Despite the challenges in 2022, Tim Crijns, Fund Manager of the Triodos Financial Inclusion funds, says microfinance continued to increase access to finance for many in emerging markets and played a vital role in their road to recovery.
Acknowledging the instability caused by COVID-19, the invasion of Ukraine and subsequent energy crisis, persistent inflation and aggressive rate hikes,Crijns says: “These upsets created a lot of uncertainty, especially for underserved people and businesses. Their demand for access to finance increased as the need for financial resilience grew. In 2022, we had more than EUR 800 million invested in emerging markets, and I believe that we helped many weather the storms.”
Crijns thinking was backed up by the 60 Decibels Microfinance Index, a financial inclusion social performance report that surveyed almost 18,000 microfinance clients of 72 microfinance institutions across 41 countries, which reported microfinance improves the quality of life and increases financial resilience in times of crisis.
Reflecting on 2022, Crijns shared the capacity of the financial institutions in the funds’ portfolio to withstand significant macroeconomic and geopolitical challenges, particularly those in Ukraine, Central Asia and Eastern Europe.
When Ukraine was invaded by Russia in February, there was concern for the funds’ investments in the country, yet the role of the financial institutions became clear early on: “It was critical to keep cash machines filled and digital payment apps online. People, especially those fleeing, needed access to money to pay for basic necessities like food. One of our investments in Lviv [western Ukraine], continued to disburse loans, especially to agricultural farmers, which was vital to maintaining food supply.”
To understand the impacts of macroeconomic and geopolitical instability in other parts of Eastern Europe and Central Asia the fund manager intensified monitoring and requested more frequent updates from investees. The concerns were met with remarkable results: “What we saw was that net energy exporting countries, like Kazakhstan, were able to profit from increased energy prices, and that there was also a flow of money out of Russia and into neighbouring countries like Tajikistan.”
In South Asia the responses varied. Crijns says that “India manoeuvred well” but Sri Lanka’s position remained fragile: “I visited Sri Lanka in May and met people who told me they’d had to postpone investments because the price of basic needs had tripled. At the same time, small-scale farmers, dependant on pricing mechanisms, benefited positively from increased prices and were able to borrow to purchase seeds and equipment to boost crops.”
Balancing impact, risk and return is crucial
Another key success of the Triodos Financial Inclusion funds was their ability to continue to successfully balance risk with social and financial returns during 2022. “Balance is crucial” says Crijns: “We have always looked at specific impacts and whether our investees are reaching underserved people, like female entrepreneurs or those in rural areas. At the same time we also look at whether there is a fair return for investors. Higher risk might bring greater returns but it’s important that we think broadly across the entire portfolio.”
Crijns also stresses the importance of balancing country risk and says: “Keeping single country exposures low is critical to mitigate country risk in the portfolio. For example, we had to take provisions for investments in Ukraine during the year, but because the country’s exposure in the portfolio was relatively low, costs were absorbed by positive full year returns.”
Crijns is quick to emphasise the success of the Triodos approach to due diligence, which has been honed over more than 25 years: “Of course we check whether the right internal controls are in place, but we also work to understand management to be sure that it really wants the best for the people in their country. We have a track record of doing this and it's stable, mature and successful.”
Investing in innovation
In addition to balancing risk, return and impact, Crijns describes the importance of investing in innovation. A new tool developed by 3Bank (a Serbian bank of which Crijns is a Board member), helps flex-paid workers in urban areas, such as delivery drivers who may need a laptop to perform their work. “Flex-workers are the new underserved as it’s hard to determine their capacity for loan repayments. But 3Bank’s tool can assess historical flex-work contracts and is opening up access to finance.”
Fintechs are also a relatively new but highly important component of the funds’ portfolios. Crijns shares his enthusiasm for Mexico-based Garantia: “Garantia is a virtual marketplace that brings doctors and small specialist private clinics together with medical equipment vendors. Ultimately, it helps improve access to high quality and affordable healthcare services, which a pressing issue in emerging markets.”
In Europe, the new Sustainable Finance Disclosure Regulation (SFDR) requires investment managers to collect and report data to support their impact claims. Much of the information can be purchased from data collection agencies, but according to Crijns, Triodos IM takes an extra step to support the Article 9 classification for 100% of its funds: “Our investors expect us to comply with SFDR and to be a frontrunner in that respect. But we go beyond data requirements because we also see it as an important opportunity to engage directly with our investees and find out where the finance ultimately goes. It helps us better understand the issues we aim to address.”
For Crijns personally one of the most satisfying impact highlights of the Triodos Financial Inclusion funds in 2022 was 180,000 educational loans disbursed (up 83%). “In many countries schools were closed for up to two years due during lockdowns. After they re-opened, many of our investees promoted educational loans, encouraging families to send their children back to school. It’s a real boost for global learning outcomes.”
Positive outlook for 2023
The Triodos Financial Inclusion funds will continue to pursue advancing financial resilience as a pathway for improved social and financial inclusion, says Crijns. He also believes that emerging markets are likely to fare better than developed markets in 2023: “There’s continued uncertainty in developed markets about the extent and impact of rising interest rates and inflation and whether we should expect a recession. In contrast, the outlook for emerging markets is comparatively positive. These economies are experienced in dealing with inflation and are more economically resilient. Investors often have a perceived emerging market risk, that they must be worse, but this time it’s the other way around.”