“We will actively support responsible digital financial services providers to innovate and expand the range of financial services available to underserved groups to help them reduce their vulnerability, build assets, and mitigate their risks for an inclusive digital economy.”
–Investor Guideline #1
Responsible investing for inclusive energy access
As co-founding Signatories of the Investor Guidelines, CDC Group and FMO have been actively supporting the development of the GOGLA Consumer Protection Code (CP Code) in the off-grid solar industry, together with the DOEN Foundation.
GOGLA is the industry association for the off-grid solar energy sector and counts several Signatories among its members, including CDC, FMO, IFC, and responsAbility. As signatories and supporters of the code, investors are taking a proactive stance to encourage their investees to protect customers, particularly in more remote or rural areas, along with scaling innovation in this evolving sector.
The CP Code, which was developed in collaboration with a diverse group of stakeholders including solar companies themselves, was created to enable off-grid solar energy companies to monitor and improve their practices, as well as provide investors with a framework for good consumer protection practices. Funders who endorse the CP Code commit to supporting companies willing to abide by the code. Digital financial services play an important role in the off-grid energy value chain and the CP Code aligns with Investor Guideline 1, to promote responsible investments in digital finance.
The opportunity to mitigate risk and drive value through consumer protection
CDC has several investments in the sector, for example contributing over €20 million to the Energy Access Ventures Fund and directly investing about $65 million in off-grid solar companies over the past four years. In addition to direct investments, FMO also invested towards financing renewable energy companies via the Access to Energy Fund launched jointly with the Government of Netherlands and other investors.
Many of these companies use a Pay-As-You-Go (PAYGo) model. PAYGo is an asset financing tool for off-grid solar home systems and, in the second half of 2018, made up nearly a quarter of the almost 4 million off-grid solar units sold. To mitigate the supply chain challenges related to rural or hard-to-reach customers, PAYGo providers have leveraged digital tools such as mobile money for collecting customers’ payments. This exposes customers to financial risk on top of the existing product risk.
As CDC has noted, the Consumer Protection Code is “…all the more important in the hybrid PAYGo business model that combines digital financial services and physical solar products, creating a broader set of potential customer risks than traditional microfinance lending.”
By committing to the GOGLA Consumer Protection Code, CDC and FMO investees agree to uphold transparency in marketing materials, responsible pricing, provision of good customer service, product quality, effective data privacy rules, and fair and respectful treatment of customers. As a first step, the investees must identify the degree to which they are already fulfilling these obligations using a self-assessment tool provided by the CP Code.
Aside from providing a framework for establishing best practices and consistent standards at an industry level, the CP Code offers CDC and FMO an opportunity to work directly with portfolio companies to help them identify potential areas of risk to customers and create action plans to address these risks. PAYGo companies – which are typically more familiar with country risk and foreign exchange risks – can under-estimate the risk associated with their customers. The pressure to scale, for example, can lead to a prioritization of quantity over quality of customers resulting in problems such as mis-selling which can lead to repayment issues.
Encouragingly, independent of GOGLA, other investors have identified some of these same areas as fundamental to building sustainable off-grid providers. Apis Partners, for example, cites the importance of developing the right incentives for agents – who often provide the first and sometimes only customer service interaction on behalf of a PAYGo company. In addition, investees are encouraged to focus on optimizing product quality for the market; sub-optimal products lead to sub-par repayment rates.
Conversely, the flexibility offered by PAYGo providers must be wielded carefully. CGAP, the Consultative Group to Assist the Poor, has indicated that this flexibility can lead to higher than expected non-repayment rates by customers, as they might opt to fulfill less flexible debt obligations first. Further research is required to figure out the right balance between profitability and flexibility of contract terms to fulfill the goal of “fair and respectful treatment”.
Towards 2030: Consumer Protection with Growth
As the off-grid solar industry and PAYGo business model continues to grow, an equally important goal is to continue to mainstream consumer protection practices. Hence, parallel with efforts to mainstream the CP code, CGAP and IFC-World Bank’s Lighting Global are working with GOGLA to convene investors, companies, technical experts, and government representatives to help test, update, and mainstream company performance KPIs into the financial sector to ensure that PAYGo companies can continue to sustainably serve their customers.
With the right set of standardized financial reporting and benchmarks, potential investors could better evaluate sustainable performance for the PAYGo sector. A complementary framework is being developed for an open, transparent process addressing PAYGo financial analysis and reporting. Based on research conducted by technical partners, off-grid solar product quality standards are continuously being improved in response to the international requirements and consumer feedback, such as to provide increased photovoltaic and battery safety requirements, as well as additional labeling and performance reporting requirements. These evolving industry standards, best practice guidelines and tools aim to contribute to ensuring the sustainable and inclusive growth of the off-grid solar industry, with the potential to demonstrate how commercial and development impact goals for inclusive energy access can go hand-in-hand.
The CDC Group is the UK’s Development Finance Institution and has the mission of supporting the building of businesses throughout Africa and South Asia, to create jobs, and to make a lasting difference to people’s lives in some of the world’s poorest places. The GOGLA Consumer Protection Code was sponsored by CDC Plus, CDC’s technical assistance team which provides expertise, networks and risk capital to improve performance and deepen impact of current and prospective investees, and to reshape industries. CDC Plus is funded by UK Aid from the UK government.
FMO is the Dutch development bank. Since 1970 we have been a driving force behind investments empowering local entrepreneurs in emerging markets. We believe in a world in which, in 2050, more than 9 billion people live well and within the means of the planet’s resources. We invest with the aim of enhancing local prosperity in places where this is needed most. We focus on the private sector in the following three industries: Energy, Financial Institutions and Agribusiness, Food & Water. In these markets we empower entrepreneurs to build a better world. We take risks that the commercial sector is not willing to take.
IFC—a sister organization of the World Bank and member of the World Bank Group—is the largest global development institution focused on the private sector in emerging markets. We work with more than 2,000 businesses worldwide, using our capital, expertise, and influence to create markets and opportunities where they are needed most. In fiscal year 2019, we delivered more than $19 billion in long-term financing for developing countries, leveraging the power of the private sector to end extreme poverty and boost shared prosperity.