Towards a green economy

Box 10: Microfinance, environmental and social risk management and sustainable opportunities

The Netherlands Development Finance Company (FMO) is one of the largest bilateral private sector development banks worldwide and has helped to finance and manage sustainable microfinance projects in countries such as Kenya, Nepal, Mongolia, Cambodia, and Bolivia.

For example, in Nepal, FMO has financed the Clean Energy Development Bank Ltd. (CEDB). CEDB is a Nepalese development bank that provides access to finance for small and medium-sized entrepreneurs in agriculture, industry, trade and other productive business. CEDB’s key focus is to invest in clean energy through its innovative renewable energy products, including mini and medium-sized hydropower projects, as well as solar and biogas projects that provide rural communities with the sustainable electricity/energy that is so crucial for private sector development. CEDB also provides microfinance loans to individuals in rural areas through MFIs and its own branch networks.

Similarly, FMO has invested in K-Rep Bank, a Kenyan microfinance institution (MFI) involved in financing implementation of a broad range of programmes with environmental and social themes such as:

■ Small piped community water and sanitation projects;

■ Household rain harvesting/water storage tanks;

■ Integrated solid waste management in urban informal settlements;

risk awareness, particularly in the case of low frequency, high severity events. In the case of catastrophe insurance, the introduction of compulsory catastrophe insurance by governments may be an important element in overcoming this problem. It is often stated that premiums are unaffordable. This may be a signal from the private insurance market that the risk is very high and unsustainable, there is great uncertainty, the scale of operations is too small, or more risk management by at-risk parties is needed.

The insurance industry has an unparalleled capacity to understand and engineer approaches and mechanisms to manage ESG risks as they emerge, and has served as an important early warning system for society by

612 ■ Small hydro-power/community water supply;

■ Eco sanitation – pay-per-visit toilets in peri-urban areas;

■ Installation of solar lighting system for schools in the rural areas; ■ Wind powered systems for water pumping; ■ Household biogas; and

■ Use of composted manure in kitchen gardening. FMO provides an innovative MFI Sustainability

Guidance toolkit for all MFIs that wish to reduce environmental and social risks. FMO has also developed and introduced the mechanism of a sustainability pricing incentive, usually an interest reduction, as part of a loan agreement. As an example, FMO has agreed upon a pricing incentive with the El Salvadorian Federation of Credit Associations and Workers’ Banks (Fedecredito). The trigger to award the interest reduction is the timely development and implementation of a portfolio- wide environmental and social risk management system across Fedecredito banks.

The implementation of practical environmental and social risk management measures within micro and SME finance and the success stories of specific MFI/ SME sustainability financing demonstrate that MFIS and SME banks may substantively contribute to a green economy.

amplifying risk signals. Steps towards improving risk knowledge, including perhaps better use of technology to

measure risk accurately, and more consumer

education to drive demand for sustainable insurance products, can help the insurance industry overcome the barriers and become a leader in mobilising financial flows to the green economy (PSI forthcoming).6

6. Principles for Sustainable Insurance Initiative (PSI) is a group of leading global insurance companies that are members of United Nations Environment Programme Finance Initiative are currently spearheading the Principles for Sustainable Insurance Initiative, which will establish a global best practice sustainability framework for the insurance business, and a global initiative of insurers tackling sustainability risks and opportunities. These principles will be launched at the 2012 UN Conference on Sustainable Development (Rio+20 Earth Summit).