Q&A: Swedfund CEO on expansion plans, investment priorities

WASHINGTON — Over the years, Swedfund, Sweden’s development finance institution, has refined its focus and processes, and now CEO Maria Håkansson would like to see it double in size. Swedfund today has a portfolio of about $500 million, and while it used to work on a global level, it now only works in sub-Saharan Africa and a few countries in Asia where it believes the needs are the greatest and it can make the biggest contribution. About 65% of the DFI’s portfolio is in sub-Saharan Africa and it focuses on three sectors: climate and energy, renewable energy, energy efficiency, and increasingly water and other climate solutions; health, with a focus on specialized clinics such as cancer or heart clinics; and small- and medium-sized enterprises and financial inclusion as a means to drive job creation and access to capital, largely delivered through banks or funds. Swedfund is also focused on working more in post-conflict and fragile states and is working with its owner, the Swedish government, to adjust return expectations as they look to riskier investments, Håkansson said. Devex sat down with her to discuss Swedfund’s priorities, how it works, and where it’s heading. “What differentiates a DFI is ... that we can be very active in how we work on supporting the things that we want to achieve.” --— Maria Håkansson, CEO, Swedfund The conversation has been edited for length and clarity. What are your current priorities? If you look at our business model, we focus on impact on society, sustainability, and financial viability. And then from our owner, we have two cross-cutting themes that have to be part of everything we do: that's climate and women empowerment. We believe very much that the value add that the DFI does beyond being additional and catalytic is of course that we are a very active owner and a sustainable owner, we are long-term but our capital that we provide also comes with conditions and support. But it's not enough for us to put the requirements forward. What differentiates a DFI is also that we can be very active in how we work on supporting the things that we want to achieve. If we want to go to more of the post-conflict and the poorest countries in the world, the starting point is often very poor. It's important for us to try to illustrate the change that we achieved in the period of time. We have actually moved when it comes to sustainability [from] looking earlier on at the ESG [environmental, social, and governance] part as being more of a risk mitigation to today actually saying that that's maybe one of our most important value creation tools. What type of conditions and support do you provide and how does it vary, for example in investments through funds? For us, the important part is where do we identify the risk and which kind of actions do they need to undertake. We normally put some kind of action plan into place that we follow up. We say that during the first three to five years, the company actually has to commit to a number of actions that they have to implement. One good example is around decent work and around the role of women empowerment where we could actually put a requirement, which could be that they have to improve on working conditions and they need to increase the share of females in leading positions. And then we would actually finance that — normally through a technical assistance project where we could do a study. And we would also run, for example, our program Women for Growth, which is very much focusing on actually improving the working conditions for women and also targeting to increase the share of women in leading positions. It could be any kind of technical assistance project, of course, around the environmental questions or around anti-corruption, but it can also be how we actually act and put effort into working in the different boards ... or trying to guide them, put advice forward on which investments to make. Does Swedfund have financial return targets that you have to meet as part of your mandate? There's not an individual threshold for each investment but overall Swedfund has to be profitable, so it's on a portfolio level that we have to achieve a return over time. “If you put too stringent return requirements, you may make us less inclined to make those most difficult investments that we also have to make.” --— How do you define profitable? Is there a specific level of return you have to receive? The way it has been expressed previously, which is not so good, is that we have to generate a profit, so it has to be above zero. That has been kind of the condition. Now we've had a discussion also saying that I think it's important that you look at the portfolio in two dimensions because as a DFI we need to take risk. We are actually in a project with our owner as we speak, where we're looking to the return requirements and how do you create the best balance between return and our mission. We want to invest in the poorest countries in the world and in some cases, we need to take additional risk. So what's the balance? So what we have said is two things, that we will look at the return and profitability over a longer period of time, because previously we've been looking year by year. Now, we will have a rolling profitability measure, we were discussing some five to seven years, which I think is a better way to actually reflect and then you can put different targets on it. And the second part is that maybe we should, as I know some other DFIs have done, actually also separate a certain part of the portfolio where we say that these are so high-risk investments where we are just happy to get back the principal or maybe not even that. So we don't have the same measurement on the entire portfolio. I am willing to take a bigger risk if the impact is bigger in a single investment, so it's very very important for us overall to look at the total portfolio. And then, we need to kind of line up with our owner and that's the discussion we're having right now. Should we make a larger share for example in post-conflict and fragile states? That has, of course, an impact on the return and how do you find that right balance. I think that's the important discussion when you talk about returns for DFIs because that changes the picture of it. And if you put too stringent return requirements, you may make us less inclined to make those most difficult investments that we also have to make. As the profile of DFIs is growing, they are also coming under more scrutiny, with more questions about how they work together and whether they sometimes compete for investments or crowd out private capital. How do you respond to those questions? We work very close to several of the DFIs when it comes to doing investments. We have been very early [movers] when it comes to requirements on gender investments, requirements we put on climate, on anti-corruption, on decent work, on U.N. [Guiding Principles] and so on. So for us it's also been important to drive a harmonization because otherwise, it becomes very difficult to do joint investments. When it comes to competing, I agree with you when it comes to fragile states. I think one of the problems is there are too few projects and they're very small. And I think an important role for the DFIs is also to think about what can we do to actually catalyze more investable projects. Another concern has been with impact measurement and proving that the funds delivered through DFIs are achieving development impact. How does Swedfund look to assess its impact? For us, it's been extremely important that the data that we present has to be objective and unbiased and that someone else is actually looking at it and saying that this is a good description and reflection of the business that Swedfund is pursuing. We have a number of KPIs, which I think most DFIs have, that we track and we follow up on a portfolio level. We try to make sure both on the portfolio level that we achieve an improvement and also, of course, on each individual investment that we achieve the targets that we have set. We work with what we call integrated reporting, which means that our auditors are making the same kind of audit on the data related to impact on society and on sustainability as they do on the numbers. And this has been quite a cumbersome and tough process for us, but it also means we generate a lot of trust around the data when we present because there's actually someone else auditing our data. And I think that's a very important part. If you can get it to the same level as your financial statutory reporting and it has actually been audited, then I think you increase the transparency and the trust of the data, and I think that's really, really important.