Kaspar Wansleben (LMDF): the importance of “S” in ESG

Kaspar Wansleben, Managing Director of the Luxembourg Microfinance and Development Fund (LMDF), says there is an increasing understanding of the need for sustainable development and regulatory factors support the development of the sustainable finance sector. Interview

Can you present LMDF in a few words?

The Luxembourg Microfinance and Development Fund (LMDF), founded in 2009, is a Luxembourg social investment fund, which counts individuals, the public sector and the private sector among its investors. It invests in emerging microfinance institutions (MFIs) across the globe, with a particular focus on countries in the bottom half of the Human Development Index (HDI). LMDF provides financial support to promising MFIs, enabling them to become solid partners for micro-entrepreneurs who need a reliable and fair supply of basic financial services. When seeking an investment, LMDF considers three core criteria. First, strong social vocation: LMDF supports institutions with a strong vision and social mission, oriented towards the development of women, young people, rural populations and the most excluded. Second: complementarity: the fund is oriented towards niches and underdeveloped markets and addresses certain complex areas of financial inclusion Third: emerging MFIs: LMDF focuses on entities with an established business model in the local microfinance sector, but for which a lack of funding is a barrier to growing and reaching more needy customers.

"The entry into force of the SFDR marked a step in the right direction, but further regulation and guidance is still expected and is certainly still needed."

What are the ESG benchmarks linked to LMDF’s investments?

Given the nature of the assets LMDF invests in, LMDF has not defined a benchmark per se. The typical benchmarks used by mainstream funds are not so relevant when investing in emerging microfinance institutions. Instead, the Fund has selected a variety of social performance metrics, which it monitors very closely, allowing trends to emerge over time. Some of the key metrics which we monitor are the number of microentrepreneurs reached, the proportion of financing provided to women and those in rural areas, the geographies which are financed – notably the proportion of our loans going to Sub-Saharan Africa. These findings are regularly collated into social performance reports – and from our last report, we are pleased to note that we have now worked with over 296,000 micro-entrepreneurs and over 70% of them have been based in Low or Medium HDI geographies. Although the Fund does not have a benchmark, we do look at the performance of individual investments against a benchmark: Cerise’s SPI4 tool. This tool looks at how Social Performance is integrated into an institution. We examine any outliers and consider whether an investment is appropriate, or whether Technical Assistance, provided via our Investment Advisor ADA, may help.

How do you see ESG benchmarks reshaping sustainable finance in the coming 5 years?
Before the COVID-19 pandemic, we were seeing an increased interest in ESG, or rather in our case, the impact investment sector and these trends have accelerated. We are now seeing an increased understanding of the need for sustainable development and regulatory factors are also supporting the development of the sustainable finance sector. Nonetheless, while reporting on financial performance relies on common standards, practices in ESG reporting are still quite fragmented. In March 2021, the entry into force of the SFDR marked a step in the right direction, but further regulation and guidance is still expected and is certainly still needed. A large focus has been on the “E” in ESG, and we really hope that the “S” does not get left behind in the process, otherwise the same fragmentation in approaches and measurement is likely to persist.