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Author: Clarmondial

As the microfinance industry has grown, there has been an increasing focus on the non-financial impacts that microfinance institutions (MFIs) can have. While the industry developed to tackle socio-economic issues through providing access to finance, its impressive growth led to increasing evaluation of MFIs potential social and environmental impacts. As a result, MFIs are increasingly expected to consider a broader spectrum of issues in their operations.

As important organisations at the forefront of business within many emerging economies, MFIs can be important catalysts for environmentally and socially sustainable growth. Despite the small size of many MFIs, their capacity for direct impact on local environmental and social issues can be significant. However it must also be recognized that pursuing initiatives that are not 'core business' is likely to be a challenge given MFIs often-limited resources. The development of appropriate mechanisms that encourage MFIs, and more broadly, SMEs (Small & Medium Enterprises) in emerging economies to adopt improved environmental and social practices is important.

In light of this, we are excited to be working with the European Microfinance Platform to develop the evaluation metrics for the upcoming European Microfinance Award: Microfinance and Environment.[1] This work has allowed us to explore the role of MFIs in positively considering and addressing environmental issues, both through direct-targeted initiatives as well as in their everyday business activities, including environmental governance and credit assessment.

We have also considered the types of programs and products an MFI could develop to positively influence the environment and their bottom line. Some environmental issues in emerging economies are also business opportunities, e.g. development of business linked to providing access to safe drinking water and energy. On the flipside, a lack of capacity, poor last mile logistics and limited access to appropriate financing mechanisms are often constraints to tackling pressing environmental issues impacting local livelihoods. MFIs are well placed to facilitate solutions to these issues.

There is also a growing interest amongst MFI professionals to incorporate environmental governance alongside social impacts.[2] This is understandable, given the pressing nature of environmental concerns in many emerging countries. Consideration of environmental issues within emerging market businesses can present opportunities to build a company with a license to operate that goes above and beyond the norm, resulting in strong consumer loyalty and word-of-mouth marketing.

In emerging economies, access to affordable renewable energy, safe water and agricultural inputs can be particularly valuable due to a lack of infrastructure. The story about a village that had no access to electricity until it was connected to solar power has been told before, but there are other opportunities to invest in leapfrogging. Some examples include certified agricultural and forestry products, water storage systems, rainwater harvesting systems, drip irrigation, high-quality & certified agricultural inputs and solar energy.

Environmental aspects should also play a key role, especially in the case of MFIs, in the assessment of credit and operational risks. Environmental events, accentuated by climate change, may create opportunities but also disrupt business activities, and their influence must be considered in business models.

MFIs can play a leading role in identifying and tackling these issues, after all, it is not the first time the industry has broken new ground and fostered high impact growth. Yet, as MFIs are often small institutions, sometimes in remote areas, with limited resources and capacity, they are likely to struggle. These challenges are often somewhat erroneously used to justify why large-scale multi-national companies do not take appropriate action on environmental issues – however these difficulties may in fact pose a legitimate challenge for MFIs. Nevertheless we see this new and growing field as interesting, and one of many opportunities that can catalyze better economic growth in emerging markets.

In consideration of this, the European Microfinance Award is an important opportunity for leading MFIs within this space to be showcased and rewarded, providing inspiration to other organisations and individuals around the world. We are therefore thrilled to help support and promote the European Microfinance Platform's important work, and particularly to work with them on designing this year's Award. We look forward to seeing applications from a wide variety of MFIs that demonstrate the emerging frontiers of sustainable business.

Applications close on June 15th 2014. For more information please check http://www.e-mfp.eu/news-and-events/5th-european-microfinance-award.

This post was originally published on Clarmondial Blog

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[1] The European Microfinance Award was launched in October 2005 by the Luxembourg Ministry of Foreign and European Affairs – Directorate for Development Cooperation and Humanitarian Affairs, to support innovative thinking in the microfinance sector. This year's edition aims to highlight opportunities for microfinance to improve environmental issues in the South and encourage the industry to find innovative solutions for global environmental concerns.
[2] See for example, Green Microfinance. Characteristics of microfinance institutions involved in environmental management by Marion Allet and Marek Hudon. Available under https://dipot.ulb.ac.be/dspace/bitstream/2013/138434/1/wp13005.pdf

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