact and do no harm.

ESG: Fully embedded into our investments

For some investors, ESG is just a simple exclusion exercise (i.e. not investing in certain harmful sectors such as fossil fuels or tobacco). However, at responsAbility, ESG goes far beyond this: It is a systematic process that ensures that investments don’t have negative issues associated with them. Our ESG criteria are then fully embedded in our investment process, and our ESG due diligence allows us to identify potential negative practices or issues that might contradict universal human rights principles of a potential portfolio company (i.e. a microfinance institution that has no formal complaint process to enable employees to raise concerns). By identifying these issues and then engaging with the company to address them, responsAbility ensures that all its investments only have positive consequences.

ESG in the financial sector: Outperforming conventional funds also during the Covid-19 lock-down

The integration of a proper ESG framework has been proven to be beneficial, not only at responsAbility but also in the wider financial sector. Research shows that funds with a proper ESG framework tend to outperform non-ESG funds – both in the short-term and the long-term. Companies that are performing well on ESG factors tend to be more resilient, avoid financial penalties and legal actions, and have a better reputation. These are some of the many ESG factors that contribute positively to the growth of the company and its financial results.

Even during the global coronavirus lockdown in 2020, ESG funds have shown statistically better performance compared to non-ESG focused funds (see Figure 1).

This trend can be explained by the fact that companies with good labour practices are protecting their workforce during the challenging Covid-19 crisis, and are therefore more capable ensuring additional support from its customers and the broader community around it.

ESG process and performance at responsAbility

Our ESG framework is aligned with the Performance Standards developed by the International Finance Corporation (IFC), the private sector arm of the World Bank Group. The framework consists of a set of indicators to screen potential investments for labour practices, environmental risks, community impacts, client protection, governance, etc.

After screening and due diligence, we either:

• Engage with the portfolio companies and help them to improve over time. In these cases, we develop an ESG Action Plan, which we regularly monitor, to ensure that the portfolio companies improve. For instance, if we invest in a company that has no formal Human Resources policies, we will help them to develop and apply HR policies to protect its workforce.
• If we identify more severe aspects, e.g. child labour, we will immediately stop the investment process and divest from such issues.

Because of our extensive work on helping our portfolio companies to improve on ESG related aspects, 70% of all investments within the responsAbility portfolio are considered low ESG risk according to IFC’s risk categorization definition. The remaining 30% is classified as ‘medium’ ESG risk.

Managing environmental and social risks

An example of a company where responsAbility’s ESG framework has had a substantial positive impact is Pan Asia Banking Corporation in Sri Lanka. Within the last year, the bank has significantly improved from an unsatisfactory ESG performance in 2018 to a current satisfactory performance. With our support, the bank has been able to develop and implement a fully-fledged environmental and social management system (ESMS). Their ESMS helps them to manage and mitigate environmental and social issues that might occur as a part of their investments as well as within their own operations.

At a fund level, the ESG performance for one of our climate finance funds has, during the last year, improved by more than 40% for financial institutions. As these companies are taking into account our recommendations, feedback, help and requests, we are positively contributing to the improvement of their ESG processes.

There will always be space for further improvement, and responsAbility will therefore continuously strengthening its ESG framework. This will be done by expanding the list of indicators that we screen our investees against as well as aligning with the upcoming EU Action Plan on Sustainable Finance, among other initiatives.

Technical Assistance (TA) at responsAbility

responsAbility strategically combines the provision of finance with advisory support to leverage development impacts. Thanks to the thorough understanding of the business context and models of the companies for which responsAbility provides access to finance, a team of professional project managers structures tailored advisory support (technical assistance – TA). TA projects aim to enhance the investment readiness of companies, improve their institutional capacities to manage operational risks and increase their development impact. These projects are typically carried out by the best qualified subject matter experts who are mandated by responsAbility and funded with capital from grants provided by public and private donors.

responsAbility values the trust and support provided by donors in creating broader and deeper levels of impact. Projects benefit company staff, clients, local communities and the environment. Some projects also aim to raise the awareness and equip companies to better manage environmental and social risks related to their business operations to ensure that the surrounding community or the local biodiversity is not negatively impacted.

How TA Helps to Save the Climate

CIFI (Corporación Interamericana para el Financiamiento de Infraestructura), a Panama-based commercial bank, has been a long-time partner of responsAbility. Convinced that climate finance is good business, CIFI has been a strong advocate of energy efficiency and renewable energy financing. As part of several climate finance initiatives, CIFI has recently engaged in a strategy to decarbonize its portfolio in line with a 1.5°climate scenario. With support from responsAbility, a TA project was launched and through a competitive process, South Pole was mandated to analyze CIFI’s exposure to carbon-intensive activities and climate-related risks. As a result of the project, science-based targets have been set to support CIFI in adapting its portfolio allocation strategy and breach the gap between CIFI’s current exposure and a 1.5° scenario. In a next phase, the project’s aim is to develop key indicators, a roadmap and a communication plan to sustain CIFI’s decarbonization efforts on the long run.

TA: Saving the Sustainable Food Supply Chain in a Crisis

In Latin America, where responsAbility provides financing to agricultural cooperatives, Peru has been hit particularly hard by the Covid-19 pandemic. Specifically, farmers and workers upstream in the agricultural supply chains, who play a pivotal role in producing most of the food supply, are particularly vulnerable. Because they often cannot rely on financial safety nets, the livelihoods of these communities, mostly represented by women, rural, aging and migrant workers, depend on established linkages with cooperatives involved in the production and post-harvesting/processing segments of the food value chains. Considering the unprecedented nature and magnitude of the Covid-19 crisis, an emergency TA program was launched to support cooperatives to cope with the operational struggles caused by the effects of the crisis, safeguard producers and workers' income and health, while ensuring business continuation and early recovery of businesses. Related interventions are expected to benefit around 15’000 smallholder farmers and their communities.