Microfinance & Environment:
Why do microfinance institutions go green?
Marion Allet
Université Libre de Bruxelles, CERMi
UMR 201 « Développement et Sociétés », Université Paris 1 – IRD
mallet@ulb.ac.be
14/12/2010
Abstract
In recent year, in addition to its financial and social objectives, the microfinance industry has started to
look at its environmental bottom line and develop ‘green microfinance’ programs. The objective of
this article is to provide some insights on this quickly growing phenomenon, by identifying why
microfinance institutions decide to go green. Basing our analysis on the results of a qualitative study
and on the mobilization of organizational decision-making theories from the Corporate Social
Responsibility literature, we find out that, in the absence of prevailing social norms regarding the role
that microfinance should play in environmental management, the decision to engage in green
microfinance still depends more on the perceptions of individual managers. Today, microfinance
institutions that decide to go green are institutions where proactive leaders act as environmental
champions with an integrated approach, capacity to innovate and ability to access required technical
expertise and resources.
Key words: microfinance; environment; triple bottom line; corporate social responsibility;
organizational decision making
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INTRODUCTION
Climate change, natural resources depletion and pollution problems have put environmental
issues high on the global development agenda. Recently, these issues have also been raised in
the microfinance sector, with promoters of a ‘green microfinance’ advocating that
microfinance, beyond its double financial and social bottom line, should include a third
environmental objective as well (GreenMicrofinance, 2007; Rippey, 2009; Van Elteren,
2007). New concepts have then emerged in the microfinance sector: that of 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); and that of a green microfinance, a microfinance
that integrates the principles of environmental sustainability in all its operations and promotes
environmentally-sound practices (GreenMicrofinance, 2007).
A growing number of microfinance institutions (MFIs) are indeed starting to adopt procedures
and develop products seeking to mitigate their environmental impact and promote a more
sustainable development. They may do so through different strategies and actions: (a)
reducing their internal ecological footprint, by taking actions at the institutional level to
decrease their energy, paper, water consumption, waste production, carbon emissions, etc.
(e.g. ACLEDA, Cambodia; MiBanco, Peru; XacBank, Mongolia); (b) using part of their
proceeds to support the development of environmental projects, like the planting of trees in
natural parks (e.g. Banco Solidario, Ecuador); (c) screening and monitoring loans according to
environmental criteria, in order to manage the environmental impact of clients’ activities and
avoid supporting practices that are highly polluting and/or that deplete natural resources (e.g.
Apoyo Integral, El Salvador; K-Rep, Kenya); (d) tailoring products and services to support
environmentally-friendly activities, practices and technologies, such as renewable energies,
energy efficiency, agroforestry or conservation agriculture (e.g. BRAC, Bangladesh; FINCA,
Uganda; Grameen Shakti, Bangladesh); or as well (e) organizing awareness-raising
campaigns or training sessions (e.g. CAMIDE, Mali; CEPRODEL, Nicaragua).
These MFIs are pioneers in adopting a triple-bottom-line approach (financial, social and
environmental). Up to now, many of those who are engaging in green microfinance are still at
a design or pilot phase. But green microfinance is a fast-growing phenomenon, which has
been drawing increased attention from the microfinance community in the past years. More
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and more MFIs are developing or planning to develop environmentally-friendly products and
services. Microfinance donors and investors are beginning to include environmental criteria in
their due diligence requirements. Some technical assistance providers (donors, NGOs) are
setting up support programs to encourage environmental management by MFIs 1. Dedicated
websites2 have started to gather the few (but growing number of) publications existing on the
subject. The topic of ‘green microfinance’ starts being introduced into university curricula on
microfinance. And the issue is even being discussed now in specific roundtables organized in
major international microfinance events3 or in discussion forums set up on the internet4.
However, very few studies have tackled the issue so far, and the relevance and effectiveness
of a green microfinance is sometimes questioned by microfinance professionals. Some
practitioners indeed argue that this environmental bottom line does not respond to a need or
priority for microfinance clients, that it would only bring about additional constraints and
costs for MFIs and their clients, or that microfinance institutions are not in a position to
address the issue in an effective manner.
The objective of this article is to provide some insights on the rationales behind the fastgrowing phenomenon of green microfinance. Basing our analysis on the results of a
qualitative study and on the mobilization of organizational decision-making theories from the
Corporate Social Responsibility literature, we will address the following questions: What are
the interests that microfinance institutions identify for engaging in environmental
management? How do they conceive their role in managing an environmental bottom line?
How relevant do they consider green microfinance? Or, in other words: why do microfinance
institutions decide to go green (or not)?
After reviewing the main arguments for engaging in green microfinance as they can be found
in the existing literature, we will briefly introduce the research methodology used in this
paper. We will then present our main findings regarding MFIs’ rationales for engaging or not
in green microfinance, and discuss the main implications of our results for the future
promotion and development of green microfinance strategies.
This is the case of the ‘Greening the Microfinance Sector’ project launched in 2007 by the
Foundation for a Sustainable Society Inc. (FSSI), in the Philippines, or of PlaNet Finance projects
under the Microfinance & Environment Business Line.
2
Microfinance Gateway and GreenMicrofinance Centre websites
3
European Microfinance Week 2009 and 2010, Microcredit Summit Campaign Latin America &
Caribbean 2009, etc.
4
www.microlinks.org
1
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LITERATURE REVIEW
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
tackle the issue of microfinance and the environment (Borge, 2004; Chowdury, 2008;
Herrold-Menzies, 2006; Kaushal & Kala, 2005; Mbile, et al., 2005). But they usually focus on
microcredit programs set up within environmental projects – such as Integrated Conservation
and Development Projects implemented in protected areas since the 1980s – and not yet on
microfinance institutions setting up environmental management programs – a much more
recent phenomenon. Some professionals have consequently been calling for a research agenda
in microfinance and environment (GreenMicrofinance, 2007). Meanwhile, the issue is being
tackled by a growing grey literature. Some articles and studies written by microfinance
practitioners are based on case studies and identify lessons learned from pioneer experiences
(Wild, et al., 2008; Morris, et al., 2007). But a large number of publications are still very
theoretical: 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). Similarly to
some of the literature on Corporate Social Responsibility (Castelo & Lima, 2006), this grey
literature puts emphasis on two types of rationales that would lead MFIs to engage in
environmental management: (1) ethical motives (moral commitment, desire to do good), and
(2) instrumental motives (enlightened self-interest).
The ethical argument used in the literature is based on the idea that MFIs should manage
environmental issues in order to effectively contribute to poverty alleviation and sustainable
development. It is not uncommon to hear that microfinance clients, because they are poor and
are only engaged in small-scale activities (especially in the trade sector), do not have a
significant impact on the environment. Indeed, contrarily to big industrial companies or
developed countries economies, microfinance clients cannot be held responsible for climate
change. Yet, promoters of green microfinance often emphasize three main reasons why
microfinance clients are concerned with environmental issues: (a) some specific microactivities can entail environmental risks, (b) environmental risks can translate into direct
threats to the livelihoods and health of the microentrepreneur and his surrounding community,
and (c) managing environmental issues can generate positive economic returns to the
microentrepreneur.
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First, microfinance clients are concerned because there is evidence today that some of the
activities held by microentrepreneurs can have an adverse effect on the environment, may it
be 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.). Even if their impact on global warming may be insignificant, such
activities can have a destructive, cumulative effect at a local level. This negative impact can
be due to production methods, inputs use, inefficiency of the production technologies, or
waste and output management (Hall, et al., 2008). Some specific sectors have been identified
as being particularly at risk, 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).
Second, microfinance clients are concerned because such environmental risks represent direct
threats to their livelihoods and that of their relatives and surrounding communities. Indeed,
natural resources are the only assets readily available to the poor (microfinance target
population), who rely on them for the provision of energy, food, housing material, medicinal
treatment, income, fodder for livestock, etc. 70 per cent of people living with less than US$1 a
day live in rural areas with high dependence on natural resources (Roe, 2003). And according
to Araya & Christen (2004), at least 80 per cent of the needs of the poor are actually derived
from biological resources. Because they rely heavily on natural resources for survival, the
poor are the most affected by environmental degradation (Hall, et al., 2008). 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 people’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).
Third, microfinance clients are concerned because managing environmental issues can help
them improve productivity and grasp business opportunities. Environmental management
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often entails reducing inefficiencies in the production process: reducing chemical use to the
minimum level necessary, using energy-efficient technologies (such as improved cookstoves,
efficient fridges, 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, 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 their
social mission of poverty alleviation and promotion of sustainable human development5.
The second type of argument used in the literature is an instrumental one: another motive for
engaging in green microfinance is that it would entail clear strategic and financial benefits for
the institutions themselves. First, by tackling environmental issues, MFIs could gain access to
new funding from socially responsible investors (SRIs) 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, 2008; UNEP-FI, 2006).
Second, they could diversify their offers, explore niche markets, differentiate themselves from
competitors and attract clients by proposing appealing ‘credit + services’ packages, for
instance 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,
5
For a discussion on the social mission of MFIs and ethical issues, see Armendariz & Szafarz (2010)
or Hudon (2009).
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2007; Zutshi & Sohal, 2004). And fourth, still according to green microfinance promoters,
MFIs could reduce their credit risks thanks to the management of clients’ environmental risks.
The argument here is that environmental risks can reduce the solvency of the client: his
business may become unsustainable due to the depletion of natural resources, he may face
reputation problems that will affect his activity, he may get fined for not respecting
environmental regulations, he may have health problems because of some pollution issues, he
may become more vulnerable to natural disasters, etc. Managing the environmental risks of
the clients would then avoid that they directly translate into credit risks for the MFI (Coulson
& Dixon, 1995; FMO, 2008; Triodos Facet, 2009; UNEP-FI, 2006; Van Elteren, 2007).
MFIs’ rationale for going green would thus follow an instrumental incentive: environmental
management is motivated by the strategic and financial benefits that can be expected from it.
The ethical and instrumental arguments put forwards by the existing literature however
remain very theoretical and lack any scientific, empirical study on the reality of these
advantages. Can actually 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. Or that 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.). As for strategic and financial benefits, how important
can they actually be for MFIs? 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 held accountable yet 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. The only limit to engaging in green
microfinance that is regularly mentioned by the grey literature is the financial cost of setting
up environmental management processes or programs (Araya & Christen, 2002; Coulson &
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Dixon, 1995; Wenner, 2002). Indeed, an MFI willing to identify the environmental risks of its
clients’ activities and train them to mitigate these risks needs to acquire new competences and
develop new procedures. Including environmental appraisal and follow-up may slightly
decrease staff productivity. And offering innovative products, such as long-term loans for
solar home systems, may also entail higher credit risk for the institution.
As summed up in Table 1, the existing literature thus emphasizes that there are two types of
motivations that can (or should) make MFIs go green: ethical rationales, based on the
commitment to fulfill a social mission through promoting sustainable human development;
and instrumental rationales, based on the enlightened self-interests of the institutions. Are
these arguments actually compelling to MFIs? Are microfinance institutions aware of the
potential benefits of managing environmental issues, and are they motivated by them? Is
financial cost the only brake preventing them from going green? Beyond the theoretical
arguments presented in the existing literature, this article will seek to identify what are the
real motivations that lead MFIs to engage in green microfinance today.
Table 1. Rationales for engaging in green microfinance according to existing literature
Ethical
arguments
(Clients’ interests)
Instrumental
arguments
(MFI’s interests)
Potential benefits / opportunities
Potential costs / limits
Contribution to poverty alleviation
and sustainable development:
 Reduced environmental risks
 Improved working conditions
 Reduced health and safety hazards
 Increased efficiency and
sustainability of clients’ business
 Improved image / reputation
 Access to new funding (SRI, etc.)
 Enhanced competitiveness /
diversification
 Exploration of new markets
 Increased staff motivation
 Reduced credit risk
 Trade-offs with economic and
social bottom lines for the
microentrepreneur?
 Financial cost of setting up new
management processes / new
programs
RESEARCH METHODOLOGY
In order to identify the motives driving MFIs to engage in green microfinance, an inductive,
qualitative approach was privileged. This methodology is the most adapted to explore an
emerging phenomenon such as green microfinance, since it enables to reveal decision-making
processes, diversity of rationales and perceptions.
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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 in
green microfinance by looking at the perceptions of MFIs’ top managers.
In this perspective, extensive interviews were conducted between November 2009 and
December 2010 with twenty MFIs’ executive directors or deputy-executive directors, coming
from fifteen different countries (Bosnia & Hezergovina, Burkina, Cambodia, Egypt, Ethiopia,
Indonesia, Kenya, Mali, Madagascar, Mexico, Morocco, Pakistan, Philippines, Tanzania,
Uganda). Our objective was to identify what determines the decision to engage (or not) in
green microfinance. Consistently with a qualitative approach (Pratt, 2009), it was decided to
interview a sample of institutions with diverse profiles in terms of geographical location, legal
status (cooperative, NGOs, non-bank financial institutions), age, size, and above all level of
involvement in green microfinance. Some were chosen because they are already involved in
green microfinance, but others were selected as well because they are not. Even though this
sample is still limited, it nevertheless enables to identify the main issues and the diversity of
rationales behind engaging (or not) in green microfinance.
We made a deliberate choice to privilege face-to-face interviews, since it better enables to
create trustful 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
MFIs’ managers in their countries of operation: six interviews were actually conducted incountry during professional field visits (Egypt, Mali, Morocco), while the other fourteen were
undertaken in Europe, at the occasion of international conferences or business trips.
An open, semi-structured protocol was established to guide the interview and get information
both on practices and perceptions. 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 (when
relevant), strategic interest for going green, and potential pressures from stakeholders.
Specific attention was given to the formulation of the questions in order to avoid biases,
presenting both arguments and counter-arguments on each topic so as to assess interviewees’
reactions. The interviews were conducted in English, French or Spanish, according to the
language privileged by the interviewee. Some of the quotations used in this article were thus
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translated from French and Spanish to English by the author. The interviews lasted on average
thirty minutes. They were all recorded and transcribed.
In order to avoid introducing any preconceived analytical biases, the collected information
was first clustered to identify emerging themes in an inductive approach. Then, a dialogue
was initiated between our results and theories from the corporate governance and Corporate
Social Responsibility (CSR) literature. We did not privilege any single theoretical framework,
but rather chose to consider a variety of organizational decision-making theories (stakeholder
theory, convention theory, management innovation, etc.) and mobilize the analytical insights
most relevant to enlighten our empirical results. All results were furthermore interpreted in
light of contextual information gathered through extensive documentary review (donors and
NGOs’ publications, investors’ appraisal formats, rating agencies’ reports and questionnaire
templates, MFIs’ annual reports, etc.) as well as additional semi-structured or informal
interviews conducted with other microfinance stakeholders (clients, employees, investors,
donors, rating agencies, etc.).
FINDINGS
A widespread concern about environmental issues
Results from our research first reveal that interviewed managers are widely 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). This level of awareness can however vary from one
manager to the other:
Yes, there may be a negative impact on the environment. For instance, we finance
textile dyers. And dyers, as you know, are polluter agents! […] But we can say that
the proportion is not big, it is minimal compared to other sectors of activity. […] It is
only very slightly perceivable.
Deputy Director, MFI 9, Mali
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. From the following perspectives: […]
most of them use processes and systems that, often, are not very friendly to the
environment. So, they can and they do have a big impact on the environment.
Director, MFI 6, Kenya
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Similarly to what is highlighted in the literature on Corporate Social Responsibility, one can
assume that these differences in perceptions are due to some individual factors, such as
individual moral development, knowledge, values, attitudes, intentions, etc. (Ferrell &
Gresham, 1985, cited in Jones, 1991; Logsdon & Yuthas, 1997). According to their own
values, beliefs and awareness of environmental issues, some MFIs’ managers may thus be
more or less sensitive to the importance of environmental management for ensuring the
sustainability of their clients’ livelihoods and achieving their social mission. Differences in
perceptions may also be explained by what Jones (1991) calls the moral intensity of the issue.
Indeed, among our interviewed sample, managers tend to be more sensitive to one or two
specific environmental issues that are closer to their daily concerns: deforestation for
managers working in drought-prone rural areas in Mali, or waste management for managers
working in periurban slums in the Philippines.
Despite these variations in perceptions, our study still reveals that there is an overall
consensus over the importance of the environmental bottom line. No managers would
question the ethical argument promoted in the literature: that environmental issues need to be
tackled in order to ensure a sustainable, human development. But not all would agree that
MFIs are the actors that should take actions in this perspective.
Controversy over the positioning of the microfinance industry
Minimalist vs. integrated approach
Even if MFI managers are aware of the potential environmental risks of their clients’
activities, they may consider that it is not the role of a microfinance institution to tackle this
issue. The decision to engage in green microfinance is indeed strongly determined by the
mission definition and position that MFIs have adopted. This draws us back to a well-known
and controversial debate concerning the limits of microfinance mission (Servet, 2006). Should
microfinance only be about the provision of financial services? Or should it have a more
holistic approach aiming at poverty alleviation and sustainable development?
Indeed, the likelihood to engage in green microfinance turns out to be strongly conditioned by
the position chosen by the MFI between a minimalist and an integrated approach. 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. MFIs may have adopted such a minimalist approach because they
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are primarily commercially-oriented; or because they believe that providing vulnerable
populations with access to financial services is already in itself a contribution to poverty
alleviation, and that other organisations are more suited to address development issues outside
of the financial inclusion one. 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, according to which the primary function of a business is to provide
goods and services to clients and profits to investors; and other types of functions, such as
social and environmental ones, are devoted to other actors which have the skills or time
required to implement them (Parsons, 1951, cited in 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 lead to
livelihood improvement for their clients. In addition to facilitating financial inclusion, these
MFIs provide business development services and additional support programs. Such
institutions are therefore more likely to consider that they also have a role, and even a
responsibility, in promoting a sustainable, human development, respectful of the environment:
What we look for in microfinance is the well-being of the community. […] We could
not ensure this well-being in a segmented way. It has to be a global well-being, taking
into account all aspirations, life harmony, in the environment where we are.
Manager, MFI 10, Mali
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
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The integrated approach is not however in drastic opposition with the minimalist one. Indeed,
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, and, on the opposite, agree that they do not have all
the skills and resources needed to tackle environmental issues on their own. Yet, contrarily to
MFIs with a minimalist approach, these institutions identify both a responsibility and an
opportunity (for themselves and for their clients) in environmental management:
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 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 with an integrated approach appear to consider that not
addressing social and environmental issues would actually constitute the mission drift. There
are thus very different standpoints from MFIs themselves on the role that microfinance should
play regarding the environmental bottom line.
Social expectations and stakeholders’ pressures
As highlighted by Labie (2005), this type of controversial debates around mission definition is
actually typical of non-profit organisations, which pursue several simultaneous objectives and
have to define what are their priorities, what are the missions they want to handle themselves
and the ones they would better leave to others. According to convention theory, in the absence
of rationale calculation or precise contract that would help a stakeholder determine action,
decisions to opt for a behaviour rather than another are influenced by the collective social
norms in place (Labie, 2005). The Corporate Social Responsibility literature as well
emphasizes that the decision to engage in Corporate Responsibility results from a complex
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process related to the way individuals, organisations, the business world and society interpret
the role of business in the society today (D’Amato & Roome, 2009). Social expectations and
institutional pressures thus play a key role in shaping the vision on what would be the socially
appropriate role of a business.
One theoretical framework, often mobilized in the CSR literature as well as in some
microfinance articles (Ashta & Hudon, 2009; Périlleux, 2008), explores in particular the
influence of institutional pressures on organizational decision-making processes: stakeholder
theory (Freeman, 1983, 1984). Stakeholder theory states that the behaviour of an organisation
is conditioned by the pressures exercised on the organisation by different stakeholders
(Baudry, 2003; Clarkson, 1995; Donaldson & Preston, 1995; Fineman & Clarke, 1996). If an
organisation wants to gain social legitimacy, it thus has to satisfy social expectations and
conform to the institutional pressures of relevant groups (Céspedes-Lorente, et al., 2003;
Hemingway & Maclagan, 2004; Logsdon & Yuthas, 1997). If we apply this stakeholder
analytical framework to the green microfinance phenomenon, we find out that today there are
neither strong social expectations nor significant stakeholders’ pressures on MFIs to engage in
environmental management.
Indeed, on the one hand, some microfinance stakeholders are not aware yet of the potential
role MFIs could play in tackling environmental issues and therefore do not exert any pressure
regarding the appropriate role of microfinance in environmental management. This is the case
of microfinance clients and employees. Microfinance clients are often little aware of the
potential importance of the environmental risks linked to their activities and of the existence
of alternative solutions that could help them enhance their productivity, reach new business
markets and improve working conditions. Environmental management is moreover likely not
to be perceived as a priority for microfinance clients who are poor and have other, more
urgent issues to manage:
Environment is just one issue. […] The poor people, what they need first, the basic,
will be eating. Second will be home. Third will be education. Fourth will be
something else. Environment is not the first priority for poor people.
Manager, MFI 3, Indonesia
Even if they were aware of the potentially negative impact of their activity and of possible
solutions to mitigate this impact, it is hard to image that microfinance clients would
spontaneously seek support from a financial institution not yet involved in green
microfinance, when the problem is an environmental one. Similarly, if an MFI is not yet
Allet M. – Why do MFIs go green? – 14/12/2010
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involved in green microfinance, its employees are not prone to perceive that they have a role
to play in promoting environmental management, and therefore they are not likely to exert
explicit pressures on top managers for implementing environmental programs.
On the other hand, some other microfinance stakeholders start considering that MFIs could be
actors of environmental management, but they still put a low urgency on the issue. This is
especially the case of investors and donors, rating agencies and governments.
An increasing number of investors and donors are now adopting a triple bottom line approach
in their funding policies. According to the Social Performance Indicators Survey realized by
the Social Performance Taskforce in 2007, 62 per cent out of forty-five interviewed social
investors expressed their interest in knowing the environmental performance of MFIs (De
Bruyne, 2008). And the Microfinance Investment Vehicles (MIVs) Survey held by CGAP in
2009 revealed that 60 per cent of the seventy-eight participating MIVs ‘report ESG
[Environmental, Social and Governance] information to their investors, and […] 41 per cent
have environmental exclusions’ (CGAP, 2009). Peer-to-peer platforms, such as Kiva, are also
starting to promote ‘green microentrepreneurs’ on their websites. The interest of some
microfinance investors and donors in environmental issues thus exists and is quickly growing.
However, it is not felt so strongly by all types of investors. International donors and socially
responsible investors may be concerned with environmental issues, but it is not so much the
case for more commercially-oriented investors or local banks. Besides, even the investors and
donors that are showing interest in environmental performance do not seem yet to put a high
priority on 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 they are generally not accompanied, in practice, by any
real sanction, reward or technical assistance.
Microfinance rating agencies are also beginning, although timidly, to 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 MFIs’ responsibility to the environment: existence of environmental
policies, processes for assessing and screening environmental risks, processes for monitoring
Allet M. – Why do MFIs go green? – 14/12/2010
15 / 26
client compliance, training and awareness-raising of staff, development of specific green
microfinance projects (renewable energies, sustainable farming, sanitation), etc. Nonetheless,
the level of importance that rating agencies give to environmental performance still remains
low as well. Indeed, 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, as we know, have only been developing recently and still remain
secondary in the microfinance rating industry.
As for governments, some of them have started to express an interest in promoting green
microfinance, may it be through the adoption of specific regulations (Burkina Faso) or
incentive mechanisms (Bangladesh). MFIs indeed have the advantage of being embedded in
their local areas of intervention: they have developed extensive networks, and have frequent
and direct contacts with thousands of microentrepreneurs. As financial institutions, they
constitute key stakeholders in a business and their capacity to influence the decision making
and management practices of this business should not be underestimated (Coulson & Dixon,
1995; Van Gelder, 2006). This actually places them in a better position than national
authorities, which can difficultly regulate the environmental behaviour of the disseminated
and widely informal micro-businesses. In a context of growing concerns about climate
change, governments that are implementing environmental protection policies can therefore
be interested in piggybacking on MFIs’ networks for the enforcement of environmental
standards or the promotion of environmentally-friendly technologies and practices (Hall, et
al., 2008):
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
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.
And when there are specific regulations regarding environmental risk management for SMEs
Allet M. – Why do MFIs go green? – 14/12/2010
16 / 26
and microenterprises, there is usually little enforcement and the decision to abide by them still
depends more on the own willingness of MFIs.
Analysis based on a stakeholder approach thus reveals that today, microfinance stakeholders
do not have yet high expectations regarding MFIs’ role in managing environmental issues. A
certain number of governments that have adopted specific regulations or policies, and some
donors or investors that are particularly committed to environmental protection may be
influencing MFIs to go green. But such types of pressures turn out to be scarce for the
moment, and they are very seldom mentioned by interviewed managers as determining their
engagement in green microfinance so far.
Nevertheless, our study reveals that MFIs’ managers somehow feel that they are expected not
to dismiss the environmental issue. As it could be observed in our interviews, some MFIs’
managers are already adapting their discourse regarding environmental issues: they integrate
the terms of ‘sustainable development’ or ‘environmentally-friendly practices’ in their
language to describe their policy orientation, even when in practice no real action is
undertaken to reach an environmental bottom line. Some other interviewed managers that are
not involved in green microfinance also showed a tendency to minimize the extent of their
clients’ impact on the environment. This reveals that they are aware of social expectations in
favour of environmental management, and that they feel the need to justify their lack of
involvement on this issue, in order not to lose their social legitimacy. Where does this
perception come from, if not from microfinance stakeholder pressure?
No collective social norm clearly defines yet what role would be appropriate for microfinance
regarding the environmental bottom line. But the microfinance industry has a specificity in
that, in addition to its financial bottom line, it is 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.
More than in other industries, MFIs’ managers are thus compelled to consider and respond to
their clients’ needs. In a context of growing concerns regarding climate change and
sustainable development, MFIs are increasingly likely to consider that environmental risks are
intricately related to economic and social impacts for their clients. In consequence, managers
may perceive that they should take these environmental risks into account if they want to
satisfy expectations regarding their social mission.
Allet M. – Why do MFIs go green? – 14/12/2010
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Moreover, MFIs’ managers may already feel compelled to integrate environmental issues (at
least in their discourses) because new expectations have been created with the engagement of
some pioneer MFIs in green microfinance. In the literature on Corporate Social
Responsibility, several authors highlight that engagement in CSR is crucially influenced by
processes of sense-making, which are co-created through the interactions of organizational
and social stakeholders (López Rodriguez, 2009; Preuss & Córdoba-Pachon, 2009). CSR is
then defined as ‘an embedded process that is both a product and a generative mechanism’
(D’Amato & Roome, 2009). The idea here is that interactions with other stakeholders will
lead an organisation to engage in CSR, and the engagement of that organization will in turn
influence others to engage. The same constructivist process can also happen in green
microfinance: little by little, a phenomenon of mimetic behaviour is creating sense around the
environmental engagement of MFIs and shaping the vision on what is the appropriate role of
the industry. However, this process is still far from having reached a consensus. And our
study reveals that today, the strategic decision to go green still depends essentially on the
vision and positioning of individual managers.
The key role of the environmental champion
Similarly to what is emphasized in the literature on Corporate Social Responsibility
(Hemingway & Maclagan, 2004; Logsdon & Yuthas, 1997; Maon, et al., 2009), leadership
turns out to be the strongest determinant for engaging in green microfinance hitherto. As few
MFIs make explicit the relative weight they attach to their different goals, or their ranking, it
indeed leaves managers with important strategic room for maneuver (Copestake, et al., 2005).
Results from our qualitative study show that pioneer MFIs that are currently implementing
green microfinance programs are MFIs with strong leaders who were ready to engage in
environmental issues. Interestingly, these leaders were not necessarily active ecologists. But
they were somewhat concerned with the environmental risks of their clients and, when an
opportunity aroused, they were not afraid to innovate and set up new management procedures
within their institutions.
Literature on CSR often points to a set of individual characteristics that can explain why some
managers have a proactive posture in implementing Corporate Social Responsibility: they are
usually managers with a propensity for change, a taste for innovation and search of new
opportunities, an ability for holism, a long term vision, a capacity to anticipate problems, the
willingness to develop new models, an ability to network and use multiple sources of
information, a strong commitment and perseverance, and an ability to extend their vision to
Allet M. – Why do MFIs go green? – 14/12/2010
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the board, managers and employees of their institution (Aragón-Correa & Rubio-López, 2007;
D’Amato & Roome, 2009; Husillos & Álvarez-Gil, 2008; Nidumolu, et al., 2009). The same
holds for green microfinance. Pioneer managers that drove their institution into environmental
management appear to be individuals with a holistic vision, who have integrated the concept
of sustainable development, where economic, social and environmental issues are all
intricately related. They therefore see a clear opportunity both for their clients and for their
institution in addressing a triple bottom line:
As long as the environment is not sustainable, my clients are not going to be
sustainable, and the institution is not going to be sustainable. I know their livelihood
is more affected by nature than by the policy of my government. […] So this is simply
business practice, a good business practice to help them to find out a way to better
manage their relationship with the environment.
Director, MFI 4, Ethiopia
Results from our interviews also confirm that these pioneer managers are individuals with a
longer-term vision and with taste for innovation, which makes them more likely to perceive
the economic opportunities that can be fostered by green microfinance:
I would not like to be a microfinance network like any other. I told myself that the bet
that we need to win is to take actions heading towards a sustainable and responsible
development. […] I think that in terms of competition, we will be one step ahead. It is
a plus for us. […] We are designing a model today.
Director, MFI 11, Mali
Individual characteristics are essential factors to explain why MFIs go green, but it is
important to realize that there is no determinism in who can be an environmental champion.
As highlighted in the literature on CSR, organizational leadership also emerges through a cocreation process (D’Amato & Roome, 2009; López Rodriguez, 2009). As MFIs increasingly
get involved in green microfinance, interactions will foster sense-making and knowledgecreation, and progressively lead to the emergence of new environmental champions within
MFIs.
The triggering factor: access to technical expertise
The literature on CSR sometimes emphasizes that a main determinant for involvement in CSR
is the economic situation of the business (Elijido-Ten, 2007). As previously mentioned, the
grey literature on green microfinance also highlights that financial cost can be a main
constraint for the development of green microfinance programs (Araya & Christen, 2002;
Allet M. – Why do MFIs go green? – 14/12/2010
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Coulson & Dixon, 1995; Hall, et al., 2008; Wenner, 2002). Of course, a solid financial
situation is essential. An MFI will not launch any type of program or innovation if it is not
financially healthy, because it will have other priorities. But some environmental actions do
not necessarily require lots of funding, and MFIs can choose a strategy along available
resources. Furthermore, environmental champions are usually leaders capable of mobilizing
additional funding if needed. And as investors and donors’ interest increase, one can expect
growing opportunities to get funding for environmental management projects.
What comes out of our study as a more constraining factor today is rather access to
knowledge and technical expertise. Indeed, engaging in green microfinance implies
management innovation. Screening and monitoring loans along environmental criteria,
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).
Even when MFIs’ managers find a latent interest in the environmental topic, even when they
consider that they would have a role to play, and even when, as environmental champions,
they would be ready to engage and push the issue forward within their institution, they often
express that they lack the knowledge and technical skills to translate this interest into practice:
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 lack orientation.
Director, MFI 2, Mexico
Today, pioneer institutions engaged in green microfinance are always the ones that were able
to mobilize technical assistance from external partners (donors, NGOs, consulting companies,
etc.):
We didn’t know how to approach the subject. And the reason we got there sort of 4
years ago, is because our partners […] began also getting involved in that area. They
brought a big support and expertise to start working in this area.
Director, MFI 6, Kenya
Access to technical expertise regarding green microfinance is still a limiting factor for MFIs’
environmental engagement today. However, as initiatives in this area multiply, knowledge is
being created through a learning-and-sharing process, therefore progressively reducing the
technical barriers that can prevent MFIs from going green today.
Allet M. – Why do MFIs go green? – 14/12/2010
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CONCLUSION
In recent years, green microfinance has started to emerge as a new phenomenon, based on the
objective to reach a triple bottom line. The issue has still been little explored, but its potential
development may be significant in the near future. Before further advocating for specific
green microfinance strategies and actions, it is essential today to ask whether such an
approach would be relevant. The objective of this article was to provide some insights on this
issue, by identifying why microfinance institutions decide to engage in environmental
management.
Existing literature in green microfinance usually recognizes two types of theoretical rationales
for MFIs to go green (ethical and instrumental), but does not provide any empirical insight on
the actual determinants guiding MFIs’ decision-making process. Basing our analysis on the
results of a qualitative study and on the mobilization of organizational decision-making
theories from the Corporate Social Responsibility literature, we found out that the decision to
engage in green microfinance actually results from more complex processes. Our study first
revealed that MFIs’ managers are overall aware that their clients are concerned with
environmental issues and that such risks should be mitigated to achieve a sustainable, human
development. However, not all managers consider that microfinance has a role to play in that
sense. Stakeholder analysis enabled us to identify that there are no strong social expectations
or institutional pressures from microfinance stakeholders hitherto concerning the role that
microfinance should play in tackling this environmental bottom line. The positioning of the
microfinance industry regarding the environmental issue is still controversial: some MFIs
managers consider it as a mission drift, when for others it constitutes an integral part of their
social mission and financial objectives. In the absence of prevailing social norms, the decision
to engage in green microfinance still depends more on the perceptions of individual managers.
Our study indeed revealed that, today, MFIs that decide to go green are institutions where
leaders act as environmental champions who promote a sustainable development vision and
an integrated approach, who see green microfinance as an opportunity and are not afraid to
innovate, and who manage to have access to the needed technical expertise and resources.
So far, many pioneer MFIs are engaging in green microfinance proactively, because they
identify a need at the level of their clients. For many leaders, this engagement is felt as an
ethical one, to fulfill their social mission, their responsibility towards the society, with a long
term vision of sustainable development. However, in a context of growing interest regarding
Allet M. – Why do MFIs go green? – 14/12/2010
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environmental protection and sustainable development, MFIs may feel increasingly
pressurized to integrate an environmental bottom line. Pressures may be exercised directly by
powerful stakeholders such as donors, investors, rating agencies and governments. They may
also come more pervasively, as mimetic behaviours and processes of sense-making
progressively define what should be the role of the microfinance industry regarding
environmental issues. The risk then is that MFIs engage in environmental management by
mere compliance to institutional pressures or social expectations, without putting clients’
interests at the heart of their approach, which entails a risk of inefficiency or even of adverse
social effect. The CSR literature indeed 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.
Green microfinance encompasses a diversity of strategies, and some of these strategies could
potentially entail important economic and social trade-offs for microfinance clients (risk of
exclusion, imposition of inadequate requirements, etc.). MFIs that engage in green
microfinance in a mere reactive posture may not adopt the most relevant policies. The risk
indeed is that these MFIs 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, will entail some counterproductive economic, social and
environmental effects.
This article sought to identify factors influencing MFIs’ decision to engage (or not) in green
microfinance, and did not assess the actual effectiveness of green microfinance programs. But
the present controversy over the positioning of microfinance indeed points to a very acute
question: what should be the role of microfinance in managing environmental issues? Can
MFIs effectively reach an environmental bottom line? To what extent and how can they
influence environmental behaviours? And what could be the economic, social and
environmental costs and benefits of the different types of green microfinance programs?
Not only do all these issues call for further investigation in order to really understand the
stakes at play around green microfinance. They also emphasize the responsibility of
Allet M. – Why do MFIs go green? – 14/12/2010
22 / 26
microfinance stakeholders to avoid rushing into the environmental bottom line issue without
engaging a real reflection regarding the adequacy of objectives and means of green
microfinance strategies.
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