Sustainable finance in action: How Oikocredit selects partners using ESG criteria

For almost 50 years, Oikocredit has been extending loans and investing in partners across Africa, Asia and Central and South America to help improve people's living conditions. This includes targeted efforts to enhance income, address social issues and promote environmental sustainability. But how does Oikocredit choose which partners and projects to work with?

On the financial side, it's relatively simple: Oikocredit works with the borrower – such as a financial services organisation, an agricultural cooperative or a renewable energy company – to assess how the loan will be used and whether repayment is assured. Such an assessment is a core tool of the financial sector, but here it is sensitively adapted to each local context.

Social impact metrics such as sustainability, however, require a different assessment by their very nature.

Central tool for evaluating non-financial criteria

For more than a decade, Oikocredit’s ESG scorecard has served as the cooperative’s primary tool for evaluating non-financial criteria, encompassing Environmental (E), Social impact (S) and good and responsible corporate Governance (G). We have defined specific, measurable criteria in each category. These are rated by using a points system and corresponding weightings, making it possible to compare various partners and their work objectively.

Examples include environmental protection, which focuses on eco-friendly practices and compliance with local sustainability standards. In the social area, the focus is on creating and sustaining decent jobs, but also on concentrating on specific underserved groups, such as rural communities, women and marginalised populations who may find it difficult to obtain a loan.

Responsible lending and corporate governance naturally include compliance with local labour law, as well as other factors such as a systematic approach to employee training and fair management-to-employee remuneration ratios.

In total, Oikocredit’s ESG scorecard evaluates around 20 individual criteria.

Four versions of the ESG scorecard

There are four scorecards, each tailored to a different type of organisation. These comprise:

• microfinance institutions
• financial institutions that fund SMEs
• agricultural organisations and
• renewable energy organisations.

For instance, a microfinance institution can promote environmental awareness or green products among its borrowers, while a company can orient its working methods and the technology it uses directly towards ecological criteria.

Why is the ESG scorecard such an important tool?

The scorecard translates broad goals such as environmental protection, social responsibility and good corporate governance into specific, measurable and actionable terms – a challenging but essential task.

The ESG scorecard provides a practical basis for discussions with potential partners and makes it easier to compare like for like. It helps identify partners’ strengths and weaknesses and enables the development of clear action plans to address any needed adjustments.

Oikocredit repeats the evaluation for each organisation annually to track progress over time.

Scorecard plus experience and expertise

However, the ESG scorecard is not a panacea that can be used to standardise and perhaps even automate the lending process, such as by setting a benchmark score or ‘pass mark’. It cannot replace the experience and nuanced expertise of Oikocredit staff.

Not all partners are strong on every point, for example. Some partners may excel in social impact (e.g. creating new jobs) but do not focus on environmental issues, while for others it is the other way around.

In such cases, the scorecard helps Oikocredit create a balanced portfolio of loans and partners across all ESG and financial criteria, where no partner falls below predetermined limits.

Partner monitoring using the ESG scorecard

We apply the ESG scorecard not just for screening but also to monitor our partners, a practice we have followed for over a decade.

In line with our own strategy, we support partners in improving on ESG matters and track this on a quarterly and annual basis. We assist them, for example, through environmental training and by connecting them with resources such as those offered by organisations like Cerise+SPTF.

With the ESG scorecard as a foundation, Oikocredit not only selects but also actively supports its partners’ development, illustrating the unique combination of structure and flexibility that defines the cooperative’s approach to sustainable, responsible lending.

Read more about how we choose our partners: Financial inclusion: How does Oikocredit select its partners?.

Or watch a video about it: Impact report partner selection.