<p style="font-weight: 400;">David is a seasoned executive and entrepreneur who has founded and led four successful organizations on two different continents. Each one serves a wider purpose of promoting a path to human flourishing in its own niche. In addition to the organizations he has started up, David has been involved in the design, setup, and management of numerous public and private organizations across multiple countries.</p>
<p style="font-weight: 400;">Originally trained as an economist with a PhD from Yale University, David has particular domain knowledge in the areas of fintech and development finance, having consulted to financial regulators and providers of digital financial services in many countries in Africa, Asia, and Latin America for twenty-five years. He also has experience in education technology (edtech) through his involvement in online professional education as co-founder and chair of the board of the professional capacity building platform Digital Frontiers. He has completed Certified Professional Coach training approved by the International Coaching Federation.</p>


Founder and CEO, Integral

David Porteous

Jesse Fripp

International ESG frameworks can be a source of both risk and opportunity for financial institutions, but many organizations have not yet engaged and often look to regulators or investors to lead and guide discussions.

Blog Post

ESG frameworks provide standards and guidance for how companies should integrate the consideration of risks and opportunities arising from environmental, social, and governance factors into their practices at all levels. But could the implementation of the frameworks themselves become a source of risk or of opportunity for companies?

We set out to explore this question in a well-defined subset of companies: financial institutions operating in the ‘Global South’, that is, low- and middle-income countries. We engaged with leaders from 32 financial institutions, including banks, fintechs, and non-bank and microfinance institutions with a fairly even spread among them. They represented institutions of different scale—around two fifths were large with over a million current clients, one fifth were small with less than 50,000 clients, and the rest were in between. In a <a href="https://www.fmo.nl/southern-voice-in-esg" target="_blank" rel="noopener noreferrer">new report</a> called Southern Voice in ESG, we seek to provide some answers to this question.

<img class="aligncenter wp-image-45394 size-full" src="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2022/11/ESG-FIs.png" alt="" width="970" height="788" />
<h1><strong>Why Is This Question Even Relevant?</strong></h1>
The question about the potential implications of ESG frameworks is relevant because of the accelerating pace of adoption of ESG measures globally. In some places, ESG measures are known interchangeably as sustainability measures, although both terms are rather vague and ill defined. The pace has been driven by two channels—investors and regulators.

On the one hand, the proportion of institutional capital under some form of ESG mandate has continued to rise, especially in the Global North (high-income countries), so any entity seeking to raise capital there would likely be subject at least to questions. This would apply whether the capital is equity or debt, and especially if it comes from public development finance institutions who have by and large adopted ESG policies relating to their practices.

On the other hand, regulators have become an active channel for entrenching frameworks in domestic regulation, so that they are no longer voluntary but compulsory. While some Northern regulators have been especially outspoken on the issue, Southern regulators have increasingly paid attention. The <a href="https://www.sbfnetwork.org/" target="_blank" rel="noopener noreferrer">Sustainable Banking and Finance Network</a> now has 62 regulators from the global South at different stages of adopting the frameworks. And voluntary frameworks are becoming international standards: consultations on the <a href="https://www.ifrs.org/projects/work-plan/general-sustainability-related-disclosures/" target="_blank" rel="noopener noreferrer">new draft IFRS Sustainability standards S1 and S2</a> closed in July 2022, with the expectation that final standards in these areas may be issued in 2023. Regulators generally require regulated financial institutions as well as public companies to follow IFRS accounting standards, so the influence of standards like these is likely to be global.
<h1><strong>The Frameworks Will Have Material Implications</strong></h1>
Not surprisingly, our respondents already sensed the mounting pressures: almost 80 percent of the people with whom we spoke in the Global South expected that their depth and breadth of reporting would change in the next three years as a result of ESG pressures – in other words, that the frameworks would have a material impact. More than 70 percent said that it was ‘important or very important now’ to have capacity internally on ESG. However, only 7 percent described the current levels of skills and knowledge inside their organizations as adequate for their needs at present – more than half reported ‘some but limited’ or no skills in this area. They aren’t alone – ESG skills are in high demand but are scarce globally, according to this <a href="https://podcasts.apple.com/us/podcast/esg-insider-a-podcast-from-s-p-global/id1475521006?i=1000578199477" target="_blank" rel="noopener noreferrer">recent podcast</a>.
<blockquote>"More than 70 percent said that it was ‘important or very important now’ to have capacity internally on ESG. However, only 7 percent described the current levels of skills and knowledge inside their organizations as adequate."</blockquote>
<h1><strong>What Are the Potential Risks or Opportunities?</strong></h1>
The impact of the ESG frameworks is expected to be material in the next three years, and there is already a shortage of capacity to address them. How could the frameworks themselves be risks or opportunities? During our discussions, we saw the following risks and opportunities:

Potential risks:
<ul>
 	<li>Diversion of skills and focus</li>
 	<li>Costs to implement</li>
 	<li>Distraction from other national priorities</li>
 	<li>Constrained access to capital if not compliant</li>
 	<li>Changed nature of impact from organization’s mission</li>
 	<li>Strategic focus that is not aligned with institutional purpose</li>
 	<li>Rapid adoption may be only skin deep: i.e. “ESG-washing” if the approach is compliance driven</li>
</ul>
Opportunities identified:
<ul>
 	<li>Differentiation from competitors in capital raise</li>
 	<li>Differentiation on staffing</li>
 	<li>Implementing new ESRMs</li>
 	<li>Resourcing for new areas of capacity-building</li>
 	<li>Funding for new portfolio development</li>
</ul>
An issue of rising importance was the heightened emphasis on the ‘E’, with most associated indicators focusing on mitigation of climate risk. As one respondent put it, “The E has landed, the S is nowhere, and the G is hiding somewhere in the other two.” Most Southern financial institutions to which we spoke were ill prepared to report on climate risk measures, although they cared deeply about what some called ‘the S in the E’, that is, the adaptation and resilience indicators among vulnerable populations whom they served, many of whom live in the areas most exposed to the effects of climate change though their own carbon footprints are very small.
<h1><strong>Which Is It — Risk or Opportunity?</strong></h1>
So, what is the answer: are the emerging frameworks seen more as risks or as opportunities? Our sample indicated a mix of both. For example, when asked to indicate their level of agreement on a scale of 1 (fully agree) to 5 (fully disagree) with the statement: “ESG frameworks are on balance a positive force for our organization”, responses averaged 2.7, almost right in the neutral middle, with little difference between banks and non-banks. Responding to the statement “ESG frameworks encourage us to consider opportunities for value creation more than the need for compliance,” responses averaged a very similar 2.8. Similarly, “ESG frameworks create new reporting burdens which are disproportionate to the likely benefits” yielded an average of 3.1, right around the neutral midpoint. However, as one respondent told us, “Different frameworks may bring specific risks or opportunities, but overall, we see having an approach to sustainability is an imperative, not a choice.”
<h1><strong>ESG Voice in the South</strong></h1>
To date, most international ESG frameworks have been developed mainly under Northern leadership and pressure, reflecting the environmental and social priorities experienced there. This is quite different from earlier moves in areas of impact finance, like modern microfinance which was ‘born’ in the Global South and whose leading early practitioners like Grameen Bank’s Mohammed Yunus, BRAC’s Fazle Abed or Bancosol’s Pancho Otero were outspoken social entrepreneurs living and working there.

We sought to understand whether international ESG frameworks considered the needs and context of developing economies. The overall average score here reflected a range of views –with many neutral, perhaps because of lack of knowledge, but some strong divergence around this.

We asked all respondents to identify leading Southern voices with a distinct view on the issue, but received few suggestions. While there clearly is some Southern voice represented in most if not all of the major framework bodies like UNEP-FI or IFRS, there is less evidence at present of a distinctly Southern voice around these issues. However, as Southern-based financial institutions start to pay more attention to the issue of ESG framed in this way, new voices are likely to emerge with the interest and passion to engage locally, regionally, or internationally.

In the course of our discussions, we encountered the view that the impact of ESG frameworks may be less asymmetric by geography (i.e. whether based in the Global North or South) but by size of institution. Small and medium sized institutions have less capacity to hire new skills and absorb the resource costs than large ones, wherever they are based. A proportional approach to the introduction especially of compulsory frameworks is needed to ameliorate this risk.
<h1><strong>What to Do About It?</strong></h1>
Our aim at this stage was primarily to benchmark current reality as the basis of considering future actions. For example, almost half the respondents reported that they had no senior manager with a designated responsibility for sustainability, although one fifth already had placed someone in this role.

The possible strategic stance of a financial institution on this issue depends on how material the issue is, which will vary based on factors like client base, regulator attitude, extent of foreign funding, and the extent to which they believe ESG frameworks are locally influenceable. This will be a function of how much domestic regulators are influenced by international norms, and whether they are open to local adaptation.

Our findings point to several possible directions to mitigate risk and emphasize opportunities:
<ol>
 	<li><strong>Discussion and advocacy:</strong> While less than half of the institutions currently discussed ESG issues in the trade groups of which they are a part, almost double this number expressed interest in being part of discussions going forward. One positive example of <a href="https://fsdafrica.org/press-release/anca-announcement/" target="_blank" rel="noopener noreferrer">proactive engagement is the work of FSDA</a> supporting the piloting of Taskforce for Nature-Based Financial Disclosures, the next frontier within the ‘E’ of ESG, with a sample of large African FIs.</li>
 	<li><strong>Capacity building:</strong> There are many examples of courses being offered, in person and online, but most at present are developed by prominent Northern-based universities like Cambridge or Yale, or Northern professional bodies like the <a href="https://www.iema.net/" target="_blank" rel="noopener noreferrer">Institute of Environmental Management and Assessment</a>. There are opportunities to support regional offerings to spread awareness and knowledge.</li>
 	<li><strong>Technical support:</strong> Several institutions directly asked about technical support offerings. However, in a recent training session for Kenyan banks run, experts from UNEP-FI said that, due to the fast-moving pace in this area, many consultants may not have more knowledge than the bank staff themselves. Local technical support may need further capacity building to be helpful.</li>
</ol>
<h1><strong>Conclusion</strong></h1>
Southern financial institutions clearly believe that international ESG frameworks matter and that they will affect their activities in some way, negative and/or positive, in the next three to five years. As the numerous voluntary frameworks converge and start to harden into standards and even local regulation, it is important that Southern financial institutions have voice and can participate meaningfully at all levels: both shaping international frameworks and especially adapting them for regional and local implementations. The urgency of climate action for mitigation in large emitting nations risks provoking a ‘rush to regulate’ Southern financial institutions whose clients may not themselves be major emitters of CO2, though their livelihoods are highly vulnerable and in need of adaptation support. In the presence of conflicting priorities and constrained local resources, it will take time to regulate appropriately. However, supporting Southern financial institutions to adapt to these priorities over time will likely improve ESG outcomes for these institutions and for the many vulnerable clients they serve.

ESG Frameworks: Risks or opportunities for financial institutions?

Sam Parker

Marc Herson

How investors can develop a smart, agile approach to make early-stage governance more effective.

<span style="font-weight: 400;">Is there value in good governance at the early-stage of a company’s life? It turns out that the answer depends on with whom you speak and on what you mean by “good governance.”</span> <span style="font-weight: 400;">We spent two months speaking widely to investors, accelerators, and founders in the startup investment ecosystem in different parts of the world. This was part of an exercise commissioned by the </span><span style="font-weight: 400;">Center for Financial Inclusion</span><span style="font-weight: 400;"> to wrap up its multi-year </span><a href="https://www.centerforfinancialinclusion.org/about/what-we-do/board-leadership-for-impact-program"><span style="font-weight: 400;">Board Leadership for Impact program</span></a><span style="font-weight: 400;"> by considering governance needs of early-stage companies – ranging from startup to a Series B funding round or equivalent.</span>

<span style="font-weight: 400;">Our interviews showed a disconnect in understanding between funders and founders, caused in part because the word “governance” is vague with different connotations</span><b>. </b><span style="font-weight: 400;">Funders differed in their degree of activism on the issue of governance, but tended to agree on the value of good governance and had a general desire to see certain practices in place over time. This was true whether or not the funder’s strategy or available resources allowed them to be actively involved in investee governance.</span>

<span style="font-weight: 400;">However, founders tended to have less positive views of the value of governance at the early-stage. Some founders experienced a low return on their investment of scarce time and money in formalizing their board. The co-founder of African fintech Zoona, Mike Quinn, writes in his recent autobiographical reflection, </span><a href="https://www.amazon.com/Failing-Win-Hard-earned-lessons-purpose-driven-ebook/dp/B09BDL1HQ8" target="_blank" rel="noopener noreferrer"><span style="font-weight: 400;">Failing to Win</span></a><span style="font-weight: 400;">, that while he spent a lot of time preparing for board meetings, the outcomes of meetings were not focused on the pressing issues he faced as an early-stage CEO. For other founders, governance connoted adding formality and bureaucracy in ways that fettered their discretion and ability to move fast at a stage when there was little time to waste.</span>

<span style="font-weight: 400;">This is one of the reasons why the accelerators with which we spoke tend to avoid putting structured emphasis on the issue of governance, and instead, focus on product-market fit and go-to-market strategies. This Silicon Valley “proverb” expresses the prevailing view of many founders that boards bring more risk than they bring value: “</span><span style="font-weight: 400;">Good boards don’t create good companies, but a bad board will kill a company every time.”</span>
<blockquote class="pullquote--right">Founders who are working on their second or later startup are much more likely to recognize the value of paying attention to governance early on.</blockquote>
<span style="font-weight: 400;">While we heard evidence of this disconnect between funders and founders in our interviews, we don’t want to exaggerate its extent: it turns out that founders who are working on their second or later startup are much more likely to recognize the value of paying attention to governance early on, in part because of ‘scars’ from difficulties they experienced in earlier ventures. And there is value in good governance: funders generally supported the view that investors are willing to pay a premium for good governance – certainly by the time of a Series B round. Even at the time of a seed or Series A round, the lack of governance processes is a negative screen for many investors. Founders can capture more investment value by building a governance roadmap that anticipates how their governance structures and practices will evolve as they mature.</span>

<span style="font-weight: 400;">Part of the disconnect is generated by different understandings of the term governance. Some definitions emphasize the structure and practices, usually focused on the role played by the board of directors. This tends to be the emphasis of </span><a href="https://www.cfainstitute.org/en/ethics-standards/codes/esg-standards" target="_blank" rel="noopener noreferrer"><span style="font-weight: 400;">ESG standards </span></a><span style="font-weight: 400;">designed for and applied primarily to large public companies where the board plays a central role. For startup companies, the board typically becomes the main governing body after an inflection point, usually a seed or Series A funding round in which external investors have at least one board seat. But prior to that point, the locus of governance may well sit outside a formal board and be vested rather in less formal decision-making structures among founders, perhaps assisted by mentors or an advisory board.</span>

<span style="font-weight: 400;">It is important to note that an overemphasis on governance structures misses a key point of what happens to a company during a startup journey: not only is a company emerging out of an idea, but it is also accumulating stakeholders other than the founders – including investors, employees, suppliers, government officials, and the society in which it operates – who have legitimate but often competing expectations that their needs and claims on the company will be considered and met.</span>

<span style="font-weight: 400;">Good early-stage governance amounts to effective and ethical decision-making processes in the transition from founder-centric to a multi-stakeholder environment. Governance is a progressive process along the startup journey: governance practices evolve as the startup evolves. Smart, agile governance</span> <span style="font-weight: 400;">recognizes not only that an evolution towards multi-party decision-making is inevitable but also that it can and should be value adding. The interviews shed light on the importance of reframing early-stage governance more along these lines.</span> <span style="font-weight: 400;">And the rationale for doing so is clear: for founders, good governance pays off through better access to capital on better terms; for funders, good governance helps to de-risk a fundamentally risky early-stage investment proposition. This forms the basis of reconnecting the interests of founders and funders.</span>
<blockquote>For founders, good governance pays off through better access to capital on better terms; for funders, good governance helps to de-risk a fundamentally risky early-stage investment proposition.</blockquote>
<span style="font-weight: 400;">Reframing early-stage governance is important.</span> <span style="font-weight: 400;">Without it, the disconnect between founders and funders may widen. ESG pressures are rising for fund managers, even in alternative asset classes like venture. Without a clear reframing, this pressure may have the unintended consequence of rigidifying early-stage governance so that it is less, not more, effective. That deadweight loss is something society can ill afford at a time when risk capital may become scarcer and when innovation is required as never before to reach the </span><a href="https://sdgs.un.org/goals" target="_blank" rel="noopener noreferrer"><span style="font-weight: 400;">Sustainable Development Goals</span></a><span style="font-weight: 400;">.</span>

<span style="font-weight: 400;">Reframing is also timely</span> <span style="font-weight: 400;">because of recent events in the emerging world, which has experienced a flood of VC investments in the past few years. In April 2022, former employees and an investigative journalist surfaced </span><a href="https://restofworld.org/2022/inside-the-scandal-at-flutterwave-nigerias-fintech-champion/#:~:text=The%20police%20said%20at%20the,ultimately%20released%20without%20being%20charged." target="_blank" rel="noopener noreferrer"><span style="font-weight: 400;">allegations of abuse and misconduct </span></a><span style="font-weight: 400;">at one of Africa’s fintech unicorns, Flutterwave. If found to be true, these may be attributed in large part to lack of good governance. This one case may be the tip of an iceberg: also in April 2022, Sequoia India published a </span><a href="https://www-india.sequoiacap.com/corporate-governance-the-cornerstone-of-an-enduring-company/" target="_blank" rel="noopener noreferrer"><span style="font-weight: 400;">blog post </span></a><span style="font-weight: 400;">reporting that some founders in their portfolio were under investigation for potential fraudulent practices or governance lapses. Their lament expresses the reality that some VCs, in their chase to win deals and be “founder-friendly,” have neglected, or at least underemphasized, their governance responsibilities. Sequoia India has committed to double down on improving governance at its early-stage portfolio companies.</span>

<span style="font-weight: 400;">We hope that other VCs and impact investors will follow suit. We also hope that the outcome will not just be more procedures or controls, though some of that may well be needed, but rather a smart, agile approach to good governance at the early stage.</span>

Is There Value in Good Governance at the Early-Stage?

Duoguang Bei

A wide range of approaches to solving the last-mile problem in delivering financial services has been tried around the world. China is no exception. One group of workers there offers an opportunity for natural experiments. 

One of the most stubborn challenges in financial inclusion has been getting past the famed “last mile” that stands between a well-designed service and the customer, particularly customers in tough-to-reach areas or who have traditionally been excluded from formal services. This is the case in much of China, where there are many remote, rural communities with people who have long been denied access to financial services that promise to boost household resilience and welfare.

But China is also home to solutions that, if pushed to a far greater scale, could get financial services to travel that last mile and generate the “first touch” on a smartphone screen that today represents the new age of products and services.

A wide range of approaches to solving the last-mile problem has been tried around the world. The most common has been the establishment of agents or shared service centers located within shops, employers, or even government agencies.

China is no exception. Regulators and local agencies have encouraged the deployment of shared service centers to augment the agency network established through the Postal Savings Bank. They have even provided subsidies to local businesses to provide these financial services. The effect is that, by 2018, the People’s Bank of China reported the existence of 914,000 rural service centers, covering 99.7 percent of China’s administrative sub-regions. Little wonder, then, that the World Bank’s Global Findex 2017 survey showed that just over 80 percent of China’s adults have a bank account, categorizing them as “included” by the most basic measure.
<h3>Explosion of Internet Access Offers New Access to the Excluded</h3>
Today, most last mile solutions target the 42 percent of Chinese who are not yet using internet or mobile payments. However, that proportion has already shrunk from more than two-thirds only seven years ago, while the share of people using mobile payments has more than tripled to 41 percent. For this large and fast-growing group, “first touch” solutions are required; that is, solutions provided on their mobile phones, bridging the tiny gap between the users’ fingers and their smartphone screens.
The question now is whether these solutions cut out the aggregators; the intermediaries that close the last-mile gap for traditional financial services.

A new <a href="http://bfaglobal.com/projects/the-changing-role-of-aggregators-in-digital-finance-ecosystems/">white paper</a> we’ve just released suggests that this is not the case: in fact, powerful new models of aggregation are emerging in the forms of mobile, app-based financial marketplaces. Created by large techfin companies like Ant Financial and Tencent Holdings, these marketplaces offer customers an expanding range of financial services—digital credit, mutual funds and insurance—offered by third-party providers. Customers can seamlessly transfer funds to providers in these growing ecosystems, and it’s far easier to choose and pay for additional services. It seems likely that these techfins—as new types of digital aggregators—will curate and recommend bespoke financial service solutions using artificial intelligence applied to the wide array of financial data collected, as clients browse and build their financial portfolios (see image above).
<h3>The Rise of the Digital Aggregator</h3>
These new digital aggregators hold great potential to advance financial inclusion by linking clients effectively to financial services that were out of reach before. By reducing the costs of distribution and administration from collecting even small savings, repayments, or premiums, they may make it cost-effective for financial providers to reach people with far lower incomes.

However, will greater choice necessarily improve a customer’s financial health? Hard to say. Financial health is a relatively new term, <a href="https://cfsinnovation.org/research/financial-health/">introduced</a> by the Center for the Study of Financial Innovation (CFSI), and now widely used in the U.S. but less so in other parts. Financial health measures not just whether people have and are using a particular category of product, but whether they can achieve certain outcomes that are considered indicators of financial health; for example, can they meet daily expenses and save a lump sum that is large enough to cover an unexpected expense? Do they undertake longer-term planning of their finances? Do they feel anxiety about their finances? Research in the U.S. has shown that while most Americans today are financially included, a majority are not financially healthy by these measures.

The concept has not been measured or tested yet in China but it seems equally applicable in an environment with high levels of financial inclusion. In particular, as the use of digital aggregation grows, China has the opportunity to research the financial health outcomes from bundling different products for different segments of people. Given that they are now digitally connected and using apps and smart phones, the costs of experimenting with and measuring financial health is much lower than before.
<h3>Delivering (Financial Services) to the Deliverymen</h3>
In our white paper, we cite the example of urban deliverymen who work on a casual basis for e-commerce platforms like Meituan Dianping, typically receiving US $0.20 to $0.50 for each completed delivery. There are now millions of people across China performing similar “gig” work, and their incomes are relatively low (by urban standards) and volatile. Such workers can see their incomes dented at any time by change in their health, by the weather, or even by the day of the week. Many come from rural areas and often leave behind dependent family members. Without a residence permit in urban areas (<em>hukao</em>), these workers lack access to welfare services like health care. They are part share of China’s urban working low-income group. However, aggregated by employment platforms, these deliverymen offer an opportunity for a set of natural experiments; what financial products could they take up and use that would smooth their consumption, reduce their risk exposures, and perhaps even unlock loan or equity capital to start their own businesses at home if they establish a good track record.

Gig workers like these can now be found in most parts of the world. But in China the size of the group, and their existing use of digital platforms for their livelihoods, opens great opportunities to discover whether digital aggregation can travel that last mile to the first touch on an app that could deliver financial health on an epic scale.

David Porteous

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