by Jaclyn Berfond - Trends/Challenges -

PAPER WRAP-UP: Microfinance and Climate Change: Threats and Opportunities, by Paul Rippey

Written by Paul Rippey, published in March 2009 as Focus Note Number 53 by the Consultative Group to Assist the Poor (CGAP), 20 pages, full text available at: http://www.cgap.org/gm/document-1.9.34043/FN_53%20ENG_4-08-09a.pdf

The world’s climate is rapidly changing, and climatologists say that the impact will fall disproportionally on tropical and semitropical regions. This will likely make poor countries the hardest hit, and poses a threat to economic development in these regions. In this CGAP Focus Note, Paul Rippey writes that climate change will impact all economies, sectors, and people, and microfinance will not be spared. The recent evolution within the microfinance sector around the understanding of ‘sustainability’, from financial viability to the “triple bottom line of profits, people, and plant,” reflects this new global environment.

The paper gives a brief overview of the science of climate change, and explores the link with economic development. While the often conflicting priorities of economic development and protecting the environment are acknowledged, the author argues that poor countries should not have to pay disproportionately for the price of climate change. Industrial development must proceed, and innovative solutions will have to be found to help poor countries to use energy wisely. Microfinance institutions (MFIs) are potential key players in this effort as they have the “distribution channels, clientele, linkages, credibility, and efficiency that can enable them to reach millions of poor people.”

To this end, the paper proposes ways for microfinance institutions to both combat climate change and help their clients adapt to a changing environment. The proposed responses are divided into two broad categories: mitigation and adaptation. Mitigation focuses on reducing the severity of climate change by limiting greenhouse gas emissions, while adaptation focuses on measures that help people adjust to changed conditions. At the household/business level, microfinance services can help customers reduce their carbon emissions by enabling them to switch to energy sources that emit less greenhouse gas. This can be accomplished by either lending directly to households so that they can purchase energy savings devices or by providing financing to micro-entrepreneurs who supply the devices. Clean energy products or activities that can be promoted include:

  • Lighting: Moving from use of kerosene lanterns to solar/LED lighting.
  • Cooking: Using new approaches such as cookers that use bottled gas, solar cookers, biomass digesters, improved cook stoves, and biomass briquettes.
  • Forestry: Encouraging reforestation and aforestation.
  • Biofuels: Promoting biofuel production where organic wastes are already collected.
  • Low-carbon agriculture: Helping farmers adopt low-carbon paths to production including no-till agriculture, integrated pest management, intercropping/crop rotation, and drip irrigation.
  • Adaptive agriculture: Assisting clients with crop choice and farming practices in the face of a changing environment.

At the institutional level, MFIs can promote financial products that will help their clients manage risk, such as savings and micro-insurance, and work to reduce their own emissions. In the longer-term, MFIs can begin to think strategically about climate change, and look into the more complex option of funding through compulsory and voluntary carbon markets.

The author emphasizes that while all in the microfinance sector can find some role to play, each MFI should find its own way of addressing climate change, weighing the risks of inaction against the cost and risks involved in institutional change. In particular, the paper highlights the fact that all MFIs can combat climate change on the systemic level by monitoring the impact of climate change, and raising awareness through advocacy and contribution to the policy debate.

As CGAP CEO Elizabeth Littlefield put it “The current response to climate change simply does not match up to the size of the problem. What we’re highlighting may be micro-level efforts. But through tens of millions of microfinance clients, these institutions can help multiply the impact and effect positive change on a global scale.”

By Jaclyn Berfond

Additional Resources

CGAP Focus Note: “Microfinance and Climate Change: Threats and Opportunities”

CGAP Press Release: “Micro-level efforts help combat climate change on a global scale”

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