This week I am writing about a Root Capital issue brief that describes how the pioneering social lender is using information on the social and environmental performance of its clients to improve its own financial performance. In the foreword, Root calls for the creation of a community of practice among financial institutions committed to marrying social and environmental performance metrics with more traditional measurements of financial well-being. It may not have to look far.
WHAT COFFEE CAN LEARN FROM MICROFINANCE.
The Social Performance Task Force has already done this across the entire microfinance sector. The Universal Standards for social performance management (SPM) it promotes are the product of years of work among a community of microfinance institutions (MFIs) that decided to move “beyond the books” and add social performance metrics to their management dashboard. The goal? Track the social outcomes of their clients and the social impacts of their businesses with the same rigor that they track their financial performance, and ultimately drive positive social impact through their business models–without ignoring the issue of profitability.
The essence of SPM is “information in action”—the way managers use data collected through those processes to improve their decisions about how and with whom to do business. And when I say “improve,” I mean expanding social impact—practices, products and services that respond better to the needs of poor people and more effectively drive positive changes in their lives.
In our New Year’s resolution #3, we committed to work with allies in the coffee sector to explore the possibility of adapting SPM practices for use with smallholder coffee enterprises. Why? Because many are turning profits year-on-year without effectively addressing the acute social and environmental challenges holding their members back: poverty, hunger, environmental degradation.
FROM DUE DILIGENCE TO PERFORMANCE MANAGEMENT.
The social and environmental due diligence practices that Root Capital describes in its issue brief are related to SPM, but different. Or perhaps more accurately, they are necessary but not sufficient to drive the social performance improvements that represent the goal of SPM initiatives. But Root’s approach may represent an important first step toward the application of SPM principles and pratices among smallholder farmer enterprises.
The first of The Universal Standards is to define and monitor social perfomance goals. Root’s due diligence system does this to some degree already, although the data fields on its social and environmental scorecards are focused more on proxy indicators than outcome and impact measurement.
And Root Capital’s issue brief is about social and environmental information in action. It describes how its due diligence informs credit decisions, attracts clients, grows the loan portfolio, and leads to the development of new products and services, But it is focused less on how these activities improve its social and environmental performance (what SPM does when it works) than how it uses this information to drive improved financial outcomes at the lender level.
As we make good on our New Year’s resolution to better understand what SPM might offer coffee cooperatives, we will consider what aspects of Root Capital’s social and environmental due diligence might offer an SPM-for-coops prototype.