“The need to act in the face of environmental risks is a logical consequence of the mission that our institution has set itself: come to the aid of the most vulnerable populations.”
Historically organized to promote access to finance for vulnerable populations, the microfinance sector must change its tools and methods of intervention in a climate and environmental emergency that can no longer be ignored. Rural populations living in economically fragile areas are very exposed to these effects in fact, as they are dependent on agriculture and have difficulties in accessing basic services (access to water, energy, acceptable sanitary conditions, etc.).
We conducted a series of qualitative interviews with the microfinance institutions that are partners of the Grameen Crédit Agricole Foundation so as to gain a better understanding of these mechanisms. This approach enabled us to identify the main environmental risks gauged by these institutions and the means implemented to prevent and address them. We share here some elements of analysis as well as the avenues of reflection that our partners have already embarked upon.
1. Meteorological risks are in most urgent need for response
Natural disasters of meteorological origin and the disruption of the seasonal cycle are having an increasing impact on the activities of MFI clients. For 65% of our partners, meteorological risks will be the most important environmental threat in the near future. Vulnerable and rural populations in particular are more exposed because they depend on agriculture, their infrastructures are fragile or they have difficulties in accessing healthcare. Our partner institutions share many examples of disruptions that impact their clients’ business. Droughts affect yields and reduce access to clean water, and floods destroy crops and infrastructure and interrupt supply chains.
The scale and nature of environmental risks vary greatly by region. Sub-Saharan Africa is the geographical area where our partners suffer the most from meteorological risks, which have already materialized for 40% of them. Significant risks of soil erosion and pollution are also reported in this region more than elsewhere. Conversely, health risks linked to air pollution are more worrying for our partners in Eastern Europe and South East Asia.
2. Strong awareness, but not very significant implementation yet
Our partners are largely aware of the environmental risks that weigh on their activities. The vast majority of respondents (88%) consider that protecting their beneficiaries against environmental risks is part and parcel of their mission. This does not necessarily translate into concrete actions at the moment, however. The commitment of the institution’s governance appears to be an indispensable prerequisite: many institutions indicate that decisions in this direction are taken and implemented only when governance is really involved in monitoring environmental issues. Of the 88% of respondents who believe that environmental aspects are included in their mission, 16% do not yet have tangible governance involvement in these issues.
3. Institutions are not yet sufficiently proactive on environmental issues
One of the levers for encouraging institutional governance to take action is client demand: many institutions have observed that when clients express their expectations regarding specific services or financing relating to the climate transition (irrigation equipment, adapted seeds, access to energy, etc.), boards of directors are more inclined to want to develop new offers and to ask their teams to be more involved in this issue. Only 40% of our partner MFIs get explicit requests from their clients on these environmental issues however, which suggests that there is real potential on this point.
The influence that donors can also have reinforces this institutional commitment. Many among our most advanced partners on these subjects have been encouraged or supported by their own financiers to define an environmental strategy or to design inclusive green finance products. This is the case for four of the seven Grameen Crédit Agricole Foundation partners with whom we conducted qualitative interviews.
4. Inspiring initiatives have already been implemented by some institutions
Several of our partners have already put in place interesting initiatives to strengthen the resilience of their activities to environmental risks and limit the portfolio’s contribution to these risks.
In order to protect clients and by extension their business, 51% of our partner institutions are making their clients aware of the vulnerability of their business to the effects of climate change (lower yields, impact of meteorological hazards, etc.). 35% of them have exclusion lists, which ban the financing of practices that weaken the activities of clients, such as the use of pesticides or overexploitation of the land, which pollute and impoverish the soil. One third of our partner MFIs train their clients in more resilient practices, especially in the agricultural sector. Finally, one of the most common actions is to promote precautionary savings, offered by 25% of the institutions. It enables small producers to make provisions and anticipate potential climatic hazards (drought, floods, cyclones, etc.).
Another effective action to protect clients is to propose specific insurance offers, particularly agricultural, but their implementation is often difficult and complex. Fewer offer emergency loans and loans with flexible conditions precedent so as to respond quickly to the needs of clients in the event of a natural disaster.
To limit the contribution of clients’ activities to environmental risks, 65% of our partners have adopted what could be called “sector policies.” These policies exclude activities that contribute to deforestation, water or air pollution or waste generation. More than 50% of our partners raise their clients’ awareness of the impact of their activity, for example the over-consumption of water or energy. 51% of the MFIs surveyed finance low-consumption equipment or transitions to clean energy. This includes, for example, low energy cooking, solar equipment and home insulation. Finally, 47% finance environmentally friendly agricultural and livestock practices. This financing is often complementary to training and awareness-raising actions for clients for strengthening agricultural value chains.
5. MFIs face many obstacles in implementing their environmental offerings
Whereas we can provide many examples of initiatives among our partner institutions, these still concern a limited number of them. Although 64% of the institutions that responded to our survey have future plans on these themes, they are confronted with financial and technical obstacles: 78% of them claim to lack the financial resources and 52% the expertise to implement their projects. In terms of financial support, the MFIs would like to have lines of financing of more than 3 years, as well as loans at advantageous rates indexed to environmental performance objectives. Technical assistance is also an effective tool to support businesses in designing new products, raising awareness and training their customers, and adapting their business to be more resilient and environmentally friendly. Our interviews revealed that receiving technical assistance plays a key role in their development, and the needs of MFIs for technical assistance are significant. In particular, many of our partners are interested in developing an agricultural micro-insurance offer, which requires a lot of resources and specific knowledge.
6. In conclusion
In order to move the microfinance sector forward on environmental issues, it seems necessary to mobilize the governance bodies of microfinance institutions. In addition to the support offered by donors, which should be strengthened, such mobilization can be achieved by learning from and replicating existing effective practices on a large scale: sharing experience by and between institutions, organizing forums and focus groups, designing adapted financial products such as microinsurance or the financing of agricultural value chains.
An “environmental protection pathway” remains to be built together with our peers and partners (like the SPTF-CERISE customer protection pathway), building on existing initiatives in the sector (Green Index, ALINUS). The practice of “green loans,” which is rapidly gaining momentum in other sectors, should be further promoted in microfinance as well. This would for instance entail offering preferential rates indexed to environmental performance targets.
Technical assistance is essential to enable institutions to implement concrete actions. As regards the Grameen Crédit Agricole Foundation, adapting the offer to the needs of the institutions is one of the key learnings of the in-depth assessment of “Our Technical Assistance Facility.” This need for adaptation applies particularly to assignments on environmental issues: the environmental risks that affect the activity of our partners vary greatly from one region to another, and even from one MFI to another. It is therefore necessary to design a technical assistance support system that is flexible and adaptable to the specific features of the institutions and the economic situation, without imposing overly precise themes and standardized methodologies. This should be accompanied by a wide variety of possible funding for different types of technical assistance missions. Another learning identified in the publication is the need to think about models for measuring the impact of missions on environmental issues, with the formulation of precise objectives and indicators.
In order to define relevant common indicators, both in terms of direct and indirect impact through portfolio activity, it is necessary to agree collectively on good practice and common definitions. In particular, the sector can reflect on support for and the development of a more sustainable agriculture, which is undoubtedly one of the major challenges of the most fragile countries on the African continent.