Green Finance: Bridging the Gap

When visiting low income households, businesses and microfinance institutions (MFIs) in my last trip to Mexico and Nicaragua, I was surprised to see how clearly entrepreneurs, farmers and financial providers could define the very present adverse effects of climate change and how these are impacting their everyday lives, businesses, crops and loan portfolios.

 

MFI agricultural clients suffer from unusually late rains that reduce their crop production, and urban clients note the increased frequency of floods or droughts in regions that have formerly never been affected by these events. In the case of Peru, MFIs link dramatic floods occurring thousands of miles away with the low reliability of local electrical grids that disrupted their clients’ business. In 2009, heavy rains flooded the Sacred Valley of Incas causing massive physical damage and electricity cuts in power plants located in this area.  Micro, small and medium businesses and low-income people throughout the country suffered businesses disruptions and experienced difficulties in repaying their loans in a timely manner. In Argentina, heat waves in the last couple of summers have tested the limits of electrical grid capacity leading to frequent disruptions of service in areas, affecting productivity and income of many farmers and dairy producers. 

 

The MFIs serving these clients, have seen their loan portfolio at risk increase dramatically in the light of these events and have begun to think of climate change as an additional risk that they should monitor together with client creditworthiness, currency risks or operational risks. They also seek to develop new financial products to finance technologies that will help their clients deal more effectively with these challenges. 
 

While support from the international community and government programs will be crucial to the success of adaptation initiatives that will materialize in actions aimed at ultimately benefiting these same MFIs and their clients, those public programs will need some time to take shape and trickle down to the most vulnerable populations.

 

In the meantime, small businesses and low income people are increasingly viewing green technologies that were traditionally considered as mitigation technologies - such as clean energies and energy efficiency - as tools that can help them adapt to climate change impacts. Solar water pumps can help in cases of changes to rain patterns or droughts; renewable energy devices can help maintain a steady energy supply that will prevent further business disruptions caused by climate change and therefore support more stable incomes. MFIs perceive this evolution as an opportunity to tap new markets and reduce their loan portfolio risk, and are consequently willing to become providers of green finance. 

 

Green finance is nevertheless a difficult new financial arena with significant challenges. Some of these challenges can be overcome by providing knowledge through technical assistance for both MFIs and their clients. In these cases, multilateral banks and international donors are key players for implementing pilot projects throughout the world. The IDB´s Multilateral Investment Fund is currently implementing EcoMicro, a regional green finance program that will provide technical assistance to twelve MFIs in Latin America and the Caribbean to facilitate their clients’ access to green technologies. However, the main challenge for green finance continues to be the high price of many of these technologies. 

 

In the past, most green technology initiatives for low-income people in Latin America and Caribbean included subsidies that once removed, disrupted the market.  While technology costs are dropping each day, especially in the solar industry, these cost savings are not always trickling down to markets in lesser-developed countries. The major reason for these high prices is the lack of sufficient scale that can drive unit costs down. The major drivers for scale in green technologies are the mitigation initiatives that developed countries are trying to develop through their initiatives to prevent adverse climate change effects. And at this very precise point is where we see how developed countries support for mitigation developments can very much affect the success of these type of adaptation measures in developing countries. 

 

Counter intuitively, I would argue that these latest developments in the adaptation movement, i.e. taking action against foreseeable climate change adverse effects through the use of green technologies, may become an important stimulus for the broader mitigation initiatives. The urgency and the scale of adaptation needs currently can drive the demand for technologies traditionally used for mitigation. If micro and small businesses and low income people can successfully use green finance to access these technologies, the potential to pent up demand could reenergize international  initiatives, lower the price of green technologies, and serve both developed and developing countries objectives.

 

This novel shift in paradigms could make green finance sustainable without subsidies and could bridge one of the main gaps that separate climate change action for both mitigation and adaptation.

 

With this post, we are initiating a new series leading up to the XV Foromic in Barbados taking place this year from 1-3 October. In the following weeks CGAP and the MIF invite you to explore with us the next frontiers in financing and creating more opportunities for microentrepreneurs and small businesses in Latin America and the Caribbean. We will be discussing emerging issues such as green finance, savings for youth and young entrepreneurs, rural microfinance solutions, and protection of consumers of financial services.