Summary 

In the modern world, it is increasingly important that the private sector takes environmental and social responsibility issues into account as an integral part of its business strategy. Since the adoption of the Paris Agreement in 2015, this topic has become of particular importance not only for the governments of most countries but also for global financial institutions as one of the key components of achieving sustainable development.

Huge efforts and financial resources are needed to ensure sustainable development and achieve climate and environmental objectives. It is estimated that total global investment needs for achieving the SDGs are around USD 5-7 trillion per year. In particular, support of private finance is needed, with public finance serving to leverage such private capital.

It is obvious that poor and developing countries are most exposed to climate change, bearing significant economic and social costs. They are most affected by climate risks given greater exposure and weaker protection. Their financial resources are rather limited and one of the leading sectors in their economies are traditional agriculture and tourism, where a large part of the poor population is employed.

Climate change can have a crucial and negative impact especially on agriculture and rural-based economies: accelerated soil and shoreline erosion, reduced crop yields, less available agricultural lands, increased irrigation demands, poor water resources and quality, inundation of coastal lands, loss of local species and natural areas, etc. These and other expected negative factors can lead to increased migration, job cuts, reduced productivity and competitiveness, higher poverty, more needs on subsidized funding, potential conflicts and so on.

Poor countries have a higher vulnerability and limited readiness to cope with such negative impact of climate change. Most of them are unable to mobilize enough financial and human resources and to encourage high-tech, capital intensive and long-term energy efficient projects. It is also problematic achieving the desired level of environmental education and habits in the local population, attracting qualified human resources and mobilizing intellectual capital in this field.

The term “Green Finance” is used as a broad umbrella term that refers to the major shift in financial flows required to support projects that benefit the environment and society by reducing pollution or tackling climate change. Green financing is to increase the level of financial flows from the public, private and not-for-profit sectors to sustainable development priorities. One of the important element of green finance is to better manage social and environmental risks, take up opportunities that bring both decent profitability and environmental benefit and deliver high-transparent accountability. It also entails greening the financial industry through the practices of due diligence and risk management to ensure that projected business activities do not harm the environment.

Microfinance, which has been successfully developing in poor and emerging markets over the past 3-4 decades, has gained vast experience in implementing financial programs for poor communities with a positive socio-economic effects. Microfinance is the provision of financial services to low income and poor households, especially those who lack access to formal banking and related services. Its main role is to enhance financial inclusion at affordable costs to disadvantaged and low-income individuals and groups.

The majority part of microfinance consumers is low-income and rural residents, most of which are self-employed in their micro and small family farms. This segment is characterized by a high degree of vulnerability towards external shocks and climate change (natural disasters, soil erosion, desertification, etc.), which can lead to a sharp decline in yield and productivity, resulting in problems with creditworthiness. Thus, microfinance institutions are anyway affected by climate change factors and they need to be more innovative to consider the climate risk in their financial products, ensure income-generating activities for customers and the sustainability of their business.

Some international best practices show that in case of right strategic decisions, effective business model and cooperation with other stakeholders, climate change threats can not only be significantly mitigated by microfinance institutions, but it is also possible to transform them into the new and attractive business opportunities by offering consumers new “green loan” products.

This may include small loans for energy efficient or renewable energy solutions such as solar home systems, anaerobic digesters, eco-friendly construction materials and heating/cooling systems, energy efficient household items (washing machine, refrigerator, air conditioner), loans to purchase hybrid or electric cars (including personal as well as business needs – to ran a taxi service) and for other environmental objectives.

Affordable access to this type of green finance products is quite important for the low-income population since it not only provides them with relatively clean energy and increases social security, but is sometimes associated with a new source of income for them.

In conclusion, it can be said that by encouragement of green funding microfinance can play a fairly positive and important role in mitigation and adaptation of climate change in developing countries.

Despite its small size compared with the banking sector, microfinance has sufficient capacity and motivation to support sustainable green projects in emerging markets, especially in rural areas.