Impact investors say they strive to achieve what they call a double bottom line of profitability and social good. Gauging the first is relatively straightforward. Lenders seeking funds from the CLO made their financial data available to prove they were solvent. OPIC, which had almost 20 years experience in microfinance and a rigorous screening process, reviewed the books to assess credit risk. Its decision to invest in the CLO was viewed by other investors as a seal of approval.
Evaluating social impact presents a greater challenge. Before investing, OPIC would send a questionnaire asking if a microlender is engaged in prohibited behavior, including child labor, environmental violations or human trafficking, and if it has connections to organizations on sanctions and terror watch lists. But its screening for consumer protection is less rigorous. A spokeswoman for the US International Development Finance Corp., known as DFC, which took over OPIC’s operations in 2019, said the agency relied largely on the Smart Campaign for that. She said the agency’s analysts visited only two of the lenders that received funds from the CLO — one in Kosovo, the other in Ecuador. None of the lenders was rejected.
Another investor in the CLO was Calvert Impact Capital, whose vetting process has been hailed as a model for socially minded firms. Calvert helped impact investing go mainstream in 1995 by launching a fund that allows investors to buy stakes for as little as $20. Today, it manages almost $500 million in assets, about 20% of which finances microlenders around the world.
Calvert requires analysts to search financial records and public documents and conduct interviews in affected communities. But Caitlin Rosser, Calvert’s director of impact management, has said those interviews don’t usually include the people the investments are intended to reach. “We are so many layers removed from the kind of end communities that are ultimately benefiting from the capital,” she said at a June 2020 seminar. Instead, she said, Calvert relies on fund managers to assess the social impact of the financial products they are pitching.
Jennifer Pryce, Calvert’s president and chief executive officer, declined to comment about the screening process or whether the company was aware before investing of the high interest rates and aggressive collection tactics employed by some lenders that got funding from the CLO.
Like Calvert, other investors in the CLO reviewed lenders mostly from their home offices, what some call “desk underwriting.” That left much of the vetting to responsAbility, a Zurich-based firm founded in 2003 that manages about $3.6 billion and has more than 200 employees who can make on-the-ground assessments.
ResponsAbility says on its website that its multi-layered screening process starts by making sure a firm targets only the neediest low-income clients. The next step is an analysis of a company’s financials. That’s followed by an onsite review that looks at everything from risk management to client protection and involves meeting branch employees and borrowers. ResponsAbility’s co-head of financial inclusion debt, Thomas Mueller, says only about 500 of the approximately 10,000 microfinance firms meet his company’s standards.
But responsAbility selected three Cambodian lenders — Prasac, LOLC Cambodia and Kredit Microfinance — that were subsequently linked to coerced land sales by Licadho, the Cambodian human rights organization. “Whatever due diligence these firms did, it clearly failed to capture the human rights violations that these investors are now complicit in,” says Naly Pilorge, Licadho’s outreach director. “The human rights abuses we are raising, such as coerced land sales, do not appear on financial sheets — they are the product of a sector that operates in a highly corrupt environment without any consumer protection.”
Martin Heimes, responsAbility’s co-head of financial inclusion debt, says his firm has a good relationship with Prasac and LOLC Cambodia and considers them conscientious lenders that prioritize consumer protection. He says both were certified by Smart, which developed and published a list of six client protection principles, including avoiding over-indebtedness and having appropriate collection practices. “If they are Smart certified,” Heimes says, “then this is a shortcut for us, then we don’t need to look too deeply into this topic.”
It apparently came as news to Heimes that Smart had decertified Prasac before the CLO was marketed. He initially said the microlender was certified at the time and only lost its accreditation later because Covid travel restrictions made it impossible for consultants to assess its operations. Heimes, who helped construct the CLO, later said Prasac had been stripped of its accreditation in 2018 mainly for allowing too many customers to refinance loans early by borrowing ever-larger amounts.