A Testing Ground for Green Microfinance

Tuesday, March 05, 2019

Green finance is not just for utility-scale solar plants or giant wind farms; it can also work for small businesses or even households. A program called EcoMicro—run by IDB Lab, the innovation laboratory of the Inter-American Development Bank—has helped design green finance solutions for small-scale borrowers as diverse as truckers in El Salvador, homemakers in Paraguay, and convenience-store owners in Mexico. Now it is expanding its presence in the Caribbean too.

EcoMicro works with financial institutions that cater primarily to low-income households and micro, small, and medium-sized businesses, including small farmers. It provides technical assistance to these lenders—often credit unions, development banks, or microfinance institutions—to help them analyze their portfolios with climate change in mind and create green loan products that make sense for their customers.

“This is not typically a segment where you would see a lot of climate investment going to work,” said EcoMicro Program Analyst Nayaatha Taitt, adding that green finance is often directed toward large infrastructure projects rather than small-scale initiatives. Many financial institutions may be interested in providing green loans but stay away because they simply don’t understand the technologies, or they lack the ability to accurately evaluate the costs and benefits associated with their adoption.

That’s where EcoMicro comes in. It partners each financial institution with a pre-qualified global consulting firm that does a market assessment and provides the tools and training the institution needs to design, pilot, and administer green financial products tailored to each specific context. Beyond establishing the financial terms of the green loan, this also involves guidance to help the financial institution evaluate technology providers and develop strategic partnerships with key local players to deliver complementary services such as agriculture extension support or energy audits.

Some products are geared toward mitigation of greenhouse gas emissions through clean energy or energy-efficient technologies, while others—especially in rural, agricultural areas—focus on adaptation to climate change. For example, in an area with increasing drought, a farmer might need the ability to harvest rainwater for crop irrigation; an urban business, meanwhile, might need a loan for solar panels, to protect against frequent power blackouts during heat waves.

Energy efficiency is one area that has proved particularly successful:

  • In Paraguay, the nonprofit microfinance institution Fundación Paraguaya found that many of its female clients were still cooking on fuel-inefficient (and unhealthy) wood-burning stoves, so it offered loans for efficient induction cookstoves. “The loans were very small, very targeted, and they went out the door in a flash,” Taitt said.
  • A financial institution in El Salvador, Apoyo Integral, realized that many of its customers were truckers, and many of them were driving old vehicles producing high carbon emissions. It offered special loans that enabled the truckers to buy new vehicles or retrofit their existing ones with more energy-efficient engines.
  • In Mexico, loans offered by the microfinance institution Te Creemos enabled food and beverage retailers to update their refrigeration systems. Many of the store owners had relied on aging refrigerators supplied by large beverage companies. These were not only energy-inefficient, but they also tied the retailer to that particular company’s products. By installing new refrigeration systems, the retailers were able to drastically cut their electricity bills, expand their product lines, and attract new customers.

“There are cases where you can see quick wins and quick returns, particularly with the energy-efficient technologies,” Taitt said in an interview. “From the moment you plug in, you’re basically saving.”

One challenge is to raise public awareness about such benefits. “I think there’s still hesitation among the general population, particularly the client base that we’re trying to reach, about the benefits that could be derived from the technologies, as well as the cost savings,” Taitt said. “They often see the up-front costs and write it off as a no-no.”

Expanding to the Caribbean

EcoMicro has been working in Latin America since 2012, with funding from the Nordic Development Fund and IDB Lab, formerly known as the Multilateral Investment Fund. In 2016, Global Affairs Canada provided additional funding to specifically target Caribbean countries. Under previous calls for proposals, the program had attracted one project in Jamaica, but the rest were in about a dozen Latin American countries.

Based on a call for proposals issued specifically for the Caribbean in 2017, EcoMicro has identified up to 13 eligible projects in the region, which it plans to roll out in the coming months. It recently announced the signing of projects in Jamaica, Belize, and Guyana and the completion of project designs for Grenada, Dominica, and Saint Lucia. It also expects to design projects in Trinidad and Tobago, Barbados, and Antigua and Barbuda by the end of this year. Several additional projects are also in the works for a handful of other Latin American countries, according to Taitt.

The idea is that these projects will support a three- to four-year pilot phase in which a financial product can be developed and tested. It’s still too early to know what kinds of products may come out of the newly signed projects, Taitt said. “It depends on the financial institutions. It’s really up to them, with the support of the consulting partner, to determine what the product will be based on the results of the market assessment.”

EcoMicro, which operates out of the IDB Country Office in Barbados, does not provide funding for the loans; rather, it offers technical assistance so that the financial institutions are in a position to mobilize their balance sheets to provide green loans themselves. Most of the technical assistance projects are budgeted at around $400,000, with EcoMicro covering 70 percent of the cost on a non-reimbursable basis and the financial institution providing the remaining 30 percent, both through in-cash and in-kind contributions.

So far, EcoMicro projects have leveraged about $4.2 million from the balance sheets of financial institutions to pilot green loans, according to Taitt. Because many of the loans created through the program go on to be offered on a wider scale once the pilot phase has been completed, they have led to an additional $16.4 million in financing being placed in the market through the participating financial institutions and other investors.

In addition to the development of green finance products, EcoMicro provides an analysis of each financial institution’s portfolio to assess its vulnerability to climate change, the specific impact on its clients, and potential strategies and measures to reduce this risk. By mainstreaming the analysis of climate risks into future credit decisions, the financial institution can work with its clients to help “climate-proof” their businesses—and, by extension, its own investment.

“It’s really helping to de-risk the entire chain of investment,” Taitt explained. “It de-risks the final client, it de-risks the financial institutions and their investment, and it also de-risks money that they would receive from investors as well.”

Finally, EcoMicro supports the development and implementation of institutional greening policies within the financial institution itself. This might include energy and environmental audits of the institution’s offices and facilities and a carbon footprint analysis. This final piece is critical to the EcoMicro approach as it builds a stronger commitment to climate resilience among the staff, who in turn are better able to articulate to end clients the benefits of “going green.”