Greening Microfinance: Clients and the Climate of Change

April 2, 2009    

With environmental challenges—from drought to flooding—disproportionately affecting poor people’s livelihoods, microfinance institutions have a strong incentive to mitigate the risks of climate change while helping their clients adapt to that change, argues Paul Rippey, the author of the latest report from CGAP on microfinance and climate change.

“Within microfinance, the word ‘sustainable’ has tended to be used in a very narrow way, mainly referring to institutions that are financially viable,” says Rippey. “But just as many MFIs have added social performance to their bottom line, they should also consider how their actions—and those of their clients—can help combat climate change."

Multiplying the Impact
It’s not that MFIs, most of which operate in poor countries, should bear more than their fair share of this global burden (after all, industrialized-country emissions dwarf those in the developing world). Still, these institutions can have an exponential impact by empowering their hundreds of millions of clients with the knowledge and financing to effect positive change in their own communities.

Take fuel consumption. Many low-income people, especially in rural areas, cook using inefficient and often dangerous stoves that burn wood and charcoal, a practice that Kirk Smith, Professor of Global Environmental Health at the University of California at Berkeley, has called “the most wasteful, unhealthy, and [greenhouse gas] intensive fuel cycle in the world.”

Simple solutions, like the “jiko” ceramic stoves found in Kenya, are safer and can cut cooking costs by half, says Rippey. Even better, by replacing wood-burning ovens with cookers that run on bottled gas, microfinance clients can help significantly reduce deforestation.

Similarly, innovative lighting solutions that use inexpensive, reliable solar technologies can empower some two billion poor people to switch from kerosene lamps, which are unhealthy and unsafe. That would cut fuel consumption by the equivalent of more than 1.7 million barrels of petroleum a day, or more than the daily petroleum production of Libya.

Paying for It
Making the switch to safer, more efficient technologies is all well and good, but who will pay for it? After all, poor people use kerosene lamps because they’re ubiquitous—and cheap.

Enter MFIs. Although many of the technologies Rippey cites may be too inexpensive to finance through individual consumer loans, MFIs can go a long way toward encouraging environmentally friendly practices by lending to green microbusinesses, including retailers of things like solar panels. The key is to link all parts of the supply chain, from wholesalers, to retailers, to end-users.

India’s Sewa Bank, for example, has formed a close partnership with SELCO, a supplier of solar panels. SELCO, Sewa, and other financial institutions have brought solar electricity to over 100,000 households, while creating new enterprises and employment.

In all cases, a three-way partnership exists between the supplier of the energy-saving device, which also provides installation and servicing, the MFI that provides financing and identifies customers, and the household acquiring the new device.

Investing in Growth
With significant investment and government buy-in, green technologies can create jobs and spur growth, but developing countries still need fossil fuels to build much-needed infrastructure, develop industries, and provide income-generating opportunities for their citizens.

Still, economic development may come at too high a price if it also causes catastrophic changes in the earth’s climate and puts the world’s poor at even more risk of hunger, displacement, or disaster. The CGAP paper, Microfinance and Climate Change: Threats and Opportunities, argues that climate change and poverty reduction must be thought of as intricately linked and mutually reinforcing.

While “MFIs cannot and should not be expected to be the world’s environmental police, the world’s response to climate change simply does not measure up to the size of the problem,” concludes Rippey. “Through their close relationships with tens of millions of microfinance clients, MFIs can effect positive change on a global scale.”