Microfinance and the Environmental Bottom Line by Fgf Ffg

MICROFINANCE AND THE ENVIRONMENTAL BOTTOM LINE

Marion Allet Université Libre de Bruxelles, SBS-EM, CEB ; CERMi Université Paris 1 Panthéon-Sorbonne, IEDES, UMR 201 « Développement et Sociétés » PhD thesis realized in the frame of a CIFRE contract with PlaNet Finance

Thesis presented in order to obtain the degree of PhD in Economics and Management Sciences

Jury of the thesis: 

Prof. Isabelle Guérin, Université Paris 1 Panthéon Sorbonne - IRD



Prof. Marek Hudon, Université libre de Bruxelles, Co-director of the thesis



Prof. Marc Labie, Université libre de Bruxelles and Université de Mons



Prof. Jean-Yves Moisseron, Université Paris 1 Panthéon Sorbonne-IRD, Co-director of the thesis

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Prof. Hubert Tchakouté-Tchuigoua, Bordeaux Ecole de Management



Prof. Jean-Pascal van Ypersele, Université catholique de Louvain



Prof. Philip Verwimp, Université libre de Bruxelles

Academic year 2012-2013 Final version

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ACKNOWLEDGMENTS

I would like to thank all the people who helped me in a way or another to achieve my PhD thesis. Their support was very valuable and essential to help me go throughout this journey. First of all, I am very grateful to Marek Hudon and Jean-Yves Moisseron, my two co-directors, who closely followed my work and provided me with essential advices on my research questions, methodological choices and thesis papers. I am also very thankful to Marc Labie and Isabelle Guérin, who were part of my thesis committee and accepted to review my papers regularly. Many thanks to the four of you for attending the regular meetings organized in Brussels or Paris and facilitating the exchange of ideas between my two supervising universities, Université libre de Bruxelles and Paris 1 Panthéon-Sorbonne. Your feedbacks greatly helped me strengthen my research and writing skills. I am also thankful to all my jury members, who took the time to read this thesis in details and provided me with useful comments and suggestions during the private defense. I am very thankful to Pascale Geslain and Pauline Bensoussan, without whom I would not have started the PhD adventure. They played a key role in setting up the CIFRE contract with PlaNet Finance that enabled me to undertake this PhD thesis. I would like to thank Pascale in particular for always being very understanding about the constraints linked to the writing of a PhD thesis and for letting me grasp all the opportunities that I could encounter during these 3 years. I would like to thank in particular Ariane Szafarz, Isabelle Agier, Arvind Ashta, Florent Bédécarrats, Kevin Maréchal, Pierre-Guillaume Méon, and Nigel Roome for their valuable insights on earlier versions of my papers and/or for their methodological advises. All my thanks also go to my PhD colleagues at CERMi: Katarzyna Cieslik, Carolina Laureti, Bertrand Moulin, Ephrem Niyongabo, Anaïs Périlleux, Koen Rossel-Cambier, Jessica Schicks, Anne-Claire Siliki, Ritha Sukadi, Ludovic Urgeghe, and Annabel Vanroose. I enjoyed being part of such an insightful, stimulating and friendly team. I am thankful to Didier Toussaint, Aurélie Rousseau and Véronique Lahaye as well. They all do a tremendous work to assist all of us.

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I am very grateful of course to all the people who accepted to be interviewed in the frame of my research. Many thanks to the 160 microfinance institutions who answered my survey, to the 23 microfinance institution managers that accepted to be interviewed, to all the team of Integral in El Salvador who facilitated my field research and answered my numerous questions, to the 60 microfinance clients in El Salvador who accepted to open their doors to a young French researcher, and to the various microfinance stakeholders (donors, investors, rating agencies, NGOs, experts, etc.) who shared their opinion and experience on my topic during informal discussions. I am also thankful to my guides Carlos, Marcos and Mauricio, who helped me find my way to microfinance clients’ houses in El Salvador. I would like to thank all the people who enabled me to present my work at various conferences or seminars, as well as all the people who attended these presentations and provided me with precious insights through their questions and suggestions. The list would be too long to be cited here without forgetting anyone but each support and insight was very much appreciated. I would like to thank ANRT and PlaNet Finance for financing my three-year research. I am also grateful to the University Meets Microfinance program and all UMM team for providing me with financial support for the organization of my field trip to El Salvador and for giving me several opportunities to present the results of my research during international workshops or conferences. All my thanks go to the “Bureau des Relations Internationales et de la Coopération” of ULB for their financial support as well: they greatly facilitated my trips between Paris and Brussels and therefore enabled me to participate in CERMi life as much as I could. Many thanks to CERMi as well for facilitating my participation to some of the research center meetings. I am also thankful to my friend Lisa, who hosted me during my field research in El Salvador, as well as to Anne-Claire, Yeliz, Régis, Marilou and Jessica for being welcoming hosts in Brussels. Many thanks to my colleagues and friends who had the patience to proofread my papers: Kathryn, Christine, Elodie, Eliane, and Cecilia. Last but not least, I would like to thank all my relatives, friends and colleagues who were there to keep me motivated throughout this work. Merci à vous !

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INDEX

INTRODUCTION…………………………………………………………………………………………………………………………….7 1.

The emergence of a triple bottom line discourse in the microfinance sector ................................ 9

Research questions ...................................................................................................................... 18

Thesis structure and main findings ............................................................................................... 20

CHAPTER 1 - ASSESSING THE ENVIRONMENTAL PERFORMANCE OF MICROFINANCE………………..…27 1.

Introduction ................................................................................................................................. 30

Why assess the environmental performance of microfinance? ................................................... 31

Focusing on processes, not outcomes .......................................................................................... 34

Assessing the five dimensions of green microfinance .................................................................. 36

Indicator selection ........................................................................................................................ 43

Scoring and aggregation issues .................................................................................................... 47

Conclusion .................................................................................................................................... 48

CHAPTER 2 - WHY DO MICROFINANCE INSTITUTIONS GO GREEN? …………………………….………………..57 1.

Introduction ................................................................................................................................. 60

Drivers of ecological responsiveness ............................................................................................ 62

Methodology: combining quantitative and qualitative studies .................................................... 70

Findings ........................................................................................................................................ 74

Discussion and conclusion ............................................................................................................ 81

CHAPTER 3 - GREEN MICROFINANCE. CHARACTERISTICS OF MFIs INVOLVED IN ENVIRONMENTAL MANAGEMENT ……………………………………………………………………………………………………………………………93 1.

Introduction ................................................................................................................................. 96

Theoretical framework and hypotheses on green MFIs’ characteristics ...................................... 98

Database and Methodology ....................................................................................................... 107

Findings ...................................................................................................................................... 115

Conclusion .................................................................................................................................. 125

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CHAPTER 4 - MITIGATING ENVIRONMENTAL RISKS IN SMALL-SCALE ACTIVITIES: WHAT ROLE FOR MICROFINANCE? A CASE STUDY FROM EL SALVADOR ……………………………………………….………………137 1.

Introduction ............................................................................................................................... 140

Involving MFIs in environmental risk management: a promising approach? ............................ 141

A pilot program in El Salvador .................................................................................................... 150

Methodology .............................................................................................................................. 152

Findings ...................................................................................................................................... 155

Conclusion .................................................................................................................................. 165

CONCLUSION………………………………………………………………………………………………………………………………177 BIBLIOGRAPHY……………………………………………………………………………………………………………………….….193

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INTRODUCTION

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INTRODUCTION

Microfinance has strongly developed over the past decades on the promise of reaching a double bottom line of financial viability and social impact 1 (Armendáriz & Morduch, 2005; Servet, 2006; Yunus, 2008). In recent years, some actors have started to advocate that microfinance, to be truly responsible, should include a third environmental objective as well (FMO, 2008; GreenMicrofinance, 2007; Hall, et al, 2008; Rippey, 2009; Schuite & Pater, 2008; Van Elteren, 2007). However, little scientific knowledge exists today on environmental management within microfinance institutions (MFIs). This thesis sheds light on how MFIs manage their environmental bottom line. More specifically, it identifies the strategies adopted by MFIs to improve their environmental performance, their motives for going green, the characteristics of MFIs involved in environmental management, and the challenges they face when implementing an environmental management program.

1. The emergence of a triple bottom line discourse in the microfinance sector It is only in the last decade that various actors from the microfinance sector (donors, technical assistance providers) have started to claim that MFIs should go beyond their double bottom line and aim at a triple bottom line of ‘profit, people and planet’ (Araya & Christen, 2004), defined around the objectives of “maintaining financial viability while advancing the social interests of stakeholders and protecting the environment” (Rippey, 2009, p.1). A new concept has then emerged: that of a ‘green microfinance’, a microfinance that will integrate the principles of environmental sustainability in all its operations and promote environmentally-sound practices (GreenMicrofinance, 2007). This discourse has started to echo back within the microfinance sector. The issue of an environmental bottom line in microfinance is being discussed in specific roundtables organized in major international microfinance events2 or in discussion forums set up on the internet3. Dedicated websites4 have started to gather the few publications existing on the subject. The topic of ‘green microfinance’ is being introduced into 1

Whether MFIs can achieve such a double bottom line is still a controversial topic that is tackled in other studies (Cull et al., 2007; Gonzales, 2010; Lensink & Mersland, 2009; Mersland & Strom, 2008; Rosenberg, 2010) 2

Social Performance Taskforce Annual Meeting 2012; European Microfinance Week 2009, 2010 and 2011; Global Microcredit Summit Campaign 2011; Microcredit Summit Campaign Latin America & Caribbean 2009, etc. 3 www.microlinks.org 4

Microfinance Gateway and GreenMicrofinance Centre websites

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some university curricula on microfinance5. Today, some technical assistance providers are setting up support programs to encourage environmental management by MFIs 6. The emergence of this triple bottom line discourse in microfinance took place in a specific context: that of increased competition between MFIs, controversies over microfinance impact, and growing attention towards responsible finance.

1.1. A context of increased competition The microfinance sector has boomed in the last decade at unprecedented rates. According to data from the Microfinance Information Exchange (MIX), the industry expanded from 2004 to 2008 at an annual asset growth rate of 39 per cent (Chen et al, 2010). In front of such an increased competition, it can be quite challenging for MFIs to retain existing clients7 and attract new ones. One way to do it is to innovate and offer new products and services. In this context, ‘green microfinance’ is presented as a new market opportunity for MFIs facing increased competition (GreenMicrofinance, 2007). Promoters of green microfinance emphasize that MFIs can differentiate from competitors if they develop, for instance, green microcredit to facilitate access to renewable and clean energies (Hall, et al., 2008; SEEP Network, 2008). Today, 1.3 billion people still do not have access to electricity, which represents around 20% of the world population, and 2.7 billion people still rely on traditional biomass fuels (e.g.: wood, charcoal and dung) as their principal source of energy for cooking (IEA, 2011a). According to Aron et al (2009), the market for clean energy and energy access for the bottom of the pyramid would represent more than USD 500 billion in total. As for Levai et al (2011), they estimate that the global off-grid lighting market only would be larger than USD 45 billion per year. The market opportunity is thus significant for MFIs (Morris et al, 2007) and contributes to explain the growing interest around a ‘green microfinance.’

1.2. Controversies over microfinance impact The triple bottom line discourse has also emerged in a context of increasing controversies over the impact of microfinance. Recent over-indebtedness crises (Guérin, et al., 2009; Schicks, 2010; Servet, 2011) and debates on commercialization and high interest rates (Ashta & Hudon, 2009; Hudon, 2011; 5

European Microfinance Program at ULB (Belgium), Master Développement Durable at ESCEM Tours (France)

This is the case for the ‘Greening the Microfinance Sector’ project launched in 2007 by the Foundation for a Sustainable Society Inc. (FSSI), in the Philippines, or for PlaNet Finance projects under the Microfinance & Environment Business Line. 7 On microfinance drop-outs and client retention, please refer to Siliki (2011)

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Mersland & StrĂ¸m, 2008; Woller, 2002) have led the microfinance sector to take a closer look at its actual impact on populations. Various studies were conducted to assess the impact of microfinance on household income, business development, poverty alleviation, women empowerment, social capital, etc. (Banerjee, et al, 2009; Coleman, 2006; Goldberg, 2005; Karlan & Zinman 2009). In parallel, different initiatives have started to call for a responsible microfinance, promoting transparent pricing (MFTransparency), client protection principles (The Smart Campaign), social performance management (CERISE, Social Performance Task Force) and ethical values (Paris Appeal for Responsible Microfinance) within the industry. In line with this trend, some donors and experts have started to emphasize that microfinance impact on the environment is not always neutral and that a truly responsible microfinance should also consider its environmental bottom line (FMO, 2008; GreenMicrofinance, 2007; Hall, et al, 2008; Rippey, 2009; Schuite & Pater, 2008; Van Elteren, 2007). Because microfinance clients are engaged in small-scale activities, a common belief is that their environmental impact is very limited and even negligible. Yet, several studies give evidence that some of the activities held by microentrepreneurs can have an adverse effect on the environment, in terms of pollution (chemical use, solid and liquid waste contamination, etc.) or deterioration and unsustainable use of natural resources (deforestation, soil degradation, overexploitation, etc.) (Blackman et al, 2006 ; Crow & Batz, 2006 ; Lahiri-Dutt, 2008). This negative impact can be due to inputs overuse, inefficiency of the production technologies, or inadequate waste and output management (Hall, et al., 2008). According to Pallen (1997), 10 to 25 per cent of small-scale activities would entail environmental risks. Some specific sectors are identified as being particularly at risk, such as leather tanning, brick making, metal working, textile dyeing, smallscale mining, charcoal making, food processing, crop growing, animal husbandry, fishery, etc. (Blackman, 2000; BRAC, 2006; Hall, et al., 2008; Wenner, 2002). There is still very little quantitative data today regarding the cumulative impact of these small-scale activities on global pollution and climate change (GreenMicrofinance, 2007; Pallen, 1997; Pimenova & Van der Vorst, 2004; Wiedmann et al., 2006). Available data on CO 2 emissions often shows that rich countries tend to produce more CO2 per inhabitant than poorer countries: according to the International Energy Agency (2011b), CO2 emissions reach 9.83 tons per capita in OECD countries, versus 2.88 in non-OECD countries. However, these statistics do not identify, within each country, what part of CO2 emissions or what part of pollution is generated by large industries and what part

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could be attributable to smaller ones. One of the most often cited estimation (Aragón-Correa et al, 2008; Smith & Kemp, 1998; Weerasiri & Zhengang, 2012) is that of Hillary (1995), which suggested that 70 per cent of all industrial pollution could be caused by small and medium enterprises (SMEs) 8. However, Hillary (2000) also considers that this estimation could not be substantiated and raises doubts on whether the global impact of SMEs could be calculated at all: “Generally, national economic statistics on SMEs do not tally with data collected on emissions, waste generation and effluents from firms, so it is doubtful whether smaller firms’ contribution to pollution can be calculated at all.” (Hillary, 2000, p.11). Other authors have tried to give estimations. For Marshall (1998), SMEs generate around 60 per cent of the total carbon emissions from businesses. Pimenova & Van der Vorst (2004) cite a study (ECOTEC, 2000) that suggests that SMEs could be responsible of 50% of global pollution and waste. However, none of these estimations tried to differentiate the impact of micro and small enterprises from that of medium enterprises. Even if the scope of SMEs’ impact on the environment is difficult to assess, Hillary (2000) still believes that their cumulative impact can outweigh the combined environmental impact of large firms, especially if one keeps in mind that SMEs represent 90 to 99% of companies in developed and developing countries (Mir & Feitelson, 2007). Blackman et al (2006) acknowledge that most pollution problems in urban areas are due to big industrial companies; but they also emphasize that clusters of polluting microenterprises can have a very negative cumulated effect on the environment. For Wenner (2002), in rural areas, the biggest threat to the environment seems to be due to the degradation and unsustainable use of natural resources, not only by big extraction companies, but also and above all by a multitude of small-scale farmers, fishermen or miners (deforestation, pesticides use, cattle grazing, soil erosion, etc.). Various authors also emphasize that deforestation in the Philippines, in Indonesia, or in Nigeria is largely due to agricultural extension by smallholder farmers relying on subsistence cultivation (Ite, 1997; Ketterings et al, 1999; Kummer & Turner, 1994). Another interesting data in that of global mercury emissions, In their study, Pirrone et al (2010) indeed demonstrate that artisanal small-scale gold mining is responsible for the emissions of 400 tons of mercury per year, amounting to around 17 per cent of global mercury emissions from anthropogenic sources. Smallscale gold mining then appears to be the second most important source of mercury emissions, after

This estimation was the result of a survey of 308 small and medium enterprises in the manufacture, construction and service sectors.

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fossil-fuel fired power plants (810 tons/year) and before non-ferrous metals manufacturing (310 tons/year), cement production (236 tons/year), waste disposal (187 tons/year), and caustic soda production (163 tons/year). This illustrates that the cumulative impact of some small-scale activities can be rather significant. Even if the environmental impact of small-scale activities at the global level may not always be clearly visible and quantifiable, many studies have demonstrated that their impact at the local level can be significant. Benjamin & Wilshusen (2007) emphasize that the contamination or overexploitation of natural resources can directly translate into the loss of inputs for microentrepreneurs’ activities. Various authors stress that inappropriate chemical use and waste management represent direct threats to people’s health and life (Pallen, 1997; Redmond, et al., 2008; Wenner, et al., 2004). Smith (1993) indeed emphasizes that, beyond ‘quantitative’ environmental emissions, which in many cases are difficult to measure, what actually matters, when looking at pollution, is exposure to it. He illustrates his argument with the example of tobacco smoke indoors and coal-fired power plants in the USA: even though the emissions linked to tobacco smoke indoors are 30 times lower than that of coalfired plants, exposure to tobacco smoke indoors is 80 times higher and generates in consequence much more health problems within the American population. In developing countries, as we mentioned earlier, 2.7 billion vulnerable people still rely on traditional biomass fuels (e.g.: wood, charcoal and dung) as their main source of energy for cooking (IEA, 2011a). In many cases, they use these biomass fuels to cook indoors and are thus very highly exposed to air pollution. As stressed by Smith (1993), indoor pollution is much higher in developing countries and generates significant health effects, such as respiratory infections, adverse pregnancy outcomes, chronic lung and heart disease, or cancer. Similarly, if we come back to the example of mercury pollution, beyond the emissions estimates, several studies have demonstrated that small-scale gold miners are highly exposed to mercury toxicity and frequently suffer from serious health consequences (Hilson, 2005). Another striking example is that of chemical use in smallholder agriculture. Even though the biggest consumers of pesticides are developed countries (Brodesser et al, 2006), exposure to chemicals is much higher in developing countries, where small farmers are prone to use forbidden and dangerous pesticides and not to use adapted protective gear. In a study conducted in Ghana with 137 vegetable farmers (77 per cent of them having less than 5 ha). Ntow et al (2006) find that 100 per cent spray their crops with pesticides; 74 per cent admitted that they use no or only partial protective covering; 37 per cent said to

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have felt body weaknesses and 31 per cent to have felt headache or dizziness after using chemicals; finally, 82 per cent mentioned some symptoms of poisoning. Ntow et al (2006) highlight that most farmers, because they are poor, tend to buy cheaper (and less suited) pesticides and to use knapsack sprayers that increase the risk of exposure. In a study conducted with 61 small-scale farmers in Northern Tanzania, Ngowi et al (2007) find very similar results. As they were engaged in vegetable, flower or fruit production, surveyed farmers all used pesticides. 53 per cent mentioned that they increased their use of pesticides in the past five years and 68 per cent indicated that they had already felt sick after applying pesticide (headache, skin problem). The high exposure to environmental risks may thus generate direct threats for the microentrepreneur, his surrounding community, and for the society as a whole. In a study conducted in Ciudad JuĂĄrez, Mexico, Blackman (2000) valuated to USD 20 to 90 million the local health damages due to the air pollution generated by small brick kilns. Of course, not all types of activities entail the same level of environmental risks. Microentrepreneurs involved in the commercial and service sectors are likely to have a rather limited impact; whereas microfinance clients engaged in agriculture and manufacturing activities can have a significant negative impact on the local environment. On the other hand, some microentrepreneurs are involved in activities that have clear positive impacts on the environment, such as honey production, agroforestry, waste recycling, biogas digester installation, etc. Through the activities that they decide to finance, microfinance institutions may thus end up supporting negative impacts (for harmful activities) or positive impacts (for environmentally-friendly activities) on the environment. Questions then arise on whether microfinanceâ&#x20AC;&#x2122;s intervention contributes to increase or decrease the negative environmental impacts of small-scale activities. On the one hand, some authors argue that microfinance can automatically reduce vulnerability to climate change and lead to environmental improvements (Agrawala & Carraro, 2010; FAO, 2005). By providing financial resources, microfinance would enable microentrepreneurs to upgrade their production processes and thereby reduce inefficiencies, pollution and waste emissions. By supporting income diversification, microfinance would reduce poor householdsâ&#x20AC;&#x2122; vulnerability and thereby make them less likely to extract natural resources as a risk-coping mechanism (Hughes & Flinton, 2001). Since the 1980s, many projects, referred as Integrated Conservation and Development Projects (ICDPs), have been implemented in and around protected areas on the basis of this assumption. Some studies demonstrate that conservation projects where a small loan program was integrated indeed had better results in reaching environmental

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objectives. For instance, Kaushal & Kala (2005), in a study on Joint Forest Management in Madurai, India, compare the rating of loan recovery and recycling with the rating of forest protection and regeneration in 27 villages participating in the ICDP. They find a “direct correspondence between the [Village Forest Councils] fund working and forest protection” and conclude that “once the people get alternative livelihoods they need not do woodcutting and consequently forest protection improves.” However, most studies on ICDPs show much more mixed results regarding microfinance impact on conservation practices. In Caohai Nature Reserve, in China, microloans provided to local people increased their incomes but had mixed effects on the environment: they sometimes resulted in a reduction of natural resource-based activities, but some other time led to an increased use of chemical fertilizers (Herrold-Menzies, 2006). In one of the islands of Bunaken Marine National Park, in Indonesia, people set up a seaweed cultivation enterprise thanks to microfinance. This initiative increased their economic bonanza and decreased illegal fishing, but it also created severe environmental damages through mangrove depletion (Wells et al, 1999). After conducting various studies on this topic in Tanzanian and Kenyan sites, Wild et al (2008) conclude that microfinance is “unlikely to have positive conservation outputs alone in the absence of other interventions, supportive policies, and governance frameworks” (Wild et al, 2008, p.2). Some authors even go beyond this observation and argue that microfinance actually contributes to lock people in unsustainable production systems. Wilson & Tisdell (2001) emphasize that “loans obtained by farmers for the purchase of inputs (for example, pesticides and fertilizers) may also be a barrier to switching to other strategies” that would be more environmentally-friendly (Wilson & Tisdell, 2001, p.457). Because microcredit provides an easier access to chemicals, farmers may be more likely to use them. Various studies thus demonstrate that MFIs’ impact on the environment is not systematically neutral. Without aiming at it or knowing it, microfinance institutions may foster negative or positive impacts on the environment.

1.3. Growing attention towards responsible finance The reflection upon the environmental responsibility of financial institutions may be very recent in the microfinance sector, but it has already emerged twenty years ago in the traditional banking sector. Historically, banks have been much slower than other industries at considering environmental issues: they considered that their direct impact was not significant enough and that they could not interfere

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with their clientsâ&#x20AC;&#x2122; activities and related environmental impacts (Jeucken, 2001). The situation changed at the end of the 1980s, in the USA, when a new regulation on lender liability was enacted. Banks could then be held directly responsible for environmental pollution of clients and obliged to pay cleanup costs in cases of environmental damages (White, 1996). American banks then started to consider environmental issues as a risk and tried to protect themselves, broadly through the adoption of exclusion lists and environmental screening criteria. In parallel, a first generation of Socially Responsible Investments (SRIs) emerged on the basis of negative criteria (Peeters, 2003). In Europe, banks were not exposed to these lender liability risks and only started to develop environmental policies during the mid-1990s. Their approach was different: they focused first on their internal ecological footprint and later on the development of new financial products to promote environmentally-friendly activities or sectors (Jeucken, 2001). Financial institutions thus started to consider environmental issues as an opportunity, an opportunity to explore new markets, to differentiate from competitors, to respond to a new social demand, etc. Beyond risk management, they developed a more positive approach of environmental management, similar to the second generation of SRIs, based on positive criteria to support specific sectors (Peeters, 2003). Various international initiatives were instrumental in promoting responsible finance. The first one was the UNEP Statement by Banks on the Environment & Sustainable Development (which later became the UNEP Statement by Financial Institutions on the Environment & Sustainable Development), which was presented during the Rio Earth Summit in 1992 (Peeters, 2003). The Statement directly calls financial institutions to integrate environmental and social considerations into all aspects of their operations. Today, more than 200 financial institutions are signatories of this Statement. This first international initiative was followed by others that sought to promote responsible finance within the banking sector: the Equator Principles (2003)9, the United Nations Principles for Responsible Investment (2006)10, the IFC11 social, environmental, health and safety guidelines, or the Global Reporting Initiative sustainable reporting guidelines and financial services sector supplement (2008). Even if there is still a long way to go (among 129 banks that are signatories of the UNEP FI Statement, Weber, 2005, only identified 22 banks as leaders in sustainability), financial institutions are 9

Equator Principles: a banking industry framework for addressing environmental and social risks in project financing. United Nations Principles for Responsible Investment: principles to incorporate social, environmental and governance issues in investment decision-making and ownership practices. 11 International Finance Corporation 10

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progressively engaging into sustainable banking by adopting codes of conduct, defining environmental policies, publishing environmental reporting, setting Environmental Management Systems to reduce their internal ecological footprint, implementing environmental risk assessment processes, offering green financial products (green loans, environmentally-friendly mortgages, environmental credit cards, green investment funds, etc.), sponsoring environmental organizations, etc. (Jeucken, 2001). At first, microfinance institutions may not have felt directly concerned by these growing debates around responsible finance. The environmental risks they may face usually escape lender liability threats for being rather small. Some international initiatives clearly focus exclusively on large-scale finance, such as the Equator Principles, which are applied where total project capital costs exceed USD 10 million. However, the promotion of responsible finance created a context favorable to raising financial institutions’ awareness of their environmental responsibility and to showing that there are various means to engage in environmental management.

The discourse around the environmental bottom line of microfinance thus emerged in a context where increased competition calls for innovation within MFIs, where controversies over microfinance impact put a greater emphasis on the social, ethical and environmental responsibility of the industry, and where the whole financial industry is encouraged to head towards more sustainable practices. In the past year, a growing number of MFIs, donors, and technical assistance providers have started to be active in the area. However, very little is known so far on the extent of the phenomenon and on the way MFIs decide to manage their environmental bottom line. Indeed, the recent nature of the green microfinance phenomenon is clearly reflected in the scarcity of academic literature existing on the topic today. A few articles published in scientific journals address the issue of microfinance and the environment (Borge, 2004; Chowdury, 2008; Herrold-Menzies, 2006; Kaushal & Kala, 2005; Mbile, et al., 2005). Yet, they usually focus on microcredit programs set up within environmental projects – such as Integrated Conservation and Development Projects (ICDPs) implemented in protected areas since the 1980s – and not on microfinance institutions setting up environmental management programs – a much more recent phenomenon. Some professionals have consequently

been

calling

for

research

agenda

microfinance

and

environment

(GreenMicrofinance, 2007).

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Meanwhile, the issue is being tackled by a growing grey literature. Some articles written by microfinance practitioners are based on case studies and identify lessons learned from pioneer experiences (AED, 2010; Barua, 2001; Morris, et al., 2007; Rippey & Nelson, 2011; Wild, et al., 2008; Winiecki et al, 2008). However, a large number of publications are still very conceptual: they only present the potential actions that MFIs could undertake to tackle environmental issues and the potential benefits that they could expect (Araya & Christen, 2004; Hall & Lal, 2006; Pallen, 1997; Rippey, 2009; SEEP Network, 2008). No study has taken the challenge to estimate the extent of the green microfinance phenomenon so far or present more in-depth empirical analysis on MFIs’ involvement in environmental management.

2. Research questions This thesis seeks to provide a better understanding of how MFIs manage their environmental bottom line. Even if the term of ‘green microfinance’ has already been defined in a broad way by some experts as a “microfinance that will integrate the principles of environmental sustainability in all its operations and promote environmentally-sound practices” (GreenMicrofinance, 2007), many donors and experts only use it in a narrow way to refer to micro-energy lending (Momo & Trook, 2011). Providing adapted microcredit to facilitate access to renewable and clean energy is indeed one strategy adopted by MFIs to manage their environmental bottom line. Nevertheless, there are many other environmental management initiatives that are implemented by MFIs today. In a first step, it is thus essential to better identify, from actual practices, what are the various strategies adopted by MFIs to manage their environmental bottom line and provide the microfinance sector with a clear framework of analysis specifying what is encompassed under the term ‘green microfinance.’ Our first research question was thus defined as follows: Q1. What do MFIs do to manage their environmental bottom line?

Promoters of ‘green microfinance’ often emphasize potential motives for MFIs to engage in environmental management, such as differentiation from competitors, access to new market segments, access to new funding, improved image, risk management, and fulfillment of their social mission (Araya & Christen, 2004; GreenMicrofinance, 2007; Hall, et al., 2008; Rippey, 2009; Schuite & Pater, 2008; SEEP Network, 2008; Van Elteren, 2007). However, no study has tried to empirically

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identify the motives of MFIs that are already active in environmental management. Understanding MFIsâ&#x20AC;&#x2122; drivers to go green is important because the choice of one environmental management strategy over another may be influenced by the type of motive driving the MFI. Assuming that not all strategies may have the same effectiveness and impact, it could help practitioners identify the mechanisms that would foster the implementation of the most effective and suited green microfinance strategies. Our second research question was thus defined as follows: Q2. Why do MFIs decide to manage their environmental bottom line?

The microfinance sector encompasses a great variety of institutions, in terms of size, status, financial performance, and mission. However, in their discourse, green microfinance promoters do not specify whether the triple bottom line approach concerns all types of MFIs or whether only the largest or more profitable institutions are in a position to manage their environmental bottom line. Identifying the characteristics of green MFIs will help understand what could be potential drivers or barriers to environmental performance in the microfinance sector. As no study has focused on this issue so far, we defined our third research question as follows: Q3. Who are the MFIs that are active in environmental management?

Finally, the discourse on microfinance triple bottom line often tends to promote environmental management strategies without specifying much the challenges that MFIs can face when implementing such initiatives. Indeed, getting involved in environmental management requires that MFIs develop new skills, procedures and partnerships beyond their core business activity (Araya & Christen, 2002; Coulson & Dixon, 1995; Wenner, 2002). A few case studies have recently highlighted the most common challenges linked to the development of adapted microcredit for renewable and clean energy (AED, 2010; Barua, 2001; Morris, et al., 2007; Rippey & Nelson, 2011; Winiecki et al, 2008). However, there is still a lack of scientific knowledge on other environmental management strategies that MFIs may opt for. Our fourth and last research question was thus defined as follows: Q4. What challenges do MFIs face when implementing an environmental management program?

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3. Thesis structure and main findings The thesis is structured in four chapters, which each address one of our research questions. The first three chapters explore the green microfinance phenomenon at a global level. These chapters are mostly based on a survey conducted with 160 MFIs worldwide and enable to identify the different dimensions of MFIs’ involvement in environmental management, MFIs’ motives for going green, and the characteristics of MFIs active in environmental management. The last chapter is based on a case study and looks at the challenges faced by a microfinance institution that implemented an environmental risk management program in El Salvador.

THESIS STRUCTURE 1. Assessing the environmental performance of microfinance 2. Why do microfinance institutions go green? 3. Green Microfinance. Characteristics of MFIs involved in environmental management 4. Mitigating environmental risks in small-scale activities: what role for microfinance? A case study from El Salvador

Starting from the observation that no adapted methodology currently exist to assess MFIs’ involvement in environmental management, Chapter 1 – Assessing the environmental performance of microfinance – proposes a new framework to assess the environmental performance of microfinance institutions: the Microfinance Environmental Performance Index (MEPI). Building on the literature on Corporate Social Responsibility and Microfinance Social Performance Management (Henri & Journeault, 2008; Jasch, 2000; Lapenu, et al., 2009), this framework is based on management performance indicators that have been adapted to the specificities of the microfinance sector. It assesses MFIs’ environmental performance along five dimensions: environmental policy, ecological footprint, environmental risk assessment, green microcredit, and environmental non-financial services. Designing such a tool was a crucial preliminary step in our research process. First, it enabled us to identify and categorize the different strategies currently adopted by MFIs to manage environmental issues. Identifying a diversity of strategies made clear the need to have a nuanced analysis when

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looking at the environmental bottom line in microfinance. Second, it allowed us to develop a survey that was submitted to a wide range of MFIs and constituted the basis for our analysis in Chapters 2 and 3. Chapter 2 – Why do microfinance institutions go green? – looks at MFIs’ motives for engaging in environmental management. We collected data through a quantitative survey of 160 MFIs and qualitative semi-structured interviews of 23 MFIs’ top managers. Basing our analysis on the model of ecological responsiveness developed by Bansal & Roth (2000), we discover that MFIs that are the most proactive in environmental management are primarily motivated by social responsibility, additionally by competitiveness (strategic and economic benefits), and to a lesser extent by legitimation (stakeholder pressure). MFIs for which legitimation is the dominant driver tend to adopt a defensive posture and set up more superficial negative strategies to appear green. In contrast, MFIs for which social responsibility is the dominant driver tend to be more proactive and innovative and develop adapted financial and non-financial services to promote environmentally-friendly practices.

In order to identify who are the MFIs that decide to go green, we conducted a quantitative analysis presented in Chapter 3 – Green Microfinance. Characteristics of MFIs involved in environmental management – Applying our framework to assess the environmental performance of MFIs, we collected data from a representative sample of 160 microfinance institutions worldwide. Basing our analysis on various econometric tests, we found that larger MFIs and MFIs registered as banks tend to perform better in environmental policy and environmental risk assessment. Furthermore, more mature MFIs tend to have a better environmental performance, in particular in the provision of green microcredit and environmental non-financial services. On the other hand, financial performance is not significantly related to environmental performance, suggesting that ‘green’ MFIs are not more or less profitable than other microfinance institutions.

After looking at the green microfinance phenomenon at a global level, we finally applied our last research question to a concrete experience in the field. Chapter 4 – Mitigating environmental risks in small-scale activities: what role for microfinance? A case study from El Salvador – presents a case study from El Salvador, in Central America. Integral, the MFI with the largest outreach in El Salvador, started in 2009 a pilot program to mitigate the environmental risks of its portfolio. Loan officers were trained to assess the environmental risks of their clients’ activities and raise their

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awareness on mitigation solutions. More than a year after the beginning of the pilot program, we conducted 95 semi-structured interviews with microfinance clients, loan officers and managers. The objective was to identify the challenges faced by the MFI when implementing this environmental management program. We first identified significant challenges at the level of the MFI regarding the acquisition of new skills and the conciliation of environmental and financial objectives, which compromised the effective implementation of the program. Furthermore, we found that the pilot program, as it was designed, did not sufficiently take into account the psychological and economic barriers to behaviour change. Finally, we found that the effort of the microfinance institution was in some cases countered by external factors out of its reach, such as inadequate public policies.

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Pimenova, P. & Van der Vorst, R. (2004) ‘The role of support programmes and policies in improving SMEs environmental performance in developed and transition economies’. Journal of Cleaner Production, 12: 549-559 Pirrone, N., Cinnirella, S., Feng, X., Finkelman, R., Friedli, H., Leaner, J., Mason, R., Mukherjee, A., Stracher, G., Streets, D., Telmer, K. (2010) ‘Global mercury emissions to the atmosphere from anthropogenic and natural sources’. Atmospheric Chemistry and Physics 10: 5951-5964 Redmond, J., Walken, E. & Wang, C. (2008) ‘Issues for small business with waste management’. Journal of Environmental Management 88: 275-285 Rippey, P. (2009) ‘Microfinance and climate change: threats and opportunities’. CGAP Focus Note 53, Washington DC: CGAP Rippey, P. & Nelson, C. (2011) ‘Beyond financial services. Marketing solar lamps through savings groups: emerging lessons from Uganda’. Aga Khan Foundation Rosenberg, R. (2010) ‘Does microcredit really help poor people?’. Focus Note No. 59, CGAP Schicks, J. (2010) ‘Microfinance Over-Indebtedness: Understanding its drivers and challenging the common myths’. CEB Working Paper N° 10/048, Université Libre de Bruxelles Schuite, G.J. & Pater, A. (2008). ‘The triple bottom line for microfinance’. Bunnik: Triodos Facet SEEP Network Social Performance Working Group (2008) ‘Microfinance and the Environment’, in ‘Social Performance Map’. Washington DC: The SEEP Network Servet, J.M (2011) ‘La crise du microcrédit au Andhra Pradesh (Inde)’. Revue Tiers Monde, 207(3): 43-60 Servet, J.M. (2006) Banquiers aux pieds nus. Paris: Odile Jacob Siliki, A.C. (2011) ‘Why people dropout from microfinance institutions? Case study of an MFI in Mali (Nyèsigiso)’. Second International Research Conference on Microfinance, Groningen, The Netherlands, June 2011 Smith, K. (1993) ‘Fuel combustion, air pollution exposure, and health: the situation in developing countries’. Annual Review Energy Environment 18: 529-566 Smith, M. & Kemp, R. (1998) ‘Small firms and the environment: a grounded report’. Birmingham: Grounded Van Elteren, A. (2007) ‘Environmental and social risk management and added value at MFIs and MFI funds – the FMO approach’. The Hague: Netherlands Development Finance Company (FMO) Weber, O. (2005) ‘Sustainability Benchmarking of European Banks and Financial Service Organizations’. Corporate Social Responsibility and Environmental Management 12: 73-87 Weerasiri, S. & Zhengang, Z. (2012) ‘Attitudes and awareness towards environmental management and its impact on environmental management practices (EMPs) of SMEs in Sri Lanka’. Journal of Social and Development Sciences, 3(1): 16-23 Wells, M. et al (1999) ‘Investing in biodiversity: a review of Indonesia’s Integrated Conservation and Development Projects’. The International Bank for Reconstruction and Development / The World Bank: Washington, D.C. Wenner, M. (2002) ‘Microenterprise growth and environmental protection’. Microenterprise Development Review 4(2): 1-8 Wenner, M., Wright, N., & Lal, A. (2004) ‘Environmental protection and microenterprise development in the developing world. A model based on Latin American experience’. Journal of Microfinance 6(1): 95-122 White, M. (1996) ‘Environmental finance: value and risk in an age of ecology’. Business Strategy & the Environment 5: 198-206 Wiedmann, T., Minx, J., Barrett, J. & Wackernagel, M. (2006) ‘Allocating ecological footprints to final consumption categories with input-output analysis’. Ecological Economics, 56(1): 28-48 Wild, R., Millinga, A. & Robinson, J. (2008) ‘Microfinance and environmental sustainability at selected sites in Tanzania and Kenya’. LTS International, CARE, WWF

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CHAPTER 1.

ASSESSING THE ENVIRONMENTAL PERFORMANCE OF MICROFINANCE

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Assessing the environmental performance of microfinance

Abstract: Environmental performance is becoming an increasing concern for all businesses. The microfinance sector is no exception. Today, a growing number of microfinance institutions are developing environmental management programs, and microfinance stakeholders are increasingly willing to monitor environmental improvement. However, no adapted methodology currently exists to do so. This article proposes a new tool to assess the environmental performance of microfinance institutions: the Microfinance Environmental Performance Index (MEPI). This tool is based on management performance indicators that have been adapted to the specificities of the microfinance sector. It assesses MFIs’ environmental performance along five dimensions: environmental policy, ecological footprint, environmental risk assessment, green microcredit, and environmental non-financial services. MEPI can be a useful tool for research and serve as a basis for environmental strategy planning, progress monitoring, and communication in the microfinance industry.

Key words: Microfinance, Environmental Performance, Indicators, Green Microfinance JEL codes: G21, Q01, Q56

I would like to thank Isabelle Guérin, Marek Hudon, Marc Labie, Jean-Yves Moisseron, as well as Arvind Ashta for their valuable comments on earlier versions. I am also grateful to PlaNet Finance and ANRT for their financial support. This article has been published in Cost Management, March/April 2012, N° 26(2): 6-17. This paper has won the European Microfinance Network (EMN) Research Awards 2012.

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1. Introduction Climate change, natural resource depletion, and pollution problems have put environmental issues high on the global agenda. Recently, these issues have also been raised in the microfinance sector. Promoters of â&#x20AC;&#x2DC;green microfinanceâ&#x20AC;&#x2122; emphasize that microfinance, like any other business or stakeholder, has a responsibility to the environment (GreenMicrofinance, 2007; Rippey, 2009; Van Elteren, 2007). Beyond their financial and social bottom lines, some microfinance institutions (MFIs) have started to look at their environmental performance. However, the triple bottom line approach is still little known in microfinance. In a survey conducted with 160 MFIs (cf Chapter 2), 78 per cent believe that they have a role to play in protecting the environment. Yet, most of these MFIs do not know what strategy they could adopt to achieve this. Microfinance investors also seem interested in knowing the environmental performance of MFIs (De Bruyne, 2008), but the microfinance industry does not know yet how to assess and monitor this performance. No adapted methodology exists today. The objective of this paper is to propose a new tool to assess the environmental performance of microfinance institutions: the Microfinance Environmental Performance Index (MEPI). Building on the literature on corporate environmental performance and microfinance social performance, this tool is based on management performance indicators and is tailored to the specificities of the microfinance sector. We show that MFIs who tackle environmental issues do it through a variety of strategies: (1) adopting environmental policies, (2) reducing their internal ecological footprint, (3) managing the environmental risks of their clientsâ&#x20AC;&#x2122; activities, (4) providing green microcredit to promote environmentally-friendly activities or clean technologies, and (5) implementing non-financial services such as environmental awareness-raising campaigns. We therefore propose a multi-dimensional index that encompasses all types of strategies. We believe that MEPI can be a useful tool for research and serve as a basis for environmental strategy planning, progress monitoring, or communication in the microfinance industry. The rest of the article is structured as follows. Section 2 presents the rationales for assessing the environmental performance of MFIs. Section 3 discusses the challenges around performance measurement and the reasons for focusing on processes rather than outcomes. Section 4 introduces the variety of strategies that are adopted by MFIs today to actively reach an environmental bottom line,

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therefore calling for a multi-dimensional index. Section 5 presents the indicators that have been selected for MEPI. Section 6 discusses scoring and aggregation issues, which call for a relative use of the tool. Finally, section 7 provides some concluding remarks.

2. Why assess the environmental performance of microfinance? When the microfinance sector started to promote social performance assessment in the early 2000s, there was initially reticence in the industry. Adding social performance indicators was seen as too complex and burdensome for MFIs (Jacquand, 2005). Today, with the recent over-indebtedness crisis (Guérin, et al., 2009; Schicks, 2011; Servet, 2011) and controversies on commercialization and high interest rates (Ashta & Hudon, 2009; Hudon, 2011; Mersland & Strøm, 2008; Woller, 2002), the sector has come to an agreement on the need for monitoring microfinance performance on a double bottom line (Doligez & Lapenu, 2006; Gutiérrez-Nieto, et al., 2009; Hashemi, 2007; Lapenu, et al., 2009). Even though significant progress has been made in designing standards and tools12 for assessing this social performance, the debate for defining the most adequate indicators is still going on. This article goes one step further: in addition to measuring financial and social performance, we propose to assess MFIs’ environmental performance as well. This proposal may seem controversial. Indeed, in a context where evaluation on a double bottom line is still subject to debate, why should we advocate for assessing a triple bottom line performance? Since its inception, microfinance has been presented as a tool to fight poverty (Yunus, 2008). Assessing its social performance thus appears necessary to check whether microfinance manages to fulfill its social promises (Morduch, 1999). However, microfinance has never been presented as a means to protect the environment. Hence, why should we assess microfinance environmental performance? Are we not just putting a greater burden on MFIs by imposing new standards to reach and report upon? Are we not making them drift away from their initial mission by adding a third bottom line?13 The rationale for proposing to assess MFIs’ environmental performance does not come from an external, pre-conceived idea that MFIs should reach an environmental bottom line. Rather, it derives from an actual observation: more and more MFIs are starting to adopt environmental objectives in

Existing social performance tools include: CERISE Social Performance Indicators, MFC Quality Audit Tool (QAT), MicroSave SPM toolkit, M-Cril, MicroFinanza and PlaNet Rating social performance ratings, The Grameen Foundation Progress out of Poverty Index (PPI), The Iris Center's Poverty Assessment Tool (PAT), etc. 13

For a discussion on MFIs’ mission drift, see Armendáriz & Szafarz (2011) and Copestake (2007).

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addition to their financial and social goals. In a survey conducted in 2011 with 160 MFIs (cf Chapter 2), environmental protection was identified as a major objective for their institutions by 19 per cent of respondents and as an important objective by 49 per cent. Only 9 per cent stated that environmental protection was not an objective for their institutions, and 24 per cent said it was a minor objective. Due to self-selection bias, these results may not be totally representative of the whole microfinance sector and may slightly overestimate the level of interest of MFIs in the environmental bottom line. However, they clearly show that this concern exists today and that a certain number of MFIs are already willing to improve their environmental performance. The interest in a triple bottom line approach is also shared by a growing number of microfinance investors and donors. In a survey realized by the Social Performance Task Force with forty-five social investors in 2007, 62 per cent of the respondents expressed their interest in knowing the environmental performance of MFIs (De Bruyne, 2008). Additionally, in 2011, the Microfinance Investment Vehicles (MIVs) Survey carried out by Symbiotics revealed that, out of seventy participating MIVs, 46 per cent seek to assess MFIsâ&#x20AC;&#x2122; environmental risks, and 45 per cent seek to integrate environmental issues into their investment decisions (Symbiotics Research & Advisory, 2011). In this context, a tool enabling the assessment of the environmental performance of MFIs could serve several purposes: (a) research, (b) strategic planning and progress monitoring, and (c) communication with stakeholders. First, such a tool could be used by researchers to better understand the emerging phenomenon of â&#x20AC;&#x2DC;green microfinance.â&#x20AC;&#x2122; There are still many questions regarding the relevance of an environmental bottom line in microfinance. Do MFIs have a comparative advantage in tackling environmental issues? Can they effectively contribute to environmental protection? Could aiming at an environmental bottom line compromise their financial or social bottom lines? Assessing the environmental performance of microfinance can help investigate some of these issues. Using this tool, researchers could identify the extent of the phenomenon, the characteristics of MFIs that adopt environmental objectives, the rationales associated with certain environmental practices, the consistency between stated objectives and achievements, the benefits and costs linked to different environmental strategies, the potential trade-offs with the financial and social bottom lines, etc. Second, a tool enabling the assessment of environmental performance could be used by microfinance institutions as a guideline for internal planning, strategy, and management. An increasing number of MFIs are willing to improve their environmental bottom line. However, they often claim that they do not

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have clear ideas on how to achieve this and would need some orientation. An assessment tool can help them define what environmental performance means to them and identify the exact environmental objectives that they would like to pursue.14 It can draw their attention to the possible strategies and means for achieving these objectives. It can help them identify where they stand and how they could follow up on their progress. Applied at the internal level, this tool can thus help improve decision making for MFIs willing to aim at an environmental bottom line. Finally, assessing MFIs’ environmental performance through standardized and comparable indicators could also serve as a communication tool to respond to stakeholders’ interest in the topic. So far, most MFIs that go green engage in environmental management through pilot experiences. They scarcely develop formal environmental policies and action plans beforehand. They do not always advertise their initiatives or label them as ‘environmental.’ Better communication regarding their environmental performance could help them improve their image and attract socially responsible investors. To respond to donors’ and investors’ interest, microfinance rating agencies have begun to look at the environmental performance of microfinance institutions. As part of their Social Performance rating products, M-Cril, MicroFinanza, and PlaNet Rating15 have defined some specific indicators for assessing MFIs’ environmental responsibility: existence of environmental policies, processes for assessing and screening environmental risks, processes for monitoring client compliance, training and awareness-raising of staff, development of specific green microfinance projects (renewable energy, sustainable farming, sanitation), etc. The Social Performance Indicators (SPI) 16 questionnaire also includes two indicators for environmental responsibility: environmental policy for portfolio activities, and environmental policy for internal activities. These environmental performance indicators are already useful and adapted. However, they are not always very precise and do not cover all aspects of MFIs’ environmental performance. The Microfinance Environmental Performance Index (MEPI) proposed in this paper has been designed to fill this gap.

Similarly to Social Performance measurement tools (Doligez & Lapenu, 2006)

M-Cril, Microfinanza and PlaNet Rating are rating agencies specialized in the rating of microfinance institutions. In addition to financial rating, they also offer social rating services. 16

The Social Performance Indicators (SPI) initiative has been led since 2002 by the French network CERISE in association with international partners. Its objective is to define and implement a tool to measure the social performance of MFIs.

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3. Focusing on processes, not outcomes When seeking to evaluate the environmental performance of a business, two main approaches can be adopted: (a) measuring operational performance, or outcomes, and/or (b) assessing management performance, or processes. These two approaches are the ones promoted by ISO 14031 17 and are very commonly used in the literature on corporate environmental performance (Brunklaus, et al., 2009; Henri & Journeault, 2008; Ilinitch, et al., 1998; Jasch, 2000). The first approach looks at quantitative indicators, measuring outcomes such as energy consumption, material inputs, waste and emissions, etc. The second approach focuses on the efforts accomplished by the top management to influence the environmental operational performance (outcomes) of the business. It looks at the policies, programs, and resources mobilized. Quantitative indicators measuring outcomes often appear as being more rigorous and objective. Many studies focus on this category of indicators and even chose to keep only one or a few indicators as proxies, such as pollution emission or energy use. However, these studies always end up focusing on manufacturing industries (Cole, et al., 2008; Henri & Journeault, 2008; Hermann, et al., 2007; Lefebvre, et al., 2003; King & Lenox, 2001; Stanwick & Stanwick, 1998). They do so because (a) it is representative to take pollution emissions as a proxy for the environmental performance of this type of firms, since pollution emissions represent their biggest environmental impact (Tyteca, 1996); and (b) data is easily available for big companies from this sector (e.g.: using the Toxic Release Inventory, like in Stanwick & Stanwick, 1998). In the microfinance sector, the situation is very different. Outcome indicators do not seem to be the most adapted to assess the environmental performance of MFIs. First, data is not easily available. MFIs that measure and track their carbon emissions, use of paper, or energy consumption are still very scarce (ACLEDA, Banco Solidario, K-Rep, etc.). Second, such indicators would only measure the direct impacts of the MFIs, i.e. their internal ecological footprint. These impacts however represent a very small portion of their total environmental impact. According to a study published by WWF & VIGEO (2010), 99.9 per cent of the environmental impacts of financial institutions are actually indirect impacts, through the activities they finance.

ISO 14031 is an international norm that provides guidelines on the design and use of environmental performance evaluation within an organization.

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A better proxy could be to assess energy consumption or pollution emissions at the portfolio level. However, that would require conducting environmental audits of all microfinance clients’ activities, which is not a realistic option. Indeed, environmental impact assessment or other types of environmental audits are difficult to handle at a micro-scale (it would be complicated to apply them to individual loans) and are furthermore very costly and time-consuming (Wenner, 2002). MFIs would generally be reluctant to engage in such assessments because they require the development of new, specific technical skills and entail very high transaction costs that can challenge the MFIs’ financial sustainability. It could be interesting for an MFI to have an environmental audit conducted from time to time at a sector or community level, in order to understand the impact of its portfolio (Pallen, 1997). But it is unrealistic to expect that such assessments could be conducted systematically before and after the allocation of each loan. Even if these assessments were done, what would their results mean? Could we hold the MFI responsible for any negative or positive change in the environmental impact of clients’ activities? How could we differentiate microfinance’s influence from that of other factors? Proving any causality would entail dealing with significant methodological challenges. The microfinance sector has already been through extensive debates regarding the evaluation of microfinance impact on clients. The question is actually complex. MFIs’ impacts are both direct and indirect; they apply to different levels (individuals, households, villages, local economy, etc.) and to different fields (economics, social issues, health, and even the environment) (CERISE, 2003). Impact assessment faces significant methodological challenges, in terms of both selection bias (how can we ensure that control and pilot groups share the same characteristics?) and attribution issues (what part of the change is attributable to microfinance influence?) (Armendáriz & Morduch, 2005; Goldberg, 2005; Hashemi, 2007). Moreover, conducting rigorous impact evaluations is time-consuming, costly, and often does not provide operational recommendations to help MFIs improve their impact (CERISE, 2003; Copestake, et al., 2005). Drawing from this observation, the microfinance sector has progressively moved towards more operational, cost-effective performance management tools that can be used by MFIs for internal planning (CERISE, 2003; Copestake, et al., 2005). The idea is that, in order to strengthen its social impact, an MFI needs to make sure that it gives itself the means for reaching its social goals (Doligez & Lapenu, 2006). Social performance is thus observed not only at the level of outcomes or results (impacts on clients), but also at the level of the whole process leading to this social impact (Hashemi, 2007). This process is assessed through the intent of the MFI (social

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mission and goals), the effectiveness of the internal system and activities (decision-making and actor responsibility, specific actions, internal monitoring, tracking systems), and MFI outputs (Doligez & Lapenu, 2006; Hashemi, 2007). Similar to the approach promoted by the Social Performance Task Force18 in microfinance, we decided to consider environmental performance through the whole process that leads to environmental impact. The evaluation of environmental performance then consists of assessing the means employed by MFIs to reach their environmental objectives. Among the two approaches endorsed by ISO 14031, we therefore opt for assessing the environmental performance of MFIs through management performance indicators. The limit of these indicators is that they only assess the efforts made by an organization, without showing whether these efforts actually translate into positive changes in terms of environmental impact. But, similar to the social performance approach, our assumption is that processes do count (Lapenu, et al., 2009). In order to improve its environmental impact, the MFI has to give itself the means for reaching its environmental objectives. In addition, these indicators can be more easily identified and assessed from information available within the institution (policies, organizational processes, etc.), making it more cost-effective to assess MFIsâ&#x20AC;&#x2122; environmental performance. They also provide more operational recommendations and can be used internally by MFIs as a planning tool. Apart from studies focused on manufacturing companies, they are also the type of indicators frequently used in the literature on corporate environmental performance (Brunklaus, et al., 2009; Henri & Journeault, 2008; Ilinitch, et al., 1998; Jasch, 2000). We therefore propose a Microfinance Environmental Performance Index (MEPI) based on management performance indicators.

4. Assessing the five dimensions of green microfinance MEPI was designed is order to reflect the diversity of the environmental management strategies that can be adopted by MFIs. Indeed, microfinance institutions that are looking at their environmental bottom line are doing it through a wide variety of approaches. Some MFIs choose to be green at the internal level, by reducing their institutional ecological footprint. Others decide to address the issue at the portfolio level, by reducing the (indirect) environmental impact they may have through the activities

The Social Performance Task Force was created in 2005 by CGAP, the Argidius Foundation, and the Ford Foundation. Its objective is to bring together leaders from various social performance initiatives in the microfinance industry to come to agreement on a common social performance framework and to develop an action plan to move social performance forward.

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of the clients they finance. Some MFIs opt for a ‘defensive’ approach with a ‘do no harm’ objective: they seek to avoid financing activities that are highly polluting and/or overexploit or degrade natural resources. Others adopt a more ‘positive’ approach: they develop specific products and services to support environmentally-friendly activities, practices, and technologies. Some MFIs integrate environmental concerns as a cross-cutting, transversal issue in all their daily operations, requiring some redefinition of management and business processes. Others opt for a niche approach, wherein the environmental component is present in specific, purposely tailored products and services. All of these various approaches are not mutually exclusive. Sometimes, they are even combined within a single strategy of intervention. Overall, we identified five main types of strategies of intervention that MFIs are implementing today: (1) adopting environmental policies; (2) reducing the internal ecological footprint; (3) managing portfolio environmental risks; (4) providing green microcredit; and (5) providing environmental nonfinancial services.19

STRATEGY 1: Adopting environmental policies A first approach, widely adopted by any type of business, is to start integrating environmental concerns into the business’s official mission, principles, and policies. The idea is to confirm institutional commitment and create a framework that is favorable for the implementation of environmental programs. For instance, Fundación Amanecer, in Colombia, includes environmental concern in its official mission statement: “Promote human, entrepreneurial, and productive development in La Orinoquia, by supporting the collective ownership of citizenship and environmental values.” ACLEDA, in Cambodia, has developed an Environmental, Social, and Community Policy, which has the following mission statement: “ACLEDA Bank is focused on achieving strong, sustainable financial returns, while respecting the environment and community within which we live. We are committed to the concept of triple bottom line (‘people, planet, profit’).” Some MFIs, such as Apoyo Integral (El Salvador), CAMIDEPASECA (Mali), and INECOBANK (Armenia) have appointed managers to be in charge of

These five dimensions were defined on the basis of MFIs’ actual (already existing) practices regarding environmental management (and not on potential activities that they could implement but for which no current experience existed). To identify actual practices, we conducted a review of the green microfinance literature, we analyzed MFIs’ websites and annual reports, we did some field visits, we attended conferences where the issue was addressed, and we interviewed microfinance stakeholders (donors, investors, rating agencies, researchers, practitioners, etc.).

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environmental issues. This first strategy can be a preliminary step in developing concrete environmental activities.

STRATEGY 2: Reducing the internal ecological footprint Like any other business, MFIs wanting to improve their environmental performance can take actions internally, at the institutional level. Some of them seek to improve their waste management. For instance, Apoyo Integral, in El Salvador, has set up a partnership with a company that buys used paper from all of their branches and recycles it. Other MFIs seek to reduce the environmental footprint of their operational activities. This is the case for ACLEDA (Cambodia), Banco Solidario (Ecuador), FIE (Bolivia), K-Rep Bank (Kenya), MiBanco (Peru), and XacBank (Mongolia).20 These MFIs set specific objectives and closely monitor their levels of energy and water consumption, paper use, carbon emissions, etc. They even decided to communicate on their progress by publishing annual sustainable reports that follow the Global Reporting Initiative guidelines21 (GRI, 2008).

STRATEGY 3: Managing portfolio environmental risks Another strategy focuses on the environmental impact at the clientsâ&#x20AC;&#x2122; level. It consists of screening and monitoring all loans according to environmental criteria. The objective here is to manage the environmental risks of clientsâ&#x20AC;&#x2122; activities and avoid supporting harmful practices. Some MFIs, like ACLEDA (Cambodia), FIE (Bolivia), Kashf Foundation (Pakistan), ProCredit, and VisionFund (Cambodia) use an exclusion list, which defines the types of activities that the institution will never finance. Activities that are screened out are ones that are illegal under national and international standards and that present high environmental (and social) risks with no mitigation plan, such as: production or trade of wood or other forestry products that do not come from sustainably managed forests, production or trade of hazardous chemicals, trade of protected wildlife products, trade of banned pesticides/herbicides or ozone-depleting products, etc. Loan applications for activities falling into one of these categories are thus rejected by the institutions. This approach is also often

These MFIs participate in the Transparency and Sustainability in Finance program, promoted by Triodos Bank and Global Reporting Initiative 21

The Global Reporting Initiative (GRI) is a network-based organization that seeks to promote the mainstreaming of disclosure on environmental, social and governance performance.

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adopted by the traditional financial sector (UNEP-FI, 2006). Similar to many banks, most MFIs that have adopted an exclusion list are using the one promoted by the IFC22. Some MFIs decide to go further and use simplified tools to assess the level and type of environmental risks of the activities of their clients. This approach is commonly used in the banking sector, but it is usually applied to large-scale project financing only and not to SMEs or retail lending (UNEP-FI, 2008). The microfinance sector is innovative in that some MFIs are trying to assess environmental risks at the level of individual clients and micro-activities. MicroCred, for instance, adopted an environmental risk categorization list that ranks different activities according to their level of environmental risk. The list classifies high-risk activities in category A (leather tanning, textile dyeing, metal work, brick making, food processing, mechanical workshops, printing, painting, charcoal making, etc.); activities with an overall medium risk in category B (crop growing, animal husbandry, fishery, transportation, etc.); and low-risk activities in category C (small trade, etc.). A quick assessment of the environmental risk level can thus be made simply by identifying the sector of the client’s activity. MicroCred then sought to limit its portfolio exposure, by allowing only a certain percentage of the total loan portfolio to be dedicated to category A (high-risk) activities. In Partner (Bosnia), as part of the client appraisal process, loan officers use a 20-question form to check whether clients respect their environment. They look particularly at chemical use, waste management, and use of natural resources. Clients are eligible for a loan only if they obtain a certain score. The MFI regularly follows up on and provides advice concerning the clients’ environmental practices. In Apoyo Integral (El Salvador) and K-Rep (Kenya), loan officers also assess the environmental risks of the clients’ activities during their field visits. They use sector fact sheets23 that specify the main environmental (and social) risks per type of activity that loan officers would need to track and provide insight on possible measures that can be taken at the client level to reduce these risks. These sector fact sheets help loan officers raise clients’ awareness of environmental risks and possible mitigation actions.

STRATEGY 4: Providing green microcredit Still focusing on environmental impact at the clients’ level, some MFIs choose to tailor their financial products in order to promote environmentally-friendly practices. The logic here is more that of a

The International Finance Corporation (IFC), a member of the World Bank Group, is a global development institution focused on the private sector in developing countries. 23

Such as the ones developed by Triodos Facet for the Netherlands Development Finance Company (FMO, 2008)

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‘positive’ and ‘niche’ approach, which has also been adopted by the traditional banking sector (UNEPFI, 2007). MFIs develop green microcredit (a) to support the development of environmentally-friendly income-generating activities, such as eco-tourism, agroforestry, waste management, and recycling; or (b) to support access to environmentally-friendly technologies, such as renewable energy technologies (solar home systems, solar lamps, solar water-heaters, solar dryers, biogas digesters, etc.) or energy efficient technologies (improved cook stoves, energy-efficient motors, etc.). This can be done by adapting lending modalities in terms of amount, duration, and repayment schedule, and eventually by providing some kind of incentives (a reduced interest rate, for instance) to encourage microentrepreneurs to develop such activities or invest in clean technology. In Bangladesh, under the national solar program, institutions such as BRAC and Grameen Shakti have established partnerships with renewable energy technology providers and extend loans to households for the purchase of solar home systems. Clients are required to contribute a minimum 20% down payment. The loans have a duration of 24 to 36 months, and, thanks to the support of international donors, an effective annual interest rate of 12 to 15 per cent. Between 2003 and 2010, more than 645,000 solar home systems were installed in the country. FINCA (Uganda), Ningxia CEPA (China), and Tamweelcom (Jordan) are other examples of MFIs who provide green microcredit to promote renewable energy solutions.

STRATEGY 5: Providing environmental non-financial services Beyond their core financial operations, some MFIs also choose to develop non-financial environmentoriented services. This approach is rarely used in the traditional banking sector. It is more a specificity of the microfinance sector, where, for some MFIs, non-financial services are as important as their financial products. These services can include environmental awareness-raising campaigns. This is what is being actively done by CAMIDE in Mali. In one of its programs (Aliniha), this microfinance institution has defined an environmental code of conduct to be signed by each client. The client commits to plant trees and take care of them, stop using plastic bags, keep her house and surroundings clean, engage in environmentally-friendly activities, and raise her relatives’ awareness of environmental issues. Furthermore, CAMIDE regularly organizes movie-debates about deforestation and waste management and raises community awareness through poster displays and T-shirt distribution. Some MFIs also choose to provide environmental non-financial services by organizing specific training sessions for microentrepreneurs engaged in environmentally-sensitive activities. This is the case, for instance, for CEPRODES (Nicaragua) and Fundación Campo (El Salvador), which

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train their farmer clients on sustainable agriculture techniques. Other MFIs undertake actions to encourage the exchange of experiences and good practices between microentrepreneurs. For instance, CrediMujer, in Peru, selected Mrs Lirenza Chavez, who has an agro-ecological farm, as its client with the best environmental practices. Mrs Lirenza Chavez was awarded the International Microfinance Award for Environment

in 2010 and became a model for her community and other

CrediMujer clients. These are only a few examples among a variety of initiatives implemented by MFIs around the world. Even though they are not exhaustive, they already illustrate that, today, some MFIs are already seeking to improve their environmental performance and that they choose to do it in different ways. Most of the time, MFIs who aim at an environmental bottom line do not simultaneously adopt all five strategies. Many MFIs start developing programs without having a formal policy. Some focus only on their internal ecological footprint, others on green microcredit, and still others on awareness-raising. The decision to engage in one strategy is not necessarily linked to the engagement in another one. That is why it is essential that the Microfinance Environmental Performance Index encompasses the large variety of environmental strategies that can be adopted by MFIs. Within the index, we have therefore defined five dimensions of environmental performance, adapted to the reality and specificities of the microfinance sector: (1) Environmental policy; (2) Ecological footprint; (3) Environmental risk assessment; (4) Green microcredit; and (5) Environmental non-financial services. Similarly to the Social Performance Indicators tool (Lapenu, et al., 2009), MEPI allows for graphic representation of performance scores along its five dimensions. Such graphic representation helps to visualize the environmental strategy of the MFI. Figure 1 provides examples of three MFIs where we used MEPI to assess their environmental performance. As shown in the graphs, each institution seems to adopt a different environmental strategy. PRISMA, in Peru, is primarily focusing on its internal ecological footprint. INECOBANK, in Armenia, is putting more effort into assessing the environmental risks of its portfolio. And ASKI, in the Philippines, seems to be prioritizing the provision of green microcredit and environmental non-financial services.

The International Microfinance Awards are organized by PlaNet Finance to reward the best microentrepreneurs around the world every year.

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Figure 1. Examples of MEPI scores in three MFIs, illustrating three different strategies

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Having a multi-dimensional tool thus enables us to obtain a global vision of environmental performance in microfinance. It does not mean that all MFIs should follow all five strategies. One MFI could make the deliberate choice to prioritize one strategy over the others in accordance with its context and mission. The advantage of a multi-dimensional tool is that (a) it specifically enables the identification of the strategic choices made by MFIs, and (b) it could improve decision-making processes by providing ideas on possible strategies to MFIs who wish to manage their environmental bottom line.

5. Indicator selection To select MEPI indicators, we first looked at the literature on corporate environmental performance evaluation. We selected the most adapted management performance indicators and added some others to reflect the specificities of the microfinance sector. Our objective was to select indicators that are clear, simple, verifiable, and specific and that could allow for comparisons between MFIs. Indicators were selected along the five main dimensions of environmental performance in microfinance: (1) Environmental policy; (2) Ecological footprint; (3) Environmental risk assessment; (4) Green microcredit; and (5) Environmental non-financial services. The first two dimensions are the ones that are the most commonly assessed in the literature, for all types of companies. The first dimension, ‘Environmental Policy’, relates to the existence of an environmental strategy within the company. Some of the most frequent indicators used in the literature to assess this dimension are: the existence of a written environmental policy (Azzone, et al., 1996; Ilinitch, et al., 1998; Lefebvre, et al., 2003), and employees with environmental roles and responsibilities (Azzone, et al., 1996; Ilinitch, et al., 1998; Jasch, 2000; Lefebvre, et al., 2003; Olsthoorn, et al., 2001). These two indicators can also be applied to the microfinance sector and have been selected to be part of MEPI. They provide essential information on the effort made by the MFI to create a framework that is conducive to the implementation of environmental programs. The second dimension, ‘Ecological Footprint’, refers to all efforts undertaken to manage the direct impacts of the company. The most frequent indicators in the literature all appear relevant to assessing MFIs’ internal performance and have been included in MEPI: environmental audits (Azzone, et al., 1996; Henri & Journeault, 2008; Ilinitch, et al., 1998; Jasch, 2000; Lefebvre, et al., 2003), the

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establishment of quantifiable objectives (Jasch, 2000; Lefebvre, et al., 2003; Pratt & Rojas, 2001), environmental reporting or disclosure (Azzone, et al., 1996; Henri & Journeault, 2008; Ilinitch, et al., 1998 ; Weber, 2005), and environmental training for staff (Henri & Journeault, 2008; Jasch, 2000; Lefebvre, et al., 2003; Rao, et al., 2009). The following two dimensions, ‘Environmental risk assessment’ and ‘Green microcredit’, are specific to the financial sector, since they look at the management of indirect environmental impacts, at the portfolio level. As mentioned previously, these indirect impacts are the most important ones for financial institutions, contrary to most other types of businesses. Nevertheless, so far, very few academic studies have tried to assess the environmental performance of banks or financial institutions (Pratt & Rojas, 2001; Weber, 2005). In this literature, two main indicators are used for assessing the ‘Environmental risk management’ dimension: no credit given to non-sustainable companies (Weber, 2005), and tools for risk analysis and monitoring of loans (Pratt & Rojas, 2001; Weber, 2005). The ‘Green products’ dimension is assessed through the following indicators: green loans for sustainable companies or start-ups (Pratt & Rojas, 2001; Weber, 2005), and connection between credit pricing and sustainable performance of the debtor (Weber, 2005). Such indicators are also very relevant for the microfinance sector and have been selected as part of MEPI. 25 Our fifth dimension on ‘Environmental, non-financial services’ is very specific to the microfinance sector and does not appear anywhere in the literature. Indeed, financial institutions usually do not grant as much importance to their non-financial services as some MFIs do. Many environmental initiatives implemented by MFIs so far are related to these non-financial services, such as environmental awareness-raising and training. We therefore had to define our own indicators for this dimension, on the basis of ongoing practices in the sector. The exact composition of MEPI is presented in Figure 2 in a simplified version. The detailed version of the index can be found in Appendix 1.

In addition to green microcredit, MFIs could also decide to offer green savings products. For instance, they could offer a product where clients could save money little by little, in order to ultimately purchase a clean energy technology, and which could offer a higher interest rate as an incentive for clients. Nevertheless, we have not encountered concrete examples of green savings products in the microfinance sector so far. Since MEPI has been defined on the basis of existing practices in order to suit the reality of the microfinance sector, we have not included “green savings” as one of our indicators. This could of course change in the future: if MFIs start offering green savings, it will be relevant to add such indicator in an updated version of MEPI.

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Figure 2. Microfinance Environmental Performance Index (MEPI)

1. ENVIRONMENTAL POLICY MISSION / VISION / VALUES

Environmental protection mentioned in the official vision, mission, or values

ENVIRONMENTAL POLICY Formal policy on environmental responsibility ENVIRONMENTAL MANAGER A person appointed to manage environmental issues INCENTIVES

Incentive system to encourage employees to take into account specific environmental objectives

2. ECOLOGICAL FOOTPRINT CARBON AUDIT Previous realization of a carbon audit

4 1 1 1 1

4 1

FOOTPRINT OBJECTIVES

Specific objectives to reduce ecological footprint (e.g.: reduction in energy consumption, carbon emissions, waste, etc.)

STAFF AWARENESS

Toolkits to raise employees' awareness of good practices in paper, water, and energy consumption, transportation, waste management, etc.

REPORTING

Inclusion of environmental performance indicators in annual report (paper, water, and energy consumption, etc.)

3. ENVIRONMENTAL RISKS ASSESSMENT EXCLUSION LIST Use of an environmental exclusion list SCREENING TOOLS STAFF TRAINING MIS

GREEN IGAs LOANS

Training module to teach loan officers how to evaluate the environmental risks of their clients' activities

Inclusion of indicators into Monitoring and Information System (MIS) to track the environmental performance of clients

4 Provision of credits to promote access to renewable energy or energy efficient technologies (RE&EE)

Provision of loans with reduced interest rates to promote the development of environmentally-friendly activities

5. ENVIRONMENTAL NON-FINANCIAL SERVICES CLIENT CHART Environmental chart to be signed by clients CLIENT AWARENESS Programs to raise clients' awareness on environmental risks PROMOTION ACTION CLIENT TRAINING

Use of specific toolkits to evaluate the environmental risks of clients' activities

4. GREEN MICROCREDIT RE&EE LOANS

4 1 1

Organization of actions to promote environmentally-friendly microenterprises

Training and other services to support clients who want to develop environmentally-friendly activities

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Overall, we favored indicators that reflect inputs and processes, rather than outputs. For example, for the ‘Green microcredit’ dimension, we decided to assess whether MFIs offer green microcredit, with a binary ‘yes/no’ variable. Another valid indicator could have been the percentage of green microloans in the total loan portfolio. Similarly, for the ‘Environmental risk assessment’ dimension, we opted to assess whether MFIs use specific toolkits to assess the environmental risks of their clients, with a binary ‘yes/no’ variable. Another option could have been to ask for the percentage of clients engaged in an environmentally risky activity26. These output indicators could provide very interesting information. However, we decided not to include them yet in MEPI for various reasons. First, information is still limited on these outputs. MFIs that are providing green microcredit or assessing environmental risks do not systematically track these activities through their Monitoring and Information System, making it difficult for them to provide accurate data. Second, in a context where environmental management is still a new and little known issue in microfinance, we wanted to focus first on the actions and effort undertaken by MFIs to reach an environmental bottom line. Looking at inputs and processes provides essential information on existing strategies and on the means the MFI employs to reach an environmental bottom line. Such information is useful both for research purposes and for providing operational guidelines to MFIs wishing to engage in environmental management. As can be seen in the detailed MEPI version (cf Appendix), we decided to back up several indicators with control questions. Experiences from previous surveys and interviews reveal that MFIs tend to give ‘greenwashing’ discourses. In order to avoid overestimating their environmental performance, we ask MFIs to provide more specific, concrete details on what they do. For instance, if MFIs state that they appointed someone to be in charge of environmental issues, we ask for the exact position of that person. If MFIs say that they provide credit to facilitate access to clean energy technologies, we ask how many of this type of loans they have disbursed in the past year. These control questions are not counted any point. We assume that simply by getting asked these questions, the MFIs will feel compelled to answer the questionnaire more genuinely, allowing MEPI to accurately reflect their level of environmental performance.

Measuring the percentage of clients engaged in environmentally risky activities may however be tricky since (1) not all MFIs may share the same definition of what is considered as environmentally risky, and (2) a positive trend could mean that the MFI helped clients to upgrade to less risky activities, but it could also mean that the MFI screened out the most risky activities, which could constitute a mission drift.

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6. Scoring and aggregation issues Even though the Microfinance Environmental Performance Index has been designed to encompass all aspects of environmental performance in microfinance, our objective was not to come up with a ‘to do’ list of actions that should be carried out by all MFIs. MEPI has not been designed to be interpreted or used in a normative way. All possible types of interventions listed in MEPI may not have the same relevance, outreach, effectiveness, or impact, depending on the context of the MFI. The limit of this type of index comes when we try to aggregate the results of the different indicators. By giving them different weights, we are arbitrarily deciding whether an action is more desirable or valuable than another (Van den Bossche, et al., 2010). Should we give the same weight to the definition of internal ecological footprint objectives and to the provision of green microcredit, when we know that MFIs’ environmental indirect impacts are much greater than its direct ones? Should the use of an exclusion list be valued as much as the organization of training on green income-generating activities? Aggregation and weighting issues indeed raise important ethical questions. For instance, by giving the same weight to the use of environmental criteria for screening loan applications and to the provision of environmental non-financial services, one could assume that both strategies have the same value. However, the first strategy raises controversial issues: by screening out loan applications along environmental criteria, an MFI may end up discriminating against the poorest clients who do not have the means to upgrade their production processes. By refusing to provide them with a loan, the MFI could drift away from its social mission, which is to offer financial services to people excluded from the traditional banking sector. Moreover, it would not solve the environmental issue since the excluded clients would continue running their activities, without having a chance to invest in cleaner production processes. When aggregating and weighting MEPI indicators, the risk is that one does not reflect anymore upon the relevance of each strategy for the MFI itself as well as for microfinance clients. Our objective here is not to impose a vision on the level of desirability of each indicator. Instead, the weighting we propose has been defined to suit research purposes. We decided to give an equal weight (4 points) to each of the five dimensions of environmental performance, making the total index rated out of 20. From a research perspective, it is important to look at all of the dimensions, without judging a priori which one should be more important or desirable than the other. Our idea is to use MEPI to assess the effort made by MFIs to tackle their environmental bottom line and to better

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understand the rationales and issues behind this effort. For each indicator, MFIs get full points when they answer Yes, and zero points when they answer No. We left the possibility to get a fraction of a point (0.25) when MFIs answer that they are in the process of developing environmental programs or processes (using then a 3-point Likert scale instead of a binary variable). The rationale for including ‘in process’ answers is that green microfinance is still in its infancy. A number of MFIs may not have developed any program yet, but they may be in active reflection or in a pilot process. Integrating “in process” answers thereby gives a more dynamic dimension to MEPI. Because it is quite exhaustive and neutral, MEPI therefore perfectly suits analytical purposes. However, if microfinance practitioners or donors intended to use MEPI for strategy planning or progress monitoring, the tool would have to be adapted. Each MFI should select the dimensions and indicators most relevant and review their respective weights according to its context, objectives, and priorities. This could be done through an internal reflection process, whereby the MFI identifies, in a participatory process, which indicators of environmental performance are the most desirable ones.27 Furthermore, each MFI should also consider these environmental objectives and activities in relation to their financial and social bottom lines. They should reflect upon potential trade-offs between these three bottom lines and establish priorities amongst them, according to the overall context of the MFI. 28 Environmental performance would then be assessed according to the environmental mission that the MFI defined for itself, and not according to what some external stakeholders consider appropriate. MEPI is not intended to be a once-and-for-all defined, normative tool. On the contrary, MEPI is meant to be an evolving tool, and serve as a basis for discussions and reflections for microfinance stakeholders willing to develop a triple bottom line approach.

7. Conclusion This article proposed a new tool to assess the environmental performance of MFIs: the Microfinance Environmental Performance Index (MEPI). The idea to create such a tool came from the following observation: more and more MFIs and microfinance stakeholders are getting interested in their

The microfinance literature on Social Performance already promotes this relative approach regarding social audit (Copestake et al., 2005; Doligez & Lapenu, 2006) 28

An interesting methodology is proposed by De Corte, et al. (2011) regarding the measurement of social performance in Microfinance Investment Vehicles. They suggest applying the MACBETH approach, which enables to weight indicators according to the relative level of attractiveness, defined during a participatory process within the institution.

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environmental bottom line, but no clear methodology exists today to assess MFIsâ&#x20AC;&#x2122; environmental performance. MEPI was thus designed to fill this gap. Building on the literature on corporate environmental performance and on microfinance social performance, we opted for a cost-effective and practical approach: assessing environmental performance through management indicators. Similar to the approach promoted by the Social Performance Task Force, we consider that it is essential to look at the whole process leading to environmental impacts. We therefore selected indicators reflecting the effort undertaken by the MFI to reach an environmental bottom line (policies, processes, products, activities, etc.). In order to reflect the variety of strategies adopted by MFIs, we built our tool around five main dimensions: (1) Environmental policy; (2) Ecological footprint; (3) Environmental risk assessment; (4) Green microcredit; and (5) Environmental, non-financial services. Acknowledging scoring and aggregation issues, we called for a relative use of MEPI, adapted to the context, objectives, and priorities of each microfinance institution. We believe that MEPI can be a useful research tool and help investigate key issues around the relevance of a triple bottom line in microfinance. MEPI could indeed be used in further research to identify the characteristics of green MFIs, the strategies adopted and their rationales, and the links between the environmental, social, and financial bottom lines. Beyond research purposes, we hope that MEPI will serve as a basis to foster reflection on the environmental bottom line in microfinance, not only at MFIsâ&#x20AC;&#x2122; internal level, but also within the entire microfinance industry.

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Appendix Microfinance Environmental Performance Index (MEPI) â&#x20AC;&#x201C; Detailed version

1. ENVIRONMENTAL POLICY MISSION / VISION Is environmental protection mentioned in the official / VALUES vision, mission, or values of your institution? ENVIRONMENTAL Does your institution have a formal policy on POLICY environmental responsibility?

1 Yes 0 No 1 0,25 0,25 0

Yes, written policy Yes, non-written policy No, but we are currently developing one No

CONTROL: If yes, what year was this policy set up? ENVIRONMENTAL Has someone in your institution been appointed to MANAGER manage environmental issues?

1 Yes 0 No

CONTROL: If yes, what is the exact title or position of this person? INCENTIVES Has your institution set up an incentive system to encourage employees to take into account specific environmental objectives? (e.g.: bonus, promotions)

1 Yes 0,25 No, but we are currently defining such an incentive system 0 No

2. ECOLOGICAL FOOTPRINT CARBON AUDIT Has your institution already conducted a carbon audit? (Carbon Audit = evaluation of the greenhouse gas emissions of an organization)

FOOTPRINT Has your institution set up specific objectives to OBJECTIVES reduce its ecological footprint? (e.g.: reduction in energy consumption, carbon emissions, waste, etc.)

CONTROL: If yes, which objectives? [Multiple answers possible]

1 Yes 0,25 No, but we will conduct one within the next six months 0 No 1 Yes, quantified objectives 1 Yes, non-quantified objectives 0,25 No, but we are currently defining such objectives 0 No Reduction in paper consumption Reduction in water consumption Reduction in energy consumption (electricity, gas) Reduction of CO2 emissions Reduction of wastes Reduction of transportation usages Other: ______

STAFF Does your institution use toolkits to raise AWARENESS employees' awareness of good practices on paper, water, and energy consumption, transportation, waste management, etc.? (e.g.: procedure manual, power point presentations, flyers)

1 Yes 0,25 No, but we are currently developing such toolkits 0 No

REPORTING Does your institution include environmental performance indicators in its annual report? (paper, water, energy consumption, etc.)

1 Yes, GRI / ISO 14001 / EMAS indicators 1 Yes, other indicators: __________ 0,25 No, but we are currently integrating such indicators in our next report 0 No

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3. ENVIRONMENTAL RISKS ASSESSMENT EXCLUSION LIST Does your institution use an environmental exclusion list? (Exclusion list = list of activities that you refuse to finance because they are harmful to the environment)

1 Yes, the IFC exclusion list (IFC = International Finance Corporation) 1 Yes, the IFC exclusion list with some adjustments 1 Yes, according to national regulation requirements 1 Yes, another list 0,25 No, but we are planning to do so in the coming year 0 No

CONTROL: If yes, how many loan requests did your institution refuse in 2010 on the basis of this list? SCREENING Does your institution use specific toolkits to TOOLS evaluate the environmental risks of its clients' activities?

1 Yes, FMO toolkits (FMO = Dutch development bank) 1 Yes, FMO toolkits with some adjustments 1 Yes, other toolkits 0,25 No, but we conduct unformal evaluations 0,25 No, but we are currently developing such toolkits 0 No

CONTROL: If yes, which actions does your institution take after evaluating environmental risks? [Multiple answers possible]

None for the moment Refusal of loan request for activities that are the most harmful to the environment Contract clauses requiring the clients to reduce his ecological risks Client awareness-raising Provision of adapted financial products: renewable energy credits, sustainable agriculture credit, etc. Reduced interest rate for environmentallyfriendly activities and for clients reaching objectives of environmental risk reduction Selection and reward of model environmentally-friendly microentrepreneurs Other: ______

STAFF TRAINING Does your institution use a training module to teach loan officers how to evaluate the environmental risks of their clients' activities?

1 Yes 0,25 No, but we are currently developing such a module 0 No

CONTROL: If yes, how many loan officers did your institution train last year? MIS Has your institution included in its Monitoring and Information System (MIS) indicators that allow you to track the environmental performance of clients?

1 Yes 0,25 No, but we are currently integrating such indicators 0 No 0 We do not use a computerized MIS

4. GREEN MICROCREDIT RE&EE LOANS Does your institution offer credits to promote access to renewable energy or energy efficient technologies? (e.g.: photovoltaic systems, biogas digesters, etc.) CONTROL: If yes, for which technologies? [Multiple answers possible]

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2 Yes 0,25 No, but we are currently developing such products 0 No Solar lanterns Photovoltaic systems Solar water-heaters Biogas digesters Solar cook stoves Efficient cook stoves Solar dryers Other: _____

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CONTROL: If yes, how many credits has your institution provided last year for investing in this type of technologies? GREEN IGAs Does your institution offer credits with reduced LOANS interest rates to promote the development of environmentally-friendly activities? (e.g.: sustainable agriculture, recycling, ecotourism, etc.) CONTROL: If yes, for which activities? [Multiple answers possible]

2 Yes 0,25 No, but we are currently developing such products 0 No Recycling, waste management, composting Conservation agriculture, agroforestry, sylvopastoralism, organic production Reforestation, forest sustainable management Ecotourism Water management Production, distribution, installation of Renewable Energy and Energy Efficient equipement Other: _____

CONTROL: If yes, how many credits has your institution provided last year for promoting this type of environmentally-friendly activities?

5. ENVIRONMENTAL, NON FINANCIAL SERVICES CLIENT CHART Does your institution ask clients to sign an environmental chart? (Environmental chart = document signed by the clients, where they commit to adopt environmentally-friendly behaviours) CLIENT Has your institution already implemented programs AWARENESS to raise clients' awareness of environmental risks? (e.g.: flyers, discussions during group meetings, etc.) CONTROL: If yes, which type of awareness-raising program? [Multiple answer possible]

PROMOTION Has your institution already organized actions to ACTION promote environmentally-friendly microenterprises? (e.g.: contest for the most environmentally-friendly client, organisation of a green microenterprise fair, etc.) CLIENT TRAINING Does your institution offer services to support clients who want to develop environmentallyfriendly activities? (e.g.: training, technical assistance)

CONTROL: If yes, in which sectors? [Multiple answers possible]

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1 Yes 0,25 No, but we are currently designing such a chart 0 No

1 Yes 0,25 No, but we are currently developing such programs 0 No Diffusion of information through flyers, posters, media Discussions during group meetings Discussions during field visits Other: _____ 1 Yes 0,25 No, but we are currently organizing such an action 0 No 1 Yes, thanks to partnerships with other specialized organizations 1 Yes, thanks to the competences that our institution developed in-house 0,25 No, but we are currently setting up such assistance services 0 No Sustainable agriculture Renewable Energy and Energy Efficient equipment installation / distribution services Reforestation Waste management, recycling Water management Ecotourism Other: _____

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Hudon, M. (2011) ‘Ethics in microfinance’. Published in: The Handbook of Microfinance, B. Armendáriz & M. Labie (eds), UK: World Scientific Ilinitch, A., Soderstrom, N. & Thomas, T. (1998) ‘Measuring corporate environmental performance’. Journal of Accounting and Public Policy 17: 383-408 Jacquand, M. (2005) ‘Measuring social performance: the wrong http://uncdf.org/english/microfinance/newsletter/pages/2005_08/news_measuring.php

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Jasch, C. (2000) ‘Environmental performance evaluation and indicators’. Journal of Cleaner Production 8: 79-88 King, A. & Lenox, M. (2001) ‘Does It Really Pay to Be Green? An Empirical Study of Firm Environmental and Financial Performance’. Journal of Industrial Ecology 5(1): 105-116 Lapenu, C., Konini, Z. & Razakaharivelo, C. (2009) ‘Evaluation de la performance sociale : les enjeux d’une finance responsable’. Revue Tiers-Monde 197: 37-54 Lefebvre, E., Lefebvre, L. & Talbot, S. (2003) ‘Determinants and impacts of environmental performance in SMEs’. R&D Management 33(3): 263-283 Mersland, R. & Øystein Strøm, R. (2008) ‘Performance and trade-offs in Microfinance Organisations - Does ownership matter?’. Journal of International Development, 20(5): 598–612 Morduch, J. (1999) ‘The microfinance promise’. Journal of Economic Literature, 37(4): 1569-1614 Olsthoorn, X., Tyteca, D., Wehrmeyer, W. & Wagner, M. (2001) ‘Environmental indicators for business: a review of the literature and standardisation methods’. Journal of Cleaner Production 9: 453-463 Pallen, D. (1997) ‘Environmental sourcebook for microfinance institutions’. Canadian International Development Agency Pratt, L. & Rojas, E. (2001) ‘Programas ambientales en bancos latinoamericanos: Una Evaluación’. Centro Latinoamericano para la Competitividad y el Desarrollo Sostenible (CLACDS) de INCAE Business School Rao, P., Singh, A., O’ Castillo, O., Ponciano S. & Sajid, A. (2009). ‘A Metric for Corporate Environmental Indicators for Small and Medium Enterprises in the Philippines’. Business Strategy and the Environment 18: 14-31 (2009) Rippey, P. (2009) ‘Microfinance and climate change: threats and opportunities’. CGAP Focus Note 53, Washington DC: CGAP Schicks, J. (2010) ‘Microfinance Over-Indebtedness: Understanding its drivers and challenging the common myths’. CEB Working Paper N° 10/048, Université Libre de Bruxelles Servet, J.M (2011) ‘La crise du microcrédit au Andhra Pradesh (Inde)’. Revue Tiers Monde, 207(3): 43-60 Stanwick, P. & Stanwick, S. (1998) ‘The Relationship Between Corporate Social Performance, and Organizational Size, Financial Performance, and Environmental Performance: An Empirical Examination’. Journal of Business Ethics 17: 195-204 Symbiotics Research & Advisory (2011) Symbiotics 2011 MIV survey report. Geneva: Symbiotics Research & Advisory SA Tyteca, D. (1996) ‘On the Measurement of the Environmental Performance of Firms - A Literature Review and a Productive Efficiency Perspective’. Journal of Environmental Management 46: 281-308 UNEP-FI (2006) Sustainability management and reporting: benefits for financial institutions in developing and emerging economies. Geneva: UNEP Financial Initiative UNEP-FI (2007) Green financial products and services: current trends and future opportunities in North America. Geneva: UNEP Financial Initiative UNEP-FI (2008) Biodiversity and ecosystem services: bloom or bust? Geneva: UNEP Financial Initiative Van den Bossche, F., Rogge, N., Devooght, K. & Van Puyenbroeck, T. (2010) ‘Robust Corporate Social Responsibility investment screening’. Ecological Economics, 69: 1159-1169

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Van Elteren, A. (2007) ‘Environmental and social risk management and added value at MFIs and MFI funds – the FMO approach’. The Hague: Netherlands Development Finance Company (FMO) Weber, O. (2005) ‘Sustainability Benchmarking of European Banks and Financial Service Organizations’. Corporate Social Responsibility and Environmental Management 12: 73-87 Wenner, M. (2002) ‘Microenterprise growth and environmental protection’. Microenterprise Development Review 4(2): 1-8 Woller, G. (2002) ‘The promise and peril of microfinance commercialization’. Small Enterprise Development, 13(4): 12-21 WWF & VIGEO (2010) ‘Entreprises et changement climatique. Défis sectoriels et perspectives pour une approche globale’. Paris: WWF & VIGEO Yunus, M. (2008) Creating a world without poverty: social business and the future of capitalism. New York: Public Affairs

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CHAPTER 2.

WHY DO MICROFINANCE INSTITUTIONS GO GREEN? AN EXPLORATORY STUDY

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Why do microfinance institutions go green? An exploratory study

Abstract In recent years, in addition to financial and social objectives, the microfinance industry has started to look at its environmental bottom line. The objective of this paper is to identify why microfinance institutions (MFIs) decide to go green. Data was collected through a quantitative survey of 160 MFIs and qualitative semi-structured interviews of 23 MFIs’ top managers. Basing our analysis on the model of ecological responsiveness developed by Bansal & Roth (2000), we discover that MFIs that are the most proactive in environmental management are primarily motivated by social responsibility, additionally by competitiveness, and to a lesser extent by legitimation (stakeholder pressure). MFIs for which legitimation is the dominant driver tend to adopt a defensive approach and set up more superficial negative strategies to appear green. In contrast, MFIs for which social responsibility is the dominant driver tend to be more proactive and innovative and develop adapted financial and nonfinancial services to promote environmentally-friendly practices.

Key words: Microfinance, Ecological responsiveness, Environmental motivation, Organizational decision making, Corporate Social Responsibility JEL codes: G21, Q01, Q56

I would like to thank Marek Hudon, Isabelle Guérin, Marc Labie, Nigel Roome, and Ariane Szafarz for their valuable comments on earlier versions. I am also very grateful to the 160 MFIs that responded to the survey, as well as to the 23 top managers that dedicated some of their time to our interviews. Finally, I am thankful to PlaNet Finance and ANRT for their financial support and to Kathryn Harrison for her proofreading. This article has been published as a CEB working paper, in 2012, N°12/015.

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1. Introduction In recent years, the microfinance sector, like many other industries, has started to look at its environmental impact. In addition to their financial and social objectives, a growing number of microfinance institutions (MFIs) are now aiming at an environmental bottom line. These â&#x20AC;&#x2DC;greenâ&#x20AC;&#x2122; MFIs opt for different strategies: screening loans according to environmental criteria, offering microcredit to support clean technologies, or training their clients on pro-environmental practices. Yet, the relevance of a third bottom line is still subject to debate in the microfinance sector, with some professionals arguing that environmental management is burdensome and would make MFIs drift away from their objectives. The objective of this article is to analyze why microfinance institutions decide to go green. Understanding the motives of ecological responsiveness in microfinance is important for various reasons. First, this understanding can help assess whether MFIs consider it relevant to add an environmental bottom line and why. Do they go green only due to outside pressure but actually estimate that they are not in a position to tackle environmental issues? On the contrary, do they go green because they consider that they have a comparative advantage and the capacity to protect the environment? Do they go green because they see synergies between their financial, social and environmental bottom lines? Or do they decide not to go green because they identify important tradeoffs between these three bottom lines? Furthermore, this understanding could reveal whether the choice of one environmental management strategy over another (i.e. adopting an exclusion list, providing green microcredit, raising awareness on environmental issues, etc.) is influenced by the type of motive driving the MFI. Assuming that not all strategies may have the same effectiveness and impact, it could help practitioners identify the mechanisms that would foster the implementation of the most effective and suited green microfinance strategies. This study is the first that seeks to empirically identify the motives leading MFIs to go green. We conducted a quantitative survey of 160 MFIs, to identify their environmental attitude, motives and practices, and a qualitative study, with semi-structured interviews of 23 MFIsâ&#x20AC;&#x2122; top managers, to understand the determining processes in the decision to go green. The analysis is based on the model of ecological responsiveness developed by Bansal & Roth (2000), which identifies three main drivers: legitimation (stakeholder pressure), competitiveness (strategic and

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economic benefits), and social responsibility. Applying their model to a sample of fifty-three British and Japanese enterprises from the manufacturing sector, they discover that firms are motivated “largely by concerns for legitimacy, less by competitiveness, and even less by ecological responsibility” (Bansal & Roth, 2000, p.733). These findings are confirmed by other studies, such as that of Céspedes-Lorente et al. (2003) and Williamson et al. (2006), which identify regulations and business performance as the main drivers of ecological responsiveness in their respective samples of 279 Spanish hotels (Céspedes-Lorente et al, 2003) and thirty-one manufacturing firms (Williamson et al, 2006). Furthermore, Gonzáles-Benito & Gonzáles-Benito (2005), who conducted interviews with 186 manufacturing companies, found that firms motivated by economic competitiveness tend to carry out deeper environmental transformations than firms motivated by social responsibility. As these samples remain modest, it would be hazardous to assume that they are totally representative of the manufacturing or service sectors. Yet, interestingly, our study reveals a different result for the microfinance sector. We find that MFIs that are the most proactive in environmental management are primarily motivated by social responsibility, additionally by competitiveness, and to a lesser extent by legitimation. By ‘proactive’, we mean that these MFIs do more than what is required by regulations, investors and donors29; they engage in more positive and deeper strategies to manage environmental issues. In opposition, we use the term ‘reactive’ to qualify MFIs that only adopt minimal measures to reduce risks for themselves and comply with regulations and stakeholders’ requirements. In our study, we find that MFIs for which legitimation is the dominant driver tend to adopt a reactive posture and set up more superficial negative strategies to appear green. In contrast, MFIs for which social responsibility is the dominant driver tend to be more proactive and develop adapted financial and nonfinancial services to promote environmentally-friendly practices. While Bansal & Roth (2000) identify regulations and pressures as a key mechanism to foster ecological responsiveness in the manufacturing sector, results from our study thus suggest that a different approach should be favored in the microfinance sector: an approach based on technical support and exchange of experiences. The rest of the article is structured as follows. Section 2 introduces the model for ecological responsiveness that has been adapted to the microfinance sector. Section 3 explains the methodology

For more details on ‘proactive’ vs. ‘reactive’ postures in Corporate Social Responsibility, see Aragón-Correa et al., 2008; Buysse & Verbeke, 2003; Clarkson, 1995.

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used in this study. Section 4 analyzes empirical results in the light of our model of ecological responsiveness. Section 5 provides some concluding remarks.

2. Drivers of ecological responsiveness During the last two decades, many researchers have investigated why firms or organizations decide to engage in environmental management. Various factors, drivers or motives have been identified: legislation (Céspedes-Lorente, et al, 2003; Sohn, 1982), stakeholders’ pressure (Buysse & Verbeke, 2003; Elijido-Ten, 2007), economic motives (Aragón-Correa & Rubio-López, 2007; Castelo & Lima, 2006), leadership (D’Amato & Roome, 2009; Hemingway & Maclagan, 2004; Logsdon & Yuthas, 1997; Rok, 2009), organizational context (López Rodriguez, 2009), ethics (Garriga & Melé, 2004; Mostovicz, et al, 2009), etc. Among the different models of corporate ecological responsiveness proposed in the literature, the one developed by Bansal & Roth (2000) seems particularly appealing. 30 Bansal & Roth (2000) conducted a qualitative study with fifty-three manufacturing firms in the United Kingdom and in Japan. Applying analytical induction to their data, they identified three motives for ecological responsiveness: legitimation (stakeholder pressure), competitiveness (strategic and economic benefits), and social responsibility. Their model is particularly interesting in that it builds on the existing literature and encompasses the major drivers identified in previous studies. It is simple and general enough to be applied to different sectors, and it has been empirically tested and used in other studies (Gadenne et al., 2009; González-Benito & González-Benito, 2005). Bansal & Roth (2000) emphasize that the three motives of ecological responsiveness can be combined and interrelated. Their cumulated influence can lead a company to engage in environmental management. Nevertheless, they identify for most companies a ‘dominant’ driver and relate each dominant driver with a type of approach (more reactive or more proactive), which was confirmed by Gonzáles-Benito & GonzálesBenito (2005). So far, empirical studies looking at corporate drivers for ecological responsiveness mostly focus on the manufacturing sector, where environmental impact is the most direct and visible (Gonzáles-Benito & Gonzáles-Benito, 2005; Williamson et al., 2006). For the first time, this paper will apply Bansal &

The choice of Bansal & Roth’s model was the result of an iterative analytical process where theories from the literature and data from our studies were constantly confronted. This confrontation enabled us to identify Bansal & Roth’s model as a suitable theoretical framework for our study. More details regarding the iterative process can be found in the methodological annex.

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Roth’s model of corporate ecological responsiveness to the microfinance sector, where environmental impact is more indirect but nonetheless exists. This section introduces the three motives for ecological responsiveness identified by Bansal & Roth (legitimation, competitiveness and social responsibility) and proposes a model adapted to the microfinance sector (Figure 1).

Figure 1. A model of ecological responsiveness in microfinance (based on Bansal & Roth, 2000)

2.1. Legitimation Bansal & Roth (2000) identify legitimation as a first motive for corporate ecological responsiveness. For them, the legitimation driver is the “desire of a firm to improve the appropriateness of its actions within an established set of regulations, norms, values, or beliefs” (Suchman, 1995). In other words, firms feel compelled to go green in order to respond to stakeholders’ expectations and gain the legitimacy necessary to their long-term survival.31

This driver is at the heart of various theories and models on corporate decision making, such as stakeholder theory (Freeman, 1983, 1984; Clarkson, 1995; Donaldson & Preston, 1995; Fineman & Clarke, 1996) or convention theory (Labie, 2005).

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In the microfinance sector, there seems to be a growing interest from various stakeholders in the environmental responsibility of MFIs. An increasing number of investors and donors are now adopting a triple bottom line approach in their funding policies. According to the Microfinance Investment Vehicles (MIVs) Survey held by Symbiotics in 2011, 45 per cent of interviewed MIVs seek to integrate environmental issues in their investment decisions (Symbiotics Research & Advisory, 2011). Peer-topeer platforms, such as Kiva, are also starting to promote â&#x20AC;&#x2DC;green microentrepreneursâ&#x20AC;&#x2122; on their websites. The interest of some microfinance investors and donors in environmental issues thus exists. However, this issue is not taken under consideration uniformly across investor types. International donors and socially responsible investors may be concerned with environmental issues, but it is less prevalent for more commercially-oriented investors or local banks. Even the investors and donors that demonstrate interest in environmental performance do not seem yet to assign a high priority to the issue. Some of them claim that they are still in the reflection process for the inclusion of environmental performance criteria. Some others have started to adopt environmental exclusion lists and reporting requirements, but MFIs, for the limited amount of investment they represent, usually fall below the limit set out for systematic environmental evaluation. As for the investors and donors that have developed environmental performance criteria and are asking MFIs to report on them, these criteria represent a relatively minor part of due diligence requirements and are not accompanied, in practice, by any real sanction, reward or technical assistance. Microfinance rating agencies also look at the environmental performance of microfinance institutions. As part of their Social Performance rating products, PlaNet Rating, M-Cril and MicroFinanza have defined some specific indicators for assessing MFIsâ&#x20AC;&#x2122; responsibility to the environment. Nonetheless, the level of importance that rating agencies give to environmental performance remains low. Environmental performance indicators are not always clearly defined, and their evaluation is usually quite brief, leading to a maximum of one or two short paragraphs, at the very end of rating reports. Their weight in the total rating grade appears as marginal. Furthermore, environmental performance is only measured so far as part of Social Performance ratings, which still remain secondary in the microfinance rating industry. As for governments, some of them have started to express an interest in promoting green microfinance through the adoption of specific regulations (Burkina Faso) or incentive mechanisms (Bangladesh). In a context of growing concerns about climate change, governments can be interested

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in piggybacking on MFIs’ networks for the enforcement of environmental standards or the promotion of environmentally-friendly technologies and practices (Hall, et al., 2008). There are, however, very few countries today that have adopted national regulations or policies that would effectively tackle the issue of environmental management by financial institutions. When there are specific regulations regarding environmental risk management for SMEs and microenterprises, enforcement is often lacking. The decision to abide by these regulations still depends primarily on the willingness of individual MFIs. In the microfinance sector, a certain number of microfinance stakeholders have started having expectations regarding MFIs’ environmental responsibility, even though pressures do not seem very strong yet. To what extent could this have some influence on MFIs’ decision to go green? In various studies (Bansal & Roth, 2000; Williamson et al., 2006), legitimation is identified as the most influential driver for ecological responsiveness in the manufacturing sector. Furthermore, Bansal & Roth (2000) emphasize that manufacturing companies for which legitimation is the dominant driver only adopt a reactive approach in order to comply with regulations; they seek to minimize the risks and costs that they could face (by conducting environmental audits for instance) and usually imitate what their peers do. To assess whether the same results apply to the microfinance sector, our first research questions will be the following: Q1: Is legitimation a driver of ecological responsiveness in microfinance? When it is the dominant driver, does it lead to more reactive or proactive strategies?

2.2. Competitiveness Bansal & Roth (2000) identify competitiveness as a second driver for corporate ecological responsiveness. For them, firms motivated by competitiveness expect that environmental management will lead to economic benefits and improve their long term profitability. In the grey literature on the topic, promoters of green microfinance also identify competitiveness as a major motive for MFIs to engage in environmental management. According to different authors, going green would entail clear strategic and financial benefits for microfinance institutions themselves. First, by tackling environmental issues, MFIs could gain access to new funding from socially responsible investors or environmentally-sensitive donors, which could help them expand their activities and eventually reduce their capital cost (GreenMicrofinance, 2007; Pikholz, et al., 2005; SEEP Network,

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2008; UNEP-FI, 2006). Second, they could diversify their offers, explore niche markets, differentiate from competitors and attract clients by proposing appealing ‘credit + services’ packages; for instance, by assisting clients to increase their productivity through access to energy-efficient technologies or training in sustainable production techniques (Araya & Christen, 2004; Hall, et al., 2008; Schuite & Pater, 2008; SEEP Network, 2008). Third, they could improve the public image of their institution, and thereby foster staff motivation, enhance market expansion, improve external relations and avoid bad reputation risks that could negatively impact their activities (Hall, et al., 2008; Rippey, 2009; SEEP Network, 2008; Van Elteren, 2007; Zutshi & Sohal, 2004).32 And fourth, MFIs could reduce their credit risk thanks to the management of clients’ environmental risks. The argument here is that environmental risks can reduce the solvency of the client. Business may become unsustainable due to the depletion of natural resources; reputational problems could arise that will affect activity; fines could be imposed for not respecting environmental regulations; health problems may emerge due to pollution, etc. Managing the environmental risks of the clients would then avoid that they directly translate into credit risk for the MFI (Coulson & Dixon, 1995; FMO, 2008; Triodos Facet, 2009; UNEPFI, 2006; Van Elteren, 2007).33 However, on the other hand, the economic benefits of environmental management may be perceived as limited. Reputation risk, for instance, may not be so high in a context where microentrepreneurs will never be responsible for large-scale contamination accidents and where MFIs are not yet held accountable for the environmental behaviour of their clients. Employees may not feel more motivated if their workload is increased because they are asked to assess the environmental performance of their clients while maintaining the same level of productivity. As for credit risk, its link with the environmental risks of microfinance clients seems very indirect, and research in this area would have a hard time proving any correlation, due to attribution problems and time mismatch. Furthermore, going green may be perceived as particularly costly (Araya & Christen, 2002; Coulson & Dixon, 1995; Wenner, 2002). Indeed, an MFI willing to identify its clients’ environmental risks and train

The competitiveness motive can thus be closely linked to the legitimation one. How the MFI is perceived by donors and investors (its public image, reputation) can indeed determine whether the MFI will gain access to lower cost funding. The division between competitiveness and legitimation is used here for an analytical purpose, acknowledging that overlaps between the two motives can exist. 33

This argument is not supported by any scientific study though. Indeed, no research has been conducted so far to assess to what extent environmental risks can affect the portfolio quality of MFIs. We only mention this argument here because it is often emphasized by promoters of green microfinance, but we do not make any assumption regarding its validity.

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them on mitigation solutions needs to acquire new competences and develop new procedures. Including environmental appraisal and follow-up may slightly decrease staff productivity. Offering innovative products, such as long-term loans for solar home systems, may also entail higher credit risk for the institution. The decision to go green will therefore depend on the cost/benefit analysis that the MFI will do. In their study, Bansal & Roth (2000) identify competitiveness as a second driver for ecological responsiveness in the manufacturing sector. When competitiveness is the dominant driver, they find that companies tend to focus on energy and waste management, which can bring clear economic returns. In their study of 186 manufacturing firms, Gonzáles-Benito & Gonzáles-Benito (2005) identify that companies that are primarily motivated by cost reduction and improved efficiency tend to carry out deeper environmental transformations in product conception and manufacturing. To assess whether the same applies to the microfinance sector, our research questions will be the following: Q2: Is competitiveness a driver for ecological responsiveness in microfinance? When it is the dominant driver, does it lead to more reactive or proactive strategies?

2.3. Social responsibility The third driver identified by Bansal & Roth (2000) in their model is that of social responsibility. It refers to the concern that a firm has for its social obligations and values, for the social good. The firm decides to go green out of a sense of obligation, responsibility, or philanthropy, rather than self-interest (L’Etang, 1995). The motivation is more ethical, whereas the legitimation and competitiveness drivers are more pragmatic motives (Bansal & Roth, 2000). One specificity of the microfinance sector is that social responsibility is already at the core of its raisond’être and actions. Beyond financial objectives, MFIs are expected to fulfill their social mission: to provide financial services to vulnerable populations that are excluded from traditional banking and potentially contribute to poverty alleviation and development. MFIs are thus supposed to be driven by ethical concerns34, even before we start considering ecological issues. Promoters of green microfinance usually emphasize that ecological responsibility is closely intertwined with the MFI’s social mission. According to these authors, MFIs should manage environmental issues in order to effectively 34

contribute

poverty

alleviation

and

sustainable

development

(FMO,

2008;

For a discussion on the social mission of MFIs and ethical issues, see Armendáriz & Szafarz (2011) or Hudon (2011).

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GreenMicrofinance, 2007; Hall, et al., 2008; Triodos Facet, 2009; Van Elteren, 2007). Ecological responsiveness is thus promoted as the â&#x20AC;&#x2DC;right thing to doâ&#x20AC;&#x2122; not only for the planet, but also for the people, and in particular, for microfinance clients. These authors emphasize that microentrepreneurs can be engaged in activities that entail environmental risks, in terms of pollution (chemical use, soil and water contamination, etc.) or unsustainable use of natural resources (deforestation, soil degradation, overexploitation, etc.). Risks are particularly present in some specific activities, such as leather tanning, brick making, metal working, textile dyeing, small-scale mining, charcoal making, food processing, crop growing, animal husbandry, fishery, etc. (Blackman, 2000; BRAC, 2006; Hall, et al., 2008; Pallen, 1997; Wenner, 2002). Environmental risks can translate into direct threats to the livelihoods of microentrepreneurs and that of their relatives and surrounding communities. The contamination or overexploitation of natural resources can directly translate into the loss of inputs for their various activities, the loss of an income-generating opportunity (Benjamin & Wilshusen, 2007), the loss of a risk-coping mechanism (natural resources are often used by poor households as a safety net in case of shocks), increased conflicts over scarce resources (Pallen, 1997) or increased vulnerability to natural disasters. Furthermore, unsafe environmental practices can represent direct threats to peopleâ&#x20AC;&#x2122;s health and life. Inappropriate use and management of chemicals, machines or waste can generate significant health and safety hazards that can be harmful for the microentrepreneur, his family, and even the surrounding communities in case of air, soil or water contamination (Pallen, 1997; Redmond, et al., 2008; Wenner, et al., 2004). Managing environmental issues could thus help microentrepreneurs improve productivity and grasp business opportunities. Environmental management often entails reducing inefficiencies in the production process: reducing chemical use to the minimum level necessary, using energy-efficient technologies (such as improved cook stoves, solar dryers, energy-saving light bulbs), limiting or recycling wastes, etc. All these improvements in the production process not only limit environmental risks, they also allow cost savings for the microentrepreneurs. Moreover, environmental management can also help improve working conditions and therefore reduce the risk of accident (and its adverse economic impact) and increase productivity and profits. Finally, environmental management can lead microentrepreneurs to explore new business opportunities with a clear added value, such as ecotourism, waste management and recycling, agroforestry, solar panel installation and maintenance,

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etc. According to the existing literature, adapted green microfinance programs that help microentrepreneurs identify and manage environmental risks and opportunities could thus bring them benefits on a triple bottom line: environmental (reduction of environmental risks), social (improved working conditions, reduction of health and safety hazards) and economic (sustainability of livelihood, improved efficiency, new business opportunities). MFIs’ rationale for going green would thus follow an ethical commitment: that of fulfilling a social mission of poverty alleviation and sustainable human development. However, the ‘win-win’ situation described by green microfinance promoters may also be questioned. Can all types of green microfinance programs automatically reach their objectives of poverty reduction and sustainable development? Can they be efficient in reducing environmental risks without implying some social or economic trade-offs for the microentrepreneurs? One could think, for instance, that a microfinance institution adopting environmental criteria in its loan screening process may end up excluding poor people just because they lack the knowledge or capacity to upgrade their business environmental practices. Alternatively an MFI imposing specific environmental contract clauses may oblige a microentrepreneur to adopt a new technology or practice that is not seen as culturally acceptable or that entails important economic costs (cost of upgrading production equipment, cost of learning new processes, etc.). MFIs may eventually refrain from engaging in environmental management because it would imply too many trade-offs on the economic and social bottom lines of the microentrepreneurs. In their study, Bansal & Roth (2000) identify social responsibility as the least influential driver for ecological responsiveness in the manufacturing sector. When social responsibility is the dominant driver, Bansal & Roth (2000) find that companies tend to develop more independent and innovative course of action, by developing green products or making donations. In contrast, Gonzáles-Benito & Gonzáles-Benito (2005) show that manufacturing companies for which social responsibility is the dominant driver tend to act only at the management or commercial level (not at the operational one), in a more superficial way. They explain it by the “need of those more environmentally conscious managers to distance themselves from social critics, thus striving to demonstrate their environmental commitment through transformations which are easily perceivable from outside the company” (Gonzáles-Benito & Gonzáles-Benito, 2005, p.474). The situation might be different for the microfinance sector. Because the microfinance industry aims at a double bottom line, the social

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responsibility motive may have a greater influence in their ecological responsiveness. To test whether different results apply to the microfinance sector, our research questions will be the following: Q3: Is social responsibility a driver for ecological responsiveness in microfinance? When it is the dominant driver, does it lead to more reactive or proactive strategies?

3. Methodology: combining quantitative and qualitative studies This paper seeks to identify what drivers of ecological responsiveness actually apply in the microfinance industry. For the first time, we conducted empirical research to contribute to a very theoretical literature in the sector. In order to provide a rigorous analysis of the phenomenon, we combined two approaches: (a) a quantitative survey of 160 MFIs, to identify their environmental attitude, motives and practices; and (b) a qualitative study, with semi-structured interviews of 23 MFIsâ&#x20AC;&#x2122; top managers, to understand the determining processes in the decision to go green.

3.1. Quantitative study The main objective of our quantitative study was to (1) identify the motives for going green that are the most often acknowledged by MFIs, and (2) assess the link between stated motives and actual environmental practices. In this perspective, we designed a survey to be submitted to a wide range of MFIs. In order to identify the motives of MFIs regarding green microfinance, we asked them whether they agree or not on a list of statements reflecting legitimation, competitiveness, and ethical responsibility motives. They could answer using a five-point Likert scale (from Strongly agree to Strongly disagree). In order to assess the level of environmental practices, we used a new methodological tool that we had previously developed (cf Chapter 1): the Microfinance Environmental Performance Index (MEPI). This tool is based on environmental management indicators and built around five dimensions: Environmental policy, Ecological footprint, Environmental risk assessment, Green microcredit, and Environmental non-financial services. For research purpose, an equal score of four points has been given to each dimension, making a total MEPI score out of twenty. The survey was submitted to a sample of 426 MFIs from the MIX Market 35. We selected all MFIs rated with 4 and 5 diamonds in February 2011, which guarantees access to quality data on control variables.

The MIX Market (www.mixmarket.com) is a website that provides access to operational, financial and social performance information on more than 1,900 MFIs, covering 92 million borrowers globally.

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MFIs were contacted individually by email in March 2011. Two reminders were sent to the ones that had not responded yet in April 2011. The survey was to be filled in online and was available in English, French and Spanish. By the end of April 2011, the survey had been answered by 165 MFIs. After clearing the database from questionnaires that could not be used (incomplete), we ended up with a total number of 160 surveys, equating to a response rate of 38%. As detailed in Table 2, our sample of 160 MFIs is well representative of the microfinance sector in terms of regional location, legal status and size (number of borrowers). Our sample only has a slightly higher proportion of large MFIs compared to the distribution of MFIs in the MIX Market.

Table 2. Profiles of respondent MFIs and their representativeness of the microfinance industry

Region

Legal status

Size (outreach)

Sample (160 MFIs)

MIX Market (1019 MFIs)

Latin America & the Caribbean

34%

Africa

21%

15%

Asia (South & East Asia)

20%

27%

Eastern Europe & Central Asia

18%

19%

Middle East & North Africa

NGO (non-governmental organization)

45%

37%

NBFI (non-bank financial intermediary)

34%

35%

Credit union / coop

12%

14%

Bank

Rural bank

Small (<10,000 borrowers)

33%

49%

Medium (10,000 to 30,000 borrowers)

23%

21%

Large (>30,000 borrowers)

44%

29%

Even if we carefully sought to avoid any selection bias, it is likely that our sample is slightly biased towards MFIs with greater environmental commitment. Indeed, MFIs that already have an interest in

Data comes from the 2009 MFI Benchmarks available on the MIX. The 2009 MFI Benchmarks are based on the most recent data from microfinance institutions throughout the developing world. This data set includes information from 1019 MFIs reaching over 85% of known microfinance borrowers. (http://www.themix.org/publications/mix-microfinance-world/2010/10/2009-mfibenchmarks)

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environmental issues are the ones that will feel more concerned by the survey and will take time to answer it. However, among our respondents, there are also MFIs that expressed no interest or very little interest in environmental issues. Even if the sample is likely to be slightly biased towards environmentally-committed MFIs, it is not a central problem for this study, since we do not aim to assess the environmental performance of MFIs in absolute terms. We rather seek to relate their level of practices (MEPI score) with their stated motives for going green.

3.2. Qualitative study To complement our quantitative results, we conducted a second study based on an inductive, qualitative approach. This methodology is well adapted to reveal decision-making processes, diversity of rationales and perceptions. The microfinance literature usually highlights the determining role of managers in strategy design, especially in setting up core values and goals and a long term vision (Copestake, et al., 2005; Labie, 2005). It was thus decided to explore decision-making processes for engaging (or not) in green microfinance by looking at the perceptions of MFIsâ&#x20AC;&#x2122; top managers. In this perspective, extensive interviews were conducted between November 2009 and June 2011 with twenty-three MFIsâ&#x20AC;&#x2122; executive directors or deputy-executive directors, from eighteen different countries (Bosnia & Herzegovina, Burkina, Cambodia, China, Egypt, El Salvador, Ethiopia, Indonesia, Kenya, Mali, Madagascar, Mexico, Morocco, Pakistan, Peru, Philippines, Tanzania, Uganda). Our objective was to identify what determines the decision to engage (or not) in green microfinance. Consistent with best practices in qualitative research (Miles & Huberman, 1984; Pratt, 2009), we selected cases in order to reach theoretical representativeness. We thus selected MFIs in order to have a great diversity of profiles in terms of geographical location, legal status, age, size, and above all level of involvement in green microfinance. Some were chosen because they are already involved in green microfinance, while others were selected because they are not. Even though this sample of twenty-three MFIs may seem limited, it nevertheless allowed us to reach saturation, which is a criteria of rigor in qualitative research (Eisenhardt, 1989; Miles & Huberman, 1984), and to identify the diversity of rationales behind engaging (or not) in green microfinance. We made a deliberate choice to privilege face-to-face interviews, since this format creates trusting and information-rich exchanges. This decision logically induced some data collection constraints, since it was not possible to travel extensively to meet a wide range of MFIsâ&#x20AC;&#x2122; managers in their countries of

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operation. Seven interviews were actually conducted in-country during professional field visits (Egypt, El Salvador, Mali, Morocco), while the other sixteen were undertaken in Europe, at the occasion of international conferences. An open, semi-structured protocol was established to guide the interview. The protocol specified a flexible list of topics to be tackled, among which were: definition of the MFI’s mission, perception on the importance of clients’ impact on the environment, opinion on the role of MFIs in tackling an environmental bottom line, capacity of MFIs to implement environmental management programs, level of engagement in green microfinance, history of engagement in green microfinance, strategic interest for going green, and potential pressures from stakeholders. Specific attention was given to the formulation of the questions in order to avoid any bias. The interviews were conducted in English, French or Spanish, according to the language spoken by the interviewee. Some of the quotations used in this article were thus translated from French and Spanish to English by the author. The interviews lasted on average thirty minutes. They were all recorded and fully transcribed. In order to avoid introducing any preconceived analytical bias, the collected information was first clustered to identify emerging themes in an inductive approach. Then, a dialogue was initiated between our results and our theoretical model of ecological responsiveness. 37 The combination of a quantitative and qualitative approach 38 enabled us to get complementary information on the overall motives and practices of a representative sample of MFIs and the precise decision-making processes at stake. A limit of this study is that, as we did not have the resources and time to go and visit each respondent MFI, we rely on managers’ declarations. 39 Direct observation of actual practices was only feasible for two MFIs from our qualitative study (one in Mali and one in El Salvador). Similar to Gonzáles-Benito & Gonzáles-Benito (2005), we could only interview one top manager in each MFI and therefore have to assume that the point of view of this top manager adequately reflects the position of the microfinance institution.

More details on the methodology (sample selection, interview protocol, content analysis method, etc.) can be found in the annex of this paper. 38

The complementarities of qualitative and quantitative studies have also been promoted in other microfinance studies (Guérin, et al, 2009; Sorvant, 2009) 39

To overcome this limit, we systematically sought to triangulate information by looking at MFIs’ websites, ratings, annual reports, and any other relevant document. These complementary sources of information are however limited because most MFIs still do not communicate on their environmental management initiatives.

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In the following section, any result based on statistics derives from our quantitative study, while results based on quotations and process analysis come from our qualitative study.

4. Findings Our analysis reveals that ecological responsiveness in the microfinance sector is primarily driven by social responsibility, additionally by competitiveness, and to a lesser extent by legitimation. We also find that, even if all three motives can have a cumulated influence on MFIs’ decision to go green, most MFIs that engage in environmental management follow a dominant driver, and each dominant driver leads to a specific type of strategy (similar to Bansal & Roth, 2000, and Gonzáles-Benito & GonzálesBenito, 2005). This section presents the results of our quantitative and qualitative studies for each driver of the ecological responsiveness model.

4.1. Legitimation The first driver of ecological responsiveness tested in our study is legitimation. As detailed in Table 3, the majority of the 160 respondent MFIs consider that developing green microfinance programs enables them to respond to stakeholders’ expectations. 77 per cent state that it enables them to respond to investors’ or donors’ expectations and 59 per cent say that it allows them to comply with national regulation requirements. In line with this data, some interviewed managers clearly mentioned that they started to look at environmental issues to respond to regulations or stakeholders’ pressure: It was [a donor] that set this criteria, this is why MFIs started to look closer at people’s activities in relation with the environment. (Director, MFI 7, Madagascar) In Burkina, there are laws on environment protection, and these laws say: ‘Here are the activities that you should not conduct because it destroys the environment.’ So, at the time of financing, we have to respect these laws. We look whether these activities that [the client] wants to conduct do not fall into the activities that destroy the environment. If it is the case, we do not finance. (Director, MFI 8, Burkina Faso)

For these MFIs, legitimation is the dominant driver of ecological responsiveness. However, our study reveals that MFIs that follow a legitimation motive engage in environmental management in a minimal way: they only adopt an exclusion list, screening out activities identified as too environmentally risky. This practice is the easiest for MFIs to implement, as it does not incur important costs and does not

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require very specific technical skills. Nevertheless, its impact on microfinance clients and on the environment can be seriously questioned. Either the exclusion list is not respected and stands as an ineffective ‘greenwashing’ tool. Or the exclusion list is enforced and may compromise the social mission of the MFI by excluding people from access to financial services, while failing to mitigate the environmental risks of the excluded activities. On the other hand, MFIs that are the most proactive today in environmental management (adopting a positive approach of environmental management by offering green microcredit or training) strongly claim that they did not decide to go green in order to respond to stakeholders’ pressure. Rather, they assert that their own motivation and commitment drove the decision to go green: What makes sense to me is what I see of value: to the community, to the society and to humanity. I don't operate by pressure! (Director, MFI 16, Tanzania) If I hadn't had my own opinion or interest, I could not be pressurized by their money. (Director, MFI 19, Ethiopia)

We also identified MFIs that are highly engaged in green microfinance but are totally financially independent from donors and investors (it is the case of cooperatives such as MFI 11 in Mali and MFI 23 in El Salvador). Their decision to go green could not be driven by stakeholders’ pressure. In any case, apart from the few MFIs that have adopted exclusion lists to respond to stakeholders’ demands, most interviewed managers stated that they do not yet feel any strong pressure from stakeholders. Legitimation thus does not appear as the most influential driver of ecological responsiveness in microfinance. Some MFIs adopt minimal environmental management standards to comply with stakeholders’ requirements. However, pressure is still low today, and MFIs that are the most active in environmental management are not primarily driven by a legitimation motive.

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Table 3. Drivers of ecological responsiveness acknowledged by MFIs Percentage of MFIs

Drivers Legitimation

Competitiveness

Social responsibility

Investorsâ&#x20AC;&#x2122; or donors' expectations

77%

National regulation requirements

59%

Differentiation from competitors

88%

Access to new funding

74%

Expansion of the client base

60%

Improvement of portfolio quality

51%

Protection of the planet

93%

Achievement of the MFIâ&#x20AC;&#x2122;s social mission

86%

4.2. Competitiveness The second driver of ecological responsiveness tested in our study is competitiveness. As shown in Table 3, a significant majority of the 160 sample MFIs associate the development of green microfinance programs with clear strategic and economic benefits. The most cited benefits are differentiation from competitors (mentioned by 88 per cent of respondents), access to new funding (74 per cent), and expansion of the client base (60 per cent). Even though the links between credit risk and environmental management are quite indirect, 51 per cent of respondents still consider that going green can help improve portfolio quality. Respondent MFIs thus appear rather optimistic on the economic benefits that can be brought by environmental management. Several MFIs that are already active in environmental management indeed confirmed during our interviews that they identify clear benefits to going green: It is an opportunity in the sense that it provides avenues for me to do business. (Director, MFI 16, Tanzania) I think that in terms of competition, we will be one step ahead. It is a plus for us. (Director, MFI 11, Mali)

Moreover, these MFIs do not consider financial cost as a barrier. In our model, we emphasized that the decision to go green depends in part on the cost/benefit analysis that the MFI does. Even if they identify some economic benefits, MFIs may still be hesitant to develop environmental management

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programs because of the costs implied. Table 4 indeed demonstrates that MFIs that are the least engaged in environmental management (lowest MEPI scores) are the ones that consider going green to require financial resources that are hard to obtain for an MFI. During our interviews, managers that are not engaged in green microfinance often mentioned that developing environmental programs would entail expenditures that they cannot afford at the moment. They often talked in terms of priorities, with risk management and financial sustainability as their major objectives. These managers thus believe that there is a trade-off between their financial and environmental bottom lines. On the other hand, managers that are engaged in green microfinance do not seem to consider the financial costs as an obstacle. The relation may be interpreted in two ways: either it is because they did not see any strong financial obstacles that they engaged in environmental management, or it is because they are already engaged in environmental management that they realized that financial resources were not such an important barrier. Indeed, as we will see in the following section, MFIs who decide to go green usually have strong leaders. Financial resources may not be seen as an important issue because these leaders are able to raise additional funding from investors and donors. Most MFIs that are proactive in environmental management thus identify clear benefits for going green and do not consider financial cost as a significant barrier.

Table 4. Comparison of MEPI mean scores according to stated barriers (MEPI: Microfinance Environmental Performance Index) MFIs stating that it IS a barrier MEPI mean Financial cost

3.97

Std.

4.01

(N=77) Technical expertise

3.97

MFIs stating that it is NOT a barrier MEPI mean 5.39

Std.

t-Test

4.48

-1.718*

4.58

-2.187**

(N=38) 3.92

(N=88)

5.75 (N=36)

Significance levels: *10%; **5%

When competitiveness is the dominant driver, MFIs tend to engage in the development of green microcredit to promote renewable energies and energy efficiency. These MFIs see the provision of energy microcredit as a new business opportunity and do not always relate it clearly to environmental

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issues. Indeed, they offer these specific financial products to respond to a demand linked to energy or electrification needs and would offer such credit even if there was no positive environmental impact. However, for a number of proactive MFIs, the decision to go green did not seem to be based on economic motives. As we will see in the next section, the primary motivation they expressed is social responsibility. Competitiveness only appears as secondary in their declarations: they go green because they feel responsible to contribute to environmental protection and sustainable development, and this decision additionally brings them clear strategic and financial benefits. This is, for instance, the case for MFI 11 in Mali: after developing environmental programs, the manager realized that these helped him improve staff motivation and attract a growing number of clients (including drop-outs who decided to come back thanks to the added-value of the environmental program). Of course, MFIs do not engage in green microfinance if they do not identify or foresee any strategic or economic interest. However,

competitiveness only appears as a

secondary,

additional

driver

of ecological

responsiveness in many cases.

4.3. Social responsibility The third driver of ecological responsiveness tested in our study is social responsibility. As detailed in Table 3, 93 per cent of our surveyed MFIs agree that developing green microfinance programs is the right thing to do to ensure the protection of our planet. 86 per cent identify a clear link between environmental management and the achievement of their social mission. These high percentages are only based on declarations regarding perceived motives for ecological responsiveness and are far from reflecting the actual environmental practices of MFIs. Yet, they show that MFIs broadly make a link between their environmental responsibility and their social mission. The percentages of MFIs agreeing on these social responsibility drivers are actually the highest compared to legitimation and competitiveness motives. MFIs that are the most proactive in environmental management are first aware that microfinance clients are concerned by environmental issues, both as actors (because they may be engaged in environmentally-risky activities) and victims (because they live and work in unsustainable and hazardous conditions): Yes, there may be a negative impact on the environment. For instance, we finance textile dyers. And dyers, as you know, are polluter agents! (Deputy Director, MFI 9, Mali)

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I think that they [microfinance clients] not only can, they DO have a very big impact on the environment, and to a very large extent.[…] Most of them use processes and systems that, often, are not very friendly to the environment. (Director, MFI 6, Kenya)

Generally, managers tend to be most sensitive to one or two specific environmental issues that are closest to their daily concerns40: deforestation in drought-prone rural areas in Mali (MFI 11), agrochemical use in old cotton-producing areas in El Salvador (MFI 23), or waste management in periurban slums in the Philippines (MFI 15). In addition to being aware of their environmental impact, proactive MFIs consider that tackling this issue is part of their role and mission. Our study confirmed that this vision is far from being shared by all MFIs. Indeed, engaging in green microfinance turns out to be strongly conditioned by the position chosen by the MFI which varies between a minimalist and an integrated approach. 41 For MFIs with a minimalist approach, the role of the microfinance industry should be limited to providing excluded populations with access to financial services, and not engaging in supporting business development or livelihood improvement through capacity-building or any other additional services. For such MFIs, engaging in environmental management is thus perceived as being out of their scope, and even as constituting a mission drift: What we look first is the financial interest that we can get from this financing. But we little worry about the consequence that can be linked in terms of environmental destruction following our client’s activity. (Deputy-Director, MFI 9, Mali) Our role is limited to financing. Environmental pollution is devoted to other services, other technical structures that handle it. […] When you enter into environmental protection, you drift from your objectives. (Head of credit service, MFI 10, Mali)

This vision directly relates to the functionalist argument often heard in the Corporate Social Responsibility debates. This argument states that the primary function of a business is to provide goods and services to clients and profits to investors. Other types of functions, such as social and

This is what Jones (1991) identifies as the moral intensity of an issue.

The debate around the mission definition and the position between the minimalist and integrated approaches is not new in microfinance (Servet, 2006). As highlighted by Labie (2005), such controversial debates around mission definition are actually typical of non-profit organisations, which pursue several simultaneous objectives and have to define their priorities, the missions that they want to handle themselves, and the ones that they would better leave to others.

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environmental ones, are devoted to other actors which have the skills or time required to implement them (Jones, 1999; Sohn, 1982). On the other hand, MFIs with an integrated approach usually define themselves as development institutions with a clear social mission. In a more holistic vision, they consider that they have a role to play to ensure that access to financial services effectively leads to livelihood improvement for their clients. In addition to facilitating financial inclusion, these MFIs provide business development services and additional support programs. Such institutions could therefore be more likely to consider that they also have a role, and even a responsibility, in promoting a sustainable human development, respectful of the environment. Not all MFIs with an integrated approach decide to engage in environmental management. However, some of them clearly emphasize that environmental management is part of their holistic approach: For me, microfinance is a means which should enable us to develop. And if today we want to develop in a responsible and sustainable way, I think we need to integrate the environmental component. (Director, MFI 11, Mali) For us, the microcredit program is important, but it is not the ultimate goal. Our objective is the holistic development of rural communities. In this perspective, environmental issues cannot be ignored. (Director, MFI 23, El Salvador)

MFIs that see a role for microfinance in environmental management usually call for partnerships with specialized environmental organisations (NGOs or public entities). They do not question the functionalist argument. Rather, they agree that they do not have all the skills and resources needed to tackle environmental issues on their own. Yet, in contrast to MFIs with a minimalist approach, some of these institutions identify both a responsibility and an opportunity (for themselves and for their clients) in environmental management. They consider that they have a comparative advantage, their embeddedness within local communities, which puts them in a good position to promote environmental protection. They are therefore ready to obtain the needed skills and resources through partnerships: I am not saying that [microfinance] has the capacity. But, somehow, we have to find the capacity. […] It is only microfinance that touches the grassroots, that will actually interact with a vast proportion of the people. Now, that in itself is an opportunity. If we use this opportunity, we

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will be able to sensitize people and provide a kind of intervention that will ensure that environment is conserved. (Director, MFI 16, Tanzania) I have this social basis in this area, […] I know about microfinance. And the one who knows about sustainable development is someone else, another group, another association, another foundation. For me, we have to find social alliances, conventions, networks, so that we can start working on the issue through the groups and relations that we already have. (Director, MFI 2, Mexico)

Overall, while MFIs with a minimalist approach define engagement in environmental management as a mission drift, MFIs that are the most engaged in environmental management consider that not addressing social and environmental issues would actually constitute the mission drift. During our interviews, managers that are the most active and innovative in environmental management kept emphasizing that their primary motive for going green is to fulfill their social responsibility: We strongly believe that this is what we have to do. (Director, MFI 22, China) It is fundamental for us. We do not do it upon request. It is rather a moral obligation that we feel we should fulfill. (Director, MFI 23, El Salvador)

Social responsibility thus appears as the most influential motive of ecological responsiveness in microfinance today. While Gonzáles-Benito & Gonzáles-Benito (2005) find that manufacturing companies primarily motivated by social responsibility only engage in environmental management in a superficial way, our findings are closer to those of Bansal & Roth (2000), who showed that companies for which social responsibility is the dominant driver engage in more independent and innovative course of action. This is the case for MFI 11 in Mali, which organizes regular awareness-raising campaigns on deforestation and waste management issues, and for MFI 23 in El Salvador, which trains its farmer clients on agro-ecological practices.

5. Discussion and conclusion Why do microfinance institutions go green? Basing our analysis on the model of ecological responsiveness developed by Bansal & Roth (2000) and on the results of quantitative and qualitative studies, we found that MFIs that are the most proactive in environmental management are primarily motivated by social responsibility, additionally by competitiveness, and to a lesser extent by

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legitimation. We defined as ‘proactive’ the MFIs that go beyond what is required by legislation, investors, and donors and develop innovative environmental management strategies, with a more holistic and positive approach (in opposition to more ‘reactive’ postures). The most proactive MFIs indeed consider that environmental management is required to reach their social mission. They believe that they have a comparative advantage in tackling the issue thanks to their embeddedness within local communities. They are convinced that they have the capacity to contribute to environmental protection, especially by building partnerships with specialized organizations. Furthermore, they identify clear strategic and economic benefits for their institution. Even though competitiveness did not always appear as a sufficient driver of ecological responsiveness in microfinance, it still comes as an additional motive for these proactive MFIs. These results are interesting in that they differ from those identified in different studies on manufacturing firms (Bansal & Roth, 2000; Gonzáles-Benito & Gonzáles-Benito, 2005; Williamson et al., 2006), where ecological responsiveness is largely driven by legitimation and competitiveness. 42 The contrary holds for the microfinance sector today. This may be explained by the specificity of the microfinance industry: in addition to its financial bottom line, MFIs are strongly expected to fulfill a social mission. In recent years, the microfinance community has put a strong focus back on microfinance clients’ needs and interests, by promoting social performance and client protection practices (Doligez & Lapenu, 2006; Gutiérrez-Nieto, et al., 2009; Schicks, 2010). More than in other industries, MFIs are concerned with their social mission and ethical responsibility. Results from our study thus entail very different policy implications. In their article, Bansal & Roth (2000) identify that regulations and stakeholder pressure can be effective mechanisms to foster ecological responsiveness in the manufacturing industry, a sector where environmental impact is directly linked to production processes and can more easily be constrained by adequate rules. In the microfinance industry, similar to the overall finance sector, environmental impact is indirect, less visible, and therefore more difficult to track through regulations. Our study revealed that when MFIs go green only to respond to stakeholder pressure (legitimation as the dominant driver), they usually opt for a minimal and negative approach: adopting an exclusion list. The risk is that these MFIs engage in environmental management by mere compliance, without putting clients’ interests at the heart of their 42

Even though these studies overall show similar results, their samples remain limited. For lack of additional data available, we have to stress that it would be hazardous to assume that these results are totally representative of the manufacturing sector. Acknowledging this limit, we still considered that the comparison with the microfinance sector could bring interesting insights and perspectives.

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approach. They could start implementing some quickly-designed, one-size-fits-all, green(washing) strategies, that at best will turn out ineffective to reach an environmental bottom line, and at worst, could entail some counterproductive economic, social and environmental effects. 43 Increasing pressure on MFIs may therefore not be the most adequate mechanism to foster a positive ecological responsiveness. On the other hand, MFIs for which social responsibility is the dominant motive tend to engage in a more positive approach (offering green microcredit, raising clients’ awareness, organizing trainings, etc.). Two contextual elements play a key role in fostering this type of ecological responsiveness: the influence of leadership and access to technical expertise. Similar to what is often emphasized in the literature on Corporate Social Responsibility44, MFIs that follow the social responsibility driver in our sample are institutions that count with charismatic leaders pushing their individual social values forwards. Interestingly, these leaders are not always active ecologists initially. However, they are somehow concerned with the environmental risks of their clients and, when an opportunity arise, they are not afraid to innovate within their institutions. Furthermore, MFIs that followed the social responsibility driver are the ones that were able to mobilize technical assistance from external partners (donors, NGOs, consulting companies, public entities, etc.). Engaging in green microfinance indeed implies management innovation. Tailoring financial products to promote environmentally-friendly technologies and practices, or developing environmental non-financial services, all require acquiring specific technical skills and setting up new management procedures (Wenner, 2002). Yet, access to technical expertise appears as a limiting factor for MFIs’ environmental engagement today. As detailed in Table 4, MFIs that are less engaged in green microfinance (low MEPI score) are the ones that consider technical skills hard to obtain. In our interviews, MFIs’ managers often expressed that they lack the knowledge and expertise to engage in environmental management: There is a trend that is propping up the issue, and I think that in the microfinance sector we could do something. But we lack orientation, we do lack orientation. (Director, MFI 2, Mexico) 43

The Corporate Social Responsibility literature already emphasizes that, when Corporate Social Responsibility is viewed as a constraint, there is a high risk that the organisation implements incongruent or counterproductive CSR programs, which produce no social value and even hurt core strategic objectives (Mostovicz, et al., 2009). When talking about Social Performance of MFIs, Copestake, et al. (2005) also argue that social performance is most successfully implemented when there is an internal buy-in of the importance of the issue (may it both for social and financial reasons), and that external demand for Social Performance may actually inhibit internal ownership. The same scenario could apply to green microfinance. 44

For more details on the role of leadership in Corporate Social Responsibility, see Aragón-Correa & Rubio-López (2007); D’Amato & Roome (2009); Hemingway & Maclagan (2004); Husillos & Álvarez-Gil (2008); Logsdon & Yuthas (1997); Maon, et al. (2009); Nidumolu, et al. (2009).

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Microfinance stakeholders could therefore play a key role in fostering a positive ecological responsiveness by facilitating the exchange of experiences and providing interested MFIs with the technical expertise that is needed to tackle this third bottom line. Nevertheless, the microfinance sector should still be cautious when promoting environmental management programs. There is still very little knowledge on the actual effectiveness of green microfinance programs and on their impacts on microfinance clients. Further research is thus needed to assess whether microfinance can contribute to environmental protection, which strategies are effective, and what the impacts of green microfinance programs on clients are.

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Annex – Details on the qualitative study methodology Selection of MFIs In order to make sure that our analysis and model could be generalized to the microfinance sector, we opted for a theoretical sampling of interviewed MFIs. The objective was to have a very diverse sample of MFIs, in terms of size, location, age, social mission, financial performance, environmental engagement, etc., so that our analysis and model could be applicable across all types of MFIs (Eisenhardt, 1989). In particular, it was important for our study to have some extreme cases: on the one hand, leaders that are strongly engaged in environmental management, and on the other hand, MFIs with a minimalist approach that totally refused to consider environmental issues. Thanks to this diversity of positions and profiles, we were able to identify the rationales and factors behind MFIs’ decision to go green (or not).

Researcher’s position and introduction to MFIs When the MFIs’ representatives were contacted, I introduced myself as a researcher only, and never as a practitioner. I mentioned that I was working with PlaNet Finance only at the end of the interview. This strategy was chosen to avoid bias in MFIs’ answers, since they could have changed their discourse, had they perceived me as a potential donor or technical assistance provider. For the first interviews conducted, I had told MFIs’ representatives that I was doing research on microfinance and environmental issues. Then, I decided to be a bit less specific in the following interviews, and introduced myself as a researcher interested in sustainable development or in microfinance impact. The intention was to avoid as much as possible greenwashing discourses, by not mentioned beforehand the specific focus of the research.

Interview protocol Semi-structured interviews were conducted following the list of topics hereunder. The order in which the questions were asked and the types and number of questions were flexible. They were adapted as the interview was going on in order to fit the dynamics of the interview.

TOPICS

Background information on the MFI

Potential questions        

 Microfinance clients and environmental issues

  

Objective

What is the mission / vision of your MFI? When was it created? Where do you operate? (country, regions, rural/urban areas) What is the legal status of your MFI? How many clients do you have? What type of financial services do you offer? (credits, savings, others; group or individual loans, etc.) Do you provide non-financial services? Which ones? To whom? How? Why? Where do you get your funding from?

 

In your opinion, do microfinance clients have an impact on the environment (in terms of pollution, degradation of natural resources, etc.)? To what extend? How? Why? Is it only the case for some specific activities? Which ones? Do you have activities that can have an impact of the environment in your portfolio? Which ones? What proportion of your portfolio do they represent?



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  

Break the ice Get an overview of the MFI when it was not previously known by the interviewer Identify whether environmental protection is part of the MFI’s mission Identify whether the MFI has a minimalist or integrated approach Identify whether the MFI is dependent on donors’ and investors’ funding Perceptions on the importance of environmental issues for microfinance clients

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 



Do you think that microfinance can increase or decrease environmental risks? Have you heard about the triple bottom line approach in MF? What do you think about it? Do you think that MFIs have a role to play in environmental protection? In your opinion, should MFIs be involved in environmental management? How? What could they do? With whom? Should environmental issues be handled by MFIs or by other actors?



Opinion on the role of MFIs in tackling an environmental bottom line



  

In your opinion, do MFIs have the capacity to manage environmental issues? Can they help mitigate environmental risks? Can they change clients’ environmental behaviours? Do MFIs have the internal skills for that?

Opinion on the capacity of MFIs to implement environmental management programs

        

Do you tackle some environmental issues within your MFI? Are you implementing environmental management programs? What do you do? Which type of program? When did you start? How? Through partnerships? Is it included in the MFIs’ procedures? How did you train the MFI’s staff? What results have you achieved? Do you measure them? What constraints do you face?



Identify actual practices



Why did your MFI decide to engage in environmental management? How did you come up with the idea of this environmental program? What triggered the decision to go green? Why at that time? Did the decision come from within your institution? What benefits are there for an MFI to go green? In your opinion, can environmental risks threaten your portfolio quality? Do you think that green microfinance can provide your MFI with a competitive advantage? Is there an economic interest in going green or is it too costly?



Understand what drove the MFI decision to go green, or what could drive it (in case of future projects)?



Identify whether the MFI sees strategic benefits in going green (competitiveness motive)

In your experience, are your donors and investors interested in these environmental issues? To what extend? Has any of your donors/investors put a requirement related to environmental management? Did you decide to go green to answer donors/investors’ expectations?



Identify potential pressures from stakeholders (legitimation motive)

MFIs role and responsibility regarding environmental issues



MFIs’ capacity to manage environmental issues



Existing environmental programs / practices within the MFI

  

 Motives for going green

     

Role of investors and donors

  

Influence of peer MFIs

   

Future projects  

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In your opinion, are microfinance clients vulnerable to / affected by environmental risks? In your opinion, are microfinance clients aware of environmental issues? Are they concerned by such issues?

Have you already heard of other MFIs (within your country or elsewhere) that are engaged in environmental management? Which ones? What do they do? Did it give you ideas to engage in environmental management? Are you planning to develop environmental management programs? Which type of program? How? When? Why?

Data analysis To analyze the data, I applied best practices in qualitative research as they are promoted by Miles & Huberman (1984; 1994) or by Eisenhardt (1989). In this perspective, I went through the following steps: (1) Transcription of the interviews: All interviews had been recorded after previous approval of the interviewees. In the days following each interview, I worked on transcribing them. It allowed me to have a good immersion in the data and to add some extra comments on the behaviour and intonation of the interviewee. Full recording and transcription of interviews is a guarantee that the data considered for analysis will be faithful to the original interview. (2) Triangulation of information: In addition to interviews, I reviewed MFIs’ websites, annual reports, ratings, and any other relevant document, in order to check the validity of the information provided by the interviewee. This triangulation of information allowed me in particular to identify “greenwashing” discourses and strengthen my analysis. (3) Coding of the interviews: In order to process my data, I followed Miles & Huberman (1994)’s technique of manual content analysis. I started with coding the interview transcriptions. Codes were not assigned to specific words but rather to units of meanings, which could be phrases, sentences, or even paragraphs. It was essential to look at units of meanings and not at words, for several reasons: words can have several meanings, interviews were conducted in three different languages, most interviewees were not speaking in their mother tongue, and looking only at words could have been misleading because it would not allow identifying greenwashing discourses. Therefore, we started by manually coding the transcriptions, using descriptive codes such as “APPROACH” (for minimalist or integrated positioning), “PRACTICE” (for environmental programs implemented by the MFI), “DONORS” (for perceptions regarding donors’ influence), or “MOTIVES” (for the motives expressed for going green). The coding was realized at several points in time, starting early in the study process, and codes were refined to become more analytical as we were collecting more data and progressing in our analysis. (4) Tabulation: Still following Miles & Huberman (1994)’s technique, we used tabular display to facilitate the analysis of our qualitative data. We built a matrix using our codes to cluster information around topics. For each topic, we had a first column that would synthesize the main information with a key word (for instance, for “PRACTICES”, we would have YES or NO) and a second column providing more detailed information and/or selected quotes. Such a display was useful to get a rapid overview of our data, while still keeping meaningful information thanks to the selected quotes. An extract of the matrix that we built (Excel spreadsheet) is presented below. (5) Cross-cases comparison and identification of patterns: The matrix enabled us to identify patterns and make contrasts and comparisons between MFIs. In particular, it helped us identify groups of MFIs sharing similar positions, rationales, and characteristics. (6) Iterative process between literature, coding, tabulation, comparison: This data analysis process was not linear but went through numerous iterations, as it is recommended in the literature on qualitative research (Einsenhardt, 1989; Miles & Huberman, 1994). After a first round of coding, clustering, and comparing, we confronted our results to the literature, which made us refine some of our analysis and assumptions, and go back to the transcriptions for a second round of coding, clustering, and analyzing. As interviews were conducted between 2009 and 2011, we had time to multiply such iterative cycles where theory and data were constantly compared. This technique allowed us to start our analysis in an inductive approach, without pre-conceived theoretical expectations, and to progressively refine our data analysis in

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light of new theoretical insights. It also allowed us to identify a theoretical framework that was the most suitable to our study. (7) Closing of the study and analysis: We reached theoretical saturation at around 16 interviews. To make sure that we were not missing any key element, we still conducted additional interviews. As additional interviews were only bringing minimal incremental learning (we were observing patterns that we had already seen before), we decided to close our data collection and analysis after 23 interviews. According to Eisenhardt (1989), who recommends analyzing between four and ten cases, this would already represent quite a good sample for qualitative analysis.

Extract of the data analysis matrix: Approach (minimalist/ integrated)

Does MF have a role to play in environmental management? Position

Quotes

Role of investors and donors

Perception

Other topics …

Quotes

MFI 1

Minimalist

"We are not interfering in what he is going to buy. We are giving them liquidity.”

Pressure

“It was the demand of the ILO”

…

MFI 2

Integrated

Yes

"Nosotros podriamos hacer mucho. [...] Tenemos que hacer alianzas para poderlo concretar."

Support

“Nos falta orientación.”

…

MFI 3

Minimalist

“The minimalist, is just giving the financing, that’s it. […] [MFI 3] is just a minimalist”

No role

Not dependent on investors

…

MFI 4

Integrated

Yes

“If microfinance helps them diversify away from dependence on nature, […] definitely microfinance can help them reduce or mitigate the effect on the environment. Or if microfinance can help them to finance solar energy.”

Other MFIs…

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…

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CHAPTER 3.

GREEN MICROFINANCE. CHARACTERISTICS OF MFIs INVOLVED IN ENVIRONMENTAL MANAGEMENT

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Green Microfinance. Characteristics of microfinance institutions involved in environmental management

Abstract In recent years, development practice has seen that microfinance institutions (MFIs), beyond their financial and social objectives, start considering their environmental bottom line. Yet, little is known on the characteristics of institutions involved in environmental management. For the first time, this paper empirically identifies the characteristics of these ‘green’ MFIs on a sample of 160 microfinance institutions worldwide. Basing our analysis on various econometric tests, we find that larger MFIs and MFIs registered as banks tend to perform better in environmental policy and environmental risk assessment. Furthermore, more mature MFIs tend to have a better environmental performance, in particular in the provision of green microcredit and environmental non-financial services. On the other hand, financial performance is not significantly related to environmental performance, suggesting that ‘green’ MFIs are not more or less profitable than other microfinance institutions.

Key words: Microfinance, Environment, Microcredit, Corporate Social Responsibility, Size, Financial Performance JEL codes: D22, G21, Q01, Q56

This paper has been written with Marek Hudon. We would like to thank Pierre-Guillaume Méon, Isabelle Agier, Bert d’Espallier, Manuel Hensmans, Marc Labie, Kevin Jackson, Roy Mersland, Hubert Tchakouté-Tchuigoua, and Philip Verwimp for their methodological insights and valuable comments on earlier versions. We are also very grateful to the 160 MFIs that responded to the survey. Finally, Marion Allet is thankful to PlaNet Finance and ANRT for their financial support.

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1. Introduction Microfinance institutions (MFIs) have developed rapidly during the last decade on the promise of reaching a double bottom line: “in addition to a financial objective, they also have a developmental or social objective” (Copestake, 2007). Next to these two traditional bottom lines, some microfinance donors and experts have now included a third objective related to the environment (FMO, 2008; GreenMicrofinance, 2007; Hall, et al, 2008; Rippey, 2009; Schuite & Pater, 2008; Van Elteren, 2007). While environmental goals are traditionally pursued by businesses as part of their Corporate Social Responsibility (CSR) strategy (Carroll, 2008), the transposition to microfinance is more recent. To reach this goal, some microfinance institutions have started to adopt new strategies such as the design of financial products to promote environmentally-friendly activities and technologies, the organization of campaigns promoting pro-environmental behaviors, or the screening of loan applications along environmental criteria. One of the most famous cases is Grameen Shakti, which has brought solar energy to hundreds of thousands of households in rural Bangladesh through microcredit (Komatsu et al., 2011). Another example is that of Génesis, in Guatemala, which has disbursed 4,000 microcredits with subsidized rates in early 2012 to support small coffee and cocoa farmers using environmentally-friendly production techniques, such as organic fertilizers, soil conservation, and agroforestry. Even though there is an increased environmental awareness in the microfinance sector (Anderson & Locker, 2002), there is no empirical evidence yet on the characteristics of ‘green’ MFIs, the institutions performing best in the environmental bottom line. In their discourse, promoters of ‘green microfinance’ do not specify whether the triple bottom line approach concerns all types of MFIs. Yet, the microfinance sector encompasses a great variety of institutions, in terms of size, status, maturity, performance, or mission. For the first time, this paper seeks to identify the characteristics of MFIs involved in environmental management. More specifically, we assess the relationships between MFIs’ environmental performance and their size, financial performance, age, and legal status. We opted to focus on these variables because they are identified as determining factors of environmental performance in the literature on Corporate Social Responsibility and corporate environmental performance (Elsayed &

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Paton, 2007; Orlitzky, 2001; Stanwick & Stanwick, 1998). Furthermore, their relationship to environmental performance is a main concern for both practitioners and researchers in the microfinance sector (as revealed by an inductive qualitative pre-study and by an extended literature review). In particular, the literature on green microfinance often emphasizes that developing environmental programs may be costly and challenging at the technical and operational level for microfinance institutions (Araya & Christen, 2002; Coulson & Dixon, 1995; Wenner, 2002). One could thus assume that only the more ‘solid’ MFIs (the larger, more profitable, mature, regulated institutions) would be in a position to manage their environmental bottom line. This paper looks at this assumption by assessing how MFIs’ environmental performance relates to their size, financial performance, age, and legal status. Identifying the characteristics of MFIs active in environmental management will help understand what are the drivers or barriers to environmental performance in the microfinance sector. It will also help donors and technical assistance providers identify where to orient their technical and financial support for the promotion of a triple bottom line approach. Today, MFIs engage in environmental management through different strategies: defining an environmental policy paper, setting objectives to reduce their internal energy and paper consumption, adopting environmental criteria to screen loan applications, offering microcredit to promote clean energies and activities, training clients on environmentally-friendly practices, etc. A specific methodology has been developed in Chapter 1 to assess the environmental performance of MFIs along this variety of strategies: the Microfinance Environmental Performance Index (MEPI). Building on a review of existing environmental measures in the literature, this index is based on management performance indicators that have been adapted to the specificities of the microfinance sector. It assesses MFIs’ environmental performance along five dimensions: (1) Environmental Policy; (2) Ecological Footprint; (3) Environmental Risk Management; (4) Green Microcredit; and (5) Environmental Non-financial Services. We decided to apply this methodology for the first time to a sample of 160 MFIs worldwide. Our key findings show that larger MFIs and MFIs registered as banks tend to perform better in environmental policy and environmental risk assessment, which are two strategies of environmental management that enable to respond to donors’ and investors’ expectations. More mature MFIs tend to have a better environmental performance, in particular in more positive and innovative strategies of environmental management, such as the provision of green microcredit and environmental non-

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financial services. On the other hand, prior financial performance is not significantly related to environmental performance, suggesting that ‘green’ MFIs are not more or less profitable than other microfinance institutions. The rest of the article is structured as follows. Section 2 describes our theoretical framework and the hypotheses to be tested. Section 3 presents the database, descriptive statistics, and econometric analysis used. Section 4 displays the empirical results, while the final section deals with specific recommendations and final conclusions.

2. Theoretical framework and hypotheses on green MFIs’ characteristics Factors that can potentially influence the environmental performance of MFIs are numerous. One may think for instance of the structure of the local market (high competitiveness leading to a need for differentiation) (GreenMicrofinance, 2007; Hall, et al., 2008), the presence of an environmental champion within the institution (D’Amato & Roome, 2009; Hemingway & Maclagan, 2004; Logsdon & Yuthas, 1997; Rok, 2009), the influence of peer organizations (mimetic isomorphism) (DiMaggi & Powell, 1983; López Rodriguez, 2009), the international origin of the institution or its managers (Cole et al, 2008), location in areas particularly prone to environmental degradation (Jones, 1991), the relative weight of donors and investors in the funding structure (Céspedes et al., 2003; Williamson et al., 2006), etc. All these variables would be worth investigating further. However, within the frame of this paper, we decided to focus, in a first step, on the factors that are the most at the heart of researchers and practitioners’ concerns today. These concerns were identified from an extensive review of the environmental performance literature as well as from a qualitative study conducted for previous research work (Chapter 2). Results from the study suggested that several MFIs’ managers were reluctant to engage in environmental management because they considered that their institution was too small and thus did not have the (financial, human, operational) capacity to launch this type of program. Others mentioned that they were still struggling for financial sustainability and that going green would imply financial trade-offs that they could not afford. Some MFIs’ managers mentioned that they would not go green because their institution was too young and had other priorities to handle. Finally, other interviewed managers stated

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that environmental management was not part of their mission since they were not MFIs registered as NGOs. Interestingly, these concerns stemming from the field find a clear echo in the literature on environmental performance. To define our hypothesis, we build mostly on theories and arguments from the literature on business environmental performance, which make clear links between size, financial performance, age, and environmental performance. We also base our reflection more broadly on the literature on Corporate Social Responsibility (CSR). This literature is interesting since many actors tend to regard CSR as including both social and environmental performance (Willums, 1999). Recent research reviews indeed suggest that CSR is often equated with community involvement, philanthropic donations, good corporate governance, implementation of ‘green’ policies, and a wide variety of other organizational actions (Crane et al., 2008). In a content analysis of CSR definitions, Dahlsrud (2008) find that the environmental dimension is explicitly mentioned in 59% of the cases, and even more systematically for more recent definitions. The assumption that environmental responsibility is an integral element of CSR is not very controversial today (Orlizky et al., 2011) and most CSR studies indeed measure corporate social performance through indicators, such as the Fortune Corporate Reputation Index, that include an environmental component (Moore, 2001; Waddock & Graves, 1997). Finally, to define our hypothesis, we looked at the literature on microfinance social performance as well. More specifically, we focus on studies where the environmental dimension is included in the measure of social performance, as it is the case for studies based on Social Performance Indicators tools (Bédécarrats et al, 2011), making it relevant to draw parallels with our more specific topic of research. This section provides an overview of assumptions and findings from the literature and presents the hypotheses related to size, financial performance, age, and legal status that we defined for this study.

2.1. Size of the institution Building on the literature, there could be various reasons why size would have an influence on MFIs’ environmental performance. More specifically, academic papers often assume that larger firms are more likely to perform better environmentally. They emphasize several explanations for a positive relationship between environmental performance and size: reputation risk, access to resources, and scale economies.

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First, many authors assume that larger firms are more likely to engage in CSR or in environmental management because they tend to be more visible and attract more attention from various stakeholder groups (Arora & Cason, 1996; Chen & Metcalf, 1980; Erlandsson & Tillman, 2009; Orlitzky, 2001; Stanwick & Stanwick, 1998). This is also the argument stressed by Scholtens & Dam (2007) in a study 45

on the characteristics of banks that adopted the Equator Principles , where they found that adopters of Equator Principles are significantly larger than non-adopters. Scholtens & Dam (2007) indeed explain their results by assuming that larger banks, because they are more visible, have to manage a higher reputation risk and stronger pressures from their investors and other stakeholders, making them more likely to engage in environmental management. For Udayasankar (2008), larger firms not only have to respond to stronger pressures but they can also gain more recognition and benefits from corporate social responsibility initiatives than smaller companies that are less visible. In addition to reputation effects, various authors argue that larger companies may have a better CSR performance because they have access to greater slack resources (be they financial or human), whereas smaller firms would be constrained by fewer or inadequate resources (Erlandsson & Tillman, 2009; Udayasankar, 2008). In particular, CSR performance often implies meeting a host of CSR reporting formalities, and large institutions with specialized staff and more developed administrative structures may be in a better position to address these issues (Fassin, 2008). Furthermore, in a study on the determinants of SMEsâ&#x20AC;&#x2122; environmental performance, Lefebvre et al (2003) assume that larger SMEs would be more likely to have a higher environmental performance because they can benefit from scale economies in their effort to go green. This potential explanation is also mentioned in other studies from the CSR literature (Elsayed & Paton, 2007; Orlitzky, 2001). Because they have a higher scale of operations, larger firms may be in a better position to effectively re-allocate resources for CSR initiatives and gain from scale economies (Udayasankar, 2008). For instance, when developing a new (green) product, larger firms can benefit from scale economies in the Research & Development phase (feasibility study, product design and testing) and in the advertizing phase (Acs & Audretsch, 1987). Some authors argue that small firms would also have some reasons to perform well in CSR. Udayasankar (2008) emphasizes that small firms may find an interest in engaging in CSR initiatives as

The Equator Principles are a banking industry framework for addressing environmental and social risks in project financing.

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a differentiation strategy. For him, the relationship between size and corporate social performance could follow a U-shape, with medium-sized firms being less likely to engage in CSR (Udayasankar, 2008). According to Aragón-Correa et al. (2008), small firms would also have the advantage of being more flexible and more innovative. However, most empirical studies have found that larger organizations are more likely to adopt proactive CSR or environmental practices, confirming the most-often mentioned hypothesis (AragónCorrea et al., 2008; Arora & Cason, 1996; Buysse & Verbeke, 2003; Céspedes-Lorente et al., 2003; Stanwick & Stanwick, 1998). In the microfinance sector, Bédécarrats et al. (2011) identified that social performance increases with MFIs’ size. The same set of assumptions related to size and environmental performance could hold for the microfinance sector. Indeed, larger MFIs are more under the scrutiny of international stakeholders, making them more likely to go green. They usually have an easier access to resources and can reach scale economies more easily. Their cost to benefit ratio of going green would thus be lower than that of smaller MFIs, making them more likely to invest in environmental management. If the reputation risk is the stronger driver, one would assume that larger MFIs are more likely to engage in the development of an environmental policy or in environmental risk management. These approaches are more visible to investors and donors, easy to communicate about, and they constitute a way for the MFI to protect itself from harmful impacts, without requiring too much effort. If scale economies are the stronger driver, one would assume that larger MFIs are more likely to engage in the provision of green microcredit to promote environmentally-friendly activities and technologies. Developing a new financial product entails important fixed upfront costs in research and development (Araya & Christen, 2004; Coulson & Dixon, 1995; Wenner, 2002) and may therefore not bring a clear return on investment for smaller microfinance institutions. Building on the literature, we thus defined our first hypothesis as follows: H1. Larger MFIs are likely to have a better environmental performance.

2.2. Financial performance In addition to size, one of the most-often studied relationships in the literature is that of corporate social or environmental performance with financial performance. The hypothesis that is usually

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privileged in the literature is that of a positive association between corporate social/environmental performance and prior financial performance, along the slack resource theory developed by Waddock & Graves (1997). Waddock & Graves (1997, p.306) indeed assume that “better financial performance potentially results in the availability of slack (financial and other) resources that provide the opportunity for companies to invest in social performance domains.” For them, firms that are in financial trouble may have little availability to make discretionary investments in social and environmental initiatives. Elijido-Ten (2007) and Husillos & Alvarez-Gil (2008) also suggest that organizations with a low profitability will primarily focus on the economic demand pushed forwards by their stakeholders and lack the financial capacity to undertake costly social and environmental programs. A better financial performance could thus be a predictor of better environmental performance. Yet, results of empirical studies are broadly inconsistent, which may be due to CSR measurement, sample selection or other methodological issues (Al Tuwaijri et al, 2004; Elsayed & Paton, 2007; Russo & Fouts, 1997; Stanwick & Stanwick, 1998). Some studies find no correlation between profitability and corporate environmental performance (Elijido-Ten, 2007; Henriques & Sadorsky, 1996), while others reveal a significant positive relation between environmental performance and financial performance (Al Tuwaijri et al, 2004; Russo & Fouts, 1997) or between corporate social performance and financial performance (Stanwick & Stanwick, 1998; Waddock & Graves, 1997). The most comprehensive survey of evidence has been done by Orlitzky (2001) in a meta-analysis with a total sample size of over 15,000 observations. His key findings show that CSR and, to some extent, environmental responsibility are positively related to financial performance, even after controlling for firms’ size. Even if empirical results are ambiguous, one could assume that a better financial performance could also be a predictor of better environmental performance in the microfinance sector. Indeed, developing green microfinance programs implies some costs and investments for the MFI (Araya & Christen, 2004; Coulson & Dixon, 1995; Wenner, 2002): cost of research and development for the design of green microcredit, cost of acquiring new competences and developing new procedures, cost of training staff, cost of providing non-financial services generating no financial revenues, decreased staff productivity due to time spent on assessing environmental risks, promoting green microcredit or raising clients’ awareness, etc. In our study on MFIs’ motives for going green (Chapter 2), we indeed mention that MFIs’ decision to engage in environmental management is also influenced by the cost /

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benefit analysis they make. MFIs with a better financial performance may therefore be more likely to engage in environmental management. In particular, they may be more likely to engage in environmental management strategies that have higher upfront costs, such as the provision of green microcredit and environmental non-financial services. Our second hypothesis is thus the following: H2. MFIs with a better financial performance are likely to have a better environmental performance.

2.3. Maturity of the institution In addition to size and financial performance, the maturity of an institution could also influence its environmental performance. One could indeed assume that, as an institution grows and becomes more mature, it becomes more visible, has better management capacities and resources, and tends to institutionalize its management processes, making it more likely to engage and perform better in environmental management. The literature on organizational life cycles provides an interesting framework to understand how maturity could influence corporate environmental performance. Organizational life cycle models “claim that all firms pass through predictable stages of growth and that their strategies, structures, and activities correspond to their stage of development” (Gray & Ariss, 1985, p.710). Even if the stages identified in the various models may be named or categorized in slightly different ways, most authors identify four main stages in organizational life cycles: (a) the birth / early growth / start-up stage; (b) the rapid growth / emerging growth stage; (c) the maturity stage; and (d) the decline / redevelopment / transition stage (Elsayed & Paton, 2007; Gray & Ariss, 1985; Jawahar & McLaughlin, 2001; Quinn & Cameron, 1983). Several authors emphasize that innovation may be greater in companies that are in the start-up stage, since they need to create a market “niche” for themselves (Gray & Ariss, 1985; Quinn & Cameron, 1983). Elsayed & Paton (2007) suggest that companies in their initial growth stage could indeed be more likely to engage in environmental management because they seek “to achieve differentiation in the market by exhibiting a unique ethical behaviour to be used as a competitive edge over their rivals” (Elsayed & Paton, 2007, p.399). However, other authors argue that companies in their start-up stage are primarily concerned with survival (Lippitt & Schmidt, 1967). According to Jawahar & McLaughlin

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(2001), young companies thus focus primarily on shareholders, creditors and customers’ expectations and tend to ignore other stakeholder groups such as environmental groups. In the rapid growth stage, most authors agree that companies tend to focus on short-term performance and dismiss environmental initiatives and stakeholders (Elsayed & Paton, 2007; Jawahar & McLaughlin, 2001). On the other hand, the literature suggests that, when they reach a maturity stage, companies are more likely to be proactive in environmental management, because they have more slack resources that provide opportunities for investing in social and environmental domains and because they are more visible and need to accommodate environmental stakeholders’ expectations (Elsayed & Paton, 2007; Jawahar & McLaughlin, 2001). The influence of maturity on corporate social or environmental performance has however been little empirically explored by the CSR literature. A reason may be because there is no simple, easily accessible variable to assess the level of maturity of an organization. One proxy could be the age of the organization. This proxy is relevant in the sense that young organizations are not likely to be mature. However, it is also limited because older organizations do not systematically reach maturity stages. One could also think that size, along with age, could be a proxy for maturity, since young organizations usually start small and may gain maturity as they grow. Nevertheless, here again, the link is far from being systematic (one can find very large organizations that are far from having mature management processes). In the absence of better proxy, and acknowledging its limit, age however remains the most practical variable to be used to assess maturity level. The few studies that have used age as a proxy for maturity have found mixed results: while Moore (2001) identifies a positive relation between age and social performance in the UK supermarket industry, Cochran & Wood (1984) find a highly significant negative correlation between age of corporate assets and social performance ranking in their sample of 39 manufacture firms. One reason they mentioned for this negative result was that older firms may be less flexible and responsive in adapting to social change than younger firms. In the microfinance sector, Bédécarrats et al (2011, p.13) identify that social performance (SP) increases with age. According to them, this positive relationship can be explained by the formalization of processes as the MFI grows: “At the beginning, MFIs rely on a small and committed team and flexible processes. Therefore most of the practices related to social mission remain informal and are not taken into account by SP assessments, which evaluate institutionalized processes. Nevertheless,

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as they grow, institutions tend to manage only what they can measure and systematize. MFIs wanting to pursue initial objectives of poverty reduction or development ultimately formalize their practices.” In line with Elsayed & Paton (2007), one could assume, on the one hand, that MFIs in their start-up stage may be likely to engage in green microfinance as a differentiation strategy. As the microfinance sector has significantly expanded in the past decades, in many countries, newcomers face tough competition on the local market and need to adopt strategies to stand out from competitors. Green microfinance could be one of these strategies. However, pressures on MFIs to reach financial objectives are very high in the sector, making us assume that young microfinance institutions are more likely to primarily focus on their short-term performance objectives and postpone the management of environmental issues for later stages. Furthermore, financial costs and technical complexity are often perceived as significant barriers to MFIs’ engagement in environmental management. One could then assume that mature MFIs, because they have reached a growth stage where they are more visible and have more slack resources (Elsayed & Paton, 2007; Jawahar & McLaughlin, 2001) or because they have developed more formal processes (Bédécarrats et al, 2011), would be likely to perform better in environmental management. Therefore, we defined our third hypothesis as follows: H3. Mature MFIs are likely to have a better environmental performance.

2.4. Legal status Finally, if we want to assess whether the environmental bottom line only concerns certain types of MFIs, we need to consider the influence of MFIs’ legal status as well. Among the four legal status widely used to categorize MFIs (banks, non-bank financial institutions, cooperatives, non-government organisations), two of them in particular could be related to a better environmental performance: the bank status, because of its higher exposure to environmental liability, and the NGO status, because of its positive relation with an integrated approach of microfinance. In the past two decades, many governments have introduced laws on the environmental liability of financial institutions (Boyer & Laffont, 1997; Coulson & Dixon, 1995; Thompson & Cowton, 2004). These laws affirm the responsibility of financial institutions for pollution damages caused by the activities that they finance and provide for fining or charging them with clean-up costs (UNEP-FI, 2007; Wenner, 2002). As these laws have been defined for the traditional banking sector, which finances

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bigger (and potentially more harmful) projects, they apply directly to the MFIs that are registered as banks (and eventually non-bank financial institutions) but may not consider MFIs under other legal status, such as cooperatives or NGOs. Because they are under the scrutiny of environmental liability regulations, MFIs registered as banks could thus be likely to perform better in environmental management. In particular, they may tend to adopt measures to reduce their exposure to environmental risks through the adoption of an exclusion list and environmental screening criteria for instance. They may also be more likely to offer green microcredit products in order to improve the environmental performance of their portfolio. While MFIs registered as banks may be more oriented towards environmental strategies enabling them to minimize their exposure to environmental risks, MFIs with a NGO status may be prone to develop more positive strategies aiming to promote environmentally-friendly activities, technologies, and practices. For FAO (2005), MFIs that have a NGO status could be more sensitive to environmental issues than commercial banks. In particular, one could assume that they would be more likely to provide environmental non-financial services, such as training and awareness-raising on ecopractices. In the microfinance sector, some institutions have indeed opted for a ‘Microfinance Plus’ approach: in addition to their core financial business, they decided to provide their clients with other social services like literacy training, health services or business development services. In a study on ‘Microfinance Plus’, Lensink & Mersland (2009) already find significant correlations between NGO status and the provision of ‘Microfinance Plus’ services. The same could hold regarding environmental non-financial services, with a higher propensity for NGOs to engage outside of the core financial business and adopt a positive approach to environmental management. As for MFIs registered as non-bank financial institutions or cooperatives, their likelihood to engage in environmental management broadly depends on the interest and willingness of their respective shareholders or members to address environmental issues, making it hazardous to formulate any predictive hypothesis. We thus defined the two following hypotheses related to MFIs’ legal status: H4. MFIs registered as banks are likely to have a better environmental performance, in particular through environmental risk assessment. H5. MFIs with a NGO status are likely to have a better environmental performance, in particular through the provision of environmental non-financial services.

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Table 1. Summary of hypotheses Hypotheses to test

Variables used Number of active borrowers

Larger MFIs are likely to have a better environmental performance.

MFIs with a better financial performance are likely to have a better environmental performance.

OSS

Mature MFIs are likely to have a better environmental performance.

Age

MFIs registered as banks are likely to have a better environmental performance, in particular through environmental risk assessment.

Legal status (dummies)

MFIs with a NGO status are likely to have a better environmental performance, in particular through the provision of environmental non-financial services.

Legal status (dummies)

3. Database and Methodology 3.1. Assessing the environmental performance of MFIs As the issue is still new in the microfinance sector, there is no standardized methodology yet to assess the environmental performance of MFIs. Microfinance rating agencies, such as M-Cril, Microfinanza and PlaNet Rating, have included a couple of environmental responsibility indicators in their Social Performance Rating, but they still remain quite vague and limited. The MIX Market is progressively starting to collect data on the environmental performance of its member MFIs, but information is only provided on a voluntary basis by few MFIs and also remains very general. To assess actual practices in environmental management and identify the characteristics of green MFIs, we thus needed to collect first-hand data. We used the Microfinance Environmental Performance Index (MEPI) presented in Chapter 1. MEPI builds on the literature on corporate environmental performance and microfinance social performance (Azzone, et al., 1996; Doligez & Lapenu, 2006; Hashemi, 2007; Henri & Journeault, 2008; Ilinitch, et al., 1998; Jasch, 2000; Lapenu, et al., 2009). It is composed of management performance indicators specifically adapted to the microfinance sector (See Annex 1). The index is build along five dimensions that reflect the variety of strategies adopted by MFIs to go green: (1) Environmental Policy; (2) Ecological Footprint; (3) Environmental Risk Management; (4) Green Microcredit; and (5) Environmental Non-financial Services. The Environmental Policy dimension refers to the existence of a formalized environmental strategy creating a favorable framework for the implementation of environmental programs. This formalization can be done through the inclusion of environmental statements in the official mission of the MFI, the

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adoption of a written policy document, the appointment of a person in charge of environmental issues and/or the implementation of an incentive system to encourage staff to achieve specific environmental objectives. The Ecological Footprint dimension relates to all internal actions made by the MFI to reduce the direct environmental impact of its operational activities, such as conducting an environmental audit, setting up specific objectives to reduce energy consumption, carbon emissions, or waste releases, raising employees’ awareness on good practices, and including environmental performance indicators in annual reports. The Environmental Risks Assessment dimension refers to the effort made by the MFI to monitor all loans according to environmental criteria. This can be done through the use of an exclusion list, the use of specific toolkits to evaluate the environmental risks of clients’ activities, the training of loan officers on environmental risk management, and the inclusion of tracking indicators into the MIS. The Green Microcredit dimension relates to the provision of financial products that have been adapted in order to promote environmentally-friendly activities and technologies. Finally, the Environmental Non-Financial Services dimension refers to the provision of non-financial services aiming to raise clients’ awareness of environmental issues and good practices. This can be done through an environmental chart to be signed by clients, awareness-raising campaigns, promotion actions such as fairs, and specific trainings on environmentally-friendly practices. The Microfinance Environmental Performance Index (MEPI) thus provides a good framework for analyzing MFIs’ current level of environmental performance.

3.2. Data collection In order to get first-hand data on the environmental performance of MFIs, we conducted a survey elaborated on the basis of MEPI. The survey was submitted to a sample of 426 MFIs from the MIX Market46. We selected all MFIs rated with 4 and 5 diamonds in February 2011. On the MIX Market, the

The MIX Market (www.mixmarket.com) is a website that provides access to operational, financial and social performance information on more than 2,000 MFIs, covering 92 million borrowers globally. Being one of the most exhaustive databases of MFIs worldwide, the MIX Market is used as a source of data for many microfinance studies. However, the MIX data has limitations that need to be acknowledged. Indeed, the MIX only gathers data for institutions that consider themselves as MFIs and that expect a benefit from voluntary reporting to this database. The dataset is thus likely to under-represent smaller

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number of diamonds reflects the level of transparency of the microfinance institution. MFIs that reach 4 to 5 diamonds are the ones that provide lots of quality data on their financial, operational and social performance, backed up with rating and audit reports and regularly updated. Selecting MFIs with 4 and 5 diamonds was a guarantee to access quality data on the additional variables needed for our study. Similar to Anderson and Locker (2002), MFIs were contacted individually through email in March 2011. Two reminders were sent in April 2011 to the ones that had not responded yet. The survey was to be filled in online. It was available in English, French and Spanish. In order to get a good response rate, an incentive was given to MFIs: they could choose to receive a free benchmark of their environmental performance at the end of the survey. By the end of April 2011, the survey had been answered by 165 MFIs. After clearing the database from questionnaires that could not be used (incomplete), we ended up with a total number of 160 surveys, equating to a response rate of 38%. We then completed our database by collecting on the MIX additional data on respondent MFIsâ&#x20AC;&#x2122; characteristics: legal status, date of creation, number of active borrowers, number of rural clients, operational self-sufficiency, portfolio at risk at 30 days, average loan on GNI per capita, etc.

3.3. Sample representativeness As detailed in Table 2, our sample of 160 MFIs is representative of the microfinance sector in terms of regional location, legal status, size (number of borrowers), average age, average portfolio at risk, average financial performance, etc. Our sample is composed of 34% of MFIs from Latin America, 21% from Africa, 20% from Asia, 18% from Eastern Europe and Central Asia (EECA), and 8% from Middle East & North Africa (MENA). This is very close to the distribution of MFIs in the 2009 MFI Benchmark of the MIX, where 34% are from Latin America, 15% from Africa, 27% from Asia, 19% from EECA, and 5% from the MENA region. In our sample, we count 45% of NGOs, 34% of Non-Bank Financial Institutions (NBFIs), 12% of cooperatives, and 9% of banks, which is again very similar to the distribution of the MIX benchmark, where NGOs represent 37%, NBFIs 35%, cooperatives 14%, and banks 8%. Our sample has an average OSS ratio of 115%, comparable to the average ratio of 111% of the MIX; an average portfolio at risk at 30 days of 5.2% when that of the MIX is of 4.6%; an average loan size on GNI per capita amounting to 55% when the average ratio in the MIX is 64%; and an microfinance providers as well as other institutions providing financial services to low-income people, such as development banks, postal banks, rural banks, or savings and credit cooperatives.

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average of 64% of female clients, very close to the 63% average of the MIX sample. The only worth noting difference is that our sample has a slightly higher proportion of large MFIs compared to the distribution of MFIs in the MIX. Indeed, our sample is composed of 44% of MFIs with more than 30,000 clients, while they only represent 29% of the MIX sample.

Table 2. Profiles of respondent MFIs and their representativeness of the microfinance industry

Region

Legal status

Size (outreach)

Mean

Sample (160 MFIs)

MIX (1019 MFIs)

Latin America & the Caribbean

34%

Africa

21%

15%

Asia (South & East Asia)

20%

27%

Eastern Europe & Central Asia

18%

19%

Middle East & North Africa

NGO (non-governmental organization)

45%

37%

NBFI (non-bank financial intermediary)

34%

35%

Credit union / cooperative

12%

14%

Bank

Rural bank

Small (<10,000 borrowers)

33%

49%

Medium (10,000 to 30,000 borrowers)

23%

21%

Large (>30,000 borrowers)

44%

29%

Number of active borrowers

104,477

85,269

Age (years)

15.4

Operational Self-Sufficiency (%)

115%

111%

Cost per borrower (USD)

194

224

Portfolio at Risk at 30 days (%)

5.2%

4.6%

Average loan per GNI per capita (%)

55%

64%

Percentage of female clients (%)

64%

63%

Data comes from the 2009 MFI Benchmarks available on the MIX. This data set includes information from 1019 MFIs reaching over 85% of known microfinance borrowers. Even if the MIX Market claims to gather information for more than 2,000 MFIs, not all MFIs voluntary provide financial, operational, and social information every year to the MIX, which explains why the 2009 MFI Benchmarks only gathers data for 1019 MFIs. (http://www.themix.org/publications/mix-microfinanceworld/2010/10/2009-mfi-benchmarks)

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Even if we carefully sought to avoid any selection bias, it is likely that our sample is biased towards MFIs with greater environmental commitment. Indeed, MFIs that already have an interest in environmental issues are the ones that will feel more concerned by the survey and will take time to answer it. Our results however show that, among our respondents, there are also MFIs that have no interest or very little interest in environmental issues. Even if the sample is likely to be slightly biased towards environmentally-committed MFIs, it is not a main problem for this study, since we do not aim at assessing the environmental performance of MFIs in absolute terms. We rather seek to relate their level of practices and environmental performance with their characteristics (which characteristic is linked to a higher MEPI score?). What is important is the relative variance in environmental performance in our MFI sample.48

3.4. Characteristics of MEPI scores For research purpose, we assessed MFIs’ environmental performance by giving an equal score of four points to each of the five dimensions described in section 2, making a total MEPI score out of twenty. We do not expect MFIs to score full points in every dimension of MEPI. Similar to the Social Performance Indicators (SPI) approach, results should rather reflect the MFI’s self-defined mission and strategy (Doligez & Lapenu, 2006). A limit of our survey is that we rely only on MFIs’ declarations, since we did not have the resources to go and visit each MFI and check actual practices. The risk could be that some MFIs overestimated their level of environmental performance (‘greenwashing discourse’). In order to avoid this bias, we included control questions49 in the survey and adjusted in the database some of the answers provided by MFIs in order to make them consistent with answers to control questions. 50 Yet, respondents’ tendency to overestimate their performance may have been limited, since the overall MEPI scores for our sample remain low. 48

In order to test if our sample was statistically different from that of the MIX, it would have been interesting to conduct some probit tests and eventually correct for selection bias through Heckman’s method. Unfortunately, the 2009 MFI Benchmarks MIX data only presents mean indicators and does not provide the whole database, which prevented us from conducting a Heckman correction. 49

For instance, if an MFI stated that it had an environmental policy, we asked for the year when the policy was adopted. If an MFI declared that it was offering green microcredit for clean energy technologies, we asked what the type of technology promoted was and how many loans they had disbursed in the past year. The detailed list of control questions can be found in the appendix section of Chapter 1. 50

We also reviewed the MFIs websites and annual reports to check for the information provided. However, these sources are quite limited since most MFIs do not communicate yet on their environmental management practices.

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On average, MFIs only reach a total MEPI score of 4.14 points out of twenty (see Annex 2). Out of 160 respondents, 145 MFIs (91%) have a MEPI score below 10 points, of which 106 MFIs (66%) even have a score below 5 points and 24 MFIs (15%) have a score of zero. The same pattern appears when we look at the five dimensions of the index. Many MFIs from our sample indeed have a score equal to zero in the various MEPI dimensions: 46% of respondent MFIs for Dimension 1 (Environmental Policy); 45% for Dimension 2 (Ecological Footprint); 52% for Dimension 3 (Environmental Risk Assessment); 72% for Dimension 4 (Green Microcredit); and 60% for Dimension 5 (Environmental Non-financial Services). These low scores are consistent with the fact that MFIs have only started to look at their environmental bottom line very recently. They also suggest that the risk of ‘greenwashing’ answers from surveyed MFIs may have been slightly overestimated.

3.5. Data analysis for global MEPI scores We conducted different types of statistical and econometric analysis, starting with Pearson correlation tests for all our variables. As none of our independent variable is strongly significantly correlated one with the other51 (see Annex 5), we thus proceeded to OLS regression analysis where the global MEPI score was the dependent variable. We included the following explanatory variables to test our different hypotheses: number of active borrowers (for size), Operational Self-Sufficiency52 (for prior financial performance), age (for maturity), and legal status. An important concern was the risk of endogeneity of the financial performance variable. Indeed, there could be a risk of reversed causality, since better environmental management can potentially lead to higher financial performance if it enables the MFI to reduce inefficiency costs (e.g. thanks to energy savings), attract cheaper funding (e.g. Socially Responsible Investors), develop new markets (e.g. through energy lending), etc. It could also impact negatively the MFI’s financial performance if environmental management leads to increased costs and reduced productivity. In order to mitigate the risk of endogeneity, we thus decided to lag our financial performance variable, taking OSS data from 2010, while environmental performance data is from 2011 (5 month lag). It is indeed more complicated to assume that actual environmental performance can determine previous financial

Correlations do not exceed 0.8, the level at which collinearity problems appear (Kennedy, 2008). Operational Self-Sufficiency is widely used as a proxy for financial performance in the microfinance sector (Cull et al., 2007;

Lensink & Mersland, 2009; Mersland & Strom, 2010).

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performance. Unfortunately, we were not able to find any instrumental variable that could be used to control for endogeneity. However, since most MFIs have engaged in environmental management only recently and since most of them do so in a pilot way, the probability that their environmental performance has impacted their financial bottom line is still low.53 In addition to our explanatory variables, we also included various control variables in our regression: region, international origin, percentage of rural clients, average loan size on GNI per capita, provision of non-financial services, and portfolio at risk at 30 days (PAR30). These control variables were included in our model because we assumed that they could have some influence on MFIs’ environmental performance. -

REGION: MFIs could engage in environmental management in a mimetic trend if they are located in regions where other stakeholders and MFIs are implementing environmental programs, in line with the mimetic isomorphism theory (DiMaggio & Powell, 1983).

INTERNATIONAL ORIGIN: The assumption here is that firms with a foreign origin (OECD countries) may apply more performing environmental management systems because they comply with the standards of the home country, which tend to have more stringent environmental regulations when they come from OECD countries (similar to the results of Cole et al, 2008). MFIs with an international origin may apply standards from the country of origin of the founders, and therefore have a higher MEPI score.

RURAL CLIENTS: Environmental degradation exists in urban and peri-urban areas, but it is often more visible in rural areas, where farmers are particularly affected by chemical pollution and soil degradation (Nishat, 2004). As MFIs tend to be more sensitive to one or two specific environmental issues that are closest to their daily concerns (what Jones, 1991, identifies as the moral intensity of an issue), MFIs that are more active in rural areas may be more likely to engage in environmental management.

AVERAGE LOAN SIZE ON GNI PER CAPITA: MFIs with larger average loan size may feel more exposed to credit risks linked to environmental risks, and therefore engage in environmental management.

NON-FINANCIAL SERVICES: MFIs with an integrated approach may be more likely to engage in environmental management, as emphasized in Chapter 1. The dummy “provision of non-financial services” is used as a proxy for MFIs’positioning between a minimalist and an integrated approach.

PAR30: MFIs that face portfolio problems have other priorities to manage than their environmental impact. One could thus assume that only MFIs with a stable, good portfolio will be likely to develop new products and services linked to the environment.

We also checked the error term and found no autocorrelation or heteroskedaticity, which could have reflected a problem of

endogeneity (cf Section 3.5).

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Our regression was thus defined as follows: MEPIi = αi + β1 x SIZEi + β2 x OSSi + β3 x AGEi + β4 x STATUSi + β5 x REGIONi + β6 x INT’Li + β7 x RURALi + β8 x AVERGLOANi + β9 x NONFINSERVi + β10 x PAR30i + εi

where SIZE is the number of active borrowers; OSS is the prior operational self-sufficiency ratio of the MFI (for 2010, while MEPI scores were computed in 2011); AGE is the number of years of existence of the MFI; STATUS is the legal status of the MFI (bank, cooperative, non-bank financial institution, nongovernment organization); REGION is the region (Asia, Sub-Saharan Africa, Eastern Europe and Central Asia, Latin America, or Middle-East and North Africa); INT’L is a dummy related to the international origin of the MFI; RURAL is the percentage of active clients in rural area; AVERGLOAN is the average loan size divided by the GNI per capita; NONFINSERV is a dummy related to the offer of non-financial services by the MFI; and PAR30 is the portfolio at risk at 30 days. Following Rys & Vaneecloo (2005), for the STATUS and REGION dummies, we kept as a reference the category that was the most frequent in our sample, respectively NGOs and Latin America. 54; 55 In the following section, we present our results when all explanatory and control variables are included in the regression. We tested different models and found that our results overall remained robust when removing our control variables. After running our regression, we furthermore conducted several tests to check the validity of our results (Gujarati, 2004). We computed the Variance Inflation Factors (VIF) for each of our explanatory variable and were able to confirm the absence of perfect multicollinearity since the VIF were all below 2. Furthermore, we conducted a Durbin-Watson test that is very close to 2 (it amounted to 2.083) and therefore shows the absence of residual autocorrelation. We also checked that the mean value of the error term is equal to zero, which validates another of the assumptions under which the OLS model

We also tested a regression where we controlled for country-level environmental performance. In this perspective, we used

the Environmental Performance Index (EPI) developed by Yale researchers and largely used by international organisations such as the UNDP (in its Human Development Index) and the G20. This index ranks countries on performance indicators gauging government policies on environmental public health and ecosystem vitality. This variable however was not significantly related to MEPI scores and was not contributing to the explanatory power of our model. We thus decided to remove it. 55

It could have been interesting to also include Social Performance Indicators (SPI) scores as a control variable. One could

indeed assume that MFIs with a high social performance (as it is measured by the SPI) would be likely to have a higher environmental performance. However, it was not possible to include such control variable since, after coordinating with CERISE, we identified that only 24 MFIs from our sample of 160 had conducted an SPI assessment in 2010.

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holds. Finally, we verified that our residual term follows a normal distribution by drawing a Q-Q plot graph and conducting a Shapiro-Wilk normality test which turned out significant.

3.6. Data analysis for disaggregated MEPI dimensions In their study on SMEs’ environmental performance, Lefebvre et al (2003, p.263) emphasize that their “results demonstrate that firms’ environmental performance cannot be viewed as a one-dimensional concept and that determinants of firms’ environmental performance depend on the dimension retained.” Similarly, regarding MFIs’ social performance, Bédécarrats et al (2011, p.11) also stress that “different institutions prioritize different facets of social performance, depending on their objectives and context. This is why it is so important to refine analysis beyond the aggregated score and analyze each dimension.” Following the same logic, we considered important to look not only at global MEPI scores but also at each of the five dimensions of the Microfinance Environmental Performance Index. For each MEPI dimension, the values of the dependent variable only range from 0 to 4, making an OLS model not appropriate. We therefore opted for ordinal models, starting with ordinal logit analysis. However, the tests of parallel lines were always significant, pointing that the model was not adequate. One explanation could be that our data is concentrated towards low values for our dependent variables (as indicated in section 3.4). We then opted for negative log-log regressions, which are supposed to be most adapted to data with a high probability of low scores. However, here again, the tests of parallel lines turned out significant, stressing that the model was not adapted. Similar to Scholtens & Dam (2007), we therefore decided to conduct t-tests for equality of means in order to identify which are the groups whose environmental performance scores are significantly different for each of the five MEPI dimensions.

4. Findings This section presents the results obtained for each of our hypotheses. Tables 3 and 4 display the results of our tests for equality of means for the various disaggregated dimensions of environmental performance, while Table 5 present the results of our global OLS regression, with MEPI as the dependent variable.

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4.1. Size Results from our tests for equality of means reveal that larger MFIs perform better than smaller ones on some of the disaggregated dimensions of MEPI. Indeed, Table 3 shows a significant difference between small and large MFIs56 for the Environmental Policy, Ecological Footprint, and the Environmental Risk Assessment dimensions. These results confirm the assumption that larger MFIs engage in environmental management, probably because they are more visible and have to take actions to respond to donors’ and investors’ expectations (Arora & Cason, 1996; Chen & Metcalf, 1980; Erlandsson & Tillman, 2009; Orlitzky, 2001; Stanwick & Stanwick, 1998), in particular in terms of environmental risk management. Yet, contrarily to what we expected, results show that larger MFIs are not more likely than smaller MFIs to design and offer green microcredit, whereas they could benefit from clear scale economies in this area. Udayasankar (2008) suggests that smaller firms may decide to engage in CSR as a differentiation strategy. The same phenomenon could apply here: smaller MFIs may also decide to offer green microcredit as a niche strategy, which would then counterweight the scale economies effect and explain the absence of significant difference on this dimension. As for the Environmental Non-financial Services dimension, Table 3 shows significant differences between medium-sized MFIs on the one hand, and small and large MFIs on the other hand. On this dimension, the relationship between size and environmental performance thus seems to follow the Ushape suggested by Udayasankar (2008), with medium-sized MFIs performing less. Small MFIs may develop such ‘Microfinance Plus’ services as a differentiation strategy or because they are more innovative (Aragón-Correa et al, 2008), while large MFIs may be in a position to offer non-financial services because they have more slack resources available (Waddock & Graves, 1997). Nevertheless, results from our OLS regression do not show any significant relationship between MFIs’ size and their global environmental performance (Table 5). We could thus assume that our hypothesis stating that larger MFIs are likely to have a better environmental performance is only partially confirmed for some specific dimensions of environmental performance.

The groups were defined along the MIX peer group definition: small MFIs are those with less than 10,000 active borrowers; medium MFIs are those with 10,000 to 30,000 active borrowers; and large MFIs are MFIs with more than 30,000 active borrowers.

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4.2. Financial performance As illustrated in Table 3, financial performance is not significantly correlated with MFIsâ&#x20AC;&#x2122; environmental performancefor any of the disaggregated dimensions. Similar to Waddock & Graves (1997), we had expected that MFIs with a better financial performance would have the resources to engage in environmental management, especially in the strategies that entail higher upfront costs, such as the Green Microcredit and Environmental Non-financial Services dimensions. However, our results did not confirm our second hypothesis: MFIs with a better financial performance overall do not appear to have a better environmental performance. The only exception is for the Environmental Risk Assessment dimension, where more profitable MFIs tend to perform better environmentally than less profitable MFIs (Table 3). However, this is not the dimension which would entail the higher upfront costs for an MFI, since integrating environmental screening criteria within the MFIâ&#x20AC;&#x2122;s procedures requires less financial investments than the research and development needed to design adapted green microcredit. Results from our OLS regression furthermore confirm this findings since financial performance does not appear as a significant explanatory variable for global MEPI (Table 5). One explanation for the overall absence of significant relationship between financial performance and environmental performance may be linked to a specificity of the microfinance sector. The CSR literature almost exclusively focuses on commercial sectors (mostly manufacture and trade), which rely on their own revenues and resources to set up social and environmental initiatives. The microfinance sector is quite different in that it is highly subsidized (Hudon & Traca, 2011), with many MFIs still requiring subsidies to cover their costs and finance their loans (UNCDF, 2005) and around USD 1 billion of subsidies given by private and public donors per year over the last 20 years (CGAP, 2006). We could therefore assume that proactive MFIs are able to mobilize funding from outside their institution in order to set up environmental management programs. If these MFIs can have access to financial support from donors, a low OSS would not be a limiting factor for going green.

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Table 3. Tests of equality of means per MEPI dimension MEPI mean scores per size, financial performance, and maturity

Dimension 1. Environmental policy

Dimension 2. Ecological footprint

Dimension 3. Environmental risks assessment

Dimension 4. Green microcredit

Dimension 5. Environmental non-financial services

0.76

0.67

0.48

0.57

0.61

0.94

0.85

0.73

0.79

0.30

1.28

1.01

1.13

0.76

0.94

SMALL-MEDIUM

-0.79

-0.88

-1.41

-0.78

1.71*

MEDIUM-LARGE

-1.48

-0.72

-1.90*

-0.08

-3.73***

-2.47**

-1.73*

-3.62***

-0.89

-1.61

SIZE Means

T-Tests

SMALL (<10,000 active borrowers) MEDIUM (10,000 to 30,000 borrowers) LARGE (>30,000 active borrowers)

SMALL-LARGE

FINANCIAL PERFORMANCE Means

T-Tests

LOW (OSS < 100%)

0.85

0.70

0.59

0.74

0.56

MEDIUM (OSS 100-120%)

1.03

0.93

0.80

0.73

0.72

HIGH (OSS > 120%)

1.26

0.90

1.10

0.71

0.83

LOW - MEDIUM

-0.71

-0.97

-0.91

0.03

-0.71

MEDIUM - HIGH

-1.02

0.12

-1.44

0.07

-0.57

LOW - HIGH

-1.52

-0.80

-1.80*

0.90

-1.07

0.78

0.74

0.93

0.44

103

1.06

0.85

0.86

0.81

0.71

1.11

0.93

0.54

0.86

1.07

YOUNG-MATURE

-1.13

-0.54

0.27

-1.76*

-1.17

MATURE-VERY MATURE

-0.20

-0.34

1.50

-0.14

-1.56

YOUNG-VERY MATURE

-1.10

-0.68

1.45

-1.27

-2.38**

MATURITY Means

YOUNG (<8 yrs) MATURE (8-20 yrs) VERY MATURE (>20 yrs)

T-Tests

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4.3. Maturity Our third hypothesis, stating that mature MFIs are likely to have a better environmental performance, is validated by results from our OLS regression: age indeed appears significantly and positively correlated to global MEPI score (Table 5). The positive relationship is particularly significant for the Green Microcredit and Environmental Non-financial Services dimensions, where more mature MFIs tend to perform better (Table 3). Contrarily to the Environmental Policy, Ecological Footprint or Environmental Risk Assessment dimensions where a high score may reflect a greater formalization of environmental management processes within the MFI, these two dimensions are evaluated along the concrete provision of environmental products or services by the MFI. As a consequence, the argument of Bédécarrats et al (2011), stating that the positive relationship between social performance and age can be explained by the formalization of processes as the MFI grows, may not apply here regarding our results on environmental performance. We would rather suggest that our results are in line with Elsayed & Paton (2007)’s hypotheses on firm life cycles. During their rapid growth stage, MFIs would primarily focus on short-term performance and growth, therefore dismissing environmental initiatives. When they reach a maturity stage, MFIs then have more available slack resources and more visibility, making them more likely to address environmental issues, in particular those implying high upfront costs (green microcredit and environmental non-financial services).

4.4. Legal status Finally, our study shows several significant results related to MFIs’ legal status. Results from our tests for equality of means first reveal that MFIs registered as banks have mean scores that are significantly higher than NGOs, NBFIs and cooperatives for the Environmental Policy and Environmental Risk Assessment dimensions (Table 3). Results of our OLS regression confirm that MFIs registered as banks tend to perform better in terms of global environmental performance: Table 5 indeed shows a positive, significant relationship between banks and MEPI scores at the global level. These results thus validate our fourth hypothesis, according to which MFIs registered as banks may be more under the scrutiny of environmental regulations and therefore more likely to set up processes to limit their exposure to environmental risks, such as adopting an exclusion list or screening loans along environmental criteria.

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On the other hand, results also show that NGOs tend to perform better than NBFIs for the Environmental Non-financial Services dimension, while there is no significant difference with banks and cooperatives. Our fifth hypothesis is thus only partially confirmed: MFIs with a NGO status do have a better environmental performance than NBFIs regarding the provision of environmental nonfinancial services, but they are not more engaged in this specific ‘Microfinance Plus’ approach than banks and cooperatives, contrarily to Lensink & Mersland (2009)’s results. Interestingly, cooperatives turn out to have mean scores significantly lower than banks and NBFIs for the Environmental Risk Assessment dimension. We could assume that cooperatives may be more reluctant to use environmental criteria to screen their portfolio because their relationship to their clients is based on membership.

Table 4. Tests of equality of means per MEPI dimension MEPI mean scores per legal status

Dimension 1. Environmental policy

Dimension 2. Ecological footprint

Dimension 3. Environmental risks assessment

Dimension 4. Green microcredit

Dimension 5. Environmental non-financial services

BANK

2.07

1.43

1.57

1.14

0.86

COOP

1.00

0.74

0.37

0.84

0.79

NBFI

0.96

0.91

0.98

0.76

0.53

NGO

0.85

0.72

0.65

0.83

BANK-COOP

2.47**

1.64

3.64***

0.53

0.16

BANK-NBFI

3.37***

1.27

1.73*

0.78

1.13

BANK-NGO

3.78***

1.75*

3.27***

1.04

0.08

COOP-NBFI

0.13

-0.73

-2.79***

0.22

0.99

COOP-NGO

0.54

0.08

-1.21

0.59

-0.14

NBFI-NGO

0.62

1.10

1.80*

0.53

-1.67*

LEGAL STATUS Means

T-Tests

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Table 5. Regression results for Global MEPI (OLS 1)

Size

Nb of active borrowers

Unstandardized coefficient

Standardized coefficient

t-test

p-value

2.042E-006

.138

1.417

.159

Financial performance

OSS

.009

.058

.598

.551

Maturity

Age

.109**

.217**

2.000

.048

BANK

3.197**

.251**

2.374

.019

COOP

-1.949

-.148

-1.553

.123

NBFI

.570

.070

.681

.497

AFRICA

1.159

.097

.941

.349

ASIA

2.037**

.206**

2.014

.046

EECA

1.525

.159

1.507

.135

MENA

.316

.024

.239

.812

International origin

.529

.068

.760

.449

Rural clients

.697

.059

.616

.539

.728

.136

1.321

.189

1.359

.157

1.608

.111

-.054

-.081

-.798

.427

Legal status

Control variable: Region

Other control variables

Average loan size / GNI per capita Non-financial services PAR30 R2: 0.252 *p<0.10; **p<0.05; ***p<0.01 Dependent variable: Global MEPI

Explanatory variables: SIZE, AGE, OSS, STATUS, REGION, INTâ&#x20AC;&#x2122;L, RURAL, AVERGLOAN, NFINSERV, PAR30. Reference variables for dummies: NGO (Legal status dummy), LAM (Region dummy).

4.5. Other significant variables Besides the five hypotheses that we decided to test, our study reveals significant relationships between environmental performance and some other variables. Table 5 indeed shows that Asian MFIs tend to have a better environmental performance than MFIs located in other regions, especially for the Environmental Risk Assessment, Green Microcredit, and Environmental Non-financial Services dimensions (see Annex 3). One explanation could be that Asian MFIs are more likely to go green in a

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mimetic trend since they are located in a region already active in Clean Development Mechanism projects57 (Flamos, 2010; Lecocq & Ambrosi, 2007) and where leaders such as Grameen Shakti, which provides microcredit for clean technologies (solar home systems, efficient cook stoves, biogas digesters), are paving the way (Barua, 2001; Islam, et al, 2006; Komatsu, et al, 2011). We furthermore identified that environmental non-financial services are particularly developed in MFIs active in rural areas (Annex 3). Environmental degradation exists in urban and peri-urban areas, but it is often more visible in rural areas, where farmers are particularly affected by soil degradation (Nishat, 2004). We can thus assume that MFIs active in rural areas would be more aware of the importance of environmental degradation and in consequence more likely to develop specific services, such as training their farmer clients on agro-ecological practices. Finally, we found that environmental risk assessment is a strategy that is more likely to be adopted by MFIs with an international origin and by MFIs with higher average loan size (Annex 3). The former may decide to engage in such a strategy to comply with the standards of their home country, which tend to have more stringent environmental regulations when they come from OECD countries (Cole et al, 2008). The latter may decide to screen loans along environmental criteria because, as they provide bigger loans, they may be exposed to greater environmental risks.

4.6. Robustness tests To check whether our OLS results still hold when we modify the specification of the model, we conducted several robustness tests. We first run regressions to test the robustness of results related to size, by replacing our variable Number of Active Borrowers by the Gross Loan Portoflio (OLS 2) and Assets variables (OLS 3). To test for the robustness of results related to financial performance, we replaced the OSS variable by the Return on Assets (ROA) one (OLS 4). We furthermore ran a regression where we added AGE2 as an explanatory variable to check whether the relation between MEPI and AGE is linear (OLS 5). As emphasized in Chapter 1, aggregating indicators within a single index (as it is the case of MEPI) raise controversies related to the weighting of indicators, which may be perceived as arbitrary or biased. We therefore decided to run three more regressions to check the robustness of our results, 57

According to UNFCCC (2012): 82.57% of all registered CDM projects are located in Asia and the Pacific, while only 2.14% are implemented in Africa.

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where we replaced our dependent variable MEPI but three other computations of MEPI scores: “Minimalist MEPI” (OLS 6), “Defensive MEPI” (OLS 7), and “Positive MEPI” (OLS 8). For each of these new MEPI scores, indicators were differently weighted, according to the following rationales: -

“Minimalist MEPI”: In the microfinance sector, some professionals consider that MFIs should have a minimalist approach, meaning that they should only focus on the provision of financial services (their core business) and that activities related to awareness-raising or social services should be devoted to other organizations (Bhatt & Tang, 2001). Following this vision, MFIs’ environmental engagement should only be related to the institution’s internal footprint (e.g. consumption of energy or paper) and should not interfere with clients’ practices in any way. To reflect this position, we thus doubled the weight given to Dimension 2 indicators (Ecological Footprint) and divided by two the weights given to Dimension 3 (Environmental Risk Management) and Dimension 5 (Non-financial Environmental Services).

“Defensive MEPI”: Some other microfinance professionals acknowledge that MFIs need to take into account environmental issues in order to protect themselves against environmental risks and to minimize liability and reputation risks. They promote a more defensive or negative approach, similar to the first “green” investment funds in the traditional banking sector (UNEP-FI, 2007). To reflect this position, we thus doubled the weight of Dimension 1 (Environmental Policy) and Dimension 3 (Environmental Risk Management) indicators.

“Positive MEPI”: Finally, other microfinance practitioners promote an integrated approach (Bhatt & Tang, 2001) and claim that it is their role to support clients in improving their living conditions, taking into account economic, social, and environmental issues. According to this viewpoint, it would thus be more important for the MFI to engage in positive strategies (UNEP-FI, 2007) to help clients upgrade to more environmentally-friendly practices. To reflect this position, we doubled the weight of Dimension 4 (Green Microcredit) and Dimension 5 (Non-financial Environmental Services) indicators.

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Table 6. Robustness tests for Global MEPI (OLS regressions)

OLS 2

OLS 3

OLS 4

OLS 5

OLS 6

OLS 7

OLS 8

Dependent variable

MEPI

Minimalist MEPI

Defensive MEPI

Positive MEPI

Robustness test

(Gross Loan Portfolio)

(Assets)

(ROA)

(AGE2)

Nb of active borrowers

0.125

0.138

0.098

0.121

0.164*

Gross Loan Portfolio

0.323***

Assets

0.349***

OSS

0.077

0.083

0.065

0.043

0.048

0.066

ROA

-0.005

Age

0.185*

0.246**

0.240**

0.544*

0.190*

0.235**

0.201*

Age2

-0.349

BANK

0.120

0.109

0.281***

0.243**

0.265**

0.234**

0.254**

COOP

-0.159*

-0.120

-0.115

-0.116

-0.141

-0.146

-0.145

NBFI

0.030

0.047

0.102

0.081

0.108

0.029

0.087

AFRICA

0.140

0.194*

0.090

0.119

0.015

0.096

0.123

ASIA

0.241**

0.270***

0.211**

0.223**

0.108

0.249**

0.204**

EECA

0.144

0.166

0.140

0.159

0.067

0.159

0.197*

MENA

0.010

0.056

0.040

0.025

-0.032

0.034

0.042

International origin

0.070

0.061

0.045

0.064

0.033

0.042

0.103

Rural clients

0.086

0.060

0.055

0.042

-0.004

0.093

0.053

Average loan size / GNI per capita

0.072

0.039

0.119

0.152

0.121

0.076

0.192*

Nonfinancial services

0.103

0.100

0.135

0.139

0.205**

0.140

0.149

PAR30

-0.092

-0.048

-0.027

-0.081

-0.071

-0.057

-0.108

0.302

0.320

0.242

0.262

0.220

0.283

0.240

Size

Financial performance

Maturity

Legal status

Control variable: Region

Other control variables

*p<0.10; **p<0.05; ***p<0.01 (Standardized coefficients)

The results from these robustness tests, displayed in Table 6, overall confirm the results of our first OLS regression. They indeed show the absence of significant relation between financial performance

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and environmental performance in all cases, confirming that MFIs with a better financial performance are not particularly likely to perform better in environmental management. Furthermore, robustness tests systematically reveal a positive and significant relation between age and environmental performance, confirming the hypothesis that more mature MFIs tend to have a better environmental performance. Results regarding size and legal status are a bit more ambiguous. Size becomes a significant variable when Number of Active Borrowers is replaced by Gross Loan portfolio or Assets (OLS 2 and 3) or when Positive MEPI is used as the dependent variable (OLS 8). These variations are not inconsistent with our previous findings, since we had identified that larger MFIs perform better in some specific dimensions of environmental performance. Small changes in model specification reveal that the relationship between size and environmental performance might be positive and significant at the global level as well. As for legal status, most of our regressions confirm that MFIs registered as banks perform better in environmental performance, except for OLS 2 and 3 (where Number of Active Borrowers is replaced by Gross Loan portfolio or Assets). Annex 4 however indicates a positive, significant, and rather strong correlation between Bank status and Gross Loan portfolio, as well as between Bank and Assets. This may explain why Bank does not appear as a significant variable in regressions where size does (OLS 2 and 3). However, these variations do not question our overall findings regarding legal status, which on the whole remain robust.

5. Conclusion This article sought to identify the characteristics of microfinance institutions active in environmental management. More particularly, we assessed whether the environmental bottom line only concerns larger, profitable, mature, and regulated MFIs. Our key findings first show that size is positively associated with environmental performance for some specific dimensions: larger MFIs indeed tend to perform better in environmental policy, ecological footprint, and environmental risk assessment. Second, we find that financial performance is not significantly related to environmental performance in our sample, suggesting that MFIs willing to go â&#x20AC;&#x2DC;greenâ&#x20AC;&#x2122; might be able to secure external funding from donors. Third, we identify a positive relation between age and environmental performance, with more mature MFIs performing better globally. Finally, our results reveal that MFIs registered as banks are more likely to have a better environmental performance, in particular for the Environmental Policy and Environmental Risk Assessment dimensions.

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When interpreting these results in the light of the different strategies adopted by ‘green’ MFIs, we notice that larger MFIs, which are more visible and therefore subject to greater pressures from stakeholder groups, tend to opt for defensive strategies that will give a positive signal to their stakeholders, such as the adoption of an environmental policy, the use of an exclusion list, or the screening of loans along environmental criteria. These are also the strategies adopted by MFIs registered as banks. The latter are more under the scrutiny of environmental regulations and therefore tend to adopt strategies that will also give the right signal on their willingness to comply with regulatory requirements. For more positive strategies, such as the provision of green microcredit or environmental non-financial services, we would have expected financial performance and size to be significant predictors of environmental performance. Indeed, these strategies imply higher upfront costs and may bring better return on investment to large MFIs benefiting from scale economies. However, our results did not show any significant relation with size and financial performance. We rather identified age as a determinant factor, with more mature MFIs being more likely to offer green microcredit and environmental non-financial services. This suggests that younger MFIs may not be in a position to develop such environmental products and services because they first have priorities in terms of growth and financial sustainability. On the other hand, in line with Elsayed & Paton (2007)’s framework, mature MFIs may have the slack resources to invest in these positive and more innovative strategies, not only in terms of financial resources, but also in terms of time, priority, and human resources. We furthermore identified that MFIs with a NGO status and MFIs active in rural areas are more likely to develop environmental non-financial services. These results suggest that social mission may be influent in the decision to go green through a ‘Microfinance Plus’ approach. Building on our findings, donors willing to promote environmental management within MFIs could play a key role by providing the financial support that has already helped pioneer MFIs, whatever their financial performance is, to engage in green microfinance. Additionally, they would have a key role to play in supporting less mature MFIs, which lack the time and human resources to develop environmental management programs, through the provision of technical assistance. Beyond pressures to comply with basic environmental requirements, donors could thus play a more active role to support the development of adapted green microcredit and environmental non-financial services.

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A limitation of this study is that we rely on cross-sectional data only. However, it is the first empirical paper dedicated to MFIs’ environmental performance and therefore still provides useful insights to understand some of the drivers and barriers to MFI’s involvement in environmental management. Further research could focus on collecting additional information in order to constitute panel data, which would allow us to control for unobservable firm-specific effects and refine our analysis on the characteristics of ‘green’ MFIs.

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Annex

Annex 1. Microfinance Environmental Performance Index (MEPI)

1. ENVIRONMENTAL POLICY MISSION / VISION / VALUES

Environmental protection mentioned in the official vision, mission, or values

ENVIRONMENTAL POLICY Formal policy on environmental responsibility ENVIRONMENTAL MANAGER A person appointed to manage environmental issues INCENTIVES

Incentive system to encourage employees to take into account specific environmental objectives

2. ECOLOGICAL FOOTPRINT CARBON AUDIT Previous realization of a carbon audit

1 1 1 1

4 1

FOOTPRINT OBJECTIVES

Specific objectives to reduce ecological footprint (e.g.: reduction in energy consumption, carbon emissions, waste, etc.)

STAFF AWARENESS

Toolkits to raise employees' awareness of good practices in paper, water, and energy consumption, transportation, waste management, etc.

REPORTING

Inclusion of environmental performance indicators in annual report (paper, water, and energy consumption, etc.)

3. ENVIRONMENTAL RISKS ASSESSMENT EXCLUSION LIST Use of an environmental exclusion list SCREENING TOOLS STAFF TRAINING MIS

RE&EE LOANS GREEN IGAs LOANS

Training module to teach loan officers how to evaluate the environmental risks of their clients' activities

Inclusion of indicators into Monitoring and Information System (MIS) to track the environmental performance of clients

4 Provision of credits to promote access to renewable energy or energy efficient technologies (RE&EE)

Provision of loans with reduced interest rates to promote the development of environmentally-friendly activities

CLIENT CHART Environmental chart to be signed by clients CLIENT AWARENESS Programs to raise clients' awareness on environmental risks

CLIENT TRAINING

Source: Allet (Chapter 1)

1 1

5. ENVIRONMENTAL NON-FINANCIAL SERVICES

PROMOTION ACTION

Use of specific toolkits to evaluate the environmental risks of clients' activities

4. GREEN MICROCREDIT

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4 1 1

Organization of actions to promote environmentally-friendly microenterprises

Training and other services to support clients who want to develop environmentally-friendly activities

Annex 2. Descriptive statistics

Number of observations Minimum

Maximum

Mean

Standard error

Global MEPI

160

4.14

3.89

Dimension 1. Environmental Policy

160

1.02

1.14

Dimension 2. Ecological Footprint

160

0.84

1.00

Dimension 3. Environmental Risks Assessment

160

0.81

1.04

Dimension 4. Green Microcredit

160

0.75

1.30

Dimension 5. Environmental non-financial services

160

0.72

1.06

Number of active borrowers

147

448

2 500 000

104 476

316 798

Operational Self Sufficiency (OSS) (%)

140

55.86

271.40

115.15

24.49

Age (years)

158

15.41

7.63

BANK

159

0.09

0.28

COOP – Cooperatives

159

0.12

0.33

NBFI – Non Bank Financial Institutions

159

0.35

0.48

NGO – Non Governmental Organizations

159

0.45

0.50

AFRICA

160

0.21

0.41

ASIA

160

0.20

0.40

EECA – Eastern Europe and Central Asia

160

0.18

0.38

LAM – Latin America

160

0.34

0.48

MENA – Middle East and North Africa

160

0.08

0.26

International origin

158

0.49

0.50

Rural clients out of number of active clients (%)

131

100

Average loan size / GNI per capita (%)

146

408

Non-financial services

160

0.74

0.44

Portfolio at Risk at 30 days (PAR30) (%)

140

37.78

5.16

5.65

EPI 2010 – Yale Environmental Performance Index

157

32.10

86.40

56.09

11.62

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Annex 3. Correlations between environmental performance and determinant variables (Pearson correlation coefficients, bilateral tests)

Size

Financial performance

Maturity Legal status

Control variable: Region

Other control variables

Global MEPI

Dimension 1. Environmental policy

Dimension 2. Ecological footprint

Dimension 3. Environmental risks assessment

Dimension 4. Green microcredit

Dimension 5. Environmental non-financial services

Nb of active borrowers

.142*

.113

.085

.092

.071

.143*

Gross Loan Portfolio

.356***

.373***

.308***

.286***

.123

.195**

Assets

.374***

.397***

.324***

.299***

.128

.201**

OSS

.137

.146*

.082

.147*

.002

.118

ROA

.046

.107

.039

.041

-.029

.015

Age

.081

.101

.106

-.101

.039

.142*

BANK

.233***

.289***

.180**

.227***

.093

.039

COOP

-.039

-.004

-.041

-.157**

.025

.023

NBFI

-.001

-.031

.044

.119

.005

-.135*

NGO

-.106

-.132*

-.118

-.141*

-.074

.091

AFRICA

-.115

-.131*

-.168**

-.072

-.033

-.011

ASIA

.195**

.102

.000

.181**

.144*

.252***

EECA

.034

.036

-.060

.194**

.013

-.064

LAM

-.068

.000

.219***

-.224***

-.073

-.144*

MENA

-.047

-.005

-.051

-.040

-.055

-.014

International origin

.009

.028

-.027

.198**

-.012

-.153*

Rural clients

.094

.036

-.109

.019

.145*

.228***

Average loan size / GNI per capita Non-financial services

.137*

.233***

.128

.233***

-.065

-.029

.085

.073

.109

-.120

.118

.101

PAR30

-.053

-.119

-.014

-.053

-.019

.027

*p<0.10; **p<0.05; ***p<0.01

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Annex 4. Correlation matrix of explanatory variables (Pearson correlation coefficients, bilateral tests)

RURAL

AFRICA

RURAL

AFRICA

-.106

ASIA

.203**

-.255***

EECA

.108

-.235***

LAM

-.119

-.369***

MENA

-.112

INT’L

ASIA

EECA

LAM

MENA

INT’L

BANK

COOP

NBFI

NGO

.333***

-.145*

-.142*

-.131*

.206***

.076

.022

.105

-.057

.051

BANK

-.223**

-.050

-.041

.089

.054

-.089

.004

COOP

-.105

.242***

-.132*

-.069

.017

-.105

-.054

-.114

.226*** .279***

.268*** .331***

.653***

.136*

-.081

.070

-.097

.133

-.242***

.143*

.219***

-.056

-.058

.063

.012

.174**

-.027

-.073

-.042

-.183**

NGO

.067

.102

-.027

ACTVBRWR

.061

-.083

.316**

-.123

-.146*

-.179**

.003

.117

.007

-.093

.440***

.001

.019

ASSET

-.154*

-.173**

.004

.046

.122

-.040

-.062

.502***

-0.20

.012

OSS

-.022

-.119

.053

-.083

-.028

.249***

-.036

.086

-.137

.029

ROA

.011

-.066

-.049

-.054

.064

.125

.019

.067

-.127

.073

NFINSERV

ROA

PAR30

AVRG

NFIN

LOAN

SERV 2010 AGE

EPI

GROSSLNPORTF

AVRGLOAN

OSS

.216***

PAR30

GROSS LN PORTF ASSET

1 .230*** .362***

NBFI

ACTV BRWR

.258*** .276***

1 .434***

.394***

.990***

.004

.131

.046

.048

-.029

.190**

.047

.022

.823***

1 .273***

-.010

.106

-.127

.054

-.039

.028

-.143*

-.142*

.069

.056

-.013

.131

.105

.064

.311***

-.253***

.148*

-.086

.022

.001

-.106

.026

.271***

.244***

-.072

.235***

-.129

.256***

.296***

-.058

-.095

.094

.122

.115

.333***

.003

.113

-.051

-.121

.129

-.176**

.154*

.053

.033

-.024

.017

-.020

-.185**

.092

.502***

.087

-.121

.003

-.023

.003

.010

-.084

.014

.004

-.004

.058

.004

-.301***

.045

.210***

.288***

-.062

.276***

-.020

.205***

.251***

.116

.086

.201**

.167**

.025

.023

.215**

.269***

.159*

.108

.187**

EPI 2010

.002

-.500***

.238***

AGE

-.043

.005

-.109

*p<0.10; **p<0.05; ***p<0.01

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CHAPTER 4.

MITIGATING ENVIRONMENTAL RISKS IN SMALL-SCALE ACTIVITIES: WHAT ROLE FOR MICROFINANCE? A CASE STUDY FROM EL SALVADOR

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Mitigating environmental risks in small-scale activities: what role for microfinance? A case study from El Salvador

Abstract Small-scale activities in developing countries face environmental risks that represent direct threats to populations’ health and livelihoods. Recently, some donors and experts have claimed that microfinance institutions (MFIs) could play a role in fostering pro-environmental behaviours among their client microentrepreneurs. This paper seeks to identify the challenges that an MFI can face when implementing an environmental risk management program. We based our analysis on a case study of a pilot program in El Salvador, where we conducted 95 semi-structured interviews with microfinance clients, loan officers and managers. Our study first revealed that, despite a real interest from its staff, the MFI had some difficulties in building internal skills and conciliating its environmental and performance objectives, which compromised the effective implementation of the program. Furthermore, we identified that the pilot program, as it was designed, did not sufficiently take into account the psychological and economic barriers to behaviour change. Finally, we found that the effort of the microfinance institution was in some cases countered by external factors out of its reach, such as inadequate national regulations.

Key words: Microfinance, Microenterprises, Small Enterprises, Environmental Behaviour, Behaviour Change, Environmental Management, Environmental Risks, Pollution JEL codes: D03, D22, G21, O17, Q53, Q56

I would like to thank Isabelle Guérin, Marek Hudon, Marc Labie, Jean-Yves Moisseron, and Ariane Szafarz for their valuable comments on earlier versions. I am very grateful to Integral, who opened its doors and shared its pilot experience in a very transparent way. I am thankful to all Integral managers and employees that supported my research and answered all my questions, especially Carlos Viteri, Silvia de Melendez, Tony Castillo, Karina Henriquez, as well as the loan officers and branch managers of Ahuachapán, Apopa, Centro, and Santa Ana. Many thanks to all 60 clients that dedicated some of their time to our interviews, and to my guides Carlos, Marcos and Mauricio. Finally, I am thankful to the University Meets Microfinance program, PlaNet Finance, and ANRT for their financial support, to Lisa Petzold for her logistical support, and to Christine Dunlap for her proofreading.

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1. Introduction Small-scale activities in developing countries face environmental risks that can represent direct threats for the health and livelihoods of microentrepreneurs and their surrounding communities. Solutions exist to mitigate these risks, but conventional strategies have largely failed at fostering their adoption within small-scale activities (Blackman & Kildegaard, 2003). Recently, some professionals have started to call for the involvement of a new actor in environmental management: microfinance institutions (MFIs) (Schuite & Pater, 2008; Van Elteren, 2007). According to the literature, MFIs would have the advantage of being embedded at the grassroots level and could therefore be relevant intermediaries for the dissemination of environmental awareness-raising information (Hall et al, 2008; SEEP Network, 2008). If they started combining tailored informational messages with their financial services, MFIs could address two main barriers to environmental behaviour change in small-scale activities: lack of awareness and lack of resources (Blackman & Bannister, 2006). The approach looks promising on paper. Doubts however arise regarding MFIsâ&#x20AC;&#x2122; capacity to implement this type of program and its effectiveness to address barriers to environmental behaviour change. For the first time, this paper looks at an actual case: a pilot environmental risk management program implemented by a microfinance institution, Integral, in El Salvador. Our objective was to identify the challenges that an MFI can face when seeking to mitigate environmental risks in small-scale activities. More particularly, we sought to identify: (1) internal challenges faced by the MFI when developing new skills and procedures to implement an environmental risk management program; (2) external challenges faced by the MFI when trying to address the barriers to behaviour change in small-scale activities. Understanding these challenges is essential to assess the role that MFIs can play, and their limits, in mitigating environmental risks in small-scale activities. It will also be useful for practitioners who can build on lessons learned and identify potential solutions to overcome such challenges. Eighteen months after the beginning of the pilot program, we conducted semi-structured interviews with 60 clients and 35 MFIâ&#x20AC;&#x2122;s loan officers and managers. Our study revealed that, despite a real interest from its staff, the MFI had some difficulties in building internal skills and in conciliating its environmental and performance objectives, which compromised the effective implementation of the program. Furthermore, we identified that the pilot program, as it was designed, did not sufficiently take into account the psychological and economic barriers to behaviour change. Finally, we found that the

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MFIâ&#x20AC;&#x2122;s effort was in some cases countered by external factors out of its reach, such as inadequate national regulations. The rest of the article is structured as follows. Section 2 introduces the rationales, assumptions and questions behind the involvement of microfinance institutions in environmental risk management. Section 3 presents the case study investigated in El Salvador. Section 4 specifies the methodology used for this research. Section 5 presents the results of the pilot program and analyzes the internal and external challenges faced by Integral in the implementation of this program. Finally, section 6 provides some concluding remarks.

2. Involving MFIs in environmental risk management: a promising approach? 2.1. Small-scale activities and environmental risks In most developing countries, small-scale activities represent over 90 per cent of private enterprises (Blackman, 2006a). Most of them do not have a significant impact on the environment, especially for those in the trade and service sectors. However, several scientific studies have shown that some small-scale activities, in specific sectors, can entail significant environmental risks (Wenner, 2002) 58. This is the case, for instance, in the following sectors: leather tanning, metal working, electroplating, mining, painting, printing, textile dyeing, auto / motor repair, brick and tile making, wood processing, charcoal making, crop growing, animal husbandry, fisheries, food processing, transportation, etc. (Blackman, 2006a; BRAC, 2006; FMO, 2008; GreenMicrofinance, 2007; SEEP Network, 2008; Pallen, 1997). As illustrated in Table 1, the environmental risks of these activities are linked to non-sustainable input use, inefficiency of production processes, inadequate chemical use, or inappropriate waste management. Due to a lack of awareness and resources, small-scale activities are indeed more likely to use older equipment and apply inadequate production techniques (Lanjouw, 2006).

Pallen (1997) estimates that 10 to 25 per cent of small-scale activities can entail significant environmental risks.

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Table 1. Examples of environmental risks in small-scale activities (based on FMO, 2008) ACTIVITY

ENVIRONMENTAL RISKS

MITIGATION SOLUTIONS  Use protective gear (masks, gloves) to avoid intoxication  Integrated pest control  Agroforestry

Agriculture – Crop growing

 Inappropriate use of chemicals  Deforestation, land erosion

Brick making

 Land erosion caused extraction  Toxic smoke emissions

clay

 Recover land after extraction to prevent erosion  Use clean fuel  Use chimneys and filters

Food stall, small restaurant

 Inadequate waste management (risk of pest, vermin, soil and water contamination)  High energy use for cooking

 Recycle organic waste as compost  Dispose via community services instead of burning  Use an improved cook stove

Leather tanning

 Use of acids, solvents, etc.  Inadequate water waste management (risk of soil and water contamination)

 Use protective gear (masks, gloves) to avoid intoxication  Use enzymes instead of lime and sodium sulfur  Recycle bath by filtering (Blackman, 2006c)

Textile dying

 Use of chemicals with heavy metals (Vincent & Sivalingam, 2006)  Inadequate water waste management (risk of soil and water contamination)

 Use protective gear (masks, gloves) to avoid intoxication  Use filters  Discharge toxic water wastes in appropriate facilities

Wood / metal processing

 Exposure to wood / metal dust  Use of acids, solvents, paints  Inadequate waste management

 Use protective gear  Recycle wood / metal wastes

Estimations of the global, cumulative impact of small-scale activities on the environment are scarce and complicated to compute59. However, different studies show that these environmental risks represent direct threats to the health and livelihood of microentrepreneurs and surrounding populations (Lanjouw, 2006). Blackman et al (2006) demonstrate for instance that brick kilns emissions in Ciudad Juárez, Mexico, are responsible for serious health damages among the nearby residents. These kilns are often fired with a variety of cheap, highly polluting fuels (used tires, plastics, used motor oil, battery cases, etc.), making air quality in Ciudad Juárez one of the worst in the world. The impact is very localized but significant on the mortality and morbidity rates in the area. After conducting a cost-benefit analysis, Blackman et al (2006) even show that there would be more benefits to reduce pollution in these small-scale brick kilns than in larger brick-making firms. Crow & Batz (2006) studied the environmental impact of small bleachers and dyers in India and found that

According to Hillary (1995), the cumulative impact of these small enterprises on the environment could represent up to 70 per cent of all industrial pollution. This number is often cited is the literature but still subject to controversies (Hillary, 2000).

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water effluents from these enterprises are loaded with chemicals and heavy metals that directly affect the health and livelihood of surrounding communities: contamination of rivers and groundwater, reduced soil fertility due to high salinity, cattle health problems, decrease in fish stocks, skin disease, shortage of drinkable water, etc. Another study by Lahiri-Dutt (2008) emphasizes that people working in small mining activities are more prone to developing respiratory problems, arthritis and tuberculosis because of their constant exposure to dust, poor sanitation and limited access to potable water. Poor people are thus disproportionately affected by the environmental risks generated by their small-scale activities as they have a limited ability to avoid pollution and treat pollution-related health problems (Blackman, 2006a). Yet, in most small-scale activities, environmental risks can be mitigated through: the adoption of an upgraded technology that improves efficiency, reduces waste production, optimizes input use and limits contamination (e.g.: energy efficient equipment, filters to reduce water contamination, integrated pest control, etc.); and/or the adoption of adapted behaviours (e.g.: rational use of chemicals, use of masks and gloves, waste sorting and recycling, etc.) (Blackman, 2006c; Crow & Batz, 2006; FMO, 2008). According to FMO (2008), these solutions could bring significant benefits to microentrepreneurs and surrounding populations by reducing inefficiency, occupational hazards, health problems, and environmental contamination. Yet, the voluntary adoption of such solutions is not always systematic.

2.2. Barriers to environmental behaviour change in small-scale activities The literature identifies a variety of barriers to environmental behaviour change in small-scale activities (Hillary, 2004). These barriers can be categorized into two main types: structural barriers and psychological barriers (Swim et al, 2010). Structural barriers mainly refer to access to information, access to financial resources, infrastructure limitations and inadequate market regulations. Indeed, microentrepreneurs often lack awareness of the environmental, health, and sanitation risks linked to their activities (Hilson et al, 2007). They usually lack information on existing solutions to mitigate these risks, on the benefits brought by these solutions, on how to access these solutions, etc. (Blackman, 2006a, 2006c; Mir & Feitelson, 2007). Access to information thus seems to be a first significant barrier to the voluntary adoption of environmentally-friendly technologies or behaviours in small-scale activities (Hillary, 2004; Lanjouw,

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2006; Pimenova & Van der Vorst, 2004). A second structural barrier often cited in the literature is the lack of financial resources that prevents a micro or small enterprise from upgrading to cleaner production processes (De Almeida, 1998; De Canio, 1998; Lanjouw, 2006; Pimenova & Van der Vorst, 2004; Swim et al., 2010). As emphasized by Mir & Feitelson (2007), small-scale activities already struggle for their short-term survival. They are often excluded from the banking system for lack of sufficient collaterals and therefore do not have access to the financial resources needed for technological change (Blackman & Bannister, 2006). Lack of adequate infrastructure is also identified as a barrier to environmental behaviour change. For instance, the lack of local technology suppliers or recycling facilities may hinder the adoption of clean technologies or pro-environmental behaviours (De Almeida, 1998; Steg & Vlek, 2009). Finally, another important structural barrier can be inadequate regulations, such as high taxes on clean technologies that lead to price distortions (De Almeida, 1998; Swim et al, 2010). In addition to these structural barriers, the literature on environmental behaviour change also stresses the important role of psychological barriers, such as habits, social norms, and affect and emotions (Henrich et al, 2001; Jager, 2003; Maréchal, 2009; Steg & Vlek, 2009; Swim et al, 2010). Many authors indeed emphasize that people are often locked in ‘habits’: they repeatedly perform the same behaviour without deliberating too much. This behaviour became a standard and people are therefore less likely to take into account new information and try new processes (Van den Bergh, et al., 2006; Jager, 2003; Maréchal, 2009; Steg & Vlek, 2007). Moreover, various studies show that people’s reluctance to adopt new behaviours is even stronger when their peers are also locked in the same habit. People tend to compare themselves to peer groups and derive ‘norms’ of what they see as a proper course of action (Barnes, et al, 2004; Henrich et al., 2001; Maréchal, 2009; Swim et al., 2010). Finally, the decision to change behaviour also depends on the affective processes related to the behaviour. For Swim et al (2010), emotions can indeed be stronger drivers of behaviours than rational decision-making. To address these different barriers, Steg & Vlek (2009) identify two types of strategies: informational and structural strategies. Informational strategies seek to address the lack of awareness of target populations. However, many studies have shown that the mere provision of information does not systematically translate into behaviour change (De Almeida, 1998; Swim, et al., 2010). Steg & Vlek (2009) therefore emphasize that informational strategies should also address the psychological

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barriers to behaviour change. Beyond the mere content of the information, the way the information is provided (by whom, when, where, how?) is essential. In a case study, McKenzie-Mohr (2000) finds that people who were individually visited by a student were more likely to change their behaviour on lawn watering than people who were just given a flyer on the issue. For Jager (2003), people are also more likely to take into account new information and change their behaviour when this information is provided at the same time as the behaviour is performed. According to Steg & Vlek (2009), environmental behaviour change is more likely to occur when awareness-raising information is tailored to the needs, wants and perceived barriers of individual segments of population. Such an approach is often referred to as individualized social marketing (Kollmus & Agyeman, 2002; McKenzie-Mohr, 2000; Steg & Vlek, 2009). In addition to informational strategies, structural programs may also be needed to encourage pro-environmental behaviours, for instance by promoting local market development for clean technologies, investing in recycling infrastructure, facilitating access to payment facilities or setting up fiscal and financial incentives for technology change (Steg & Vlek, 2009). The choice of a strategy over another one will depend on the specific barriers identified in each context.

2.3. The need for alternative actors to foster pro-environmental behaviours Public agencies have already tried to address barriers to environmental behaviour change through both informational and structural strategies, by implementing for instance national awareness-raising campaigns or subsidies / tax incentives programs. However, these interventions have largely failed to improve the environmental behaviours of small-scale activities (Blackman & Kildegaard, 2003), for two main reasons: the lack of adaptation of informational messages and the failure to reach these target populations. A first reason for the failure of public agenciesâ&#x20AC;&#x2122; interventions is due to the lack of adaptation of environmental messages. Low awareness and lack of technical information are identified as some of the main barriers to the adoption of pro-environmental behaviours in microenterprises (Blackman, 2006a, 2006c; Mir & Feitelson, 2007). However, national awareness-raising campaigns have a limited effect on small-scale activities since messages are often not adapted to the concerns and education level of microentrepreneurs and may not be broadcast through media accessible to this target population.

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A second reason for this failure is due to the difficulty to reach microentrepreneurs. Command-andcontrol strategies are often ineffective because public agencies lack the human and financial resources to enforce these policies (Wenner, et al, 2004). Most small-scale activities are informal, numerous, and widely spread over the territory, making it very complicated and costly for public agencies to control and sanction them along environmental requirements (Blackman, 2006a, 2006b). Positive strategies based on subsidies or fiscal incentives also have limited effects since they are designed for legal companies and do not reach microentrepreneur populations who are mostl y informal. In Ghana, for instance, an incentive program aiming to reduce mercury contamination in gold mining failed to reach 90 per cent of small gold miners because eligibility was conditioned to the legal registration of the activity (Hilson, et al, 2007). Similarly, in Malaysia, microentrepreneurs engaged in textile dyeing and metal finishing were not motivated at all by the fiscal incentives to improve pollution control since they were not registered and did not pay taxes (Vincent & Sivalingam, 2006). Past experiences have thus shown that public agencies may be limited in their capacity to reach smallscale activities. On the other hand, several recent studies have pointed that a promising approach could be to involve new actors, at the grassroots level (Blackman, 2006a). Ahmed (2006) shows for example that an initiative implemented in Guadalajara (Mexico) was successful in making small and medium enterprises reduce their environmental impact thanks to the mobilization of bigger suppliers who mentored their partner SMEs on environmental management. In Le贸n (Mexico), Blackman (2006c) demonstrates that community mobilization was key to disseminate information on the costs and benefits of clean technology and foster the adoption of environmentally-friendly solutions among leather tanneries. Involving grassroots actors could thus be a promising approach to mitigate environmental risks within small-scale activities.

2.4. Involving microfinance: the promise of an integrated approach? In recent years, some professionals have started to call for the involvement of another grassroots actor in the field of environmental management: microfinance institutions (Hall et al., 2008; Schuite & Pater, 2008; Van Elteren, 2007). A donor, the FMO 60, has been particularly involved in promoting

The FMO is the Dutch Development Bank.

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environmental risk management within MFIs. Through the development of specific toolkits 61 and the organization of international workshops, the FMO has sought to encourage its partner MFIs to assess the environmental risks of their clients’ activities and raise clients’ awareness of mitigation solutions. At first, this approach looks particularly promising. MFIs indeed have a first advantage in promoting pro-environmental behaviours within small-scale activities: they closely interact with thousands of microentrepreneurs and, as investors, are in a good position to influence microentrepreneurs’ decision making (Coulson & Dixon, 1995; Wenner, et al, 2004). Very early, some MFIs indeed identified that the close relationship with their clients is a good opportunity to raise awareness of microentrepreneurs on different issues (Dunford, 2001). Beyond financial education and business management, some MFIs such as Grameen Bank (Bangladesh), BRAC (Bangladesh) or PRO-MUJER (Bolivia) started to take advantage of their network to educate clients on health issues like family planning or HIV/AIDS prevention. Similarly, MFIs could decide, through their loan officers, to raise awareness of environmental risks and provide information on mitigation solutions. As loan officers have face-to-face interactions with these microentrepreneurs, they could individually tailor their messages. The second advantage of MFIs is that their mission is to provide access to financial resources for people excluded from the banking system, which is often identified as a binding constraint on technological change (Blackman & Bannister, 2006). An integrated approach combining financial and informational services could thus generate clear synergies in the promotion of pro-environmental behaviours. However, environmental risk management is a very new field for microfinance institutions, which may face important challenges in implementing this type of program.

2.5. Challenges linked to MFIs’ involvement in environmental risk management Building on the literature on microfinance and environmental behaviour change, we identified two main types of challenges that MFIs may face when getting involved in environmental risk management: (1) challenges in setting up the program within the institution; and (2) challenges in addressing the barriers to behaviour change of their microentrepreneur clients.

Environmental and social toolkits available online: http://www.fmo.nl/esg-tools

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First, the capacity of MFIs to effectively implement an environmental risk management program can be questioned. Doubts can arise regarding the technical capacity of MFIs to provide environmental advice. Indeed, microfinance institutions are professional in the provision of financial services, but they do not have a priori the skills and expertise needed to assess the environmental risks of their clients’ activities and give advice on solutions to mitigate those risks. As microfinance clients are engaged in a variety of activities, each with its specific environmental risks, the range of issues that loan officers would need to master is quite broad. One could thus question the capacity of the MFI to build the internal skills and expertise required to manage environmental risks. Furthermore, practitioners are often concerned that the provision of non-financial services may conflict with the MFI’s financial objectives (Lensink, et al, 2011; Lensink & Mersland, 2009). In order to respond to donors’ requirements regarding their financial performance, MFIs often put a lot of pressure on their loan officers (Ahmad, 2003). Some studies show that loan officers sometimes fear that they will lose their job if they are not performing and therefore they tend to prioritize the activities on which they are evaluated – usually portfolio development and quality – at the expense of other activities (Ahmad, 2003; Bazoberry, 2001; Dixon et al., 2007). For loan officers, spending time assessing the environmental risks of their clients and discussing mitigation solutions with them could thus conflict with their performance goals and be sidelined as non-priority activities. An MFI willing to implement an environmental risk management program may thus face significant internal challenges in building skills and conciliating the program with its performance objectives. In addition to these management issues, one could question the capacity of an MFI to address the psychological and structural barriers to environmental behaviour change of microfinance clients. Through their loan officers, MFIs could provide individually tailored messages to their clients, on a face-to-face interaction, at the microentrepreneurs’ workplace where the environmental behaviour is performed. They would therefore adopt an approach in line with individualized social marketing and could be more likely to foster behaviour change (Jager, 2003; Kollmus & Agyeman, 2002; McKenzieMohr, 2000; Steg & Vlek, 2009). Nevertheless, some authors stress that an informational approach, even if it is individualized, is not enough to change environmental behaviours if people are locked in strong habits (Verplanken & Wood, 2006). According to Verplanken & Wood (2006), breaking a strong habit would require changing the context in which the habit is performed, which may be beyond MFIs’ reach. Furthermore, breaking habits requires time (time to change behaviour and time to settle into the

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new habit) (Verplanken & Wood, 2006), whereas MFIs’ relationships with their clients is more based on short-term contracts. Another key barrier to environmental behaviour change in small-scale activities is the lack of financial resources to upgrade to cleaner production processes (De Almeida, 1998; De Canio, 1998; Swim et al., 2010). As mentioned earlier, microfinance institutions are in a perfect position to provide the financial resources needed to invest in clean technologies. However, this implies that alternatives to upgrade production processes (for instance, an efficient cook stove for small restaurants and snack bars) are available on the local market (Millard, 2002) and that these alternatives bring clear economic benefits to the microentrepreneur in order to be voluntarily adopted by him (De Canio, 1998; Srinivasan, 2008). In Ciudad Juárez, Mexico, a project failed to promote the use of propane gas in brick kilns, instead of dirty fuel, because propane prices were too high and the substitution was not bringing direct economic benefits to the brick makers (Blackman, 2000). Even if they manage to implement an environmental risk management program, MFIs may not be able to address other structural barriers to behaviour change such as technology availability, pricing or even inadequate infrastructures and regulations (Steg & Vlek, 2009; Swim et al., 2010). An MFI willing to implement an environmental risk management program may thus face significant external challenges in addressing all psychological and structural barriers to behaviour change.

Environmental risk management is still a very new issue for the microfinance sector. After reviewing the literature, we saw that MFIs may face serious challenges in setting up an environmental risk management program and addressing barriers to clients’ behaviour change. No study so far has looked at the way this approach is being implemented by microfinance institutions. Two main research questions thus remain untouched: (1) What challenges does an MFI face at the internal level when setting up an environmental risk management program? (2) What challenges does an MFI face at the external level when seeking to address barriers to environmental behaviour change in small-scale activities? For the first time, this paper seeks to tackle these questions by looking at actual practices through the analysis of a case study from El Salvador.

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3. A pilot program in El Salvador El Salvador, a small country of around 7 million inhabitants in Central America, faces several major environmental challenges, among which are water contamination, outdoor air pollution, and deforestation (MARN, 2011; World Bank, 2006). The Ministry of Environment and Natural Resources (MARN) is however constrained with limited resources. All micro and small enterprises are supposed to comply with the Environmental Code and get Environmental Licenses from MARN. However, the Ministry does not have the means today to ensure the enforcement of the Code at the micro and small enterprises level. It rather focuses on big companies through a system of complaints and sanctions. Furthermore, apart from a couple of nationwide awareness-raising campaigns on specific issues (such as turtle protection, organic composting, energy savings, etc.), the Ministry is not very involved in implementing prevention and support programs to foster the adoption of pro-environmental behaviours within the Salvadorian society. The National Committee for Micro & Small Enterprises (CONAMYPE) however identifies environmental management as a key issue for micro and small enterprises in the country. In 2009, CONAMYPE even decided to include environmental objectives in its vision and mission. They are currently considering developing some support programs to help micro and small enterprises to progressively comply with the Environmental Code. However, for the moment, they have not had the means to effectively start addressing the issue. In 2009, the Salvadorian Microfinance Network ASOMI, which gathers eleven MFIs in the country, organized a couple of workshops to raise awareness among its member MFIs regarding their ecological footprint. The context in El Salvador was therefore favorable to the involvement of a microfinance institution in promoting environmental management within small-scale activities. Integral, which has been registered as a non-bank financial institution since 1990 and is by far the MFI with the largest outreach in El Salvador (with more than 45,000 active borrowers), started to be interested in the issue. In June 2008, two representatives of the institution participated in a workshop on environmental risk management in Quito, organized by the FMO for its partner MFIs. During the workshop, the FMO presented a methodology to assess and mitigate the environmental risks of microfinance clients62. Integral decided to test this approach through a pilot program in six agencies, before rolling out the program to all twenty-five agencies over the Salvadorian territory. The six pilot

The methodology developed by Triodos Facet and promoted by the FMO is available online: http://www.fmo.nl/esg-tools

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agencies were selected because their portfolios were estimated to be the most environmentally-risky ones. Around that time, the Housing Loan Manager was appointed as the Social & Environmental Issues focal point and became in charge of the coordination of the pilot program. Integral worked on adapting and simplifying FMO tools. In October 2009, they organized a training session on environmental risk management for agency staff (loan officers, branch manager, and operation manager) from the six pilot agencies. Loan officers were then asked to: (a) identify in their portfolio environmentally-risky activities; (b) discuss environmental risks and mitigation solutions with clients; (c) fill in a specific form for each client wherein they would write down the environmental risks that they have identified in the client’s activity and the mitigation solution that they suggested to the client; and (d) conduct follow-up visits to monitor and write down changes in practices linked to environmental risks. The pilot program was initiated in October 2009 and pursued throughout 2010 and 2011. It targeted mostly three types of activities considered as environmentally risky: 

Food production and sale: Activities such as bakeries, food stalls, small restaurants, tortillerías or pupuserías63 may be associated with environmental risks depending on their cooking energy source. Using wood for cooking indeed raises issues of deforestation (in a country where the origin of the wood used by microenterprises is difficult to trace) as well as health and sanitary issues linked to air pollution (frequent exposure to smoke emissions can create eye irritation, throat inflammation, chronic lung disease, or even some throat or lung cancers).



Manufacturing workshops: Activities such as metal workshops, aluminum workshops, autorepair workshops, brick making, carpentry, sewing, can all be concerned with environmental risks linked to chemical use and waste management.



Agriculture: Farming can also entail environmental risks due to inadequate use of chemicals and unsustainable natural resources management.

Integral thus decided to become a new actor in the field of environmental risk management, trying to promote mitigation solutions in small-scale activities through an innovative individualized informational approach. This initiative stands as an interesting case study for different reasons. First, Integral is one of the very few microfinance institutions that have taken the challenge to engage in environmental risk

Tortillerías and pupuserías are food stalls that produce and sell tortillas (thin corn ‘pancakes’ or breads) and pupusas (corn tortillas stuffed with cheese, beans, meat, etc.). Both are very typical and widely consumed Salvadorian dishes.

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management. As a pioneer in this field, Integral gives us the opportunity to identify the achievements and challenges in implementing this type of program. The case is furthermore interesting in that Integral is a large and very professional MFI which has been able to achieve good financial performance. The issues that Integral faces when implementing an environmental risk management program can therefore be representative of what other MFIs may encounter. Finally, the case is interesting because Integral decided to get involved following the insights provided by one of its donors, the FMO. Contrarily to some MFIs which would only adopt an environmental exclusion list to respond to donors’ expectations (cf Chapter 2), Integral opted for a positive approach – raising their clients’ awareness of environmental risks – which seems more constructive but is also more complex to implement. For all these reasons, we therefore decided to apply our two research questions to Integral’s case.

4. Methodology This article is based on a qualitative study conducted during six weeks in May and June 2011 in El Salvador. We opted for a qualitative approach, with 95 people interviewed, in order to fully understand, beyond the results of the pilot program, what are the factors determining such results. To understand the institutional opportunities and challenges faced by Integral in the implementation of the pilot program, we first conducted semi-structured interviews with a wide range of managers and employees of the MFI (35 people in total). We interviewed fourteen top managers working at Integral’s headquarters: the Executive Director; the Housing, Social & Environmental Issues Manager; the three Housing, Social & Environmental Issues Officers; the Regional Manager, Financial Manager, Audit Manager, Organization & Processes Manager, Risk Manager, Projects & Planning Manager, Information Technology Manager, Marketing Manager, and Human Resources Officer. We furthermore conducted interviews at Integral’s branch level. On the one hand, we interviewed two branch managers and nine loan officers in branches that were involved in the pilot program (Apopa, Ahuachapán, Flor Blanca). On the other hand, we interviewed two branch managers and eight loan officers in branches that were not part of the pilot (Centro, Santa Ana). Each interview lasted between thirty and forty-five minutes. An open, semi-structured protocol was created to guide these interviews. The protocol detailed a flexible list of topics to be tackled, among which were: importance of environmental issues, environmental risks in the portfolio, clients’ environmental awareness, clients’

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capacity to mitigate environmental risks, role of loan officers in tackling environmental issues, willingness and capacity of loan officers to promote pro-environmental behaviours; and for those who participated in the pilot, opinion on the training and tools that were provided for the pilot, implementation of pilot activities, and eventual difficulties encountered.64 Then, in order to identify the achievements and challenges faced by Integral in addressing the barriers to clients’ environmental behaviour change, we compared an experimental group of clients (pilot agencies’ clients) with a control group (other agencies’ clients). We conducted a total of sixty semistructured interviews with a sample of clients from both groups (thirty clients in the pilot group, thirty clients in the control group) in four different agencies. In order to select a valid control group, we opted for a matching approach, which is often used in the economics literature (Girma & Görg, 2007; Frondel & Schmidt, 2005; Hujer et al., 2004; Hulme, 2000; Wagner, 2002). This approach consists in pairing each observation with a control one that shares characteristics as similar as possible. Sample selection was thus made in two steps: (1) selecting pilot and control agencies, and (2) pairing pilot clients with control clients. Out of the six agencies that were involved in the pilot program, we decided to focus on two agencies that have proved to be the most active in implementing the pilot program: Apopa, whose portfolio is mostly urban and peri-urban, and Ahuachapán, whose portfolio is more rural. On the basis of information provided by Integral, we then identified Centro and Santa Ana as suitable control agencies because they present similarities respectively with Apopa and Ahuachapán, in terms of portfolio size, number of clients, number of loan officers, average loan amount, gender distribution and urban/rural distribution. Moreover, Centro and Apopa are both located in San Salvador area, whereas Santa Ana and Ahuachapán are both in the Western part of the country. In the two pilot agencies, our objective was to interview as many clients from the pilot program as possible. Some of the pilot clients could not be interviewed for various reasons: they had dropped out from the institution; they were located in areas with high insecurity issues; or they could not be encountered during the multiple field visits. Out of the fifty-eight clients that were involved in the pilot program in the two selected agencies, we managed to interview a total of thirty clients (fourteen in

The detailed protocol can be found in Annex 1.

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Apopa and sixteen in Ahuachapán). Thanks to MIS 65 data and loan officers’ knowledge, we then paired each pilot client already interviewed with a control client presenting similar characteristics (fourteen in Centro and sixteen in Santa Ana). Our first criterion was to match activities (since environmental risks are intrinsically related to the sector of activity): for example, if we had interviewed two metal workshops in Apopa, we tried to find two metal workshops in Centro. Then, when there was enough choice, we sought as much as possible to find control clients with similar gender, geographical location (rural/urban), education level, and age, since all of these variables can have some influence on the environmental awareness and behaviour of the clients. We also collected data on the level of exposure to media (TV, radio, newspapers) which can have an impact on environmental awareness and behaviour as well. The characteristics of our sample are presented in Table 2. Each client’s interview lasted between thirty and sixty minutes. The interviews were conducted in Spanish directly by the author. Loan officers or representatives of Integral were not allowed to stay during the discussion in order to avoid any bias in clients’ answers. An interview protocol had also been prepared with a list of topics to be tackled, such as: credit history with Integral, relationship with the loan officer, satisfaction regarding Integral’s services, awareness of environmental risks linked to the surroundings and the activity, capacity to reduce these risks, previous and actual environmental behaviour, environmental management suggestions given by the loan officer, and opinion on the role of loan officers regarding environmental management suggestions.66 To identify actual environmental behaviours, we looked both at self-reported and observed behaviours. For previous environmental behaviours and eventual changes of behaviours, we relied on self-reported behaviours, as well as on the environmental risk forms that had been filled in for pilot clients by loan officers in 2009-2010. Collected data was first analyzed in an inductive approach, before creating a dialogue between our results and the literature on environmental behaviours. Specific attention was given to the triangulation of information (Guérin, et al, 2011) thanks to the multiple levels of interviews (top management, branch managers, loan officers, clients)67. Preliminary results were presented to and validated by Integral’s top management at the end of the field research.68

65 66

MIS: Monitoring & Information System The detailed protocol can be found in Annex 2.

We also conducted interviews with six external stakeholders to gather more contextual information about environmental issues in El Salvador and ongoing programs and policies at the level of microenterprises. We interviewed two managers of the Ministry of Environment and Natural Resources of El Salvador, the Director of CONAMYPE (the Salvadorian Micro and Small

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Table 2. Client sample characteristics ACTIVITY

PILOT

CONTROL

Food production and sale

Manufacturing workshops

Agriculture

PILOT

CONTROL

None

13%

Primary

46%

44%

Basic

33%

30%

Medium

13%

Superior

PILOT

CONTROL

Urban

57%

67%

Rural

43%

33%

PILOT

CONTROL

Male

47%

50%

Female

53%

50%

MEDIA

PILOT

CONTROL

Has a TV

96%

97%

Has a radio

86%

77%

Regularly reads newspapers and magazines

22%

40%

EDUCATION LEVEL

LOCATION

GENDER

5. Findings Findings from our study show that the pilot program implemented by Integral in El Salvador only has modest results. This confirmed the relevance of our research questions: as the implementation of this environmental risk management program was not very successful, it is essential to identify the internal and external challenges faced by Integral. Indeed, the pilot program first did not have a big outreach in terms of number of clients sensitized. From December 2009 until May 2011, the program reached a total of 149 clients. They represent only

Enterprises National Committee), the Director of the Salvadorian microfinance network ASOMI, the Executive Director of another Salvadorian MFI actively engaged in environmental management (FundaciĂłn Campo), and an officer of IPES (the Permaculture Institute of El Salvador). 68

More details on the data analysis method can be found in Annex 3.

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1 per cent of the portfolio of the six pilot agencies and 0.3 per cent of the total portfolio of Integral (in terms of number of clients). This low outreach is rather surprising since interviewed branch managers and loan officers all estimate that environmentally risky activities represent between 10 and 40 per cent of their portfolio clients (depending on the geographical location). Out of the 149 clients reached, seventy were visited by the loan officers from the six pilot agencies after they had received training, in late 2009 and early 2010. Loan officers conducted a follow-up visit in early 2010 for forty out of these seventy clients. However, they did not take the initiative to assess the environmental risks of other clients later in 2010 and 2011, until someone from the headquarters came for this purpose and conducted visits of seventy-nine additional clients in March 2011. The number of sensitized clients was moreover very different from one pilot agency to the other: two agencies did not asses the environmental risks of any client at all after receiving the training, whereas one of them raised awareness of up to thirty-six clients. Even if the program was first implemented as a pilot, outreach appears to be very limited. Furthermore, the impact of the pilot program also seems rather modest. Among the clients who were reached by the pilot, 40 per cent remember that someone from Integral came to discuss environmental and sanitary issues. Only 23 per cent actually remember what the loan officer recommended in order to reduce environmental risks and health hazards. Two factors could explain this limited result: either the clients did not pay attention to the advice due to lack of awareness or interest in environmental issues; or, despite what they claim, loan officers did not actually try to raise clientsâ&#x20AC;&#x2122; awareness and just worked on assessing environmental risks and filling out the required form. It is very difficult to know exactly what happened during the field visits, but one could assume that both factors played a role in the limited effect of the program. Furthermore, almost all 23 per cent of clients who remember the loan officerâ&#x20AC;&#x2122;s advice say that they already knew about the mentioned environmental risk and the recommended mitigation strategy. Finally, the pilot program does not seem to have fostered any change in environmental behaviours. None of the interviewed clients from the experimental group reported a change in behaviour following the loan officersâ&#x20AC;&#x2122; advice between 2009 and 2011. These modest results thus confirm the importance of understanding the challenges faced by Integral in mitigating environmental risks in small-scale activities. Following our research questions, we first identified internal challenges linked to the setting up of the environmental risk management program

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within the institution. Second, we identified various challenges in addressing the barriers to environmental behaviour change of small-scale activities.

5.1. Internal challenges in implementing the program High motivation, low technical knowledge The limited outreach of the pilot program cannot be attributed to a lack of motivation from loan officers. On the contrary, during interviews, loan officers as well as branch managers expressed a high interest in the topic. They all asserted that 10 to 40 per cent of their portfolio clients is concerned by environmental risks, and that it would be important to reduce these risks. In Integral, loan officers who manage rural portfolios are recruited for their background as agro-economists or agro-engineers, which makes them even more inclined to consider the environmental risks of their clients’ activities. Several of them clearly defined environmental assessment as being part of their job and mission. In Integral, loan officers are called ‘asesores’, which can be translated in English as ‘advisors.’ As ‘asesores’, many affirmed that it is their role to give advice to their clients and help them improve their businesses and well-being, may it be in terms of financial management, marketing, productivity, or even environmental risk management. Interviewed loan officers made a clear link between environmental management and social mission. In addition, they mentioned that supporting clients to reduce their environmental risks could be beneficial to their institution: it could improve the reputation of the MFI and avoid some credit risk (a baker that gets sick from fire smoke or a farmer that gets intoxicated from chemicals may stop repaying their loans). However, loan officers felt that they are not in a good position to help clients mitigate their environmental risks because they still lacked the technical knowledge and tools that would be needed. Loan officers and branch managers that participated in the pilot were interested in the training that they received about environmental risk management. Yet, they deplored that the training was too theoretical and short (it lasted half a day) and that they were not provided with more specific tools and technical information on solutions to mitigate environmental risks. As they are not professionals of environmental or energy issues, they found it difficult to provide clients with information that would actually foster pro-environmental behaviours.

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Conflicting priorities within the microfinance institution Another barrier to the effective implementation of the pilot program was related to the internal strategy of the MFI: the activities of the pilot program were to some extent conflicting with the actual objectives and processes of Integral. Similar to what we found in the literature (Ahmad, 2003; Bazoberry, 2001; Dixon et al., 2007), loan officers all mentioned that they are already overloaded with work and have strict objectives to achieve (in terms of portfolio size, number of clients and portfolio quality), which determine in part the amount of their monthly salary. Loan officers’ objectives had not been reviewed to be compatible with the new tasks required by the pilot program. In consequence, they found it difficult to have the time to both achieve their regular objectives and raise clients’ awareness on environmental issues: It is difficult with the workload we have. (Loan officer, Apopa) There is a lot of pressure with our other goals. We lack time. We have many other things to do. (Loan officer, Ahuachapán) It could be conflicting with our objectives, because we sometimes run against time. (Loan officer, Santa Ana)

Moreover, assessment of environmental risks had not been integrated in the credit methodology or the manual of procedures of the MFI. Environmental risk assessment was performed after the provision of the loan, outside of the regular field visits that loan officers would conduct. The extra burden of assessing environmental risk was thus important. Had environmental risk assessment been included as one of the tasks to be completed by loan officers during their regular field visits, when they assess the capacity and willingness to pay of microentrepreneurs applying for a loan, the additional burden of the new task would have been lesser. Despite the willingness of the person in charge of the pilot program, data collected by loan officers on environmental risks was not included in the Monitoring & 69

Information System (MIS) . This data was processed manually, which entails a higher risk of incomplete or incorrect data and makes it more difficult to ensure clients’ follow-up and progress monitoring. Some loan officers also mentioned that they lost motivation in manually sending data to the headquarters because they never received feedback on the data analysis. Another issue was the lack of regular training. Loan officers in the pilot agencies only received training at the beginning of the program. However, out of the twenty-one loan officers trained in Apopa and Ahuachapán in 2009, only 69

Integral is however planning to integrate social and environmental indicators into its MIS.

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eight were still working for Integral in 2011. Loan officer turnover would have required more regular training sessions, but it did not occur because training on environmental risk assessment had not been included in the regular training curriculum provided to every new loan officer. For all these reasons, the pilot program was perceived by several branch managers and loan officers as a very specific, timebounded, punctual initiative. Some loan officers thought that they had to perform environmental risk assessment only once, for a specific set of clients. They perceived the exercise as a requirement from the headquarters, somehow conflicting with their regular objectives, but not as a task that was to be integrated into their daily processes. Integral’s experience thus confirms that an MFI willing to implement an environmental risk management program may face important challenges in building internal skills and conciliating its different objectives (financial, social, and environmental), which may in the end compromise the effectiveness of such type of program.

5.2. Challenges in addressing barriers to environmental behaviour change In addition to these internal management issues, our case study also revealed further challenges in addressing barriers to environmental behaviour change, be they psychological, economic and financial, or other structural barriers.

Psychological barriers By asking loan officers to discuss environmental risks with their clients during field visits, Integral opted for an approach very close to individualized social marketing. Integral assumed that a face-to-face discussion would be efficient to promote pro-environmental behaviours. Our study however revealed that this approach still encounters difficulties in addressing some of the psychological barriers to behaviour change mentioned in the literature (Jager, 2003; Maréchal, 2009; Steg & Vlek, 2007; Swim et al., 2010). We identified that some clients may ignore the advice provided by loan officers and stick to their behaviour because: (a) they do not always perceive loan officers as legitimate ‘messengers’ of pro-environmental practices; and (b) they appear to be locked in strong habits that cannot be broken by the mere provision of information. One of the promises of involving microfinance in raising clients’ awareness of environmental risks is based on the assumption that, as investors and advisors, loan officers are in a good position to

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influence the decisions of their clients regarding business management. Loan officers themselves seem to be conscious of this power: As loan officers, we could have a bigger impact because there is trust, clients listen to us. (Loan officer, Ahuachapán) We could be a good channel of awareness-raising since clients see their loan officer as the 70

‘Dios Dinero’ . (Loan officer, Santa Ana)

A significant majority of interviewed clients (84 per cent) said that they would be interested in receiving some advice from their loan officers on environmental risks. They see it as an attention given by the MFI to the client. During the pilot program, the approach was never perceived by clients as a constraint but rather as a support. However, our study clearly reveals that, even if they would be interested in receiving advice, not all clients would actually trust the capacity of the loan officer to provide adequate recommendations. Indeed, as detailed in Table 3, the quality of the relationship with the loan officer is directly linked to the opinion of the client regarding loan officers’ capacity to give environmental recommendations. The quality of the existing relationship with the MFI thus directly determines how the recommendation will be perceived. Some loan officers were conscious of this limit: It only works with clients who already trust us. (Loan officer, Apopa)

Table 3. Relation between trust in the loan officer and opinion on loan officer’s capacity to provide environmental advice

Level of trust in the loan officer

Clients believing that loan officers have the capacity to provide environmental advice

High

71%

Medium

50%

Low

20%

In our sample, some clients stated that they have very good and trustful relationships with their loan officers. These clients said that they are confident in the capacity of loan officers to help them mitigate environmental risks (with the condition that they would receive some training). They are already used to discussing with their loan officers and expressed interest in receiving advice from them:

‘God of Money’ in Spanish

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I know her well. I really trust her. Any time I need some advice, I go and find her. (Pupusería, Apopa) He is smart and nice. Every time I need some help, I go and find him. (Pupusería, Centro)

However, on the other hand, part of our sample revealed that they do not have a very good relationship with their loan officers. These clients usually think that the latter will not have the capacity to give them adequate recommendations regarding the environmental risks of their activity and solutions to improve it. They consider that loan officers would not be credible in this role, since they are primarily focusing on economic aspects and repayment imperatives: Loan officers are only interested in economic aspects. They don’t take time to talk. (Carpenter, Santa Ana) Loan

officers

not

have

the

knowledge.

They

only

know

about

finance.

(Pupusería, Centro) I do not have so much trust. They put too much pressure. […] I don’t think it should be their role to give advice on environmental risks. They do not know anything about occupational hazards. (Metal workshop, Apopa) They put too much pressure when one is just two or three days late. I want to get out of here. […] It is important to give advice, but loan officers are not interested in clients’ well-being. (Workshop, Santa Ana)

Our study thus reveals that microfinance clients do not systematically perceive loan officers as legitimate advisors regarding environmental risk management. As a consequence, they may just ignore the suggestion provided by their loan officer. As emphasized in the literature (Jager, 2003; Maréchal, 2009; Steg & Vlek, 2007; Van den Bergh, et al., 2006), the tendency to dismiss new information is even stronger when people are locked in ‘habits’, which is the case for part of the microfinance clients that we interviewed. Our sample clients seem to be relatively aware of the environmental risks linked to their activity. Very few of them identify these risks as ‘environmental’ or relate them to ecological issues (such as deforestation or biodiversity loss). They are rather concerned with the health consequences of such risks: asthma and lung disease generated by daily exposure to smoke (for food-related activities using wood as a cooking

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energy source71), wood dust (for carpenters), clothe dust (for sewers); risk of intoxication from chemicals (for farmers); risk of water contamination from inappropriate waste management, etc. However, even if they are aware of health hazards linked to chemicals, very few clients decide to decrease their use of chemicals or at least use protective gear (two of the farmers we interviewed had been seriously intoxicated but were still using chemicals without wearing any mask or gloves). Even if they are not pleased with smoke emissions, many interviewed clients keep using wood as a cooking energy source. Indeed, even though they are aware of certain risks, the microentrepreneurs that we interviewed do not change their practices because they have always done it this way before: I could use protective gear. It is not a question of cost. It is just a question of habit. (Farmer, Santa Ana) It is a question of habit. I never used protective gear when I was working with muriatic acid with my father. (Aluminum workshop, Santa Ana) I would not listen to the loan officers’ advice regarding the use of chemicals, because my grandparents have always done it this way, we are used to it. (Farmer, Apopa)

Interviewed loan officers identified this barrier as being part of the ‘culture’ of the people. Clients justify their behaviours compared to what they are used to doing and compared to what other people around them do. These ‘habits’ may have resulted from a learning process through which people have acquired knowledge, know-how, and perceptions of control and power over the specific practices or processes, which they are reluctant to give up (Barnes et al, 2004; Kollmus & Agyeman, 2002). The ‘habits’ may also result from cultural norms or family history, and therefore be considered as part of the identity of the person, which would also explain why people would not be receptive to changes (Stek & Vlek, 2009). The literature on environmental behaviour identifies some specific strategies that address this psychological barrier and prove more efficient in fostering behaviour change: providing the opportunity to directly experience the promoted technology or behaviour (Duerden & Witt, 2010), providing comparative feedback (Steg & Vlek, 2007; Swim, et al, 2010), promoting role models (Steg & Vlek, 2007), providing positive feedback on what people do well or could do well rather than negative criticism on actual behaviour (Jager, 2003; Maréchal, 2009; Steg & Vlek, 2007; Swim, et al, 2010),

Half of interviewed clients engaged in food production and sale said that they do not like using wood as an energy source because the smoke can generate eye and lung problems.

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challenging people and making them commit to a change in their environmental behaviour (Maréchal, 2009; Steg & Vlek, 2007; Wood, et al, 2005), etc. Some interviewed loan officers suggested for instance to foster pro-environmental behaviours by organizing a ‘competition’ between their clients, with an award granted to the microentrepreneur with the best environmental behaviour. However, at the time of the study, the approach implemented by Integral was only based on a discussion regarding actual practices and potential mitigation solutions. Furthermore, such discussions between the loan officer and the client had only happened once or twice over 18 months, whereas breaking habits would require longer term actions and innovative strategies addressing psychological barriers (Verplanken & Wood, 2006). Finally, environmental behaviours are determined by psychological factors that go beyond mere environmental considerations and on which the MFI may have very little influence, such as social norms, representations linked to identity, status, comfort, or effort (Steg & Vlek, 2009), or perception of risk, which is a social construct (Swim et al, 2010) and may lead people to consider that these environmental and health risks are not so important, especially in comparison with other livelihoods issues they may face.

Economic and financial barriers Additionally, the pilot program implemented by Integral did not manage to foster behaviour change because, beyond mere advice, it did not make the link with technical solutions that would entail clear economic benefits for the clients. For instance, in a context where gas subsidies have been drastically reduced (the Government of El Salvador removed most gas subsidies in March 2011), loan officers cannot expect their clients involved in food-related activities to reduce their wood consumption and use more gas just because they advise them to do so. Loan officers could however play a more effective role if they started to raise clients’ awareness on the existence of energy-efficient cook stoves on the Salvadorian market. 36 per cent of our clients involved in food production and sale have already heard about efficient cook stoves (mostly on television). However, only one had already seen such a cook stove, and most clients did not know anything about the actual economic and health benefits of this technology or about its cost and access. 47 per cent said they would be interested in investing in such an efficient cook stove, provided they can get access to a microcredit. Integral has been working on developing specific credit lines for investing in efficient cook stoves, solar panels and solar lanterns. However, when this study was conducted, the institution was still in an initial phase and had not yet developed marketing and communication tools around these technical solutions. Other

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initiatives in the microfinance sector have shown the importance of linking awareness-raising to the provision of microcredit: this is the case for Grameen Shakti for instance (Barua, 2001). However, within Integral, the pilot program was implemented without taking advantage of the synergies that could be created by linking the informational approach to the access to credit for investing in clean technologies. Structural barriers beyond the MFIâ&#x20AC;&#x2122;s reach Had it tailored its informational approach (with comparative feedback, etc.) and coupled it with the provision of adapted loans, Integral might have been able to better influence the environmental behaviour of its clients. However, there are still some structural barriers to behaviour change that are beyond the reach of the microfinance institution. A first barrier that we identified is the lack of adapted local infrastructures. Several clients living in rural areas mentioned that they do not have the choice but burn their wastes or throw them away (usually in the nearby river) because there is no service of garbage collection in their area. One of the interviewed carpenters expressed concern on the issue of deforestation in El Salvador. He asserted that he would rather buy timber from sustainably managed forests, but that his suppliers today do not use any certification that would help him know what the exact provenance of timber is. Lack of adapted infrastructures constrained these clientsâ&#x20AC;&#x2122; ability to mitigate environmental risks. A second type of barrier beyond microfinance reach is linked to public policies. When we carried out this study, we had a clear example of a public policy giving the wrong signal to microentrepreneurs (De Almeida, 1998; Swim, et al., 2010). A month before field data collection, in March 2011, the Salvadorian government drastically decreased subsidies on gas bottles. The price of gas bottles almost tripled for microfinance clients, increasing from USD 7 to around USD 20. The economic shock obliged some interviewed clients to decrease their use of gas and replace it with wood (eight clients out of thirty-six involved in food production and sale) and went counter to the effort of Integral in promoting gas as a cleaner cooking fuel. Finally, the economic and social context is also a strong determinant of microentrepreneursâ&#x20AC;&#x2122; behaviour choice. 63 per cent of our sample says that they are affected by the global economic crisis. 46 per cent clearly mention that they are not ready to invest in anything today, even if they have access to a microcredit. Salvadorians are even more reluctant to invest in upgrading their businesses out of

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concern that it could attract the attention of maras (armed gangs) who would ask them to pay rentas (extortions). Initiatives taken at the level of a microfinance institution may thus be challenged by barriers that go beyond their reach and hinder the influence of an informational approach.

6. Conclusion Recently, some donors and experts have claimed that microfinance institutions could play a role in fostering pro-environmental behaviours among their client microentrepreneurs. Our study revealed that involving MFIs in such a new area entails significant challenges that may limit the role that MFIs can play in mitigating environmental risks in small-scale activities. On the one hand, microfinance institutions seemed to be in a good position to foster proenvironmental behaviours in small-scale activities, thanks to their embeddedness at the grassroots level and to the synergies that could be created between informational and financial services. On the other hand, results from the pilot program conducted in El Salvador showed very limited results, both in terms of outreach and effectiveness. Basing our analysis on 95 interviews with microfinance clients and staff, we identified two types of factors that could explain such modest results: (1) internal challenges faced by MFIs in implementing an environmental risk management program; and (2) challenges in addressing barriers to behaviour change through the pilot program. First, the results of our study showed that the MFI had some difficulties in building internal skills and in conciliating its environmental and performance objectives. Despite a high motivation, loan officers lacked the technical skills required to orient clients towards adapted mitigation solutions. They had to deal with conflicting priorities within their institution, as they were asked to spend some time raising clientsâ&#x20AC;&#x2122; awareness on environmental issues but were still pressured to reach tough operational objectives. Second, even if awareness-raising is essential to foster pro-environmental behaviours, we clearly found that its effect on behaviour change is hindered by psychological, economic and other structural factors that the pilot program was not able to fully address. In particular, we found that clients were not always receptive to awareness-raising messages, either because they did not perceive loan officers as legitimate advisors or because the pilot program did not include more innovative strategies that would have encouraged them to break their habits. Moreover, the MFI did not create the synergies between

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its awareness-raising activities and its financial services that would have helped overcome the economic and financial barriers to behaviour change. Finally, the effort provided by Integral was in some cases countered by external factors, such as a change in national policy, on which the MFI could not have any influence. As we based our analysis on a case study, a limit of this paper is that our results cannot be generalized. Furthermore, the data collection took place less than two years after the beginning of the pilot program, which is a very short period to be able to initiate and identify changes in environmental behaviours. Nevertheless, this study enabled us to have a fine understanding of ongoing processes around the implementation of this particular program in El Salvador and to identify some lessons that can be valuable for practitioners. In order to reduce the tensions between the different bottom lines of the microfinance institution and make sure that such awareness-raising activities are performed on a daily basis, a first recommendation would be to fully integrate environmental risk management in the objectives and daily processes of the MFI, at all levels (manual of procedures, staff training, MIS, etc.). Second, an MFI could gain direct benefits and have a greater impact on its clientsâ&#x20AC;&#x2122; environmental behaviour if it took advantage of the synergies created by an integrated approach: by raising awareness on a mitigation solution bringing economic benefits to the client and providing them with access to credit to invest in this solution. Third, the impact of the informational message could be improved by adopting strategies that consider the psychological barriers to behaviour change, such as comparative feedback, direct experience, and commitment strategies. Finally, developing partnerships with technical organizations could be key in making this type of program more effective in the future, as it would respond to different issues: that of low technical skills within the MFI and that of the lack of legitimacy of the loan officer. Further research is needed to assess whether environmental risk programs taking into account these recommendations show better results and whether this type of program can be cost-efficient compared to other approaches aiming to foster pro-environmental behaviours in small-scale activities.

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Annex ANNEX 1. Interview protocol for loan officers and branch managers

Introduction When interviewing Integral loan officers and branch managers in Integral, I introduced myself as a student doing research on the needs of microfinance clients. I did not mention the environmental risk management program beforehand, since I first wanted to identify whether loan officers were sensitive to environmental issues and whether loan officers from pilot branches spontaneously mentioned the pilot program. Semi-structured interviews The interviews were conducted in Spanish; the protocol hereunder is thus a translation. Interviews took place within Integral premises and were conducted individually for branch managers and in group for loan officers (3 to 4 loan officers in each group).

Introduction - I am a PhD student from France. I am doing research on the needs of microfinance clients. - The information you will provide remains confidential and anonymous. It is important to get correct information for the study. - I am interested in your point of view, there are no “right” or “wrong” answers, all are important and valuable for the study. - Do you have questions before we start? Loan officers’ characteristics and processes 1. How long have you been working with Integral? 2. Why did you come to work here? (social, economic motives) 3. When you started working here, what training did you receive? 4. And afterwards? 5. Have you received trainings related to some specific topics or issues? Which ones? 6. Could you tell me in a few words what your job is? How do you meet the client for the first time? 7. Do you visit the client? What do you do during the visit? 8. Do you give recommendations to your clients regarding their businesses? What type of recommendations? Perceptions related to environmental risks 9. Do you think that your clients are exposed to environmental risks? Which type of risks? 10. Can your clients’ businesses be harmful to the environment? How? 11. Do you have examples in your current portfolio? 12. In your opinion, what are the activities where there are environmental risks for the client? 13. Do they represent a big part of your portfolio? 14. In your opinion, would it be important to reduce environmental risks? 15. Are clients aware of these risks? 16. Would clients have the capacity to reduce their exposure to environmental risks? 17. Are there barriers? Which type? (economic, cultural, knowledge)

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18. Would it be the role of the loan officer to raise clients’ awareness of environmental risks, and give them recommendations on alternatives? 19. Do you think that it would be important that you raise awareness and support clients in mitigating these risks? 20. Would you be able to do it? 21. What would be needed to do it correctly? Trainings? Incentives? Perception related to the pilot program 22. Did you attend the training on environmental risks in 2009? 23. What did you think about this training? Did you learn new things? Was it sufficient? Was it too short? Was it clear enough? 24. What did you think about the “Hojas de Trabajo” (environmental risks forms)? 25. Do you know what the use of these forms is? 26. After the training, did you feel that you would be able to fill them in? 27. Did you use them with clients? With how many clients? 28. How did you choose the clients that you would assess and sensitize on environmental risks? 29. Was it easy to do it? To use the forms? 30. Did you follow up on these clients? 31. Why so or why not? 32. Would you be ready to do it regularly, systematically, if you receive more training? 33. Would you be ready to do it regularly, systematically, if environmental risk management is integrated in your objectives? 34. Do you think that it could conflict with your productivity objectives? 35. Would you be ready to do it regularly, systematically, if environmental risk management is integrated in the manual of procedures, in the credit evaluation methodology? 36. Would you be ready to enter data on environmental risks in TOPAZ if specific indicators are integrated in the system? 37. Have you already screened out credit applications when there were high environmental risks? 38. Do you base your decisions on the exclusion list of the credit policy? 39. Do you have clients that used their loan to buy an efficient cook stove or solar panels? 40. Do you promote such products to your clients? Conclusion - Thanks

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ANNEX 2. Interview protocol for clients

Introduction When interviewing clients of Integral, I introduced myself as a researcher doing research on the needs of microfinance clients, in order to provide Integral with recommendations to improve their services. I did not mention the environmental risk management program beforehand, since I first wanted to identify whether clients were sensitive to environmental issues and whether pilot clients would spontaneously mention the pilot program. Interviews took place at the workplace or at the house of clients. Integral had provided me with the list of clients to visit (according to the criteria I gave them) and I was accompanied by a local guide who was NOT part of Integral staff. The guide’s role was to help me find the clients, but he was never allowed to attend the interview. In front of the client, I insisted that I was an independent researcher and that all what they say would remain confidential and anonymous. Semi-structured interviews The interviews were conducted in Spanish; the protocol hereunder is thus a translation.

Introduction - I am a student from France. I am doing research on the needs of microfinance clients. - The information you will provide remains confidential and anonymous (I will not tell Integral who said what). It is important to get correct information for the study. - I am interested in your point of view, there are no “right” or “wrong” answers, all are important and valuable for the study. - Do you have questions before we start? Clients’ characteristics (others than what is found in the MIS) To identify some factors that could influence on the level of environmental awareness of the client 1. Distance of the house from the main road: 2. Do you have a TV? Yes No A radio? Yes 3. Do you regularly read newspapers and magazines? Yes

No No

Perceptions related to the business To assess whether the client will spontaneously mention environmental risks linked to its activity 4. 5. 6. 7. 8.

In which activity do you work? What is your business? Is it your main activity? Yes No Do you work alone? Are you an employee? Do you have employees? How long have you been working in this activity? How did you start working in this activity? Why did you start this activity?

9. Are you happy with this business? Are you satisfied? 10. Do you like working in this business? What do you like? Why? Does it enable you to make a living? 11. Are there some aspects that you do not like in this work? Which ones? Why? 12. Do you have children? How old are they? Do they work already? In what area? Would you like that your children work in the same business as yours? Why? It does not generate enough revenue? It is dangerous? 13. Do you have another activity as well? Yes No 14. What percentage of your time do you dedicate to the other activity?

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Relationship with Integral and with the loan officer To assess the quality of the relationship between the client and the MFI To assess whether pilot clients spontaneously mention receiving advice on environmental risks 15. When did you start taking loans? With Integral? How many loans have you taken until now? 16. What do you use your loan for? Business creation Working capital (cash flow, inventory of the business) Investment in an equipment Personal expenditures An emergency Other 17. Does it help you improve your business? 18. In addition to microcredit, does Integral help you in some other way? Providing trainings or advice? What types of training or advice have you received from Integral? 19. Do you know your loan officer well? Do you often discuss with him? Do you have a good relationship with him? Do you trust him? 20. What did you have to do to get a microcredit? Can you briefly tell me what the process was? Did you go to the agency first? Did the loan officer come to visit you? What did he do during the visit? What type of information did you have to give to him? Do you know why you had to give this information? 21. Did the loan officer give you advice on your business? Which ones? Did it sound strange to you? Were you interested in these recommendations? 22. Did the loan officer ask questions on the type of energy that you use, whether you use chemicals, how you manage your wastes, etc.? Did it sound strange to you that he would ask such questions? 23. Do you know what this information is used for? Perceptions related to environmental risks To assess the level of environmental awareness and environmental attitude of the client 24. Have you already heard of â&#x20AC;&#x153;climate changeâ&#x20AC;?? Is it something that affects you? 25. Are environmental issues important for you? Why? 26. According to you, are there environmental problems in your community? Which ones? 27. What impacts do they have? Are they dangerous for your health? 28. Do these problems affect your business? 29. Who is responsible for these environmental problems? 30. Would it be important to address these problems? 31. Do you have an idea of how to address these problems? 32. Who is responsible for addressing these issues? 33. Do you have the capacity to reduce the impact of these problems on your business? 34. Do you think that your activity has an impact on the environment? 35. How? Why? 36. Would it be necessary to reduce this impact? 37. Why? Do you think that it is harmful to your health? To your family? To your neighbours? Are you afraid of it? 38. Do you think that this environmental impact also affects your business? 39. Do you know a solution to change / reduce this impact? How? How did you hear about this solution?

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40. Do you think that doing [recommendation] would be good for you? (Adapt the [recommendation] according to the activity of the client and the environmental risks identified) 41. Would it reduce environmental / health risks? 42. According to you, what would be the benefits / advantages of doing [recommendation]? Economic benefits? Health benefits? 43. Would most of the people that are important to you support you in doing [recommendation]? 44. Would most of the people that are important to you think that you should do [recommendation]? 45. According to you, would doing [recommendation] be easy? 46. In your opinion, what is your capacity to do [recommendation]? 47. Why? What would you need to make it easier? To have a higher capacity? 48. Is it because it is too costly? Because you do not know what to do exactly? Because nobody does it? Do you really have alternatives? Environmental intent and behaviour To identify the environmental practices of the clients (past and present) and behaviour change 49. Would you be ready to do [recommendation] in order to reduce environmental risks of your activity? 50. Would you be ready to invest in something that would help do [recommendation]? 51. Why? 52. Did you already do [recommendation] before? How often? 53. Today, do you do [recommendation]? 54. Did you recommend to your family, friends or colleagues to do [recommendation]? 55. Do you manipulate dangerous / chemical substances? 56. What type of energy do you use? Electricity? Gas? 57. Do you use efficient equipments? 58. Do you have to pay a lot every month for energy? 59. Did you already take a loan to buy solar home systems or efficient cook stoves? Impact of the environmental risk management program of Integral To identify whether environmental behaviour change can be related to the pilot program 60. According to you, were the recommendations on environmental risks that the loan officer gave you interesting / useful? 61. Did these recommendations have an impact? 62. Did they help you in your business? 63. Did you follow these recommendations? Why? Perceptions regarding Integralâ&#x20AC;&#x2122;s involvement in environmental management 64. According to you, would it be the role of loan officers to give advice on environmental risks? 65. Would you be interested in receiving such advice? 66. Do you think that loan officers would have the capacity to give such advice? 67. Do you think that you would listen to this advice? Conclusion - Is there anything else you would like to say? - Thanks - Small present given to the client (biodegradable pen)

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ANNEX 3. Qualitative data analysis

To analyze the data coming from clients’ interviews, we went through the following steps: (1) Review of the field notes: Interviews could not be recorded for various reasons (safety issues in the field, reluctance of microfinance clients, interviews taking place in noisy areas, etc.). The researcher thus took as many notes as possible during the interview itself, using forms based on the interview protocol in order to facilitate note-taking. Right after each interview, the author took five to ten minutes to read her notes and complete them with additional elements that were still fresh in her mind, as well as impressions or specific observations from the field. (2) Tabulation: Thanks to the protocol-based form, interviewees’ answers were already clustered into main topics, such as “RELATIONSHIP WITH INTEGRAL”, “ENVIRONMENTAL AWARENESS”, or “ENVIRONMENTAL BEHAVIOUR (PAST/PRESENT)”. Following Miles & Huberman (1994)’s technique, we then used these topics to build a matrix, which would facilitate the analysis of our qualitative data. For each topic, we had a first column that would synthesize the main information with a key word (for instance, for “RELATIONSHIP WITH INTEGRAL”, we assessed the level of trust by using “HIGH”, “MEDIUM” and “LOW” codes) and a second column providing more detailed information and/or selected quotes (such as the following quote, which was linked to a “HIGH” code: “We see each other every two or three months, we have quite a close relationship, we trust each other.”). (3) Triangulation: For clients that were part of the pilot program, we triangulated information regarding their environmental behaviours. For past behaviour, we compared what had been noted by loan officers in the environmental risk forms (“Hojas de Trabajo”) with what the client reported as his past behaviour. For present behaviour, we confronted the clients’ declarations to what was observed in the field during the interview (and which had been written down by the researcher). (4) Counting: The tabular display allowed us to count the occurrences of some patterns and themes (such as the number of people who remembered the pilot project, or the number of people who have changed their environmental behaviour). As emphasized by Miles & Huberman (1984), counting enables to assess the extent of a phenomenon and identify unexpected differences. (5) Cross-cases comparison and identification of patterns: The matrix also enabled us to identify patterns and make contrasts and comparisons between microfinance clients. (6) Iterative process between literature, tabulation, and comparison: At several points in time, we confronted our results to the literature, which made us refine some of our analysis and assumptions and go back to the data for further analysis.

To strengthen our overall analysis, we applied the following techniques: (7) Multi-layer data collection and triangulation: We paid a lot of attention to collecting data at multiple levels and confronting points of views. Before going in the field, we had interviewed within the FMO the person who had been in charge of the environmental risk management program dedicated to partner MFIs, in which Integral participated. Once in the field, we interviewed clients, top managers at the headquarters, branch managers, and loan officers, both in pilot and non-pilot branches. In addition, we

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gathered and reviewed all the documentation available on the pilot project, including the guidelines that loan officers had received regarding the pilot program, the training tools that were used, the environmental risk forms that had been filled by loan officers, and the few reports and statistics that had been compiled at the headquarters level regarding the project. We also reviewed the manual of procedures and the Monitoring & Information System of the MFI to have a better understanding of current procedures. These multiple levels of data collection enabled us to triangulate information, identify contrasting opinions or consensus, and therefore get a better understanding of the factors that played a role in the modest results of the pilot program. (8) Feedbacks from the MFI: At the end of the field visit, we had the opportunity to present our preliminary results to some of Integralâ&#x20AC;&#x2122;s top managers, including the Executive Director, Head of Operations, Head of Finance, Head of Human Resources, Head of Legal Department, and Environmental Management Officer. They broadly considered that the findings were valid and provided some feedbacks that helped refine the analysis.

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Dunford (2001) ‘Sustainable integration of microfinance and education in child survival, reproductive health, and HIV/AIDS prevention for the poorest entrepreneurs’. Discussion Paper commissioned by the Microcredit Summit Campaign, Freedom from Hunger FMO (2008) ‘MFI and SME sustainability guidance tool’. Available on FMO’s website: http://www.fmo.nl/esg-tools Frondel, M. & Schmidt, C. (2005) ‘Evaluating environmental programs: the perspective of modern evaluation research’. Ecological Economics, 55: 515-526 Girma, S. & Görg, H. (2007) ‘Evaluating the foreign ownership wage premium using a difference-in-differences matching approach’. Journal of International Economics, 72: 97-112 GreenMicrofinance (2007) ‘Microfinance and the environment: setting the research and policy agenda’. Roundtable May 5-6, 2006. Philadelphia: GreenMicrofinance-LLC Guérin, I, Morvant-Roux, S., Roesch, M., Moisseron, J-Y. & Ould-Ahmed, P. (2011) ‘Analysis of the determinants of the demand for financial services in rural Morocco’. Impact Analyses Series, No.6, Paris: AFD Hall, J, Collins, L., Israel, E. & Wenner, M. (2008) ‘The missing bottom line: Microfinance and the Environment’. Philadelphia: GreenMicrofinance-LLC Henrich, J., Boyd, R., Bowles, S., Camerer, C., Fehr, E., Gintis, H. & McElreath, R. (2001) ‘In search of Homo Economicus: behavioral experiments in 15 small-scale societies’. Economics and Social Behavior, 91(2): 73-78 Hilson, G., Hilson, C. & Pardie, S. (2007) ‘Improving awareness of mercury pollution in small-scale gold mining communities: challenges and way forward in rural Ghana’. Environmental Research, 103: 275-287 Hillary, R. (2004) ‘Environmental management systems and the smaller enterprise’. Journal of Cleaner Production, 12: 561-569 Hillary, R. (2000) ‘Introduction’. Small and medium-sized enterprises and the environment. Greenleaf Publishing Ltd Hillary, R. (1995) ‘Small firms and the environment—a groundwork status report’. Birmingham: Groundwork Hujer, R., Caliendo, M. & Thomsen, S. (2004) ‘New evidence on the effects of job creation schemes in Germany – a matching approach with threefold heterogeneity’. Research in Economics, 58: 257-302 Hulme, D. (2000) ‘Impact assessment methodologies for microfinance: theory, experience and better practice’. World Development, 28(1): 79-98 Jager, W. (2003) ‘Breaking “bad habits”: a dynamical perspective on habit formation and change’. In: L. Hendrickx, Jager, W. & Steg, L. (Eds). Human decision-making and environmental perception. Understanding and assisting human decision making in real-life settings. Liber Amicorum for Charles Vlek. Groningen: University of Groningen Kollmuss, A. & Agyeman, J. (2002) ‘Mind the gap: why do people act environmentally and what are the barriers to pro-environmental behaviour?’. Environmental Education Research, 8(3): 239-260 Lahiri-Dutt, K. (2008) ‘Digging to survive: women’s livelihoods in South Asia’s small mines and quarries’. South Asian Survey, 15(2): 217-244 Lanjouw, P. (2006) ‘Small-scale industry, poverty, and the environment. A case study of Ecuador’. in Blackman, A., Small firms and the environment in developing countries, Washington DC: Resources for the Future Lensink, R. & Mersland, R. (2009) ‘Microfinance plus’. Working Paper Lensik, R., Mersland, R. & Vu Thi Hong Nhung (2011) ‘Should microfinance institutions specialize in financial services?’. Second International Research Conference on Microfinance, Groningen, The Netherlands, June 2011 MARN (2011) ‘Nace la política nacional del medio ambiente’. Consulta pública, Ministerio de Medio Ambiente y Recursos Naturales del Salvador Maréchal, K. (2009) ‘An evolutionary perspective on the economics of energy consumption: the crucial role of habits’. Journal of Economic Issues, 43(1): 69-88

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McKenzie-Mohr, D. (2000) ‘Promoting sustainable behaviour: an introduction to community-based social marketing’. Journal of Social Issues, 56(3): 543-554 Miles, M. & Huberman, M. (1994) An expanded sourcebook – Qualitative Data Analysis, Thousands Oaks, USA : Sage Publications Miles, M. & Huberman, M. (1984) Qualitative Data Analysis – A sourcebook of new methods, Newbury Park, USA: Sage Publications Millard, E. (2002) ‘Building financially sustainable incentives for environmental conservation into small enterprises development’. Small Enterprise Development, 13(3): 34-44 Mir, D. & Feitelson, E. (2007) ‘Factors affecting environmental behavior in micro-enterprises laundry and motor vehicle repair firms in Jerusalem’. International Small Business Journal, 25(4): 383-415 Pallen, D. (1997) ‘Environmental sourcebook for microfinance institutions’. Canadian International Development Agency Pimenova, P. & Van der Vorst, R. (2004) ‘The role of support programmes and policies in improving SMEs environmental performance in developed and transition economies’. Journal of Cleaner Production, 12: 549-559 Schuite, G.J. & Pater, A. (2008). ‘The triple bottom line for microfinance’. Bunnik: Triodos Facet SEEP Network (2008) ‘Microfinance and the environment’. SEEP Network Steg, L & Vlek, C (2009) ‘Encouraging pro-environmental behaviour: an integrative review and research agenda’. Journal of Environmental Psychology, 29: 309-317 Srinivasan, S. (2008) ‘Positive externalities of domestic biogas initiatives: implications for financing’. Renewable and Sustainable Energy Reviews, 12: 1476-1484 Swim, J., Clayton, S., Doherty, T., Gifford, R., Howard, G., Reser, J., Stern, P. & Weber, E. (2010) Psychology and global climate change. Addressing a multifaceted phenomenon and set of challenges. Report from the American Psychology Association Task Force on the interface between psychology and global climate change Van den Bergh, J., Faber, A., Idenburg, A. & Oosterhuis, F. (2006) ‘Survival of the greenest: evolutionary economics and policies for energy innovation’. Environmental Sciences 3(1): 57-71 Van Elteren, A. (2007) ‘Environmental and social risk management and added value at MFIs and MFI funds – the FMO approach’. The Hague: Netherlands Development Finance Company (FMO) Verplanken, B. & Wood, W. (2006) ‘Interventions to break and create consumer habits’. American Marketing Association, 25(1): 90-103 Vincent, J. & Sivalingam, G. (2006) ‘Economic incentives for cleaner small and medium enterprises. Evidence from Malaysia.’ in Blackman, A., Small firms and the environment in developing countries, Washington DC: Resources for the Future Wagner, J. (2002) ‘The causal effects of exports on firm size and labor productivity: first evidence from a matching approach’. Economics Letters, 77: 287-292 Wenner, M. (2002) ‘Microenterprise growth and environmental protection’. Microenterprise Development Review 4(2): 1-8 Wenner, M., Wright, N., & Lal, A. (2004) ‘Environmental protection and microenterprise development in the developing world. A model based on Latin American experience’. Journal of Microfinance 6(1): 95-122 World Bank (2006) ‘Republic of El Salvador Country environmental analysis. Improving environmental management to address trade liberalization and infrastructure expansion’. Washington DC: World Bank Wood, W., Tam, L. & Guerrero Witt, M. (2005) ‘Changing circumstances, disrupting habits’. Journal of Personality and Social Psychology 88(6): 918-93

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CONCLUSION

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CONCLUSION

Microfinance has considerably grown in the last decade. As they are facing increased competition, MFIs are exploring ways to innovate and tackle new markets. Additionally, MFIs are facing serious controversies related to their business practices and actual impact and are therefore looking for solutions to be seen as responsible finance actors. Recently, in addition to its financial and social objectives, the microfinance industry has thus started to look at its environmental bottom line. A growing number of practitioners have started to initiate ‘green microfinance’ programs, but the issue has however received very little attention from researchers so far. This PhD thesis sought to fill this gap by exploring how MFIs manage their environmental bottom line. We defined four research questions to address our topic: (1) What do MFIs do to manage their environmental bottom line? (2) Why do MFIs decide to manage their environmental bottom line? (3) Who are the MFIs that are active in environmental management? (4) What challenges do MFIs face when implementing an environmental management program? Each research question was tackled in a specific chapter of this thesis. Chapter 1 identified the different strategies adopted by MFIs to manage their environmental bottom line and categorized them into five dimensions: environmental policy, ecological footprint, environmental risk assessment, green microcredit, and environmental non-financial services. Building on the literature on Corporate Social Responsibility and Microfinance Social Performance Management, we proposed a new framework to assess the environmental performance of MFIs: the Microfinance Environmental Performance Index (MEPI). This framework, based on management performance indicators adapted to the microfinance sector, was used to collect original data for the empirical analysis conducted in the following chapters. Chapter 2 focused on MFIs’ motives for managing their environmental bottom line. We based our analysis on a quantitative survey of 160 MFIs and on qualitative interviews of 23 MFIs’ top managers. Interpreting our results in light of Bansal & Roth (2000)’s framework of business ecological responsiveness, we found that the most proactive MFIs are primarily motivated by social responsibility, additionally by competitiveness (strategic and economic benefits), and to a lesser extent by legitimation (stakeholder pressure). When legitimation is the dominant driver, we discovered that MFIs

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are more likely to adopt a defensive approach, setting up more superficial negative strategies to appear green. In contrast, when social responsibility is the dominant driver, MFIs tend to be more proactive and innovative and develop adapted financial and non-financial services to foster proenvironmental practices. In Chapter 3, we sought to identify the characteristics of MFIs that engage in environmental management. Using our database of 160 MFIs, we conducted various econometric tests to assess the relationship between MFIs’ environmental performance and their size, financial performance, age, and legal status. Our results revealed that larger and more mature MFIs are likely to have a better environmental performance overall, but that green MFIs are not particularly more profitable. MFIs registered as banks also showed a higher environmental performance, in particular in the setting of an environmental policy framework and an environmental risk assessment program. Finally, Chapter 4 focused on a specific case study in El Salvador. We analyzed a pilot program that was started by the MFI Integral in 2009 and that aimed to identify the environmental risks of its portfolio and raise clients’ awareness of mitigation solutions. In order to identify the challenges faced by the MFI when implementing this environmental management program, we conducted 95 semistructured interviews with microfinance clients, loan officers and managers. We first found that the MFI encountered some difficulties in building internal skills related to environmental risks and in conciliating environmental and financial objectives. Moreover, we showed that the pilot program, as it was designed, did not sufficiently take into account the psychological and economic barriers to behaviour change. Finally, we found that the effort of the microfinance institution was in some cases countered by external factors out of its reach, such as inadequate regulations.

Through this PhD, we thus provided the first set of empirical papers on the ‘green microfinance’ phenomenon. Indeed, the academic literature on the topic was still very scarce when we started our research project and the grey literature was overall very conceptual. In the course of this three-year project, some empirical papers have been published by microfinance practitioners but they focus mainly on microfinance and energy and do not provide a broader overview of the phenomenon as we did here. We thus believe that each of these thesis chapters brings original contributions in terms of methodology, knowledge and policy implications.

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First, by designing MEPI, a specific tool to assess MFIs’ environmental performance, we contributed to specify what is encompassed under the generic term ‘green microfinance’. Indeed, as the issue of environmental management is still new in the microfinance sector, many stakeholders only have a limited understanding of what ‘green microfinance’ is. We witnessed that in many website articles, online forums, or conference roundtables, the term ‘green microfinance’ is often used to refer exclusively to energy lending. By developing MEPI, we put back into perspective that environmental issues linked to MFIs go beyond energy access and clean energy issues. We rather emphasized that pioneer MFIs adopt a variety of strategies (positive or negative), at different levels (internal or portfolio), in response to different problems or needs (energy, water, chemical pollution, natural resources degradation, etc.), in order to tackle their environmental bottom line. In addition to providing a clearer understanding of ‘green microfinance’ strategies, the MEPI tool was also instrumental in identifying actual practices regarding environmental management in microfinance. Indeed, we were able to constitute an original database of the environmental practices of a representative sample of 160 MFIs worldwide. This is the first time that such information has been collected on a large scale for the microfinance sector. It therefore gave us very original and valuable information. Through statistics and concrete examples, we demonstrated that the microfinance sector is already involved in environmental management today. Even though the level of environmental practices is still low in the industry, we clearly showed that the issue is drawing increasing attention and may become one of the future ‘hot topics’ of the microfinance sector. Beyond research purpose, we believe that MEPI could be a useful tool for microfinance practitioners. First reactions from microfinance stakeholders comforted us in this idea. After processing our data, we sent back to each of the 160 surveyed MFIs a benchmark of its environmental performance compared to the rest of the sector. Around twenty of them took time to respond, acknowledging that the questionnaire and its results actually gave them ideas to improve their environmental performance. Additionally, various support organizations (donors, NGOs, rating agencies) have shown interest in MEPI. Some are currently testing it with their partner MFIs or including it into new social and environmental performance tools being developed. We indeed believe that MEPI could be used by

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practitioner in a similar way as Social Performance Management tools, to guide internal strategy planning and progress monitoring in MFIs willing to address their environmental bottom line. 72 Because the MEPI tool is so innovative and can have clear applications for the microfinance sector, it was essential to dedicate a specific chapter of this thesis to present it in details. It is also important to acknowledge some of its limits. Being based on management processes, MEPI indicators only look at the processes implemented and at the resources mobilized by MFIs to address environmental issues. Similar to the Social Performance Management approach, the assumption is that MFIs cannot achieve environmental objectives if they do not give themselves the adequate means (Doligez & Lapenu, 2006). However, MEPI does not reflect at all the actual impacts of these processes and programs on the environmental bottom line. Even when adequate processes seem to be in place, one could still question whether they directly translate into improved environmental situations. Indeed, some environmental management strategies could turn out inefficient or even counterproductive, as we will illustrate below. Furthermore, we strongly insist on the fact that MEPI has first been designed for research purpose, to provide a rather exhaustive overview of existing green microfinance practices, without judging the level of desirability of one strategy or the other. If practitioners want to use this tool, they will need, in a first step, to initiate an in-depth reflection upon the implications and relevance of each strategy. MEPI should not be used as a â&#x20AC;&#x2DC;to-do listâ&#x20AC;&#x2122;, as a normative path to be followed without giving it much thinking. It should rather serve as a basis for fostering reflection and discussion regarding the relevance of environmental management for MFIs, taking into account the specific context surrounding the latter. A limit of MEPI is that it does not emphasize the potential trade-offs that could be implied for MFIs, microfinance clients, and even the environment. Indeed, not all environmental strategies listed in MEPI may generate clear benefits for both MFIs and their clients, as illustrated in the following table. For instance, let us look at one strategy linked to environmental risk management that is often promoted by investors in the traditional banking sector and starts being promoted in the microfinance sector as well: the use of an environmental exclusion list. This strategy has been included as an indicator of environmental performance within MEPI for research purpose because it reflects the willingness of an MFI to manage environmental risks at its portfolio level. Yet, one needs to reflect 72

For this purpose, the microfinance sector could also explore how other tools, such as the Global Reporting Initiative (GRI) guidelines or the ISO 26000 norm (international standard that offers guidance on socially responsible behavior and possible actions) could help them define adequate environmental management strategies.

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upon the relevance of setting such strategy as an objective for MFIs willing to improve their environmental bottom line. An exclusion list can bring several benefits to a microfinance institution. First, it can help reduce credit risk linked to environmental risks (a textile dyer using dangerous and forbidden chemicals may get intoxicated, stop working, and therefore stop repaying his loan). Second, using an exclusion list is a convenient and easy strategy for an MFI to limit its exposure to risks and therefore avoid bad reputation (an MFI’s image may deteriorate if it is associated to financing very polluting activities for instance). It can then be perceived by investors and donors as a signal that the MFI is environmentally responsible and therefore deserves receiving funding from socially responsible investors. Additionally, the cost of setting up and implementing an environmental exclusion list is rather limited for MFIs. On an MFI’s point of view, this strategy could thus be seen as worth adopting. Yet, if we adopt the viewpoint of microfinance clients, the story is very different. Most clients that are engaged in environmentally risky activities are usually very poor. They use polluting or inefficient production processes because they do not have the resources to upgrade to safer and cleaner technologies and practices (Blackman, 2006a; Lanjouw, 2006). An exclusion list prevents these vulnerable microentrepreneurs from accessing financial services that could help them upgrade their production processes. The trade-off is double for microfinance clients: they may become even more financially excluded and remain locked into unsustainable and dangerous production processes. This strategy of environmental management thus entails a clear risk of mission drift for the MFI and does not contribute at all to mitigating environmental risks, on the contrary. To further illustrate potential benefits and trade-offs linked to green microfinance strategies, let us analyze a second type of approach that has been developing in recent years: the provision of ‘Energy Loans’, microcredits to facilitate access to renewable energies (solar home systems, biogas digesters, solar dryers) or energy efficient technologies (improved cook stoves, efficient fridges). In theory, this strategy can bring benefits for both MFIs and their clients. For microfinance institutions, it can be a new business avenue, the possibility to diversify their product offer and expand their market. In contexts of high competition, it can be a way for MFIs to differentiate themselves and attract additional funding, from Socially Responsible Investors for instance. (GreenMicrofinance, 2007; SEEP Network, 2008) By offering Energy Loans, MFIs help clients gain access to technologies that are supposed to bring them direct benefits. Thanks to solar lanterns, households can have quality lighting inside their house and get rid of kerosene lamps that are costly, dangerous and generate respiratory problems

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(Levai et al, 2011). Thanks to a solar home system, a microfinance client can have lighting for his shop, attract clients in the evening, and start a small business of mobile phone recharging in the village. Thanks to an efficient cook stove, a mother will be able to save the quantity of wood needed to cook and will thus reduce the time she spends walking for hours to collect firewood; she will also reduce her exposure and that of her children to smoke emissions that generate eye and lung diseases (Smith, 1993). Thanks to an energy efficient fridge, a grocery retailer can reduce its electricity bill and use the money saved for his business or household. Because all these equipments have a rather high upfront cost for vulnerable populations, microcredit would stand as an interesting solution to facilitate access to these technologies (Levai et al, 2011). Yet, the reality is slightly more complex than that, and the win-win bottom line may not always be there. When MFIs start promoting specific equipments, clients might not have the choice upon the new technology to adopt. The latter may not necessarily meet their needs and might even turn out inadequate. A microfinance client may get convinced by the nice arguments provided by his loan officer and decide to take a loan to purchase a solar cook stove or a biogas digester for instance. Only later on will he find out that his wife refuses to use the solar cook stove because it proved to be too time constraining and limited to stew cooking; or that the biogas digester does not generate enough methane because the family does not produce sufficient quantity of organic wastes to feed the digester. By replicating what has been done in other countries or regions, some MFIs may promote technologies that are not culturally adapted (this is often the case of cook stoves, that can directly question cooking habits and traditions). If loan officers are provided with financial incentives for reaching a certain number of disbursed Energy Loans, they may even encourage clients to get into debt for purchasing an equipment that they did not need or that will not bring them any benefit. We read about an initiative in China, where people who wanted to access credit for income-generating activities were obliged to buy the new energy technology promoted by the project (Wisions of Sustainability, 2006). Microentrepreneurs were thus constrained to adopt a technology that might not have matched their needs and to take out two loans at the same time. This type of practice raises considerable ethical issues. Following the recommendations of their loan officers, microfinance clients may decide to invest in a renewable energy or energy efficient technology on the promise that, additionally to usage benefits, it will also bring them economic benefits. However, these economic benefits may not be so obvious.

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First, some technologies can indeed save energy, but their return on investment may be quite long (this return on investment depends on the technology used beforehand, on the energy saved monthly, and on the upfront cost of the technology, including the loan cost when relevant). For instance, the payback period for an Egyptian microentrepreneur switching from a gas water-heater to a solar water heater may last up to eleven years (FreemE, 2012). In some cases, because of the programmed obsolescence of modern equipments, the return on investment may actually be reached at the same time as the technology stops working, without giving time to get economic benefits out of the energy savings. Moreover, most MFIs are reluctant to provide long-term loans to their clients. They may thus offer Energy Loans for a period shorter than the pay-back period. If our Egyptian microentrepreneur takes a loan to purchase a solar water heater with a 24-month duration (which is already long for an MFI), it will mean that during the first two years, he will actually have to spend more every month to repay his loan installment than he would have paid in gas expenditures, had he not switched technology. Even if economic benefits appear later on, the microentrepreneur will still have to face increased expenditures in a first step, in contradiction with the promise of savings that was given to him. Furthermore, the literature often emphasizes that the economic benefits of energy efficient technologies may actually be counterweighted by a ‘rebound effect’ (Herring, 2006): as we switch to an energy efficient equipment, we may consider it cheaper to use the equipment (e.g. having the light bulbs on is cheaper per minute when we use energy-savings ones), and as a consequence we may increase our use of the equipment (e.g. leaving the light bulbs on even when we leave the room), which may in the end counterbalance or even overcome the savings realized thanks to energy efficiency. This ‘rebound effect’, linked to the behaviour of the end-user, may thus considerably reduce the economic benefits that can be expected from en energy efficient equipment. Finally, economic benefits linked to a renewable energy or energy efficient equipment may drastically decrease if there are hidden costs linked to the maintenance of the equipment (e.g. changing batteries for solar home systems) or if the technology cannot be used anymore for lack of spare parts or after-sales services in the area (this is what happened in Indonesian villages where solar home systems had been promoted, cf Adra, 2009).

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Table 1. Benefits and trade-offs linked to green microfinance strategies MEPI dimensions

Environmental policy

Ecological footprint

Environmental risk assessment

Green microcredit

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Potential benefits

Potential trade-offs

For MFIs: - Better image - Attract new funding (SRIs) - Increase staff motivation

For MFIs: - Cost of appointing someone in charge of environmental issues - Cost of incentive systems

For the environment: - Depending on the policy

For the environment: - No effect if only a greenwashing strategy

For MFIs: - Reduce wastes and inefficiencies and thereby reduce costs - Better image

For MFIs: - Cost of staff training - Cost of footprint objective monitoring - Green alternatives not systematically bringing economic benefits as expected

For the environment: - Reduction of CO2 emissions and wastes

For the environment: - Impact may not be significant

For MFIs: - Decrease credit risk and reputation risk - Attract new funding (SRIs)

For MFIs: - Cost of staff training - Decrease in staff productivity due to time spent on assessing environmental risks - Risk of mission drift

For clients: - Awareness of environmental risks linked to their activities and of mitigation solutions if the MFI takes the time to discuss with the clients - Health and economic benefits linked to environmental risk mitigation

For clients: - Risk of exclusion from microfinance services

For the environment: - Avoid the development of harmful activities

For the environment: - Environmental problem not solved if clients engaged in harmful activities are only screened out by the MFI

For MFIs: - New market - Diversification of products - Increased competitiveness - Attract new funding (SRIs, carbon credits)

For MFIs: - Cost linked to staff training and coordination with technology suppliers and partners - Decrease in staff productivity due to time spent on promoting green technologies or practices - Higher credit risk if the loan is linked to an equipment whose quality is hard to ensure

For clients: - Easier access to clean energy solutions - Savings thanks to more efficient production processes and technologies - Health benefits of replacing kerosene lamps with solar lanterns - Lower interest rate for developing an environmentally-friendly activity

For clients: - Technology not always culturally adapted - Technology not always bringing economic advantages as expected (long pay-back period, rebound effect, hidden maintenance costs, etc.)

Environmental non-financial services

For the environment: - Promotion of environmentally-friendly technologies and practices

For the environment: - Rebound effect: energy consumption may actually increase - Lack of appropriate recycling of equipments, solar home systems batteries, etc. - Increased consumerism and issue of programmed obsolescence of new equipments

For MFIs: - Better image - Achieve social mission - Attract new clients and retain old ones - Increase staff motivation

For MFIs: - Cost linked to staff training and/or coordination with partners - Cost of non-financial services - No revenues directly generated

For clients: - Increase knowledge of green practices - Economic and health benefits linked to environmentally-friendly practices

For clients: - Opportunity cost of attending training - Trainings not always adapted to needs

For the environment: - Promotion of environmentally-friendly technologies and practices

By pointing to these limits, our purpose is not to discourage MFIs from engaging in environmental management. Rather, our objective is to emphasize that a triple bottom line cannot be achieved systematically, that engaging in green microfinance may entail trade-offs for the MFIs themselves and for their clients, and that, in consequence, MFIs and microfinance stakeholders should take the time to reflect upon the relevance and impact of the green microfinance strategies they wish to promote or implement.

Going one step further, this PhD thesis also opened the debate regarding the role of MFIs in managing environmental issues. On the one hand, some of the specificities of MFIs put them in a good position to address environmental issues. They first have the advantage of being embedded at the grassroots level, with extensive networks and close relationships with thousands of microentrepreneurs. They can therefore be good intermediaries to reach vulnerable populations, raise their awareness of environmental issues, and facilitate solutions to promote a sustainable development (Coulson & Dixon, 1995; Dunford, 2001). Another specificity of MFIs is that they usually are hybrid institutions, with not only financial objectives, but also a social mission. Even though the industry is currently going through several crisis in various countries, with mission drift and over-

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indebtedness issues (Armendáriz & Szafarz, 2011; Guérin et al, 2009; Servet, 2011), the microfinance sector is very active in self-reflecting about its own impacts and responsibilities. More than other industries, the microfinance sector may thus be open to considering environmental management as part of its responsibilities and contribution to poverty alleviation. Furthermore, because they are hybrid institutions and because they work in a competitive market, MFIs are prone to innovate and explore new ways to develop their market and improve their impact. Microfinance is also a highly subsidized sector (Hudon & Traca, 2011; UNCDF, 2005), which can be seen as a limit or constraint on the one hand, but allows for pilot testing innovative products and services (including green microfinance ones) on the other hand. Our research however reveals that including an environmental bottom line in microfinance is rather complex. As emphasized in Table 1, developing green microfinance programs implies some costs that may challenge the financial objectives of MFIs. It requires acquiring technical skills and developing operational capacities (be it internally or through partnerships). It implies reviewing existing processes in order to fully integrate environmental management objectives. It may raise issues of conflicting priorities within the institution (cf Chapter 4). Even if MFIs overcome all these internal management and operational challenges, they may still face difficulties in addressing environmental issues. Their legitimacy as environmental actors may be questioned and their involvement in environmental management not well received by clients or other stakeholders. Even though they may promote environmentally-friendly behaviours through awareness-raising and the provision of financial services (to facilitate access to clean technologies for instance), MFIs are still limited in their capacity to address other barriers to behaviour change, such as the lack of adequate infrastructure, the lack of alternatives bringing economic benefits to the clients, the lack of distribution and maintenance services for clean equipments in remote areas, wrong market signals (e.g. subsidies on fossil fuels or titles of land ownerships given to farmers who clean forests), psychological, social, and cultural factors linked to the behaviour (issues of identity, power, know-how and other representations linked to the behaviour). MFIs’ efforts may even be countered by external factors on which they have very little influence, such as public policies (cf Chapter 4). Finally, the relationships between MFIs and their clients is usually based on short-term contracts (3 to 12 months in general), whereas behaviour change is a long-term process. This time mismatch is also a limiting factor to MFIs’ capacity to manage environmental issues. One of the general insights of this thesis is thus to emphasize that one

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has to be realistic about the role that MFIs can play regarding environmental protection. Expectations around green microfinance need to remain modest and realistic. Microfinance institutions, like any other stakeholders, have responsibilities towards the environment and have the means to contribute to sustainable development to a certain extent. However, one has to keep in mind that MFIs are MFIs; their role will always be limited and they will never replace other actors in environmental protection. One should thus be cautious when promoting MFIs’ involvement in environmental management, especially at a time when we still lack knowledge on the relative effectiveness of the various green microfinance strategies. This is even more crucial that many green microfinance programs are subsidized. One should then wonder whether supporting green microfinance development is the most effective and efficient way to use public subsidies in order to address specific environmental issues. Would it not be more relevant to provide support directly to producers’ organizations, which have longterm relationships with their members, to promote agro-ecological farming practices, as it is already done by some socially responsible investors (e.g. Alterfin)? Would it not be more efficient to finance specific industry unions to promote and facilitate access to clean production technologies, as it is suggested by Blackman (2006a)?

In direct link with the subsidizing issue, another contribution of this PhD thesis is to open the debate on the role that donors and investors could play regarding green microfinance. By identifying MFIs’ motives for going green (Chapter 2), we showed that MFIs that only respond to stakeholders’ pressure tend to adopt more minimalist and defensive strategies that may eventually be inefficient or counterproductive. For instance, if MFIs feel pressured by their investors and need to give a signal showing that they are taking into account their environmental expectations, they tend to adopt an environmental exclusion list. An exclusion list is indeed perceived as a first, easy-to-implement step into environmental management. Various investors are actually pushing for the adoption of environmental exclusion lists as they also see it as a tool to raise MFIs’ awareness of the negative impact that some of the activities they are used to financing can have. Yet, as we already emphasized, this strategy entails significant trade-offs for the clients as well as for the MFIs’ social mission. On the other hand, MFIs that engage in environmental management to fulfill their social mission tend to be more innovative and proactive. In that case, they try to identify strategies and solutions that respond directly to clients’ needs and that will bring them clear benefits. Engaging in innovative green

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microfinance programmes however entails that the MFI manages to mobilize adequate resources and expertise. Our research indeed showed that investors and donors have often been instrumental in providing these pioneer MFIs with the technical and financial support required to launch pilot programs. The main recommendation stemming from these findings is that microfinance donors, investors and regulators could have a more positive and efficient role to play in promoting green microfinance by being facilitators (providing technical assistance and financial support) rather than pressuring or sanctioning MFIs along environmental criteria.

Beside these contributions, we acknowledge that this research work has some limitations. First, our first-hand database used for Chapters 2 and 3 is still limited. Due to time and resource constraints, we were not able to apply our survey to a larger number of MFIs or to replicate it through time in order to constitute a panel database. Our analysis thus relied on a cross-section database of 160 MFIs. Furthermore, because it was not possible for us to go and visit each of our respondent MFIs, we could only rely on their declarations to assess their level of environmental performance and conduct our analysis. We sought to correct for eventual bias by including control questions in our survey, but we have to acknowledge that direct observation of MFIsâ&#x20AC;&#x2122; practices may reveal different patterns from those we identified in our analysis. Another limitation of this work is that, after providing an overview of environmental management within the microfinance sector, we were able to explore more in depth only one of the strategies of environmental management, in our last chapter: environmental risk management. During our research, we had encountered other types of initiatives implementing by MFIs that would have been worth exploring, such as the provision of microcredit for clean energies, the training of farmer clients on agro-ecological practices, or the signing of an environmental chart by microfinance clients. Depending on the strategy adopted, the commitment of the MFI and the local context, results may be different from the Salvadorian example and raise complementary issues regarding MFIsâ&#x20AC;&#x2122; involvement in environmental management. Even regarding the environmental risk management strategy that we explored, we still have to acknowledge that results from our case study cannot be generalized, and that similar initiatives in different contexts may also show different results.

Nevertheless, this PhD thesis still brought a clear contribution in opening the debate on the relevance of green microfinance, a new phenomenon that is growing and drawing increasing attention. As the

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issue of the environmental bottom line in microfinance is still rather new, perspectives for further research are manifold. More particularly, we suggest two areas that would deserve further exploration. First, very little is still known on the various strategies of environmental management adopted by MFIs, on their achievements, their limits, their effectiveness, and cost-efficiency. In this PhD thesis, we only looked at one case study of environmental risk management. Looking in depth at other ongoing experiences, such as the use of exclusion lists, the signing of an environmental chart by microfinance clients, the training on agro-ecological practices, or the conditioning of credit renewal to tree planting, could bring valuable insights on the role MFIs can play in environmental protection and on the strategies that would be most adapted to achieve an environmental bottom line. Second, another issue worth exploring would be the dynamic processes generated by the assessing of MFIsâ&#x20AC;&#x2122; environmental performance. Indeed, after receiving a benchmark of their environmental performance, around 20 of our surveyed MFIs answered back saying that undertaking the survey and looking at their results made them think about ways to improve their environmental bottom line. Some of them even started to reflect upon the implementation of some specific programs. It could thus be interesting to explore how the creation of a new tool assessing a type of performance that had not been considered by the sector so far can influence attitudes and practices regarding environmental management in MFIs. The environmental bottom line in microfinance is still a new topic which is drawing increasing interest from the sector. By conducting this PhD thesis, we gave some very first insights on a phenomenon that still calls for much more research.

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