Co-Regional Director Asia and Impact Manager Dina Pons discusses with us what 2021 has in store for impact investors and more specifically for Incofin.
How do you look back on the past year?
Dina Pons: “2020 was probably one of the most challenging, and disturbing years that our sector has ever experienced. Even when compared to the financial crisis of 2008, this was on another level. There was no escaping it. Neither from a portfolio, nor from a risk management perspective.
Despite these strenuous circumstances, I think we handled it quite well. We demonstrated resilience and agility. We kept our promises on both sides: to our investors and our investees. We showed our investees that even in difficult circumstances, we are their hands-on co-pilots. This was also proven by the fact that our portfolio remained stable in 2020. We were patient lenders: we didn’t call back any loans, but instead we restructured, provided waivers and didn’t push any institutions into more distressed situations. We continued, and even enhanced our technical assistance activities. On the equity side, we organized exceptional crisis meetings, trying to find emergency line funding for our investee.
For investors, we managed to maintain and even increase our trust by communicating transparently throughout the year. The openness gave them reassurance and even led them to invest more in our funds.”
You label the Covid period as one of the most disturbing periods for the sector, but did it not at the same time create a momentum for impact investing?
Dina Pons: “Oh, absolutely. This is a crisis that shows that only sustainable, balanced, patient capital can be a useful tool. The Covid crisis is today a sanitary crisis, but it is an environmental crisis in its origins. Smart, sustainable, ESG-labeled money is the only guarantee that people’s savings can be saved for tomorrow, for their children and the children of their children. The work of impact investors is now indispensable for a lot of people. Those who are excluded from financial services, from water access. Covid-19 also had and will continue to have an impact on global food and nutrition security: lockdowns and their economic impact have meant many households have reduced their food quantity and quality. A lot of work needs to be done.”
How different will 2021 be?
Dina Pons: “It might turn out that nothing will be the same as it was before the Covid crisis. Will people continue to buy SUVs, will tourists fly around the world the same way they have done before?
For emerging markets, it means that people will focus more on the local economy. Institutions fostering growth of local economies will be far more resilient. If you are an institution focused on small-holder farmers or small entrepreneurs, you will have a more interesting 2021 than if you are an international trader, for instance.
An important nuance is that the speed of the virus spread has been very uneven, and logically the same applies of the government’s measures and their economic repercussions – going from an immediate full lockdown, over a partial lockdown, borders closures or even no lockdown at all. While India and Latin America were hit severely by the virus, the spread went slower in big parts of Africa and in Cambodia for example there were even almost no cases.
As announced in the recently published Impact Report Incofin has broadened its impact mandate with two new initiatives focused on food security and safe drinking water access. Which other things will the new year bring for Incofin on the impact front?
Dina Pons: “We are working further on the expansion of our impact focus. 2021 will be the time to ensure that each pillar of answering to basic needs is equipped with the right level of impact methodology, from methods of how to assess the environmental and social risks to the way we track outcome. We want to deepen our professionalism in each of these areas.
We also wish to enhance our impact culture even further. To do so, we will introduce an impact committee at Incofin IM firm level in the same way we have a compliance and a risk committee. We think strategically and collectively about impact, not just fund by fund, and this committee will formalize this existing practice.
Thirdly, we will further gear up our value creation in the equity portfolio. Typically, we would invest in a company and then take on the role as a hands-on board member. From now on, we will add our value more systematically: before we make the investment, we will agree on an impact plan with the company involved. We will identify where the gaps are: in the social, or environmental fields, labor practices, … and we will agree how to work on the shortcomings together while tracking indicators. Say for example we want to invest in a water pipe system and they tell us that they waste 20% of the water they produce. We would then want to establish that two years after our investment is made, the waste will be reduced to only 10%. We would commit ourselves to the best practices in order to achieve this goal.
Lastly, we will ensure that by early March 2021 we are fully compliant with the EU Sustainable Finance Disclosure Regulations. With this achievement, we will be able to meet the highest standards out there, not just the minimum standard guidelines.”
That sounds all very promising. Which challenges do you see for the whole impact sector?
Dina Pons: “The risk profile of a lot of microfinance institutions will be much higher, especially in the first half of 2021. This means we will need to continue to explain investors why their patience is key. We also have to be cautious with our activities and we have to challenge our investees to reinvent themselves.
I applaud the increased attention impact investing that I mentioned before, but it also poses a challenge for our sector. Mainstream investors will position themselves as ESG-focused investors. When there are suddenly thousands of voices saying “impact”, it could dilute the meaning of what impact investing truly stands for. There is a perception of ESG that you could pitch a very basic savings product to any individual. However, when you really look into ESG, you discover all sorts of interpreations. I think that now a lot of traditional, mainstream, and commercial money will relabel itself as ESG, but will in fact make few changes to its core activities.
At the same time, I’m not too worried. Impact is such an inherent part of Incofin’s DNA: it is embedded in our governance, in our rigorous due diligence processes, etc. It will take a mainstream investor a lot of time to implement an impact philosophy and strategy as profound and meaningful as ours.”