Davide FORCELLA started by sharing the objective of the session: to get an investor perspective on green inclusive finance. He showed the sector is growing, with 40% of MFIs declaring to raise awareness on environmental impact, 34% declaring to conduct environmental risk management and 19% declaring to offer environmentally-friendly products, among the MFIs reporting on their social performance on the MIX Market in 2014. The number of MFIs offering green products is growing in all regions, while a large and growing percentage of MIVs claim to integrate environmental issues into investment decisions. However, in terms of percentage of portfolio size, green microfinance remains a niche area for investors. The session aimed to uncover why scale remains low. Is it a lack in funding, or a lack of appetite from MFIs, what are the opportunities and challenges?
Sonja OOMS provided two perspectives: as manager in charge of environmental strategy within Oikocredit, and as chair of the Green Inclusive Finance Working Group within the Netherlands Platform for Inclusive Finance (NpM). On Oikocredit, she shared the progress on green microfinance: from a portfolio of currently 534 MFIs, 59% had an environmental policy in 2015, compared to 28% in 2009. Ooms also underlined Oikocredit’s Environmental Policy. Implemented since 2013, it touches upon internal improvements, environmental impact assessment guidelines, green investments, natural disaster management, continual improvement and awareness raising. She in particular stressed the importance of awareness raising and training, both with investors, Oikocredit and MFIs.
She then mentioned the letter of intent which NpM sent to the Dutch Ministry of Foreign Affairs, committing the group to ‘greening’ the inclusive finance sector through impacts (reduce carbon emissions, climate smart adaptations, protection of biodiversity) as well as means (business cases, partnerships, guidelines and indicators). The NpM Green Inclusive Finance Working Group already established a baseline of member’s green activities and will look, among others, at working definitions and indicators, and develop best practices in particular looking at Climate Smart Agriculture (CSA) and technology (e.g. geodata), risks and opportunities, and awareness raising. She closed by stressing that we need to focus on incentive-based, cost-efficient solutions. These need to provide business opportunities to all partners.
Hatem MAHBOULI shared that FMO pledged to have 20% of its annual commitment in green and climate finance. The inclusive finance space is considered as a potential channel for green investments. FMO established a Green Finance panel to determine whether investments can be considered green or not. Hatem stressed that green microfinance needs to be based on a win-win situation, benefiting the financial institution (new clients and market, cross-sells), the client (less cost, access), and suppliers (new distribution channel). Other success factors are awareness raising, a buy-in by management, and incentives for loan officers and effective partnerships with distributors. He considered providing good-quality, cost-effective products that require low maintenance of particular importance to safeguard the reputation of the MFI.
In terms of challenges, Mahbouli stressed the small portfolio size of green microfinance, with most MFIs focusing on short-term credit products. To allow FMO to better invest in the sector, consolidation is needed at regional level. Another challenge is that some successes are context specific and cannot be replicated. In terms of client protection we need to ensure clients truly need green finance products and loans are provided based on proper loan appraisals. On impacts, he has seen that demand for green finance is mostly dependent on a MFIs commitment to sell such products and the trust it enjoys. Moreover, he sees that most green products are complimentary to conventional products.
Hoa LE first explained BlueOrchard Finance has its origins in microfinance but now also invests in other impact investment areas, using partners with experience and innovative products. BlueOrchard is currently not managing a dedicated green microfinance fund, but several of its investment funds cater to the green finance sector. This includes their Climate Insurance Fund and two funds with a regional focus.
Forcella kicked-off the discussion by returning to the challenges of green microfinance funding. Ooms focused on training to MFIs to raise awareness of green microfinance options. Le indicated that the lack of a track record makes it a difficult category to sell to investors. DFIs are still needed to build such a track record. Furthermore, labels such as the LuxFLAG’s Climate Finance Label or Environment Label are important to convince investors. Mahbouli stressed the lack of synergies between programmes and funders which need to be made in order to upscale successful initiatives. Forcella agreed that the industry needs to capitalise better on lessons learned.
Forcella then asked the panel what they are looking for in green microfinance projects. For Ooms it is about bringing together the right stakeholders to make projects work: MFIs, service providers, funders, and distributors. Mahbouli indicated he needs to see a management buy-in. Do they really understand the market and its needs, have they got the right partners and capacities? Forcella added that the division of roles and risks is important for project success. Mahbouli mentioned that associated risks are part of due diligence.
Based on a question from the Microfinance Council of the Philippines, the panel discussed the potential role of networks in furthering green microfinance. Mahbouli proposed to bring practitioners to markets where green is well established and learn from their experiences. Ooms suggested to develop, demonstrate and replicate best practices and build awareness of green inclusive finance among MFIs. Le added that networks can provide support in terms of standardising forms and tools.
The discussion then turned to regional differences. For Ooms, all regions offer opportunities for green microfinance investments. She mentioned Africa as of interest because of Fintech capacities. Mahbouli and Le both agreed that Africa is a difficult region as the funding landscape is highly competitive, with cheap funding from development organisations. Mahbouli also added that there are differences in perceptions and needs for green microfinance between the regions, for example energy related products are important in Africa, whereas sustainable production is a key focus in Latin America. Ooms indicated that because of this, it is important for funders to listen to MFIs and learn what regional or local needs are. Moreover, as challenges are different in these regions, funding also needs to be structured in a different way.
Forcella closed the session by calling for innovative tools and platforms. These are needed to move the sector forward, and bring funding needs as well as green finance best practices together.