MFIs and ESG Framework: Fostering a Foundation For Sustainable Development

As the MFIs take stride in their bid to foster development, that need to adhere to the environmental, social and governance framework to make it sustainable

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Microfinance institutions work toward the purpose of providing capital access to micro, small-scale entrepreneurs--especially women from economically weaker sections of the society--for whom the mainstream financial services are mostly unreachable or unapproachable. Mainstream financial service providers have designed their services in such a way that it generally excludes those hailing from economically weaker sections and they also have limited operational reach, hence, they are not positioned to service the bottom of pyramid communities, while MFIs include them and help foster their social and economic development at the grassroots level.

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However, MFIs should now look for overall sustainable development by including ESG framework as there lies an opportunity to reset and build an improved economic ecosystem that works for both people and the planet. Very few sectors are better placed to drive this transition to sustainability and a stable future than the microfinance sector. A well-established ESG framework can help keep the development achieved irreversible and sustainable.

It has often been stated that India beyond metro cities is a different world altogether. For a sizeable population living in villages and small towns, development let alone sustainable development is a word beyond recognition. There are two prime factors behind this: either the younger generation has migrated to metros for better jobs or there is absolute scarcity of adequate resources for employment generation in villages. This also results in undue pressure on the urban infra and environment, thereby leaving people scrambling for essentials.

Having providing financial support in the form of small loans in the rural parts and also creating employment opportunities by recruiting employees from these sectors, MFIs can help in plugging the gap, eventually slowing down the urban-rural migration cycle. While the burden on urban infra would be minimized, many sources of pollution could also be blocked, resultantly benefiting the environment. In addition to it, MFIs promote renewable energy and wellbeing by financing solar lanterns, sanitation facilities, bicycles, pressure cookers and conduct activities such as sapling plantation drives, etc., as part of their community outreach activities.

Many of the programs by microfinance institutions undoubtedly bring about a slew of societal changes by ensuring financial assistance and support to women entrepreneurs. While it acts as a catalyst for empowerment and financial inclusion of women, it also helps them acquire new skills and explore varied options to earn livelihood. Such actions, which are an indispensable part of the ESG framework, alleviate social evils too in the course of benefitting women in rural and remote parts of India. The added boon of it is that it can help eliminate crimes against women and instances of domestic violence.

With theirwidespread outreach in rural sectors, microfinance institutions play a key role in financial inclusion of the masses. MFIs also need to realize how crucial their role is in upliftingthis class of people without harming the environment. As we can see, recurring natural disasters owing to climate change has already acted as a wake-up call for all and emphasize the need for embedding ESG policies into MFIs corporate strategy for managing risks and returns. We also need to build resilient systems along ESG for long-term value creation.

While what the MFIs do for the environment and society is extremely important, one cannot ignore the internal processes and governance policies that constitute the ‘G’ in the ESG framework. When we say internal governance, we basically refer to the processes adopted, operational practices and control, among other aspects. Adhering to the same, the microfinance institutions can make informed, effective decisions and devise policies that are compliant with different laws and rules, simultaneously fulfilling the needs of stakeholders. Every company, which is itself a legal creation, requires governance. It, therefore, becomes extremely crucial for institutions such as MFIs to put in place long-term strategic and sustainable vision along with a properly structured Board, which is empowered to take objective decisions.

Equally important is the participation of independent women directors on the board of the company. Besides, there should also be regular performance assessment and compensation review of all employees across different hierarchies. Transparent financial reporting and compliance track record further add merit to the ESG framework of an institution.

As the MFIs take stride in their bid to foster development, that need to adhere to the Environmental, Social and Governance framework to make it sustainable and long lasting -it helps in ascertaining the future goals and further sets the course of societal and economical progressions.