Corporate social responsibility and treasury haven’t traditionally crossed paths too often, but the two are now coming together – with global socially responsible assets increasing by over 25% in the period 2014 to 2016.
Banking giants such as Deutsche Bank, Citi and Credit Suisse are increasingly opting for socially responsible investments in their asset portfolios.
The rise stems from a growing range of non-profit businesses offering financial products, such as health insurance and business loans, to emerging markets.
Companies are partnering with socially responsible investment firms to boost corporate social responsibility and make returns but also to launch new financial products to large networks of low-income clients.
In 2016 there were $22.89 trillion of assets professionally managed under responsible investment strategies – an increase of 25% in just two years, the biannual Global Sustainable Investment Review 2016 reports.
Non-profit microfinance specialist FINCA International – dubbed “the World Bank for the Poor” – is one of the companies facilitating this growth by offering corporations financial products that enable investment in innovative microfinance and social enterprise in some of the world’s poorest countries.
The African branch of FINCA currently provides financial services to more than 295,000 borrowers and nearly 417,000 savers living in the Democratic Republic of Congo, Malawi, Tanzania, Uganda and Zambia.
Despite working in some of the world’s poorest countries, FINCA’s return on equity (RoE) has averaged at 10% over last five years and it has had no default over its 25-year track record.
Deutsche Bank has worked with FINCA as an investor in local businesses in Azerbaijan for several years.
The German bank previously raised money for a subordinated debt deal with a seven-year note, of which they had six years of good returns, says Rupert Scofield, FINCA’s president and co-founder, speaking to GTNews.
Microfinance is an area in which FINCA has previously made strong returns for investors.
“We had decades where everyone made a lot of money, especially lenders, lending to us at 10% and we never defaulted in all that time,” he says.
However, Scofield admits there can be sudden geopolitical shifts with the potential to cause large losses. “Sometimes problems arise that are bigger than anyone can deal with and you have to take some hits,” he adds.
Due to the unpredictable nature of emerging markets geopolitical situations, FINCA has a strong focus on geographically diversifying its risk portfolio. “We work in 20 different markets. Some are doing well and some are not doing well, but on average, unless there is a huge calamity, you can balance it out,” says Scofield.
FINCA also employs financial tools such as collateralised debt obligations (CDO) which issue different layers, or tranches, for different risk characteristics.
Social enterprise investment
FINCA has diversified away from simply providing microfinance, which Scofield says, “is great but is not meeting peoples’ other needs for things like healthcare, energy and sanitation”.
The company more recently launched several social enterprises, such as BrightLife project which in Uganda sells solar powered lamps that double up as phone chargers and efficient cook stoves, replacing the widely used kerosene lamps which cause death by smoke inhalation and accidental fires.
FINCA uses its local regional knowledge to distribute the lamps and helps families to finance them through microfinance.
Consequently, clients have reported improved respiratory and eye health, better lighting that allows children to study at night, the ability to socialise at night in safety and substantial savings on lighting and phone charging.
“I have concluded that we now have the ability to truly get people out of poverty, the challenge is simply reaching them now,” says Scofield.
A global corporate movement
In all regions except Europe (which tightened its definition of sustainable investing) sustainable investing’s market share has grown since 2014, the Global Sustainable Investment Review found.
In relative terms, responsible investment stood at 26% of all professionally managed assets globally in 2016, according to the investment review.
From 2014 to 2016, Japan had the fastest growing socially responsible investment, due to greater reporting and sustainable investing activity by Japanese institutional asset owners. This is followed by Australia and New Zealand and then Canada.
In terms of assets, the largest three regions were Europe, the US and Canada, respectively.
Clearly, sustainable investing constitutes a major force across global financial markets.
New products, new markets
Corporates are using impact investment partnerships to launch new products, as well as boost corporate social responsibility and increase profit.
Credit Suisse and FINCA partnered to develop the ‘local currency microfinance note’, a newly launched investment product in microfinance, in which the bank is a strategic investor.
The note provides social investors with the double bottom line, a potential financial return with a social impact
The note offers exposure to a portfolio of loans in local currency to eight microfinance institutions (MFIs) affiliated with FINCA and based in emerging and developing countries: Armenia, Azerbaijan, Georgia, Kyrgyzstan, Mexico, Russia, Tanzania and Uganda.
It is a closed-end structure with two-year term and no secondary market. The expected yield per year in local currency is 10%1 (net of fees) and is settled in USD with no currency hedging.
Credit Suisse chose to work with FINCA as less than 30% of its portfolio was considered at risk at 1.3%. The bank also cited FINCA’s lack of default over its 25-year track record as a reason for their partnership.
Image source: Global Sustainable Investment Review 2016
China's bad debt markets are such a hot commodity that distressed assets are being sold on Alibaba’s Taobao ecommerce platform alongside household products. But the IMF warns the situation is unsustainable.
Many banks around the world, large and small, continue to experience major security failures. Biometric systems such as pay-by-selfie, iris scanners and vein pattern authentication can help.
Despite all the automation and improvements that digital banking has the potential to achieve, customers and their needs still form the very core of the banking sector.
Banks might feel justified in victim blaming when fraud occurs, but it does little for customer confidence.