Social Performance Infrastructure’s Big Barriers

A recent CFI blog by Gail Buyske, “What’s Going On with Microfinance’s Information Infrastructure? Should We Care?”, and stakeholder meetings in Washington and Europe are focusing attention on the under-utilization of data platforms and ratings and the threat this poses to maintaining transparency and continuing progress in standard setting and benchmarking, particularly in the area of social performance. This increased attention is especially pertinent as a couple initiatives wind down, most notably MFTransparency. The team at Grassroots Capital, as a very active supplier of data to multiple initiatives, a user of their outputs, and a heavy user of “in-house” data, sees the challenges from multiple perspectives.

The industry clearly needs reliable, timely data and in particular, improved data and accepted frameworks and conventions in the area of social performance. Significant strides have been made in recent years thanks to MFT, SPTF and many other efforts. But at the same time it is essential to consolidate initiatives and promote the widest possible buy in by the broadest possible group of investors, regulators, standard setters and other industry participants. We believe that one of the major issues is that social reporting and ratings are under-enforced by investors, leading to a lack of incentives for MFIs to devote the time and resources to report social data and become rated. Simultaneously, multiple microfinance-specific initiatives are not viable given that impact investors’ interest is shifting and broadening into other sectors such as affordable housing and SME lending. In addition, MFIs’ own business models are becoming more complex. Investors, practitioners, and industry experts all need to work together at this crucial juncture to consolidate and rationalize frameworks with broader impact investment initiatives to reduce reporting burden, engage the wider impact investor community, and allow more time for what matters – improving service and benefits to poor and low income clients.

While providing benchmarks and setting goals can help MFIs improve their own performance, reporting was and still is largely investor-driven. Investors, fund managers and competitive pressure play a large and very important role in promoting social performance monitoring and reporting requirements. Transparency is encouraged if it leads to funding. The underutilization / under-compensation of data platforms and ratings reflects in part the sub-viable scale of an overly fragmented infrastructure.

The proliferation of initiatives over the years have undoubtedly advanced our ability to meaningfully report, but have also given stakeholders a pretext to hold back and “wait and see” which initiatives the industry will coalesce around as the standard. In the impact investing space, microfinance has enjoyed particular focus and support over the past twenty years and in many respects has a much more developed infrastructure than newer impact sectors. But this privileged position has its downside: our initiatives are sector specific, while many impact investors are sector agnostic and do not have the time or patience to delve into a single sector framework.

As Gail noted in her blog, microfinance has only been able to achieve success as the most mature and established business model in the impact space due to the support of this infrastructure. Grassroots believes that efforts to encourage broad agreement on a core set of microfinance social indicators is a step in the right direction. At the same time, Grassroots has also actively supported B Corp and GIIRS since their inception, because they aim to engage a broad range of impact investors. Everyone, both in the microfinance community and the broader impact community, cannot afford to take the essential infrastructure for granted. Rather we will need to make some choices and compromises to rationalize the infrastructure to reflect the evolving composition and focus of the investor community and engage the broadest possible financial support and mandate reporting requirements.