Climate change and the growing scarcity
of natural resources have generated
concern worldwide given the
risks to economic and
financial stability that they represent. This is
why governments and regulators
are implementing policies that
promote the sustainable development of
the country. Additionally, investors are
showing greater interest in supporting
companies that generate a positive impact on
the society.
Along those lines, financial institutions are already integrating ESG factors (ASG, in Spanish) into their institutional strategic plan, with their respective objectives, indicators, and goals. Hence, many of the institutions have opted for the creation of a credit and service offering with a green connotation (solar panels, climate insurance, etc.), as well as for the issuance of thematic bonds (gender bonds, green, blue, among others). For smaller entities, such as microfinance institutions (MFIs), implementing the same measures as a banking entity is quite a challenge. Access and processing of ESG data and metrics becomes essential to evaluate their performance in terms of sustainability and develop effective strategies to improve their impact. However, the vast majority of MFIs face financial and technological limitations in collecting information on the environmental and social impact of their operations.
Leading institutions in microfinance collect socioeconomic information (type of housing, educational level, activity, etc.) at the time of evaluating the payment capacity, which allows them to profile their client base according to their characteristics and needs, in order to develop and strengthen their offering of products and services. Likewise, many entities are already exploring and implementing methodologies to measure the institutional carbon footprint such as, for example, the Greenhouse Gas Protocol (GHG Protocol).
The organizational culture and training of staff on sustainability is not very widespread in many microfinance institutions. In this sense, it is crucial that the leaders of the institutions promote the importance of implementing this type of practices in the operation of the business. Some institutions integrate sustainability topics into the training program for staff and, even, the Board of Directors and Senior Management. In addition, they carry out volunteer programs where collaborators are invited to participate in river clean-ups, reforestation campaigns, among others, in order to raise awareness. Another important aspect is the effective integration of ESG factors in the comprehensive risk management, seeking to ensure the long-term sustainability of the MFIs and their clients. This involves identifying and mitigating the environmental and social risks associated with lending and financial services activities, as well as developing policies and procedures to promote transparency and accountability in all areas of operation. One of the most commonly used tools is the SARAS (Environmental and Social Risk Management System), which serves to address the environmental and social risks and impacts of credit operations. However, it is important for microfinance institutions to evaluate if the profile of the clients and the credit offering warrants the use of this tool that is commonly used to assess credit risk in large investment projects.
The incorporation of digital tools for measuring climate risk in agricultural loans represents a significant advance in microfinance. This allows for an efficient and accurate assessment of farmers' ability to cope with climate change considering the area, the technological sophistication, the type of crop, among other variables. Additionally, it enables credit advisors to provide guidance and recommendations to the clients on measures to mitigate their exposure to climate risk. In conclusion, we can affirm that the future of microfinance in terms of sustainability is marked by the need to integrate ESG factors into their operations and offer sustainable financial products, based on client information to promote social, economic, and environmental development in an equitable manner. This requires the commitment and leadership of their leaders and their ability to adapt to changes in the economic, regulatory, and social environment.
Writing:
Daniel Panaifo
Senior Risk Analyst