Microfinance Needs Better Policies to Safeguard the Environment

Many see microfinance as a solution to poverty.  It may be a powerful tool, but what can it do to finally build the sustainable economy we desperately need?  Of what use will microfinance be if it contributes to the environmental degradation that aggravates inequality and poverty?

There is no shortage of policies that govern the environment and policies that regulate the microfinance sector.  Many microfinance institutions have their own internal environmental policies. Voluntary policies are nice, but there is a lack of action on the part of government to impose sustainable practices in the microfinance sector, but, it isn't for a lack of ideas for such policies. Here are some:

Reporting and transparency

The Natural Capital Declaration is an initiative aimed at financial institutions to commit to integrating natural capital considerations into their decision-making processes. The declaration sets out a number of policies governments can adopt to induce financial institutions to move in this direction.

One policy is to “require companies to disclose the nature of their dependence and impact on Natural Capital through transparent qualitative and quantitative monitoring.”  Even if lenders are not being forced to favour more sustainable projects, this level of transparency can influence their decisions.

The Asset Owners Disclosure Project is an initiative from Australia working towards this level of transparency.  While they have not gained much support as of yet, this campaign is part of a larger conversation about the need for reporting and transparency that holds promise.

China’s green credit policy

It’s tough out there for a green entrepreneur.  Ask for a loan and you might find yourself competing with projects that are dirtier and more lucrative to the lender.  The World Bank’s International Finance Corporation (IFC) has partnered with the Chinese government to develop a policy solution for this.

A green credit policy is one that calls on banks to direct loan financing away from dirty and inefficient projects and toward clean ones. Enforcement hasn’t been easy, as regional banks have been reticent to recall loans from lucrative projects that have failed to pass environmental muster. The IFC has continued to work with the government to support the policy by engaging with banks in training and the development of assessment systems.

Get the prices right

A 2006 roundtable convened by the Wharton Environmental Management Program and Green Microfinance concluded that while microfinance institutions (MFIs) can do much, they cannot do it all by themselves.  They concluded that governments need to provide an infrastructure in which sustainable activities have market value.

Since that time, the conversation about getting the prices right to create such an environment has gotten louder and louder.  Subsidies, free access to resources and a lack of limits on pollution create perverse incentives that do not take into account the enormous value of ecosystem services.

If policymakers can take into account the value of ecosystem services, they will realize that unfettered, dirty business is actually not cheap, and regulations and taxes need to make them less competitive. Subsidies and tax breaks for clean projects should be considered an investment on the part of the government in the economy’s ability to continue to function in the face of environmental change.

Feed-in tariffs

Germany, France, China, Czech Republic and Ontario, Canada are among some of the locations that have strived to get the prices right by agreeing to pay small-scale, renewable energy producers a competitive rate for the electricity they contribute to the grid. Buying and installing solar panels and windmills is a capital intensive project that would be well served by the services of microfinance institutions.

Coming up

When it comes to policies that govern the behaviour of microfinance institutions in their interaction with the environment, so far the only ones that exist are voluntary and internal. As long as the impacts of projects are unreported, sustainable projects are expected to compete with dirty ones for loans and the prices remain out of sync with the value of ecosystem services — microfinance cannot be the green hero we need.

The financial sector is among the slowest industries to respond to change.  Financial institutions generally don’t change until it is absolutely necessary. Governments have the ability to force these changes to make the market more welcoming to small-scale, environmentally-sound economic activity.  The question is: how much political capital do they have to do so?

By Mariana Gerard, Charles Ojei, Windhi Trianugrayati, Jacquelyn Pinckney, Sovanlyna Phin, and Samuel Benoit. The authors are Master of Social Entrepreneurship candidates at Hult International Business School. 

[image credit: Frank van der vleuten: Flickr cc]