In pursuing its development goal MEF observes principles of sustainability.
Sustainable Investment Objective
MEF aims to improve access to finance for microenterprises and households by contributing to the debt financing of microfinance institutions (MFIs), with a view to supporting these institutions to provide microfinance services, including (without limitation) credit, savings, deposits, insurance, remittances, and housing loans, to the working poor in developing countries (hereinafter referred to as the "Sustainable Investment Objective" in accordance with Article 9 of the SFDR).
MEF expects that investments in MFIs should represent a minimum of 70% of its total assets. Detailed investment criteria to support MEF’s Sustainable Investment Objective are set forth in its investment guidelines to ensure that MEF:
- supports economic development and prosperity globally through the provision of additional development finance to micro-enterprises via qualified financial institutions, and
- observes principles of sustainability and additionality, combining development and market orientations in pursuing its development goal.
- compliance with national laws, including those related to environmental and social performance, health and safety work environment, and microfinance regulations where applicable, and
- presence of adequate policies and procedures regarding lending to micro, small and medium-sized enterprises to adhere to the principles of responsible finance and prevent over-indebtedness.
- outreach (the number of final borrowers reached by MEF funding)
- average and median loan amount per borrower
- % of women and rural final borrowers
No Significant Harm
MEF seeks to ensure that its Investments do not significantly harm any sustainable investment objective by screening potential Investments and monitoring existing Investments against the key adverse impact indicators and their operational safeguards outlined below.
MEF will not knowingly invest in any MFI which is expected, or is determined, to do significant harm to the sustainable investment objectives, and the Fund will seek to actively engage MFIs in order to put in place or monitor the implementation of environmental and social management systems that can adequately meet the Fund’s E&S requirements.
|Area of risk||Potential Adverse Impact||Safeguards|
|Labour conditions, Health and Safety||Risk that employees at MFIs and MFIs’ Borrowers (MSEs) are working in conditions representing a risk for their health and safety||Compliance with the Fund’s Investment Guidelines, loan covenants, S&E risk management and reporting, MFI SEMS Plan and SEMS Officer, MEF Exclusion List and ILO Labour Standards|
|Over-indebtedness of MFIs’ Borrowers||Risk that financial products and conditions are not representing the best interests for the MFIs’ clients, with a risk of e.g. over-indebtedness, excessive pricing conditions, inadequate products etc.||Compliance with the Client Protection Principles,* MEF’s Principles of Responsible Finance
|Financial exclusion||Risk that an overzealous approach to risk integration and mitigation can lead to denial of basic financial services to certain groups||Appropriate design of risk and information management systems, adequate staff training in relation risk management and customer service, fair pricing, complaints policy|
|Climate Change / Pollution Prevention and Control||Very low to no risk identified – e.g. potential pollution of soils and water through financing of agribusinesses||Compliance with national laws and standards|
MEF engages its Investment Advisors, each a signatory to the Operating Principles for Impact Management (OPIM; www.impactprinciples.org), to identify the potential adverse sustainability impacts of proposed investments, recommend mitigation measures and perform follow-up monitoring. Further, in accordance with MEF’s standard loan agreements, partner MFIs are required to make E&S representations towards MEF and meet the Fund’s E&S requirements at the level of such MFI. The loan covenants include requirements such as escalating and implementing corrective measures in case underlying client activities are inconsistent or in breach of MEF’s E&S requirements. In the event that a partner MFI fails to engage its borrowers to take corrective measures, such MFI is required to take commercially reasonable steps to exit from such borrowers’ activities. Ultimately, a breach of MEF’s loan covenants may be deemed to be an event of default, giving rise to MEF’s recourse to call the loan due and accelerate repayment of principal and interests, as well as penalty interest as the case may be, in accordance with the relevant agreement with such MFI.
In addition to the above potential adverse impacts on sustainability factors, the Fund is very conscious of its role to crowd-in the private sector and to prevent crowding-out of private financial institutions. To achieve this, MEF focuses on providing liquidity to MFIs that the market does not offer, which includes a focus on local currency debt financing to allow effective de-risking of partner MFIs. In turn, MEF fully hedges the principal of each investment against the Fund’s reference currency (USD), and to the extent economical to do so, MEF will also seek to hedge local currency interest flows.
Integration of Sustainability Risks
At MEF, taking account of environmental, social or governance events or conditions that, should one occur, could cause a negative material impact on the value of the Fund’s investments (sustainability risks) lies at the heart of our investment philosophy. This is demonstrated through the systematic integration of sustainability risks into our decision-making processes, as well as the way we leverage the power of MEF funding to actively engage our partner MFIs to improve the livelihoods of the working poor.
As a global self-managed fund, MEF has engaged four Investment Advisors – each a reputable leader in the impact asset management field – to identify, appraise, structure and negotiate MFI investments and opportunities, perform ongoing monitoring of the portfolio and risk management as well as provide all reporting required by MEF, in accordance with MEF’s legal documents, investment guidelines and any other applicable policies and procedures.
In particular, partner MFIs are required to comply with the EDFI Exclusion List,* the Client Protection Principles,** and MEF’s Principles of Responsible Finance. These requirements are also reviewed by MEF from time to time and are reflected in the agreements entered into by MEF with its Investment Advisors and its partner MFIs.
Investment Advisors are required to first complete their respective due diligence on a prospective partner MFI, including the identification and evaluation of environmental, social and governance aspects, risks and opportunities. The pricing of investments shall reflect market conditions, risk profiles, and each prospective partner MFI proposal is first of all screened by the investment committee of the respective Investment Advisor. Final proposals of all potential MFI investments are then submitted to MEF’s Investment Committee for decision-making, and as the case may be, to the Board of Directors of MEF.
Partner MFIs are required, in their respective agreements with MEF, to provide a copy of their social and environmental (S&E) management plan, the contact details of their senior officer responsible for their S&E management system (SEMS Officer) and to notify MEF of any amendments to their SEMS plan or changes to their SEMS Officer. While MEF does not exclude prospective partner MFIs which do not have a fully-fledged environmental and social management system, it does assess the ability of partner MFIs to comply with MEF’s S&E requirements and, to the extent applicable, to take appropriate corrective actions and implement a SEMS plan in accordance with agreed schedules. Investment Advisors are required to monitor and provide timely reporting, or escalation, as required, regarding external social and environmental factors with respect to any partner MFI, or their borrowers, that could reasonably materially impact the MFIs’ compliance with MEF’s S&E requirements and the MFI’s profitability and risk profile.
For more information regarding MEF’s investment decision-making process, governance set-up and organisational structure, please visit: https://www.mef-fund.com/investment-process.php.
MEF’s culture for responsible finance and E&S management is reflected in its remuneration practices. For the members of MEF’s Board of Directors and Investment Committee, a basic pro-rata temporis annual remuneration scheme, benchmarked to rates in comparable development finance funds and organisations, is subject to approval by the Shareholders or the Board of MEF, as the case may be. For more information regarding the role of MEF’s governance bodies in safeguarding the E&S requirements of MEF, please see here.
As a responsible lender and signatory to the Operating Principles for Impact Management (OPIM; www.impactprinciples.org), MEF remunerates its four Investment Advisors according to competitive market rates, whereby the Investment Advisors integrate assessing sustainability risks as part of their core duties and are each a signatory to OPIM.