This article is sponsored by Schroders Capital
What does responsible investment mean to you as a private debt investor?
When we talk about responsible investment at Schroders, we are primarily referring to a definition used by UNPRI, which is the integration of environmental, social and governance aspects into our investment processes.
At the level of Schroders Capital, the private markets division of Schroders, ESG integration has now been completed for 100 percent of total assets, as of the end of last year. That means that each team and each strategy, from infrastructure debt to securities products, has to complete a yearly accreditation process, which scrutinises the way in which it implements its ESG approach.
The recent proliferation of sustainability regulation including the Sustainable Finance Disclosure Regulation and the European taxonomy has only made the accreditation process more robust and strengthened our resolve.
Is ESG purely a diligence tool then, or is it possible, even as debt investor, to positively influence the businesses that you back?
The process that I was just outlining is primarily about credit selection, certainly. We conduct an ESG assessment every time we underwrite. But then, once we have made an investment, we typically have ESG KPIs that we monitor over time. For example, we are increasingly engaging with companies on the way in which they measure and report on carbon emissions. In those situations, we are working alongside existing borrowers to help deliver a higher level of positive environmental impact.
How would you say the debt fund industry responded to the challenges of covid in terms of being responsible investors?
My perspective on this is twofold – my experiences of mainstream debt financing at Schroders Capital, and then my experiences of an impact strategy focused on emerging markets at BlueOrchard. I would say that in both instances, the private debt industry has proved itself to be highly supportive in the covid-19 aftermath, engaging with borrowers and proactively seeking ways to responsibly reschedule debt where needed.
Can you point to any specific ways in which you were able to help businesses weather the pandemic?
Absolutely. In 2020, we launched a covid-19 MSMEs support strategy, designed to address the wide-ranging impact of the pandemic that threatened decades of progress made towards reducing global poverty and inequality. While many financial institutions in these emerging and frontier markets weathered the crisis without major disruption, it was clear that others needed support in order to keep financing the micro, small and medium-sized enterprises which form the backbone of developing countries’ economic growth and employment.
This year, we held a second closing with $207 million of total commitments. Investors include the Visa Foundation, the UK’s development finance institution CDC, the US development finance institution DFC, as well as FSD Africa Investments, the Japan International Cooperation Agency, German development bank KfW on behalf of the German Government (BMZ), IDB Invest, and, of course, Schroders and BlueOrchard.
And, as of September 2021, we had invested in 32 financial institutions across 18 countries, spanning Africa, Asia, Eastern Europe and Latin America, and supporting more than 4.2 million micro and small and medium entrepreneurs and enterprises and ensuring that associated jobs are maintained during and after the pandemic.
To what extent are you seeing LPs diligencing the responsible investment credentials of debt managers today and how has that changed over time?
We have absolutely seen an increased level of due diligence on all matters relating to sustainability and responsible investment practices. I think if you were to compare any due diligence questionnaire today with a questionnaire from two to three years ago, you would see that the section relating to the tools and procedures needed to support environmental and social practices at a manager and individual company level had increased exponentially.
Does that extend to detailed questioning around diversity and inclusion?
Yes, it does. In fact, at Schroders, we now have D&I targets at a group level, as well as at a private assets level. And we very often have limited partners asking for gender diversity and inclusion targets, right down to targets relating to specific strategies. D&I is being evaluated across the full value chain, right down to how you promote diversity within your supply chain.
It is something we take very seriously as a business and we actually have a
women empowerment strategy at BlueOrchard, with a strategy designed specifically to provide debt financing tailored to women-led micro and SMEs in Asia where female financial inclusion is still relatively low compared to other regions.
What role do you believe debt financing is playing in the impact sector, overall, and why is debt such a crucial ingredient?
There is huge potential for debt to deliver impact in whatever specific area of focus is targeted, whether that be a particular geography or a community that is underserved. For example, at Schroders Capital we have a real estate strategy that is focused on tackling deprived areas within the UK. There is also enormous potential for debt providers to engage with the financing of low carbon assets. Debt is an extremely powerful tool in the impact industry’s armoury across developed and emerging markets.
Debt and diversity
BlueOrchard launched a $241 million women empowerment strategy in 2016, backed by the Japan International Cooperation Agency, Japan Bank for International Cooperation and other Japanese institutional investors.
The strategy was the first of its kind, specifically investing in female micro-entrepreneurs in the Southeast Asia frontier and emerging markets, where even today, many women are not given an equal opportunity, and in some countries, remain excluded from the workforce and from entrepreneurship.
Empowering women economically and socially is proven to lead to stronger economies and the better achievement of internationally set goals for development, as well as sustainability. It also improves the quality of life, not only for women, but entire families, communities and ultimately society at large. As of this September we had reached over 20 million micro-entrepreneurs through the financial institutions in its portfolio, with a median loan of just under $300.