Many agree that financial institutions have a very important role to play in the transition to a sustainable economy. According to the opinion of experts, the financial sector can and should play an important role in respecting labor, health and safety rights, intellectual property rights of communities, anti-money laundering and the financing of terrorism. The sector should encourage its partners to align themselves with international standards in this area. In addition, it can greatly influence the implementation of an environmental risk management system for its customers and other partners (eg suppliers or service providers).
Although, even if they can be classified as environmental low-risk activities, financial institutions must also adopt environmental good practices and workplace safety and health frameworks. While efforts in this direction are being made in the banking sector in Africa, it is not the same situation in the microfinance sector in Africa. However, there are many initiatives in support of microfinance institutions in implementing environmental management systems. As referenced in the SPI4 social assessment and Inclusion [Africa] tools, the commitment of microfinance institutions to this issue should be reflected in:
- The existence of environmental policies: the MFI should have a policy that gives details on the strategic and operational orientations of its environmental policy;
- Internal Environmental Risk Management: The MFI should have a system to reduce its internal ecological footprint through the use of tools for evaluating its ecological impact on the basis of specific objectives and indicators that are objectively measurable;
- External Environmental Risk Management: The MFI should have a mechanism to assess the environmental risks of the activities it finances and to sensitize its partners to the adoption of good practices;
- Promoting green opportunities: The MFI should develop green microcredit products to support the development of environmentally friendly activities and provide non-financial environmental services.
The various missions and social studies carried out by Inclusion [Africa] in Africa show that several microfinance institutions have weak practices on social and environmental issues. Institutional commitment to this issue is usually limited to statements in the documents or in the values they adopt. But note that more and more players are committed to supporting the microfinance sector in developing green financial products.
One of the difficulties for the institutions is the additional costs (time and resources) that would arise from setting up an internal and external environmental risk management system, with regard to the amounts of credit generally offered to clients (low amount). Added to this is the level of expertise needed to better assess the environmental risks of a given activity.
In order to minimize the transaction costs that would result from an external environmental and social risk analysis, Inclusion [Africa] recommends that specific actions (action plan) should be undertaken for larger loans.
Decisions leading to corporate actions are therefore made on the basis of two key criteria: the level of the E&S risk and the amount of the loan as proposed in the decision matrix below, developed by Gilles Da Costa based upon his experience in the RD Congo.
Decision matrix for action following an E&S (Environmental and Social) risk assessment
In view of this matrix and the amount of loans granted in the microfinance sector, the majority of microfinance institutions should focus on raising awareness and sensitizing their clients on the need to take into account E&S risks in their activities.
Gilles Da Costa
West Africa Regional Manager