MEbA (MICROFINANCE FOR ECOSYSTEM-BASED ADAPTATION TO CLIMATE CHANGE)

Transcription

1 MEbA (MICROFINANCE FOR ECOSYSTEM-BASED ADAPTATION TO CLIMATE CHANGE) NEWSLETTER N

2 GENERAL MESSAGE Alejandro Laguna The microfinance for ecosystem-based adaptation (MEbA) project represents an innovative opportunity to promote the proper management of ecosystems as a climate change adaptation strategy for small farmers in the Andean region of Colombia and Peru. UNEP and Frankfurt School, in collaboration with six microfinance institutions (MFIs), are currently developing investment and capacity-building microfinance products and services aimed at reducing the vulnerability of both people and the ecological and productive systems they depend on. Highlights among the project s objectives include: To increase the capacity of MFIs to finance ecosystem-based adaptation. To enhance awareness and capacity of microfinance clients to invest in adaptation actions. To influence national and international public policies to promote adaptation through microfinance. THE MICROFINANCE SECTOR AS A STRATEGIC ALLY TO PROMOTE ADAPTATION TO CLIMATE CHANGE A few days after the initial workshops of the MEbA project undertaken in Bogotá and Lima at the end of 2012, the World Bank published an article that emphasized the consensus of the international scientific community which states that without a significant change in business as usual practices, the planet will experience an increase of at least 4 degrees Celsius in global temperature, which will have catastrophic impacts on the economy and human well-being 1. The report emphasized the urgency to plan and invest both in climate change adaptation to minimize the negative impact on the production systems and quality of life, as well as to take advantage of the opportunities that arise from an environment with a changing climate. The microfinance sector represents an opportunity and a strategic ally in the financing and execution of adaptation actions, at a very local level and at a scale which is significant to small producers. Therefore, the United Nations Environment Programme and the Frankfurt School UNEP Collaboration Centre, put in place this project, which represents an opportunity to demonstrate to both the international climate change and microfinance community that an alliance between these two sectors represents an important potential to promote resilience and adaptation to the climatic reality, at least in the rural and agricultural sector. Over the last few months the exchange between governmental entities, environmental specialists, the microfinance industry, universities, and international cooperation agencies working together towards a common end -- to find alliances and methods to reduce the climatic risk for rural producers -- has been a source of satisfaction and inspiration, both professionally and personally. here is hope, without a doubt, to confront climate change, as long as we can accomplish these types of inter-sectorial and interdisciplinary alliances. The newsletter contains a summary of progress made thus far in this initial phase, and outlines the next steps on this innovative project. We are aware, however, that this means of communication is not enough to achieve the level of intersectorial, inter-institutional and interdisciplinary exchange and coordination that this project requires. Therefore, we invite and request all stakeholders involved in the project to maintain constant informal communication among each other and, in particular, with Frankfurt School and UNEP, to allow for a continuous exchange of ideas and opportunities for an improved development of activities. Please do not hesitate to contact us in case of questions, feedback or ideas. 1 Turn Down the Heat: Why a 4 C Warmer World Must be Avoided, a Report for the World Bank by the Postdam Institute for Climate Impact Research and Climate Analytics, November

3 MEbA - NEWSLETTER N 1, Montserrat Valeiras PROGRESS Based on the feedback of the microfinance institutions involved in the project, the focus in an initial phase will be on developing MEbA credit products. The MEbA products are based on adaptation activities aimed at reducing climatic risks. INSTITUTIONAL ASSESSMENTS Currently there are very few microfinance entities that incorporate climate risk in their credit evaluation methodology with the purpose of addressing the needs of small agricultural farmers. Between February and March, Frankfurt School s consultants have conducted institutional assessments on Bancamía and Crezcamos in Colombia, and Edyficar and Fondesurco in Peru, through the following activities: Interviews with senior executives of all divisions within the organization. Review of MFI credit technology based on internal documentation. Field visits to become acquainted with client s case studies, by partnering with credit advisors on their tours to promote, evaluate, approve and follow-up on various operations. Gap analysis between the proposed methodology and actual processes within the institution. The result will be, without a doubt, of vital importance for the application of an agricultural credit technology framed by the generation of financial products to help farmers reduce the effects of climate risk. 3 KEY CONCEPTS: CREDIT METHODOLOGY In this sense, within the project s framework, we will focus on adjusting the credit methodologies of the MFIs, mainly by incorporating climate risk variables, and designing adequate financial products for the needs of the agricultural farmers (MEbA products). This will allow them to strengthen their resilience to climate change and maintain or increase their income. In addition, a more efficient credit methodology is proposed through the standardization of credit evaluation. Both aspects will allow the MFIs to ensure their credit portfolio and, to the extent possible, decrease the related costs of providing financial services in rural areas. Among other aspects, the proposed methodology introduces a new layer to the credit decision structure: a team of experts as a unit within the risk management department.

4 Traditional Methodology There is a large concentration of responsibility and institutional knowledge in the agencies personnel. This creates inadequacies in personnel to attend to a growing market, high training costs and a lack of adequate division of functions between risk and market. Proposed Methodology A change in institutional structures is proposed, ensuring higher efficiency, systematisation of institutional knowledge and a better measurement of credit risk. b) RESPONSIBILITIES OF THE CLIENT MANAGER Partially liberated from the responsibility of credit risk evaluation, the function of client manager in agricultural microfinance is created. The client manager makes the field visit and collects all required information, e.g. type of livestock and total cultivated land, agricultural production management, inputs, irrigation methods, climate risk mitigation measures, as well as information regarding additional income and household expenses. CLIENT MANAGER IN-SITU VISIT TO CUSTOMER VERIFICATION: - SOIL QUALITY - CROP MANAGEMENT - WILLINGNESS OF REPAYMENT - FAMILY INCOME AND EXPENSES a) RESPONSIBILITIES OF EXPERTS The work of experts mainly focuses on establishing the general framework to evaluate climate, market, and production risks in different areas where the financial institution works. The four areas of the technical slips are shown in a timeline with the aim to establish a link between different risk aspects in time, e.g climate risks and phenological parameters or required inputs during production and their expected prices in a determined period of time. The team of experts will also act as a point of reference for the on-site MFI client manager. For example, the client manager could send to the expert with the use of modern information and communication technology solutions pictures of the state of a crop, via 3/4G, to confirm the kind of pest it is affected by. Complementing this technical credit risk dimension, analysis patterns on costumers repayment capability are incorporated. c) RESPONSIBILITIES OF CREDIT COMMITTEE MEMBERS Depending on current implementation, e.g., if it is semiautomated (based on Excel) or automated (specific software), the system automatically generates risk reports that inform credit committee members about the areas that must be considered with special attention. The reports take into account deviations from the established zone patterns as well as information provided by the customer. Credit committee members members verify these areas with the client manager. Scoring elements will be incorporated as soon as sufficient data is available in the system allowing to track the behaviour and characteristics of good and bad clients. TEAM OF EXPERTS ELABORATION OF TECHCARDS: - PRODUCTION PATTERNS - PRICE MATRIX - CLIMATE RISK MATRIX - ADAPTATION MEASURES ON-SITE RESEARCH BY REGION RISK REPORT PRODUCTION OF tecnical slips VERIFICATION AUTOMATIC GENERATION: - CASH FLOW - BALANCE SHEET - PROFITS AND LOSSES - NON-FINANCIAL ANALYSIS - PRODUCTION CYCLE ANALYSIS As a consequence, the team of experts assumes a major portion of the responsibilities that are nowadays traditionally assigned to the MFI agency personnel. CREDIT COMMITTEE DECISION 4

5 Pablo Alfredo De Luca Lucia Scodanibbio d) INCLUSION OF CLIMATE DATA The proposed methodology uses a phenological coding to determine, in a decimal manner, growth for each crop, related economic activities, and thus the necessary costs and investments. On the other hand, the timeline connects agricultural activities with climate risk, allowing to monitor the differences between observations in the field and stages for normal crop growth by zone. In case differences are found, these could be caused by external or internal factors (climate or crop management and family expenses, including additional economic activities, respectively). Once the main events of climatic risk by zone have been detected, the most appropriate adaptation measures will be indentified by means of a catalogue, and on that basis a financial product will be created. The tool measures the impact of a risk event and estimates the potential reduction in income or increase in production costs. This is reflected in a risk-adjusted operational flow, which is integrated into a family unit cash flow. To define climate risks, past meteorological information and probability projections of occurrence for the following main events is required: - Heavy rain - Frost - Hail - Drought - Floods Climate risk make reference to the possibility that extreme climate-related natural events occur and result in a negative economic impact on agricultural producers and the credit portfolio of the institution. Determining the frequency of climatic event occurrences represents a very complex task that in practice surpasses the possibilities of microfinance institutions. To reach this goal, participation of meteorological institutions, public entities or ministries aimed at promoting the country s food security, and even international organisations who support the country in climate-related projects is of vital importance. In the agricultural sector the credit risk is closely linked to climate risk; EbA measures are, therefore, essential to reduce both risks in a sustainable manner. e) MEBA CREDIT PRODUCTS Ecosystem-based adaptation (EbA) is an available option to diminish the risk of climatic events through the sustainable use of resources and services that ecosystems provide. Although one of the objectives is to protect or improve the environment, the central focus is to increase the resilience of people and their productive activities to climate variability. In the context of this project, we have defined two types of EbA measures that can be implemented in the agricultural sector of the Peruvian and Colombian Andes, through financial products and services promoted by associated MFIs: investment and capacity-building. Investment measures are timely interventions that mainly require financing and, to a lesser extent, technical assistance. Some examples include fog catchers, drip irrigation systems, greenhouses and windbreakers. On the other hand, capacity-building measures represent changes in techniques or productive practices to integrate a better management of the environment and, even though they require investment, the main element for their implementation is technical assistance. Some examples include: conservation agriculture, establishment of agroforestry systems, integrated pest management, and agro-ecology, among others. At this moment both options are being analyzed as to how they could be implemented in cooperation with the associated financial entities. While in the case of an investment measure, credit products are often the most viable option, capacity-building options require the establishment of a sustainable mechanism for the execution and financing of technical assistance to producers. Based on this analysis it will be determined how the MEbA project will promote these activities in a differentiated manner in conjunction with the MFIs. In the following months the implementation mechanism in pilot areas will be defined. 5

6 NEXT STEPS Montserrat Valeiras ACCESS TO CLIMATE DATA An essential aspect for product development and pilot implementation, which shall be executed in the coming six months, relates to climate data access for both countries. Data is needed in the following dimensions according to climate zones: PRECIPITATION (in mm) HUMIDITY % TEMPERATURE ( C) SOLAR RADIATION FLOODS (number and intensity or reported occurrences) FROST (number and intensity of reported occurrences) DROUGHT (number and intensity of reported occurrences) HAIL (length and intensity of reported occurrences ) In this sense, cooperation with the respective ministries and meteorological institutions will be sought in each country, which will allow us to gain access to the necessary climate data. COORDINATION WITH NATIONAL GOVERMENT (MINISTRIES) Project coordinators have had face-to-face follow-up meetings in past weeks with various ministries and agencies in both countries. The project is about to conclude the procurement process of Public Policy Liaisons in Colombia and Peru. We expect to count on the support of an organisation or an individual to act as liaison in each country before the end of May. QUALITATIVE STUDY We will conduct a focused survey on current and potential customers of partner MFIs focusing on: Becoming acquainted with Andean rural clients, their customs, beliefs, attitudes and purchasing behaviour regarding financial services. Their opinion on services offered by MFIs and other credit- related product offers they may know. Their perception on the main climatic events of the past years, how these have affected them economically and socially, as well as their practices and expectations regarding how to address these events. The products and activities that sustain their economy, production practices and how these are related to climate and the environment. The results from the study will also allow to identify market opportunities for MFIs regarding financial products and services (individual or collective) associated to EbA measures to foster socioeconomic development of the population and deeper penetration of partner MFIs in the Rural Sector. The qualitative study will be undertaken in pilot areas defined jointly with participating MFIs, and it is expected that results will be available in June, this year. QUANTITATIVE STUDY Based on the qualitative study, the quantitative study will be undertaken in the same pilot areas. WORK PLAN PER MFI Based on the institutional assessment, individual work plans will be developed with each institution in the course of the following months. Alejandro Laguna Alejandro Laguna Alejandro Laguna 6

7 METHODOLOGICAL PILOTS The launching of the first pilots for the new credit methodology is expected between June and August of the present year. Ivan Jordán AWARENESS CAMPAIGNS Based on the results of the qualitative and quantitative surveys, awareness and capacity-building campaigns will be undertaken in the pilot areas, taking advantage of the presence of on-site experts (FS consultants in the pilot phase). Currently, sustainable mechanisms for the execution of such campaigns in the future are being defined. MEBA NEWSLETTER As agreed upon during the initial workshops, quarterly newsletters on project progress will be published, in January, April, July and October of each year, to keep all stakeholders and interested parties in MEbA informed. These newsletters are intended for an interested audience beyond the immediate project stakeholders. The creation of a website (static) is foreseen as a progress communication platform. ANNUAL WORKSHOP It is envisioned to have a workshop in each country in the last trimester of 2013, in which project progress will be reviewed and political, scientific, and economic tendencies that could impact the project will be discussed. MEbA The Microfinance for Ecosystem-based Adaptation project has the following objective: To provide vulnerable rural and peri-urban populations in the Andean region of Colombia and Peru with microfinance services and products that will allow them to invest in activities related to ecosystem sustainability, improving their income and resilience towards climate change effects. With the objective to inform project members and interested parties, a quarterly newsletter will be issued, presenting key concepts regarding in project implementation, as well as a summary of all planned and performed activities. 7

8 For more information: Jason Spensley - UNEP Climate Change Programme Officer and Head of REGATTA project Telephone: jason.spensley@unep-rolac.org Christoph Jungfleisch - Frankfurt School UNEP Collaboration Centre MEbA Coordinaiton Unit Telephone: c.jungfleisch@fs.de Jacinto Buenfil - UNEP Climate change project advisor Telephone: jacinto.buenfil@unep-rolac.org United Nations Environment Programme Building 103, Morse Avenue, City of Knowledge, Clayton P.O.Box: PNUMA Balboa Panama City, Panama Cover photograph: Montserrat Valerias, Neil Palmer (CIAT), Montserrat Valeiras y Oscar Mauricio Montserrat Valeiras 8