Objectives
The objective of the Sub-Fund is to make sustainable investments (or “dark green”) within the meaning of article 9 of Regulation (EU) 2019/2088 of the European Parliament and of the Council of 27 November 2019 on sustainability-related disclosures in the financial services sector (the “SFD Regulation”) by contributing to the financial inclusion of women by improving their access to financial services. The Sub-Fund invests in mature financial institutions (“FIs”) so that these intermediaries improve the provision of services to female entrepreneurs in countries who are member of the Central American Integration System (“SICA”), specifically Guatemala, El Salvador, Honduras, Belize, Nicaragua, Costa Rica, Panama, and the Dominican Republic. In pursuance of its objectives,
The Sub-Fund invests principally in debt instruments issued by FIs. The FEF’s investment strategy is aligned to the microfinance and financial inclusion strategies to provide access to quality financial services for excluded individuals and small and medium sized companies in order to foster social and economic development.
The Sub-Fund has two principal objectives, social and financial. Specifically, increase access to financial services, especially to enhance access to credit for women-led businesses in the SICA region, as well as generate sufficient income to sustain its own operations and give its Shareholders a financial return.
The Sub-Fund will strive to provide tailor-made and innovative solutions to FIs, coupling its investments with technical support from an associated technical assistance programme. The Sub-Fund aims to create permanent changes in the underwriting practices by which FIs evaluate the risk of small and medium-size enterprises led by women. The Sub-Fund aims to facilitate positive demonstration effects within financed FIs and from communicating the impact metrics collected by FEF from financed FIs.
The Sub-Fund aims to increase the number and volume of loans and the amount of credit that the financed FIs offer to women-led Small and Medium Enterprises (“SMEs”), and that despite such increase, the quality of the loan portfolio of those FIs remain the same (or improve). FEF focuses on niche activities where its participation might help achieve the desired demonstration effect.
Although the definition of SMEs may differ in different Target Countries and among different FIs, the Sub-Fund typically considers enterprises having between 11 and 50 employees as small and between 51 and 200 employees as medium in size. Women led SMEs are those where the leader or principal decision maker is a woman or where the majority of the ownership is held by women.
The Sub-Fund is not pursuing an environmental objective as defined in the EU Taxonomy , but does take measures (including the adoption of an exclusion list) to ensure no significant harm is caused in this regard.
No index has been designated since FEF’s investment model is not comparable to any existing index.
The Sub-Fund’s investment strategy is not aligned to any reference benchmark.
Key Metrics
The Sub-Fund’s investment focus is on FIs with an interest in having a positive social impact and a proven business model. FIs are expected to have reached financial sustainability and have a strong social vision and mission focused on positive impact for the ultimate clients. The Sub-Fund focuses on the financial sustainability of the credit activity and solvency of the FI. The commitment of the FI, its board of directors, shareholders and other stakeholders is important to ensure alignment with the Sub-Fund’s vision.
The Sub-Fund has established a series of key performance indicators at the level of the FIs and the level of the end client intended as the SMEs.
The key performance indicators used to measure the attainment of the sustainable investment objective at the FI are grouped in three main areas
Impact indicators at the level of the FI – Client outreach
- Percentage of women clients, including SMEs led by women.
- Percentage of portfolio disbursed to women during the period
- Average amount disbursed to women
- Percentage of loans to women with a delay of cash-flows more than 30 days (PAR 30)
Impact indicators at the level of the FI – Organization and culture
- Percentage of women in the workforce
- Percentage of women senior managers
- Percentage of women on the Board / Board gender diversity
- Gender Wage Equity / Unadjusted gender pay gap
- Non-discrimination policy
- Women career progression promotion / activities
Impact indicators at the level of women-led businesses
- No. of loans disbursed under the FEF
- Amount disbursed under the FEF
- Business founded by a woman
- Percentage of women in the workforce of the SME
- Percentage of women as senior managers of the SME
The Sub-Fund strives to deliver a positive impact and expects portfolio companies’ commitment and high environmental, social and governance standards. At the best of its capacity, the Sub-Fund will track its contribution to the following UN Sustainable Development Goals (SDGs): N° 1 – No Poverty, goal N°5 – Gender equality, goal N° 8 – Decent work and economic growth, goal N° 10 – Reduced inequality, and goal N° 17 – Partnership for the goals.
Sustainability Risk and Adverse Impacts
The Sub-Fund’s investments may be subject to Sustainability Risks. Sustainability Risks are environmental, social or governance events or conditions that, if they occur, could cause an actual or a potential material negative impact on the value of the Sub-Fund’s investments.
Specific Sustainability Risk can vary for each product and asset class. Such risks are further described hereunder:
(i) Social Risk: The risk posed by the exposure to issuers that may potentially be negatively affected by social factors such as poor labour standards, human rights violations, damage to public health, data privacy breaches, or increased inequalities.
(ii) Governance Risk: The risk posed by the exposure to issuers that may potentially be negatively affected by weak governance structures. For companies, governance risk may result from malfunctioning boards, inadequate remuneration structures, abuses of minority shareholders or bondholders rights, deficient controls, aggressive tax planning and accounting practices, or lack of business ethics. For countries, governance risk may include governmental instability, bribery and corruption, privacy breaches and lack of judicial independence.
(iii) Environmental Risk: The risk posed by the exposure to issuers that may potentially be (a) causing or affected by environmental degradation and/or depletion of natural resources or (b) negatively affected by the physical impacts of climate change. Environmental risks may result from air pollution, water pollution, waste generation, depletion of freshwater and marine resources, loss of biodiversity or damages to ecosystems, extreme weather events such as storms, floods, droughts, fires or heatwaves, changing rainfall patterns, rising sea levels and ocean acidification.
Key potential sustainability risks are monitored via appropriate due diligence conducted during the investment process, though, among others, the Alinus, an assessment tool for impact-driven organisations that promotes a common language for measuring impact performance and implementing the Universal Standards for Social and Environmental Performance Management (SEPM). The due diligence results using the Alinus tool are submitted to the Investment Committee for revision and approval.
The due diligence process includes an institutional and contextual analysis of the FI, drawing upon qualitative and quantitative criteria. This analysis will look into the institutional structure of the FI (background, governance, legal structure, human resources, etc.), it will assess its social profile (social mission, targeted clients, product offering, quality of established links with customers, etc.), and it will examine its financial robustness (cost coverage, capital structure, dependency on donors, portfolio quality, credit methodology, reserves and provisions, etc.).
During the investment process of the Sub-Fund, key potential Sustainability Risks are categorised on the basis of the level of their potential adverse social and environmental impacts (i.e. significant, limited or minimal impact) and reasons, taking into account the possibility of implementing mitigation measures taken into account. Investments will be approved and made by the Sub-Fund after due consideration of the level of the relevant Sustainability Risks and of mitigating factors that have been put in place as follows:
| Risk | Details | Level | Mitigants |
|---|---|---|---|
| Governance | The Sub-Fund works with FIs, which may have lower levels of formalisation and weaker governance | Medium | • Governance structures are systematically analysed during due diligence, including a review on directors and shareholders • Covenants can be placed on companies requiring certain minimum governance standards to be met • Local tax law is expected to be respected |
| Environmental risk | The Sub- Fund supports FIs with a low consideration of the environment in their business model, which could lead to environmental degradation | Medium | • During the due diligence the FI business activities are carefully assessed and monitored to ensure that financing is not provided which could contribute to material adverse environmental impact • The Sub-Fund adopts an exclusion list prohibiting investments which are likely to have a substantial negative environmental impact |
| Social and Employee matters | The Sub-Fund invests in FIs which may have lower governance standards and a lack of formalisation of HR issues | Medium | • The Sub-Fund has an exclusion list has strict labour-related requirements • All FIs are expected to pay at least the relevant local minimum wage to all staff. Staff turnover and compensation are monitored during due diligence • All FIs are expected to comply with their national employment law • All FIs are expected to have minimum standards of non-discrimination policies and processes in place. |
| Respect for Human Rights | Businesses do not give adequate regards to Human Rights in their practices | Low | • Human rights are enshrined in local laws, which investee companies are required to respect • Investee FIs are expected to maintain a strong social vision and mission which enshrines the importance of human rights. More specifically, FIs are expected to not engage or provide financing to activities that might involve harmful or exploitative forms of forced labour/ harmful child labour, engage in projects which might limit people’s individual rights and freedoms or violating their rights, activities that involve political or religious content or require resettlement or forced eviction of people. •During due diligence, and through continued monitoring and covenants, the Fund places a high emphasis on initiatives which support the rights and protection of those living in poverty, notably the Client Protection Pathway and the implementation of high standards in terms of Social Performance as prescribed by the SPI Online ALINUS tool |
| Bribery and corruption | Underlying businesses engage in corrupt practices with consequent legal and reputational issues | Low | • Levels of corruption are analysed beforehand and are taken into consideration in the investment decision-making process • Financing provided to institutions is to be exclusively used for the financing of the Sub-Fund related activities • Checks are conducted on financial statements on a regular basis • Name checks are conducted on key individuals at the time of disbursement and on-going monitoring • Sanctions and disputes in court with local authorities and/or employees and clients are assessed and monitored. |
Although certain key risk factors, notably governance, may have a substantial effect on individual assets, the Sub-Fund investment restrictions, implying a diversification of the portfolio, limit the potential impact on returns faced by the portfolio as a whole.
Sustainability risks are therefore not anticipated to have a material negative impact on the financial returns of the Sub-Fund.
The Sub-Fund opted to collect and report data for the mandatory Principal Adverse Impact (PAI) indicators specified in Table 1 of Annex I of final draft RTS on a best-effort basis.
In relation to the mandatory Principal Adverse Impacts (PAIs) that apply to the Sub-Fund, the mandatory collection is performed on a best-efforts basis on the following indicators.
Certain risk factors would eliminate the possibility of investment; in other cases the significance and relevance of risk are considered and identified. In most circumstances, the Sub-Fund will not go ahead with investments where both the significance and relevance of a non-compliance risk is high unless steps can be taken to mitigate it.
PAIs are collected, monitored, analysed and reported on an annual basis and presented in the Sub-Fund annual report.
Policies
Engagement
The majority of assets are in asset classes which do not have voting rights. Given this, an engagement policy has not been developed for this sub-fund; however, the Fund is an active creditor where possible, and does encourage a commitment to social performance through Social Performance covenants and reporting requirements.
Business Codes
Investing for Development SICAV is a member of various groups and initiatives which support and uphold global best practice with regards to ESG. Further information can be found here.t
The Fund is a signatory of the National Business and Human Rights Pact since 2023.
Remuneration
The remuneration policy of the Sub-Fund is provided and details that social targets are taken into account in the variable compensation of key staff. The remuneration policy is available here.
These disclosures reflect current practices within the sub-fund. Should there be any evolution in these practices, this will be reflected and explained on the website.