1. Assess E&S in SME finance institutions
Webinar, Social investors
April 23° 2018
Lucia Spaggiari, Business Development Director, MicroFinanza Rating

2. Scope

3. STATUS. E&S in SME financing largely undermanaged:
Upscaling MFIs (small enterprises) rarely have an ESMS in place.
Downscaling banks (medium enterprises) often have an ESMS in place, sometimes on paper, sometimes in use. Usually SMEs are classified as low risk, without further assessment.
E&S regulation in SMEs: good and necessary starting point but not enforced enough in majority of emerging and developing countries.
Whether and ESMS exists depends often on previous collaboration with DFIs.
RATIONALE. E&S management needed also for SMEs to factor in the cumulative risks and impacts of multiple small / medium enterprises.

4. Risks but also opportunities
Objective
Risks but also opportunities
Promote Environmental and Social Management Systems (ESMS) commensurate to SMEs, that support incremental improvement of SMEs E&S practices.
Not about exclusion
Not about full compliance
ESMS = Environmental and Social Management System

5. Principle 1: Modular
Challenge: 10 emloyees enterprise different from 250 employees enterprise
Modularity allows having a common ESMS framework applicable to FSPs financing very different types of SMEs. SAME. ESMS framework, logic and process. DIFFERENT. Definitions, depth of analysis.
So the ESMS framework for SMEs is applicable both to Small enterprise FSP and medium enterprises FSP. Then, for medium enterprises FSP, other tools are available to go more in depth -better designed for this purpose- (e.g. CDC Toolkit on ESG for Fund Managers)
E.g. 2 A classification of portfolio by high, medium and low E&S risks will always be useful. However, the high risk category of an FSP financing medium enterprises will be different from the definition of the high risk category of an FSP financing small enterprises.
E.g. E&S checklists will always be integrated in loan appraisals. But: the high risks checklist of an FSP financing small enterprises will be very basic compared to the one of an FSP financing medium enterprises

6. Principle 2: Commensurate
ESMS should be commensurate to:
E&S risks,
type of financing
leverage the FI has in obtaining mitigation measures from borrowers
e.g. leasing companies have little leverage with their clients.
E&S reduces the business risks (operational, reputational, regulatory) and strengthen performance (e.g. cost savings from energy and resource use efficiency).
Opportunity.
Use the ESMS to turn gaps into opportunities and prioritize measures with a positive impact on E&S, business performance and business capacity to meet loan repayments.

7. SME finance institution: manage E&S (ESMS)
Determine ESMS approach (individual/cluster)
1. Define E&S policy
2. Classify loans by E&S risk category
3. Assess the SMEs risks and opportunities
4. Measures to improve SMEs E&S
Monitor SME E&S progress
Report, analyze E&S, review ESMS
E&S management can be conducted:
at the level of individual loans -more accurate;
at the level of clusters of loans -less accurate but acceptable for low and medium risk (high risks* should always be assessed individually).
*e.g. medium enterprises, high risk sectors.

8. Guidance for SME Finance Institutions
Guidance on how to set up an ESMS (selection of tools):
FMO MFI and SME sustainability guidance e-learning tool (more suitable for small enterprises);
CDC toolkit to categorize and manage E&S risk and opportunities (more suitable for medium enterprises).
-IFC: firstforsustainability.org;
-Standards: National standards, IFC Performance Standards, ILO Conventions, EBRD, UN Global Compact, The Global Reporting Initiative, the ILO, GIIR, equator principles, OECD guidelines.

9. FMO sectoral matrix … …

10. CDC sectoral matrix

11. Investor: assess SME finance institutions’ E&S
1. Identify SME
2. Identify SME finance institutions
3. Classify SME finance institutions by E&S category
4. Assess the Sustainable performance of SME finance institutions
5. Promote the improvement of the ESMS of SME finance institutions
6. Monitor the improvement of SME finance institutions ESMS

12. 1. Identify SME
Common definition of SMEs for all investments in all countries
National definition of SME for all investments in the same country;
Adopt the definition of SME used by each investee;
Adopt the definition provided by the fund investor
a. : either an international standard one (e.g. IFC, EU) or a internally developed one (e.g. standard one, adjusted for the Purchasing Power Parity);
c. which can be the national definition or a different one defined by the FSP

13. 2. Identify SME finance institutions
Adopt a common definition of SME finance institution (e.g.: >50% outstanding portfolio in SMEs)*
Adopt the way investees define themselves
Option: in addition to the above, define MFI with a SME component (e.g. >20%-30% outstanding portfolio in SMEs).

14. Feedback please Option A Option B For SME finance institution
Sustainable performance of SME finance institutions
123 indicators
For MFIs with an SME component
Current SPI4 (without green) + ESMS
179+18=197 indicators

15. 3. Classify SME finance institutions (option)
Define E&S risk categories according to the % of the investee portfolio exposed to E&S risks (e.g based on high risk sector and larger loan size).
Define which E&S risk level will trigger an assessment of the SME finance institution ESMS.
High risk sectors: use international sectoral matrix (e.g. FMO, CDC) or adjust based on the country

16. 4. Assess the sustainable performance of SME finance institutions
1. DEFINE AND MONITOR SUSTAINABILITY GOALS
2. ENSURE BOARD, MANAGEMENT AND EMPLOYEE COMMITMENT TO SUSTAINABILITY GOALS*
3. DESIGN PRODUCTS, SERVICES AND DELIVERY CHANNELS THAT MEET CLIENTS' NEEDS AND PREFERENCES
4. TREAT CLIENTS RESPONSIBLY
5. TREAT EMPLOYEES RESPONSIBLY
6. BALANCE FINANCIAL AND SUSTAINABLE PERFORMANCE
7. ENVIRONMENTAL AND SOCIAL MANAGEMENT SYSTEM*
4. Assess the sustainable performance of SME finance institutions
Tot indicators: 123, of which 18 for ESMS* ALINUS SME: TBD first draft 60 indicators
(current ALINUS 63)

17. 5. Promote the ESMS improvement (option)
Agree on E&S Action Plans to improve the ESMS based on the assessment;
Investor leverage to promote improvements depends on the type of financing (debt / equity) and TA to support the ESMS development

18. 6. Monitor the ESMS improvement
Monitor the improvement of SME finance institutions ESMS during the course of the loan or at loan renewal

19. Thanks
Lucia Spaggiari, Business Development Director, MicroFinanza Rating

20. Language Microfinance SME finance Loan officer Relationship manager
Loan appraisal
Due diligence
Social*
Sustainable / impact
*E&S, CP, SME outreah, satisfaction and outcomes