About Green Microfinance
Green microfinance is “the practice of weaving the principles of environmental sustainability into the daily operations of microfinance institutions (MFIs) and promoting environmentally-friendly practices and solutions” (yourSRI, 2020). These practices and solutions can be active (providing environmentally conditioned micro-financial and non-financial services) or passive (refusing to finance harmful activities) (Huybrechs et al., 2015) and can be focused either internally, externally, or both. "Green" refers not just to loan products but also to environmental policy, environemental risk reduction procedure, and environmental training to clients (Forcella et al., 2017).
Green microfinance takes many different forms and is thus able to be implemented in a variety of ways that is best suited to each microfinance institution. Examples of green microfinance include:
Providing loan products or incentives that encourage clients to make their businesses or homes more sustainable;
Providing microinsurance to clients to help them better cope with climate change-related severe weather events;
Funding local sustainability projects or renewable energy initiatives;
Offering non-financial sustainable products, such as clean cook stoves or solar panels, through partnerships; and
Providing education and outreach about sustainability.
Why Green Microfinance?
Approximately 90% of MFI clients and portfolios are still not insured against weather or climate-related events (Forcella et al., 2017). This leaves most clients incredibly exposed to climate change-related extreme weather events, events that will only increase in the future. In fact, the 2020 World Economic Forum Global Risks Report has ranked environmental risks as each of the top five risks in terms of likelihood: extreme weather ranks first followed by climate action failure, natural disasters, biodiversity loss, and human-made environmental disasters (World Economic Forum, 2020). Green microfinance can not only help to make clients more resilient through microinsurance, but also through practices that insulate clients from energy instability and price volatility (e.g. through promoting the use of alternative energies).
MFIs themselves also benefit from green microfinance practices from reputational dividends to a positive effect on the financial bottom line. Green microfinance policies can also attract new clients to MFIs, secure portfolios against risks related to climate or client health, allow for development of new markets, and promote innovation and expansion into rural areas, where competition is lower and energy needs and the need for environmentally sustainable practices are higher (Forcella et al., 2017).
Risk management is a key aspect of managing an MFI, however most MFIs do not include climate change-related or environmental risk in risk analyses and assessments. Climate change impacts will greatly impact lending operations around the globe, negatively affecting both clients and MFIs. Drought and crop failures will cause people to flee to cities leading to resource strain, overcrowding, and slums which can fuel extremism and chaos (Lustgarten & Kohut, 2020). Green microfinance means accounting for this shift in demographics and being prepared to meet these new needs. Climate scientists have been underestimating future displacement from sea level rise by a factor of three: "the likely toll being some 150 million globally. New projections show high tides subsuming much of Vietnam by 2050 — including most of the Mekong Delta, now home to 18 million people — as well as parts of China and Thailand, most of southern Iraq and nearly all of the Nile Delta, Egypt’s breadbasket." (Lustagarten & Kohut). This shift in demographics is certainly a risk that MFIs need to prepare for and green microfinance helps MFIs to do so.
Despite its benefits, green microfinance is still not widely implemented or reported on by MFIs, thus institutions that adopt green microfinance and environmental sustainability practices will gain a competitive advantage over other MFIs. These serious adopters could gain access to new investment and funding opportunities through partnerships with forward-thinking impact investors.
Because of its wide applications and flexibility, green microfinance presents many opportunities for collaboration. These collaborations can include but are not limited to: new partnerships with local environmental/sustainability-focused companies and businesses (e.g. alternative energies), new ways to expand social performance funding to include a sustainability component, new funding from partnerships with environmentally-focused investors, and the opportunity to join collaborative investment groups that focus on green investing or specifically on green microfinance.