Microfinance has evolved enormously in recent decades. Do professional investors see this as a mature investment segment, like stocks and bonds for example?
Crijns: “We are not quite there yet, but it’s clear that the market is starting to look at the investment segment very differently. Triodos Investment Management has been investing in microfinance for over 25 years. Until about 15 years ago, the main reason professional investors invested in the strategy was the positive impact we generated. But since then, I've noticed that the risk-return profile has become an increasingly decisive factor. We have now built up a long track record of stable returns combined with a low correlation to traditional investment categories. We have shown for a long time that our method of investing in emerging markets is much less risky than you might think.”
What is the reason for the relatively low risk profile?
Crijns: “Triodos Microfinance Fund invests in banks and financial institutions in more than 40 developing and emerging economies. These institutions provide loans to small-scale local entrepreneurs. I recently visited 3Bank (previously named Opportunity Bank Serbia) in Serbia, which is one of over 100 financial institutions in our portfolio. 3Bank provides credit to small-scale farmers who have little or no access to the traditional banking sector. This is small-scale farming, with 20 to 30 cows that are fed on corn or other crops that the farmers grow themselves. Loans by 3Bank provide farmers with the opportunity to expand their operations, ensuring they have sufficient income even during challenging years.
Furthermore, the institutions we work with do not only provide credit. For example, farmers often receive training on how to deal with drought more effectively, or how to make their homes more sustainable. This greatly increases their chances of building a better life for themselves. It also increases the likelihood of paying the interest and eventually paying off the loan. The repayment rate by microfinance clients is between 95% and 99%. The microfinance institutions we invest in also have a buffer to absorb setbacks. Investing in microfinance in emerging countries is not as challenging as it may seem at first glance.”
“Our role is critical for the development of rural Serbia"
You are a fund manager of both Triodos Microfinance Fund and Triodos Emerging Markets Renewable Energy Fund. How do these funds overlap?
Crijns: “Triodos Microfinance Fund provides loans with a maturity of several years to institutions that serve tens of thousands of local entrepreneurs, while Triodos Emerging Markets Renewable Energy Fund invests in solar or wind energy projects often with a term of at least 10 years. In addition, you often do business with a single large electricity buyer, rather than the investment going to thousands of businesses.
Yet there are many similarities between the funds. In both cases, it is very important to properly analyse and manage country risk. Another similarity is the positive impact created by addressing inequality. With both microfinance and access to renewable energy, people are given the resources they need to develop their talents and improve their livelihoods. ARC Power's Clean Energy Expansion Plan demonstrates a successful combination of these elements. This energy company aims to make clean energy accessible and affordable for all residents of Rwanda. The project we are financing will connect more than 30,000 households to the electricity grid for the first time. From an ESG perspective, these types of investments score very well on both the Environment and the Social pillars.”
There is an increasing focus in the investment world on measuring positive impact. How do you approach this?
Crijns: “We explicitly choose to go the 'extra mile' throughout our investment process. We review all projects manually instead of relying on ESG data from a provider. Another advantage of working with many local operators is that we can use primary data to accurately assess the impact of our investments. This gives you a much better picture of the actual impact, rather than the broad picture you can paint from external data. As a result, you sometimes face difficult dilemmas during the selection process. We recently considered a potential investment in a bank that provides student loans for secondary and higher education in Africa. It was a good investment based on the financial figures and the positive impact. But the bank was part of a larger conglomerate that had a joint venture with a mining company in Sierra Leone. In the end, we decided not to invest.
Our 2023 Impact Reports contain both the figures and stories behind our investments. The way we report is also in line with the Sustainable Finance Disclosure Regulation (SFDR). We classify Triodos Microfinance Fund and Triodos Emerging Markets Renewable Energy Fund as Article 9 funds, or dark green, under these regulations, just like all other Triodos funds. This means that all our funds have a clear sustainable objective. Investors in Triodos Microfinance Fund and Triodos Emerging Markets Renewable Energy Fund can be confident that their investments will support local economies in emerging countries in becoming more resilient. This provides people with better opportunities to earn a good living. And our funds’ solid track records help more investors recognise that positive impact comes with a solid, stable and uncorrelated return.”
This is a marketing communication. Please refer to the prospectus and the Key Information Document of Triodos Microfinance Fund and Triodos Emerging Markets Renewable Energy Fund before making any final investment decisions. An English summary of investor rights can be found here. The value of your investment can fluctuate because of the investment policy. Triodos Microfinance Fund and Triodos Emerging Markets Renewable Energy Fund are managed by Triodos Investment Management. Triodos Investment Management holds a license as alternative investment fund manager and UCITS manager and is under the supervision of the Autoriteit Financiële Markten and De Nederlandsche Bank in the Netherlands. Triodos Investment Management may decide to stop the marketing of its collective investment schemes in your country.