There are many approaches MFIs can take to influence environmental management of client businesses. The first step is to identify the areas that require attention. MFIs could conduct an Environmental Impact Assessment (EIA) to determine the impact of their lending activities. Another effective way to identify sources of environmental degradation is by using the loan application. Low cost solutions are a prime consideration in formulating these methods so as not to raise MFI operating expenses. Low administrative costs can be maintained by smoothly integrating these techniques into similar existing procedures.
Environmental Impact Assessment (EIA)
Environmental Impact Assessment (EIA) or Environmental Assessment is a key tool in natural resource management. It is a very flexible and effective method that can be adapted to a scale appropriate to the MFI. In most cases it will be inappropriate to use EIA for individual loans, but rather for loan sectors, or on an institutional level.
EIA "is the practice of evaluating and anticipating the environmental impact of a project, identifying mitigation measures and, if necessary mapping out alternatives" (Pallen 1997, p.13). In this context the MFI is evaluating the impacts of a variety of enterprises. To do this efficiently it is best to first identify those enterprises that require attention before embarking on a more detailed process.
In general, the following steps should be observed when conducting the EIA (this is an abbreviated version):
- Identify the objectives of the assessment.
- Assess environmental impacts by evaluating the salient features of the existing environment (baseline condition) and by predicting and evaluating the likely environmental implications of the development - use checklist below to identify impacts. If the client is an existing business look at the currently occurring impacts.
- Identify and evaluate mitigation measures.
- Choose course of action on the basis of environmental and economic criteria.
A description of the existing environment may include various biophysical parameters depending on the circumstances. Major categories within a broad environmental checklist include:
- Natural vegetation
- Wildlife and fisheries resources
- Heritage resources
- Land use on adjoining property
- Noise pollution
- Solid or liquid waste and disposal
* For a more detailed checklist see annex.
Loan Application Analysis
The loan application can be used to ask prospective clients about their activities. Application questions could be as simple as asking to describe general environmental effects of the enterprise, to detailed questions regarding types and source of inputs, waste and disposal techniques, location and so on. This is a very effective and efficient way to identify sources of environmental impact. A UN sponsored enterprise development program used this method of loan application analysis in the West Bank and Jerusalem.
The data collected from Loan Application Analysis can also be very useful in conducting an EIA (as described above).
Participatory Sub-sector Analysis (PSA)
This is already a well known tool used by MFIs (Pallen 1997, Chen 1996) to help entrepreneurs identify production inefficiencies. Many of these production inefficiencies are themselves sources of environmental degradation. This method can also be used to specifically focus on identifying processes that negatively impact on the environment. Since use of this method is already fairly common it would be advantageous to simply add an environmental component to the existing process.
MFIs provide a variety of training opportunities to their clients. This is often a prerequisite for obtaining loans. Training programs provide an existing infrastructure for imparting environmental awareness and specific management information.
Significant environmental benefits are possible since environmental awareness will be introduced into the community. Spreading environmental awareness amongst small entrepreneurs may have a greater social effect since the said community will influence other sectors of the economy in the present and in the future as well. MFIs are very uniquely placed to promote environmental awareness.
While there are environmental (and health) concerns which will be relevant to almost all entrepreneurs it is best to provide information appropriate to the individual entrepreneur's activities. MFIs should identify those areas which are of greatest environmental concern and have environmental management information available to clients involved in those businesses.
MFIs have the ability to directly influence small business activities since their conduct is tied to loan requirements. Of course there are requirements tied to any loan agreement. Where appropriate, environmental management can be made part of these agreements. There are several organizations that employ this method. One such organization is Conservation International, which provides credit to small farmers working around a nature reserve in Costa Rica while requiring that activities be designed to be environmentally benign. This has helped to maintain the rich biodiversity of the nature reserve.
Regulation could also be employed to induce input substitution or adoption of other environmental management practices. For example, if a (client) carpentry business is utilizing wood from a threatened or endangered tree species, the MFI could require that the business switch to another source of wood.
One key consideration here - and in every other policy area - is that regulation must be sensitive to the needs and concerns of the business. A measure of flexibility can even contribute to more successful regulation.
Various incentives can be used for encouraging polluting enterprises to adopt environmental management techniques.
Possible incentives include provision of more favorable interest rates and repayment schedules, or the promise of future loans. Another form of an incentive is to create competition whereby the least impacting (pollution or resource degradation) enterprise receives some sort of reward (Feoli 1995).
Building networks and partnering is useful in several different contexts. A good reason for networking is to obtain information on environmental management techniques. This can be obtained by working with environmental NGOs and relevant government institutions (Pallen 1997). This is particularly useful if partner organizations are local specialists on the specific issue.
Partner organizations can also help to directly implement environmental management. This could be in terms of training (microentrepreneurs and MFI staff), promoting new technology, or in obtaining environmental certification. The latter could be tremendously important since certification can be value adding to certain products (organic products, and other green certification). MFIs can work with organizations promoting environmentally friendly products in a way that provides the credit or business training needs of the small producers.
Networking with government agencies and environmental groups can also enable MFIs to reach out and support small entrepreneurs involved in recycling and waste management. Another area for cooperation is with small-scale transportation. In many cases governments are requiring small transportation operators to improve their efficiency or to switch to cleaner alternatives. Microfinance could help finance the technology required for upgrading of urban vehicles.
Another type of partnership is between renewable energy providers and MFIs. This has been proven to be very effective in developing the renewable energy market. Government agencies in Nepal are effectively using credit to promote biogas energy. Biogas uses farm wastes and other biomass to create a gas fuel. Solar (photovoltaic) energy also benefits from partnerships.
SELCO is a renewable energy service provider that operates in India. They provide renewable energy and maintenance services to residents and businesses while outsourcing the financing to a local MFI. The partnership works since each organization brings their specialized expertise to the business - thereby reducing overall costs of service. The result is that residents (and businesses) have solar energy electricity at roughly the same cost they were previously paying for conventional sources.