European Microfinance Week 2019

PRESENTATIONS

Alain LEVY introduced the session by explaining the relevance of investments in climate change resilience. Levy affirmed that climate change mostly affects rural agricultural and fishery areas with little economic and institutional capacity to address the problems. KANZE illustrated this with an example of the effects of extreme weather events on the lives of farmers. Kanze added that when they lose their crops, they are often unable to pay back their loans and must leave their homes. Levy explained that financial institutions and particularly microfinance institutions could help to build resilience in these areas with their financial products, such as credit and insurance, and with financial planning.

ZAPPIA presented the need for investment in climate change resilience from a market perspective. She showed large gaps between current investments in climate finance and estimated investment needs. In terms of climate mitigation, she stated that there is an annual average gap of USD 400 billion until 2030; as concerns climate adaptation instead, there is an annual average gap of USD 188-278 billion between 2010 and 2030, as estimated by the United Nations Environmental Program (UNEP). Zappia is particularly concerned about the insurance gap specifying that, in all regions of the world, large shares of losses from natural disasters were not insured. The biggest insurance gaps are in Asia, South America and Africa.

Jacinto BUENFIL continued that poor people are most vulnerable to climate change. For example, marginal populations often live in the least suitable locations, such as steep slopes where heavy rainfall causes erosion and ultimately landslides that destroy property or even lives. Buenfil added that their capacity to get back on their feet after such an event and improve their situation is limited. He affirmed that UNEP promotes ecosystem-based measures to adapt to climate change and reduce the effect on livelihoods of these people. This comprises training and tools to microfinance institutions such as climate change awareness raising for farmers through games. By embedding the ecosystem-based adaptation measures in microfinance products, the large number of microfinance clients together can achieve a large impact.

After Levy asked Zappia to provide the investor perspective on climate change resilience, she presented the InsuResilience Investment Fund (IIF). She first showed that currently 95% of investments are made into climate change mitigation and only 5% of investments are directed towards climate change adaptation. Zappia added that climate change mitigation sounds sexier to investors than adaptation. Moreover, adaptation is more challenging and requires more time, which results in a lower attractiveness from the investment perspective. She pointed out that the IIF builds an ecosystem for climate insurance together with tech companies such as providing weather data (e.g. weather stations), insurers, brokers and clients. In response to a question from Levy on the insurance premium, Zappia explained that the premium depends on the local context. IIF can provide premium support for smallholder farmers who cannot afford higher premium. However, ultimately, the premium should be established on a market basis and any temporary support provided needs to be phased out as activities are scaled-up and affordability is achieved.

Levy asked Kanze to present about the market for financing climate resilience and the main features of this market. Kanze provided examples from the portfolio of Grassroots Capital Management, which is a company managing a fund that made investments into financial institutions in Latin America. Even before the company invested in these financial institutions, some of them were already providing climate change adaptation programmes in response to client needs. She concluded that these financial institutions have often invested a large share (over 40%) of their loan portfolio in the agriculture market and their clients in this market need financial products and technical assistance that strengthen their climate resilience.

Buenfil stressed the need for more investments in climate change adaptation, as opposed to climate change mitigation. He affirmed that this requires investors to consider the large exposure and sensitivity of farmers and the need to build their adaptive capacity to reduce risks. Buenfil further explained that besides insurance, which provides post-disaster relief, financial institutions should also increase capacity to implement measures that increase resilience to climate risks before disasters happen. Farmers need capacity building on diversification measures such as multi-cropping. For example, they can build an agroforestry system combining agricultural activities with other income sources such as beekeeping. When financial institutions use ad-hoc tools, such as those developed by the MEbA project, to assess risks of climate change, they can adjust interest rates to the actual risk the client represents: those who invest in adaptation should pose less risk and be rewarded with lower interest rates. Zappia added that premiums can only go down if financial institutions use their intelligence to advise farmers on practices that will lower climate risks. Buenfil hoped that financial institutions would receive support for developing information management systems through digitalization to provide such advice and enable risk-adjusted pricing of their products.

DISCUSSION

Based on a question from the audience, the panellists discussed the role of technical assistance for investing in climate change resilience. Zappia explained that technical assistance to financial institutions, usually 10-15% of the loan amount, can significantly help to show them the potential of the market for financing climate change resilience and develop appropriate products for their clients. Buenfil added that technical assistance can also improve the efficiency of financial institutions and catalyse investment by improving loan performance.