As from 10 March 2021, the European Regulation 2019/2088, called SFDR (sustainable financial investments disclosure regulation) in short, has been in force in its entirety (as from January 2023 the SFDR level 2 disclosure will be in force too). It defines the obligation of ESG reporting from 2022 and it aims to introduce a shared definition of the term «sustainability» for financial investments and to have a series of transparency obligations towards the operators (i.e., financial market participants) who manage them.
The objective of the Regulation is to expand and standardize the information provided to investors on financial products that are defined as ESG, or those investment products that take into account environmental, social and governance aspects and that are measurable. With this information, it should be easier for investors to compare different investment products and understand their level of sustainability. The measurability of the impact is in fact the distinctive element between investments guided by ESG criteria and the more generic set called «sustainable investments», of which ESGs are part, but which do not always allow to measure the impact (while the economic return is always measurable).
The ESG criteria make possible to concretely measure the social and environmental effects of these investments, in addition to the economic effects linked to business results and allow the creation of real rankings that put in the «ranking» the performance of companies that aim to obtain results in terms environmental, social and governance.
On closer inspection, the terms ESG investing, Impact and socially responsible investing are often used interchangeably.
ESG investing examines and measures the environmental, social and governance practices of the business and investments that can have an impact on the performance of the investment itself, together with more traditional financial measures. So the objective remains the financial performance of the investment but is measured on two dimensions, the traditional technical one, the financial returns, and that of ESG practices.
The socially responsible investing implies the active removal or choice of investments based on specific ethical guidelines, thus eliminating specific investments such as alcohol, tobacco, gambling etc. For clients engaged in socially responsible investing, making a profit is still important, but it needs to be balanced against principles. The goal is to generate returns without violating one’s social conscience.
Impact investing aims at both creating financial return and measurable environmental or social impact. In this type of investment, assessable positive outcome of the investment is the utmost priority compared to financial gains, such as in the case of non-profits.
Therefore, the regulation also comes into play to clarify and aim to protecting the interests of the investors by requiring intermediaries to: assess the impact of Sustainability Risks on products sold and / or recommended and allow investors to better understand the level of sustainability of their investments and to know the policies on Sustainability Risks adopted.
There is no doubt that ESG and sustainability issues have now become a central topic so much that a specific regulation has to be created. But somebody could wonder if this need is due to an investor’s real desire/need to follow ESG logic for his investments or if it isn’t better due to a strategy of the financial market to renew its offer and at the same time to rebuild its reputation since in the past it has often been accused of looking only at economic results.
I believe that if we want to hypothesize an underlying reason, we must take into account many elements, including history, both recent and older, and the evolution of the investor:
- The focuses of social responsibility and impact investing are not new and there are many examples in the past.
- The major financial crises, especially the last one in 2009, required the entire financial world to reflect and revise its principles
- The pandemic and the resulting economic crisis has generated in investors the awareness that their money can have an important impact on society, the environment, and on other persons
- Finally, the investors themselves: new generations of investors are approaching the financial markets. They are people with different values and experiences from their predecessors, who grew up with a greater awareness of the impact that their actions can have. There is no longer only personal profit, but personal and collective profit.
To give a dimension of what we are talking about, according to the 2020 survey by the United States Forum for Sustainable and Responsible Investing, in the United States socially responsible investing and one of its subsets, impact investing, accounted for more than 1 dollar for every 3 dollars managed by professionals. This equates to over $ 17 trillion in assets under management per year, a 42% increase over 2018.
Ultimately I do not think it is a question of renewal of the financial market offer but a real market (investors) demand.
This conviction led me to the decision to voluntarily adhere to some of the ESG transparency rules and to have our own ESG report. We are not obliged by SFDR to draw up and provide investors with a ESG report. For us it is a choice.
Precisely because of the elements I have previously described, that is the investor’s awareness and evolution, we have decided to meet the investor’s need to have a vision as accurate and transparent as possible of the impact that his investments have, to regardless of absence of legal obligations to do so. On top of that, social impact has been in our DNA since the foundation of Mikro Kapital.
In addition, our business model allows us to collect the information necessary for ESG reporting in a timely manner. In fact, the two Luxembourg special purpose vehicles (SPVs), named Mikro Fund and Alternative, invest in their portfolio of Micro Finance Institutions that provide loans directly to small, medium and micro enterprises in the emerging areas of the Silk Road and micro leasing and sharing economy companies in the same areas. In fact, intermediaries and the corresponding fees are thus eliminated. This model allows a timely monitoring and control process on the investment.
The local presence of the MFIs in the portfolio and their operational offices allows constant support to the end-borrower and direct communication. Which is also reflected in the collection of the information necessary for the compilation of the ESG report referred to above.
All this as a guarantee and for the benefit not only of the beneficiary of the loan disbursed but also of the investor. (Mikro Kapital/mc)