• To collect a catalogue of examples of SRI in practice in emerging markets;
• To raise awareness about SRI in emerging markets;
• To reflect on what SRI in emerging markets means to practitioners; and
• To enable SRI practitioners in emerging markets to network with peers around the world.

This week’s interview is with Makhmud Saidakhmatov, CEO, FINCA Microcredit Company, Bishkek, Kyrgyzstan.

FINCA’s mission is to provide financial services to the world’s lowest-income entrepreneurs so they can create jobs, build assets, and improve their standard of living.  Its vision is to be a global network collectively serving more poor entrepreneurs than any other microfinance institution (MFI) while operating on commercial principles of performance and sustainability.  Based in Washington DC, FINCA currently reaches over one million clients through its worldwide network of 21 subsidiaries in Africa, Eurasia, the Greater Middle East, and Latin America.  After 28 years of leadership, FINCA’s outreach is among the broadest and most comprehensive of today’s microfinance networks.  FINCA International, Inc. is the parent of 21 operating Microfinance Institutions (subsidiaries), and manages these global microfinance activities through a holding company that allows us to bring additional resources to our mission.  FINCA International, Inc.is a non-profit entity that raises funds to: drive research and development to enhance microfinance services; create new services that enhance the lives of clients; carry out demographic, market, and social research that allows us to better understand and measure benefits to clients; and maintain FINCA’s ownership level in FINCA Microfinance Holdings.  FINCA Microfinance Holding Company, LLC (FMH) is a subsidiary of FINCA International, Inc. that leverages the funding of socially-responsible investor partners who share FINCA’s mission of providing services to low-income people so they can increase their employment, incomes, and standard of living.  FINCA’s country-based subsidiaries are held by FMH, creating a global network of shared expertise.  FINCA created its program in Kyrgyzstan in 1995 in order to provide poor but potentially economically active people of Kyrgyzstan with small loans needed to either start up or expand their businesses. In an effort to formalize its operations, in July 2003 FINCA’s program in Kyrgyzstan was incorporated as a joint stock company under the laws of Kyrgyzstan, taking the name “FINCA Microcredit Company” (FMCC), and certified to operate by the National Bank of Kyrgyzstan.  Today, FMCC is present in all seven regions of the country: Batken, Chuy, Jalal-Abad, Naryn, Osh, Talas and Issyk Kul running a network of 26 branches and more than 100 outlets with over 1,000 employees.  FINCA MCC is one of the largest microfinance institutions in Kyrgyzstan in terms of client outreach, portfolio and geographic presence in the country. FINCA is currently serving over 117K clients running a loan portfolio of over 97MM USD.  Makhmud Saidakhmatov, FMCC-Kyrgyzstan’s Chief Executive Officer, joined FINCA in December 2006. Since the joining FINCA, Makhmud has been working in positions, like COO of FMCC-Kyrgyzstan, and CEO of FINCA Azerbaijan.  Prior to FINCA, he worked for over four years for “LFS Financial Systems GmbH,” a German consulting and management company specialized in micro and small business finance projects in developing and transition countries. As a banking advisor, he managed projects in Uzbekistan and Tajikistan focused on building and development of micro lending capacities and practices at various commercial banks. In 2003, Mr. Saidakhmatov worked in Azerbaijan assisting the LFS team to develop micro and small lending practices at Access Bank (formerly Micro Finance Bank of Azerbaijan). Mr. Saidakhmatov commenced his professional banking career in 1998, at the National Bank of Uzbekistan, where he worked for three years as a Senior Investment Officer. Mr. Saidakhmatov holds a diploma in economics from the National University of Uzbekistan and a Master’s degree in Economic and Social Studies from the University of Manchester, UK. Mr. Saidakhmatov also holds a professional certification from Stonier Graduate School of Banking administered by the American Bankers Association at the University of Pennsylvania, Philadelphia, USA.

Emerging Markets ESG:  How would you define socially responsible investment (SRI)?

Makhmud Saidakhmatov:  Any investment decision considers certain objectives. In many cases, the goal is to obtain higher financial returns on invested capital within a given period of time, regardless of the associated impacts coming from this investment to society, the environment or simply to human beings. SRI is an investment which bears such responsibility – to respect and improve the environment, nature, people’s lives, diversity and development. As such, SRI is an investment that seeks not only financial returns, but rather considers other positive impacts coming from an investment.

With respect to FINCA Kyrgyzstan – we run our business with a certain business philosophy. Our philosophy is to empower and encourage people to strive for a better life though their own aspirations and abilities. We provide them with financial services, so that they increase their assets, create additional workplaces and be self-employed, and thus improve their standard of living.

Emerging Markets ESG:  What distinguishes SRI from mainstream investment? 

Makhmud Saidakhmatov:  Nowadays, it is not easy to find a business which does not interrelate with society, the environment, human capital and the social sphere. The problem begins at the point when a business assesses its impact on those areas – let it be positive or negative. You can take any type of business and will find that, one way or another, it impacts our surrounding world. So to my mind, mainstream investment simply does not know, or does not want to assess, its impacts on the environment, people, society, or to diversity. Having said that, I would rather say that, compared to other types of investment, companies practicing SRI undertake constant research about their social impact and are interested in benefitting from the improvement of their social targets. For example, if a paper-producing company invests in new technologies and equipment that will decrease the amount of waste products and usage of chemicals, or does more recycling – then to me this could be SRI, given that the company assesses its social performance and social impacts deriving from those investments.

Emerging Markets ESG:  Which extra-financial theme – environmental, social or governance – is the most challenging for companies in Kyrgyzstan to manage?

Makhmud Saidakhmatov:  I think all three are very typical challenges for companies in Kyrgyzstan. However, I would stress the governance and social points as key challenges for companies in Kyrgyzstan to manage.  On the governance side, I think there are good movements in the minds of people managing and owning different businesses. They are interested in the investments benefitting them for the long run and not just for an immediate financial return. More and more companies are building good relationships with society / local communities and are involved in different social projects. However, I think there is still a lack of advocacy of socially-responsible business ethics when it comes to real business owners – the people who are investing into the Kyrgyz economy. To my mind, one of the key factors in doing SRI is the support and advocacy of social performance from the shareholders of a company. As such, performance targets for a company, and individual performance of company management/staff – should all include certain level of social targets, and these targets need to be regularly monitored and assessed. In other words, social performance culture needs to be cultivated as part of company strategy and performance, and this need to be advocated by all stakeholders of the company.

As regards social performance –the most difficult challenge is impact assessment of a particular investment or of the company itself. Is it a socially good and friendly company or not?  Unfortunately, many limit their analysis to a one-time impact assessment of the investment to society, or to other specific social indicators of the population. For example, we often hear about projects like helping hospitals with equipment, constructing bridges or installing lighting in town streets, etc.  The social impact from such investments is obvious, though the company itself might have a different approach in doing its business which may be, in fact, socially irresponsible or even unethical – such as gambling or hunting of animals for leisure. As such, it still remains a big challenge for companies to be able to assess their business model with regards to social performance and social impact.

Emerging Markets ESG:  Which extra-financial theme – environmental, social or governance – is the most challenging for investors in Kyrgyz companies to analyze?

Makhmud Saidakhmatov:  Again, I think the most difficult challenges for investors to analyze are the social and governance items. Not every investor may be willing to invest certain resources of its company in order to perform regular social performance assessments, or manage the company equally, based on financial and social returns, where the latter could be limited by the company to an individual social project without wide-scale impact assessment.

Emerging Markets ESG:  FINCA Kyrgyzstan has been operating for over 15 years.  How do you measure the impact of investments made to date?  Please briefly describe some of the most significant impacts.

Makhmud Saidakhmatov:  As mentioned above, the decision to establish FINCA in Kyrgyzstan was itself a huge social event. In 1995, when there was a limited supply of financial services to businesses, not to mention ordinary people – FINCA entered the country with its true social mission to provide financial services to the country’s lowest-income entrepreneurs so they could create jobs, build assets, and improve their standard of living. Throughout the past 17 years, FINCA Kyrgyzstan has been meeting its mission and has provided more than a million microloans to customers totaling almost US$700 million. The average size of a microloan has never been above US$600-900.  Microloans were provided to support the low income population in their endeavors to start and support their businesses and families. All these loans made it possible for customers to be self-employed and, simultaneously, create additional workplaces for their countrymen.  I can say roughly that every three to four microloans may result in the establishment of one additional workplace – which means that FINCA Kyrgyzstan supported the establishment of more than 250,000 new workplaces in the country. If we consider that most company operations are in remote and rural areas, the social impact from each company is even more obvious. During this period of time, our customers extensively improved their scale of business and living standards. We also prioritize the empowerment of women – who care about their families and the future of their children; as such, over 65% of our customers are women, living and working in villages and small towns.

Our social performance can also be seen in our targets to capture the poor population of the country and support them with financial resources. In 2011, almost 49% of our customers were among the poor and vulnerable category of population of the country (as per the Kyrgyz national poverty definition). In coming years, we plan to increase the percentage of poor and vulnerable population in our portfolio and provide them other financial services through full financial inclusion (savings and deposits).

In order to asses our general social impact and performance, we use the FINCA Client Assessment Tool (FCAT), which measures internationally comparable variables of our customers’ social well-being. The FCAT is implemented utilizing best practice surveying techniques and a rigorous methodology to collect valuable client information, including: A) Expenditures and Assets (e.g. home ownership, food expenditure and other household or social expenditure, expenditure on education, characteristics about the dwelling, etc.). B) Business Activities (e.g. main business sector and number of other businesses clients are actively involved with, and the duration of their businesses). C) Access to Financial Services. D) Satisfaction with FINCA (e.g. satisfaction with the interest rate and the loan structuring, ease of application and disbursement, the extent to which FINCA helped clients achieve their goals). E) Household Demographics (e.g. details about household and head of household regarding their education levels, school attendance, literacy rates, occupation status, source of drinking water, sanitation facilities).

FINCA Kyrgyzstan is also a good and ethical employer which currently provides over 1,100 jobs to young people of the country, of which over 80% are located in regions of the country. Some of the employees have developed professionally and now work in other countries where FINCA operates. We bear full responsibility for the environment and business ethics in our operations. As such, we have a list of businesses which we will never support, such as gambling, businesses involving child labor, production of tobacco or alcohol, environmentally-unfriendly businesses and others.

As regards other one-time and targeted social projects – FINCA Kyrgyzstan has always been a part of communities where it operates and always participates in projects undertaken to improve the social well-being of the population. For example, only last year we financed over 100 different social projects.  Among them, I can cite schools which were provided with teaching materials, computers and equipment; village kindergartens which were supported with furniture and other construction materials; and reconstruction of parks and recreational places in many small towns.

Apart from this, we also feel responsible for society’s financial literacy level. Beginning last year, we started to provide special training for the population-at-large on financial literacy. As of today, we have conducted more than 140 such trainings in 135 different settlements and communities of the country. This year we would like to provide over 500 such trainings to the population.

• To collect a catalogue of examples of SRI in practice in emerging markets;
• To raise awareness about SRI in emerging markets;
• To reflect on what SRI in emerging markets means to practitioners; and
• To enable SRI practitioners in emerging markets to network with peers around the world.

This week’s interview is with Guido Giese, PhD, Head of Indexes, RobecoSAM, Zurich, Switzerland and Julia Kochetygova, Senior Director, Global Equity Indices, S&P Dow Jones Indices, New York, New York, United States of America.

RobecoSAM is an investment specialist focused exclusively on Sustainability Investing. Its offerings comprise asset management, indices, private equity, engagement, impact analysis and sustainability assessments as well as benchmarking services. Asset management capabilities include a range of ESG-integrated investment and theme strategies (in listed and private equity) catering to institutional asset owners and financial intermediaries across the globe. Together with S&P Dow Jones Indices, RobecoSAM publishes the globally recognized Dow Jones Sustainability Indexes (DJSI). Based on its Corporate Sustainability Assessment, an annual ESG analysis of more than 2,000 listed companies, RobecoSAM has compiled one of the world’s most comprehensive sustainability databases. RobecoSAM’s proprietary research and sustainability insight, gained through its direct contact with companies, are fully integrated into the company’s investment solutions.  RobecoSAM is a member of the global pure-play asset manager Robeco, which was established in 1929 and offers a broad range of investment products and services. Robeco also has a long tradition of practicing and advocating Sustainability Investing principles. RobecoSAM was founded in 1995 out of the conviction that a commitment to corporate sustainability enhances a company’s capacity to prosper, ultimately creating competitive advantages and stakeholder value. As a reflection of its own commitment to advocating sustainable investment practices, RobecoSAM is a signatory of the UNPRI and a member of Eurosif, ASrIA and Ceres. Headquartered in Zurich, RobecoSAM employs over 100 professionals. As of December 31, 2012, RobecoSAM’s assets under management, advice and license amounted to a total of USD 11.4 billion.  In his function as Head of Indexes, Guido Giese PhD is responsible for the maintenance and the further development of the Dow Jones Sustainability Indices (DJSI). Additionally, he will oversee global sales, licensing, partnerships and client services for the DJSI. Prior to joining RobecoSAM, Guido Giese was Head of Research and Development at STOXX where he was responsible for developing new index solutions. He has more than 12 years of experience in risk management and asset management at large international banks as well as at KPMG. Guido Giese holds a PhD in Applied Mathematics from the Swiss Federal Institute of Technology Zurich.

S&P Dow Jones Indices LLC, a subsidiary of The McGraw-Hill Companies is the world’s largest, global resource for index-based concepts, data and research. Home to iconic financial market indicators, such as the S&P 500® and the Dow Jones Industrial Average℠, S&P Dow Jones Indices LLC has over 115 years of experience constructing innovative and transparent solutions that fulfill the needs of institutional and retail investors. More assets are invested in products based upon our indices than any other provider in the world. With over 830,000 indices covering a wide range of assets classes across the globe, S&P Dow Jones Indices LLC defines the way investors measure and trade the markets.  Julia Kochetygova, Senior Director at S&P Dow Jones Indices, heads up the Russia/CIS client coverage group.  Julia’s duties include managing relations with the RTS stock exchange and designing the methodology for the global S&P ESG index.   Prior to joining S&P Dow Jones Indices, Julia worked for the Russian MDM Bank in the corporate and investment block, where she developed their business strategy, and before that was a head of corporate relations at the same bank.  Prior to working at MDM Bank, Julia was a director of corporate governance services at S&P Ratings, where she was responsible for analytical supervision and business development of this new analytical service.  Julia holds a Ph.D in economics and a master’s degree in economics from Plekhanov State Institute of National Economy in Moscow.

Emerging Markets ESG:  How would you define socially responsible investment (SRI)?

Guido Giese:  This is indeed a very interesting question because when you ask different people you will get a number of different definitions for the term SRI and ESG. We at RobecoSAM make a very clear distinction between SRI and ESG. In our view, SRI tends to concentrate on the exclusion of certain companies from portfolios based on what they do or products/services that they provide. This approach is alive and well globally. However, what we at RobecoSAM do is called “ESG integration” and this is something different, though some confuse the two. We look at environmental, social and governance (ESG) criteria when evaluating companies. We employ a systematic approach that allows for identification of high-growth investment themes and integration of material extra-financial criteria into traditional investment analysis to build portfolios that generate superior returns and add value to existing asset allocations.

Emerging Markets ESG:  What distinguishes SRI from mainstream investment? 

Julia Kochetygova: As genuine believers in sustainable investment strategies, we would be happy if there were no difference between mainstream and SRI types of investments. Eventually, the time will come when they will fully converge. However, this is happening very slowly, and particularly so in emerging markets, where more opportunistic investment strategies currently dominate. These are driven by short-term financial considerations, with little regard to such long-term issues as environment pollution, climate change, social inequality and human rights abuse, and various issues in corporate governance. These are important both as risk factors, and as sources of future breakthrough growth and competitive advantage. There have been quite a few examples when companies in emerging markets who took these issues seriously, would experience higher growth than their peers. As long as this link becomes more evident, integration of ESG factors into investment process will become more common, eventually leading into mainstreaming SRI. We at S&P Dow Jones Indices offer such options through a variety of sustainability-themed indices, some of which are focusing specifically on emerging markets, such as S&P/IFCI Carbon Efficient Index, S&P ESG Indices in India, Egypt and Middle East and recently launched DJSI Emerging Markets.

Emerging Markets ESG: Which extra-financial theme – environmental, social or governance – is the most challenging for companies in emerging markets to manage?

Julia Kochetygova: We believe that corporate governance is the most challenging factor in emerging markets because of the historical legacy of the lack of corporate culture based on checks and balances. Moreover, good corporate governance is a pre-requisite for proper treatment of environmental and social issues: Solid internal controls, comprehensive strategy-setting process, transparency and independent oversight are needed to take these issues seriously. Management remuneration system can encourage responsible behaviors and ensure sustainable development only when executives are remunerated in accordance with their long-term and not financial only results. Push from global investors can trigger such transformation. We see this gradually happening in such countries as China and India, but more consolidated efforts are still needed.

Emerging Markets ESG:  Which extra-financial theme – environmental, social or governance – is the most challenging for investors in emerging market companies to analyze?

Guido Giese: The growth of the ESG industry in the emerging markets in recent years has seen the regions, along with other high-growth areas, starting to play a role in the global ESG market alongside the established hubs of Australia, Europe, and North America. Investors are increasingly showing an interest in the emerging markets as an alternative to these other markets as a place to make sustainable investments. Since uncertainty in Western financial markets seems to remain for the time being, this in turn offers emerging markets the opportunity to close the sustainable and responsible investment gap on its Western peers, both as an area into which to invest and as a place from which to manage assets. Global investors employing sustainable investment strategies will need to tackle the challenge of being near their clients while at the same time also near investee companies. This challenge is very relevant for established investors in sustainability investing (Europe, Australia and North America) because they currently underweight emerging markets and Asia, but are targeting greater emerging market allocation in public and private markets.

Emerging Markets ESG:  Would you please introduce to readers the newly launched Dow Jones Sustainability Emerging Markets Index (DJSI Emerging Markets). 

Guido Giese: The DJSI Emerging Markets offers investors a tool for measuring the performance of companies that RobecoSAM has recognized as leaders compared to their peers in terms of corporate sustainability. It also provides an effective engagement platform to encourage companies from the emerging markets to adopt sustainable best practices. Although much progress has been made in terms of political and economic stability, many companies in the Emerging Markets continue to operate in challenging surroundings. The DJSI Emerging Markets seeks to identify corporate sustainability leaders by drawing on RobecoSAM’s extensive experience in measuring intangibles through the annual Corporate Sustainability Assessment (CSA). For example, RobecoSAM has identified resource efficiency as a potential driver of corporate success in the emerging markets based on the important role commodities play in the regional value chain. The steady increase in the number of emerging market companies that participate in our CSA shows that businesses around the world are embracing sustainable practices as an important factor in their future competitive position. As the emerging markets have come of age, demand for a regional benchmark for sustainability investors has increased and with the DJSI Emerging Markets we can now offer an appropriate product.