Northeast Brazil boasts some of the world’s most beautiful beaches, ribbons of white sand tracing a region known as “a terra da felicidade” — the land of happiness; but venture inland and a harsh, semi-arid landscape with some of the country’s worst poverty emerges.
Geographer Friedrich W. Freise, in a survey of the region, painted a bleak picture: “The principle disintegrating agent is solar heat, which is operative many hours daily from a cloudless sky. The cracking and splintering effect … is great, and the surface is therefore widely strewn with sand and dust.”
Freise made these observations in 1938 and he commented — rather hopelessly — on the prospects for reforestation to restore natural watersheds. “There is strong evidence that man is utterly powerless here,” he wrote.
But today, “green growth” advocates are trying to prove Freise wrong, and they’re relying in part on a tool he could not have referenced in 1938: microfinance.
Microloans are a vital tool for farmers and rural entrepreneurs to upgrade their businesses or invest in the next growing season. But what happens to microfinance models when the next growing season never materializes? Or the one after that? Microfinance institutions can help answer those questions and can offer a key bridge to climate change adaptation and mitigation strategies. And, according to some researchers, they better, if microlenders — and their clients — are going to weather the climate change era.
Dry and getting drier
Drought is no stranger to the northeast region of Brazil, where people have coped with and adapted to the stress of water scarcity for generations. But in recent years, drought-prone communities have seen a glimpse of what is projected to be a drier, hotter future.
The region typically receives about 700 millimeters of rain per year. In 2014 it received 100 millimeters. The current drought is described as the worst in many decades, with roughly half a million households, at times, facing freshwater shortages. The last century was the hottest on record, and 96 million Brazilians were affected by climate-related disasters between 1991 and 2000. Those impacts were concentrated in the northeast. The country has long sought to find pathways for economic growth in the region, many of them involving large-scale infrastructure programs.
The northeast region is served by Brazil’s largest microfinance institution, Agroamigo, which reaches more than 800,000 clients. Microfinance institutions like Agroamigo offer lending tools that can help people unserved by traditional financial institutions access credit, start and sustain businesses, and make productivity-enhancing investments, like better seed varieties, or improved irrigation.
In many cases, microfinance institutions are not yet accounting for the impacts of climate change, or providing financing products designed to address them. But as the effects of climate change become more apparent, they may hurt borrowers’ ability to repay their loans, causing default rates to rise. The overall viability of some microfinance business models could be at risk.
In many parts of Latin America, it’s already starting to happen. Microfinance lenders describe a situation where climate stress is harming their lending portfolios. Arantza Loza, a consultant with the Inter-American Development Bank’s Multilateral Investment Fund, spoke with lenders, who told her climate change is becoming a problem.
The lenders told her, “We see our clients losing crops. we see our clients affected by … high electricity prices. We see our clients affected by electricity breaks …That is not only affecting them, it’s also affecting me and the quality of my portfolio,” she said.
Many farmers and ranchers in northeast Brazil operate on the threshold of profitability, and one bad year can sink a small business. The worst drought in half a century could be just the beginning. Surface air temperatures are expected to increase up to 4.5 degrees Celsius while rainfall could decrease by 50 percent by the end of this century, according to the Brazilian Panel on Climate Change. Northeast Brazil stands at a climate change “front line” that is growing longer and longer.
‘Something big is going to happen’
EcoMicro, a program co-financed by the Multilateral Investment Fund of the Inter-American Development Bank Group and the Nordic Development Fund, seeks to fill a gap in climate-related financing products. EcoMicro offers technical assistance to microlenders, many of whom have recognized the impacts of climate but have lacked the strategies and products to address them. EcoMicro helps them develop and distribute green loans, which come in two varieties: adaptation loans and mitigation loans, Loza explained.
Adaptation loans offer financing and technical assistance for clients who want to invest to be more resilient in the face of expected climate impacts. These loans might go toward drought resistant seeds, livelihood diversification, or water conservation and storage technologies.
Mitigation loans target emissions-reducing investments, like energy efficient refrigerators for shop owners, or solar water heaters.
Brazil is the world’s seventh biggest contributor of greenhouse gases to the atmosphere, and financial products that can target both emissions and adaptation strategies can be critical for a country facing both challenges.
The new Sustainable Development Goals call for the mobilization of $100 billion annually by 2020 through the Green Climate Fund. With world leaders and representatives gathering in Paris in December for the COP21 climate change summit, many expect additional climate funding commitments to follow.
As representatives think about the financial mechanisms to implement climate change strategies, they will have to consider “how they can reach out to the very poor,” Rafael Moser, a microfinance researcher, told Devex. Microfinance institutions offer a well-known and well-tested access point, but “they will have to start thinking about about climate change at the managerial level,” he said, if they are going to receive donor funding.
If MFIs, with help from technical assistance providers like EcoMicro, can show they have a working model that achieves both adaptation and mitigation objectives among rural populations in highly climate-affected areas, they will be better placed to deliver some of that climate finance windfall to their clients.
“This is the year,” Loza said, adding, “something big is going to happen in the green world … Microfinance will have a role in this.”
The results of EcoMicro’s work targeting loans that support adaptation and mitigation measures, so far, are “very anecdotal,” Loza admits, but they are seeing results and learning key lessons as well.
Not everyone needs a solar-water heater
Microfinance has a history of generating massive enthusiasm as a poverty cure-all or silver bullet, only to see expectations outpace results. The early advocates for “green microfinance” are taking pains to manage expectations. Green microloans will neither stop climate change, nor prevent all of its impacts from disproportionately harming the poor.
One of the key lessons Loza is seeking to impart among the institutions that partner with EcoMicro is: just because green loans sound good, doesn’t mean everyone wants or needs them.
Green microfinance lenders have to be aware of constraints their clients face, the products and inputs that will actually generate income for them, and tailor their financial products accordingly.
“Not everyone needs a solar-water heater,” Loza said. “I think there is a market, but we need to be cautious about what that market needs.”
5 questions green MFIs should ask:
1. Are you sure there’s a market for your product?
2. Can you partner to mitigate risk?
3. Is this investment climate-smart, or just climate-related?
4. What else can you offer your clients?
5. How can you get closer to them?
Dumping “green” products on rural farmers without any additional extension programs is not the climate change answer, nor is it an effective way to deploy microloans. That’s why it can be helpful to look for partners who can offer technical assistance, so that MFIs aren’t financing investments without also providing the knowledge about how to purchase, install and profit from a “green” investment.
MFIs and their clients can also look to grant-making institutions for additional support to help them “go green,” without taking untenable business risks. Since these lending models are relatively new, some grant-making institutions — like the IDB’s Multilateral Investment Fund — have grants available that can absorb potential losses, instead of allowing them to fall on lenders and their clients.
“We realize this is a very risky model,” Loza said. “This is the first time we’re helping develop these types of loans. We also need to learn … What we’re trying to do is derisk these models so that private capital can come in.”
Just because it’s climate-related, doesn’t mean it’s climate-smart
There is some nuance in what makes a financial product green and what makes it just generally related to the phenomenon of climate change, and MFIs have to be intentional about the difference.
The livestock sector is highly vulnerable to climate, and 79 percent of Agroamigo’s lending went to the industry over an eight-year period. But that doesn’t necessarily mean those loans should count as “climate adaptation.”
In fact those investments could create “significant risks both to a MFI’s portfolio and its clients, and Agroamigo portfolio’s concentration on livestock lending goes exactly in that direction,” Moser and fellow researcher Lauro Gonzalez wrote in the Brazilian journal RAE, adding, “a more nuanced approach is needed.”
Nuance will be a challenge if global climate agreements create a financial windfall for adaptation lending. Both donors and MFIs will have to be careful not to prioritize getting money out the door for things that look like climate change adaptation over investments that actually build resilience to changes and shocks. In many cases, the answer will not be funnelling loans towards climate-vulnerable sectors, but instead helping clients diversify their incomes so they can better weather climate shocks.
MFIs should also ask themselves whether there are financial products beyond credit that can help cut climate risk. Credit is not always the only answer. Sometimes, as in one particularly dramatic case in 2013 where droughts killed off cattle and led to insolvency for many of Agroamigo borrowers who made a point by depositing their animals’ carcasses outside Agroamigo’s branch in the village of Campina Grande, Moser and Gonzalez report.
“It’s important to expand the products related to protection against these kind of events,” Gonzalez told Devex. “Insurance and savings are probably, in this order, the mechanisms that should be supplied in a more aggressive or extensive way.”
In their exploration of northeast Brazil’s potential to benefit from green microlending, Moser and Gonzalez stumbled upon a key ally: credit agents.
“I didn’t expect to find these credit agents knowing so much about their regions, their local clients as they did,” Moser said.
The reason that’s so important is that it allows a wide-reaching microfinance institution to deliver the types of products its clients are actually looking for — and it allows those MFIs to “nudge” borrowers towards climate-friendlier income options.
Agroamigo’s potential for success is due, in large part, to its network of locally-placed professionals. Other institutions should take note that climate change adaptation and greener financing decisions have to be informed by real knowledge of what is happening in climate-affected places and what people there do — or do not — want to do about it.
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