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) 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.
(ii) 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.
(iii) 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.
Key potential sustainability risks are monitored, via appropriate due diligence conducted during the investment process, through dedicated due-diligence tools and the ALINUS (an abridged version of Cerise + SPTF’s SPI social performance audit tool), and presented to the Investment Committee.
The due diligence process includes an institutional and contextual analysis of the MFI, drawing upon qualitative as well as quantitative criteria. This analysis will look into the institutional structure of the MFI (history, 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 possibly to implement mitigation measures are 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:
|Environmental risk||The Fund supports MFIs with a low consideration of the environment in their business model which could lead to environmental degradation||Medium||• The Fund works closely with its Investment Adviser, ADA, to conduct due diligence. During this time, the MFI’s business activities are carefully monitored to ensure that financing is not provided which could contribute to material adverse environmental impact
• The Fund adopts an exclusion list prohibiting investments which are likely to have a substantial negative environmental impact
|Social Risk ||The Fund financially supports MFIs which may have a low consideration of their social impact||Low||• Investments are specifically oriented towards MFIs with a strong social impact (the only exception is in the context of liquidity management). Investment provided by the Fund is for the sole purpose of supporting microfinance portfolios (where the potential for generating positive social impact is very high)
• The Fund works closely with ADA to conduct due diligence. During this time, analysts ensure that MFIs adopt practices in keeping with their social vision and mission. Particular attention is paid to the principle of Fair Treatment of Customers. Where possible branch offices and microfinance clients will be visited to ensure that Fair Treatment is upheld in all MFI branches.
• The ALINUS is run at the time of investment, allowing the Fund to benchmark each MFI’s performance in core areas reflecting the formalisation of social performance
• The Fund adopts an exclusion list prohibiting investments which are likely to have a substantial negative social impact
• Covenants can be placed on companies requiring certain minimum governance, financial and/or social standards to be met
• Monitoring of core social performance metrics from MFIs is received and analysed on a quarterly basis
|Social and Employee matters||Fund invests in MFIs which may have low governance standardised and a lack of formalisation of HR issues||Medium||• Fund has an exclusion list which has strict labour related requirements
• All MFIs are expected to pay at least the relevant local minimum wage to all staff. Staff turnover and compensation are monitored during due diligence
• All MFIs are expected to comply with their national employment law
|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 MFIs are expected to maintain a strong social vision and mission which enshrines the importance of human rights
• 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 PPI and ALINUS
|Governance||Fund works with MFIs which may have low levels of formalisation and weak governance||Medium||• Governance structures are systematically analysed during due diligence, including due diligence 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
|Bribery and corruption||Underlying businesses engage in corrupt practices with consequent legal and reputational issues||Low||• Bribery and corruption regulation is in place in Luxembourg and MFIs are required to respect this law
• Levels of corruption are analysed beforehand. They are taken into consideration in the investment decision-making process
• Financing provided to institutions is to be exclusively used for the financing of microfinance activities
• Checks are conducted on financial statements on a regular basis
• Name checks are conducted on key individuals at time of disbursement
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 be collected, monitored, analysed and reported on an annual basis and presented in the Sub-Fund annual report.