The Case for Social and Environmental Awareness in Finance

Root Capital is a nonprofit social investment fund that grows rural prosperity in poor, environmentally vulnerable places in Africa and Latin America by lending capital, delivering financial training, and strengthening market connections for small and growing agricultural businesses. In our very first issue brief, we examined the increasingly convincing business case for financial institutions to conduct due diligence on the social and environmental practices of their borrowers.

Here are three takeaways from the brief:

1. It’s a competitive advantage.

For financial institutions, conducting due diligence on the social and environmental practices of borrowers and investees is not just a way to create impact or implement corporate social responsibility. It’s also a competitive advantage that pays for itself, at least partially, and may even bolster the bottom line.

As the brief explains in further detail, we have found alignment between social, environmental, and financial interests to be strongest in five areas:

1. Identifying and mitigating risk;
2. Generating new business;
3. Identifying businesses with growth potential;
4. Strengthening client businesses by improving their relationships with suppliers; and
5. Identifying opportunities to support more of our existing clients’ unmet financial needs.

Of course, Root Capital is far from the first financial institution to consider these factors. Our partners at Citibank have arrived at similar conclusions, as Courtney Lowrance, Citi’s director of Environmental and Social Risk Management, recently discussed with Root Capital CEO Willy Foote.

2. Low cost, high reward.

The financial costs of social and environmental due diligence are surprisingly low, and the financial benefits surprisingly large.

For example, Root Capital’s own social and environmental due diligence process adds only modest time and cost to our credit underwriting process – at the same time, evidence from our portfolio suggests that the financial benefits may be on the same order of magnitude.

It’s also true, however, that the initial costs of developing due diligence tools may represent a barrier to adoption by other institutions. That’s why we published our Social and Environmental Scorecards, in hopes that others can avoid some of the fixed costs of development.

3. There’s even more important data out there.

While data about impact and the costs and profits associated with loans subject to social and environmental due diligence are increasingly available, we still lack counterfactual – in other words, what would our profitability and impact be without social and environmental due diligence?

Creative solutions to this challenge will help convince more financiers and food companies to incorporate social and environmental issues into their decision-making. We need more practitioners to roll up their sleeves and collect and analyze data to prove, disprove, or expand upon the knowledge we already have.

This Issue Brief is a small first step in that direction. Download the brief for more findings, including the five main ways in which social and environmental due diligence has improved Root Capital’s financial results.

In the meantime, feel free to use the comments section to move the conversation forward. How can we get more data to build the business case for financial institutions to consider social and environmental factors in their lending? Which commercial financial institutions are already using similar tools and approaches, and what can we learn from them?