G20 GLOBAL PARTNERSHIP FOR FINANCIAL INCLUSION (GPFI) 1 Climate Smart Financing for Rural MSMEs: Enabling Policy Frameworks G20 Global Partnership for Financial Inclusion 2 CLIMATE SMART FINANCING FOR RURAL MSMES: ENABLING POLICY FRAMEWORKS   IMPRINT Authors Eva Csaky (IFC) Angelika Frei-Oldenburg (GIZ) Ulrich Hess (GIZ) Saskia Kuhn (GIZ) Calvin Miller (consultant) Panos Varangis (World Bank) Debra Perry (IFC) Photo credits Cover: GIZ/Ulrich Hess, Saskia Kuhn p. 7: dhana shekar/Shutterstock.com p. 8 + p. 19: Ulrich Hess p. 10: 24Novembers/Shutterstock.com p. 20: LungLee/Shutterstock.com p. 23: GIZ/ASEAN Sustainable Agrifood Systems p. 30: Elena Galliano p. 32/33: ventdusud/Shutterstock.com p. 34: GIZ/Markus Matzel p. 40: Sophie Lenoir/Shutterstock.com p. 52: Bogdan Wankowicz/Shutterstock.com p. 58: Paul Prescott/Shutterstock.com Desgin Jeanette Geppert, pixelundpunkt kommunikation, Frankfurt May 2017 G20 GLOBAL PARTNERSHIP FOR FINANCIAL INCLUSION (GPFI) 3 TABLE OF CONTENTS ACKNOWLEDGEMENTS 4 ACRONYMS 5 EXECUTIVE SUMMARY 6 1. INTRODUCTION 7 1.1 Objective – enabling policy frameworks for climate smart financing for rural MSMEs 8 1.2 Document structure 8 2. RURAL MSMES ADOPTING CLIMATE SMART SOLUTIONS 10 2.1 Rural MSME challenges for adaptation 11 2.2 Risk reduction needs 11 2.3 Transaction cost hurdles 13 2.4 Climate smart solutions for Rural MSMEs 14 2.5 Financial needs associated with climate smart rural MSME solutions 16 3. CLIMATE SMART RURAL MSME OPPORTUNITIES AND BUSINESS MODELS 20 3.1 Opportunities for climate smart green business models for MSMEs 21 3.2 Opportunities for financial institutions and investors to fund climate ­ smart technologies and green business models for MSMEs 21 3.3 New or additional financing needs and opportunities for upgrading ­ to green MSME business models 22 4. FINANCIAL SOLUTIONS FOR MSME ADAPTATION TO CLIMATE CHANGE AND MSME GREEN BUSINESS MODELS 23 4.1 Financial solutions for MSME climate smart adaptation for risk mitigation 24 4.2 SEF lessons for financing climate smart investment opportunities in rural MSMEs 29 4.3 Other Innovations for Green Growth Financing and investment 29 5. POLICY IMPLICATIONS FOR SUPPORTING MSME ADAPTATION TO CLIMATE CHANGE 30 5.1 Policy implications for agricultural risk reduction 31 5.2 Policy implications for promoting financial models for risk mitigation and adaptation by MSMEs 31 5.3 Policy solutions for promoting an enabling environment and regulatory framework ­ for climate smart risk management for rural MSMEs 32 5.4 Policy implications from SEF for an enabling environment for financing climate smart MSMEs 33 5.5 Policy Implications for promoting green MSME business models 33 6. CONCLUSIONS FOR POLICY MAKERS 34 6.1 Policy analysis and design 35 6.2 Policy Toolbox – policy options 36 7. ANNEXES: CASE STUDIES 40 7.1 Commercializing Energy Efficiency Finance (CEEF) 41 7.2 Philippines: Sustainable Energy Finance (SEF II) 42 7.3 Sri Lanka: Portfolio Approaches to Distributed Generation Opportunities (PADGO) 43 7.4 MasAgro, Climate Smart Agriculture in Mexico 44 7.5 Catastrophe Insurance for MSMEs by IFMR Holdings in India 46 7.6 Weather Index Insurance in Zambia 47 7.7 Accelerating Private Sector Agencies for Climate Resilience Training in Bangladesh 49 7.8 Joint Actions for Mobilizing Tourism Actors for Climate Resilience in Costa Rica 50 7.9 Risk-Sharing Model to Facilitate Climate Smart Financing in China 51 7.10 Agricultural Water Pricing Reform in China 53 7.11 GAFSP Private Sector Window 55 4 CLIMATE SMART FINANCING FOR RURAL MSMES: ENABLING POLICY FRAMEWORKS Acknowledgements This policy document was produced on behalf of the G20 It is important to recognize the support of BMZ and GIZ Global Partnership for Financial Inclusion (GPFI) in 2017. It for their leadership and organization of the G20 GPFI was completed under the German Presidency and the workshop on “Climate smart financing for rural MSMEs leadership of the Co-chairs of the GPFI SME Finance Sub- – ­enabling policy frameworks” in February, 2017 in group Natascha Beinker (Germany) and Aysen Kulakoglu ­ Frankfurt am Main, Germany, which provided the venue (Turkey). In addition, other G20 GPFI members also pro- for review and discussion of the lessons and policy issues vided valuable comments and contributions including on this important topic. The paper was presented at the Australia, Canada, Italy and India. The document was pro- G20 GPFI Forum and endorsed by the G20 GPFI at the duced jointly by GIZ, the World Bank Group and the Plenary in May 2017 in Berlin. ­ German Federal Ministry for Economic Cooperation and Development (BMZ). In particular, it is important to recognize the sponsoring institutions, including the BMZ, GIZ and the World Bank The document was prepared by the following team of Group for supporting this research and Roundtable, and ­ experts based on research and personal experience: Eva especially the project leadership of Ulrich Hess from­ Csaky (IFC), Angelika Frei-Oldenburg (GIZ), Ulrich Hess GIZ and Panos Varangis from the World Bank Group. We (GIZ), Saskia Kuhn (GIZ), Calvin Miller (consultant), Panos also recognize the support of contributing authors of case Varangis (World Bank) and Debra Perry (IFC). studies and workshop p ­ resenters. The authors have benefited tremendously from the chair- manship of Roland Gross (GIZ) and Brigitte Klein (GIZ) as well as from the very substantial support throughout the writing process of Silvia Heer (BMZ). The authors also wish to thank Peer Stein and the climate finance team at IFC, Financial Institutions Group, for their support. Recognition is also given to Weijing Wang (consultant), Nancy McCarthy (LeadAnalytics), Vipul Sekhsaria (IFMR Holdings), Victor Kommerell (CIMMYT), Quyen Nguyen (IFC), ­Veronika Bertram-Huemmer (KfW), Sylvia von ­Stieglitz (GIZ) and Janina Wohlgemuth (GIZ) for their contributions to the case studies and other materials for this document. G20 GLOBAL PARTNERSHIP FOR FINANCIAL INCLUSION (GPFI) 5 Acronyms CEEF Commercializing Energy Efficiency Finance CGIAR Consortium of Agricultural Research Centers CIMMYT International Maize and Wheat Research Center CP Cleaner production EE Energy efficiency EF Energy finance EU European Union ESCO Energy Savings Company FI Financial Institution FIAP Financial Inclusion Action Plan GEF Global Environment Facility GPFI Global Partnership for Financial Inclusion GHG Greenhouse Gas ICT Information and communication technology IFC International Finance Corporation MSME Micro, small and medium enterprise PCG Partial credit guarantee PO Producer organization PPP Public-private partnership RE Renewable energy RSF Risk sharing facility SDGs Sustainable Development Goals SEF Sustainable Energy Finance SME Small and medium enterprise UNEP United Nations Environment Program UNFCCC United Nations Framework Convention on Climate Change VC Venture Capital 6 CLIMATE SMART FINANCING FOR RURAL MSMES: ENABLING POLICY FRAMEWORKS Executive Summary   Climate change increases risks and presents significant understanding of the climate financing problem as well as challenges as well as potential opportunities for rural relevant lessons learnt from the sustainable energy Micro, Small and Medium Enterprises (MSMEs.) However, ­ ­ financing area, followed by potential ways forward, with financing is crucial for enabling these MSMEs to adopt policy implications relating to adaptation. It then presents needed practices and investments in technologies and opportunities that can be realized from new climate smart approaches that are climate smart. This is particularly technologies and efficiencies that can be gleaned from challenging for those MSMEs in the rural and agricultural “green” finance and investment. setting which are most vulnerable and already have the most difficulties accessing finance. The document moves from outlining the needs, constraints and opportunities to focusing on the climate smart finan- The document presents a synthesis of the key lessons and cial solutions for MSMEs. These financial solutions include implications of climate change needs and solutions for financial tools and public-private collaboration for scale- MSMEs in developing countries with an emphasis on the up of climate smart investment with an emphasis on the implications for governments and development agencies policy implications. Policy is noted as an important driver to consider. The document is enriched with many case of change and a policy assessment and options are ­ examples of practices implemented around the world. ­presented with regards to how policy makers can ­promote Based on this analysis, evidence from the case studies financing MSME climate smart adaptation. The policy and the modeling of climate smart MSMEs, the document ­ options are summarized into a Policy Toolbox with elaborates policy options for G20 policy makers. These applications and examples to facilitate policy discussion. ­ options are designed to help overcome market failures that prevent rural MSMEs’ adaptation to climate change Key policy messages highlight that climate smart adaptation and help enable and incentivize MSMEs to access climate and risk mitigation policies need to empower and provide smart financing. These adaptations would not only reduce an enabling environment for change, provide incentivizes MSME vulnerability but also help reduce CO2 emissions to build capacity and facilitate financing and investment. and pollution. Blended finance, partial guarantee schemes and insur- ance support may be required to promote and incentivize The paper first addresses the issues surrounding rural financial institutions to lend and for rural MSMEs to be and agricultural MSMEs and constraints they face for able to borrow. Private financial institutions must play an ­ finance and investment; it then assesses the gaps for important role in climate smart financing and public ­ climate smart MSMEs. The subsequent section describes ­ financing schemes can help “crowd in” their participation. climate smart adaptation and mitigation solutions for MSMEs. It does this by highlighting some of the current G20 GLOBAL PARTNERSHIP FOR FINANCIAL INCLUSION (GPFI) 7 1. Introduction Micro, Small and Medium Enterprises (MSMEs) are often not equipped to absorb the economic effects of losses climate change may bring. Investment in climate smart MSMEs, as well as investment that encourages rural MSMEs to become climate smart, is therefore needed to adapt and build resilience of rural communities, as well as to reduce greenhouse gas emissions from rural areas. . (G20 GPFI SME Finance Sub Group Workshop, February 2017) The 2014 Financial Inclusion Action Plan (FIAP) developed By endorsing the G20 Action Plan on SME financing in by the Global Partnership for Financial Inclusion (GPFI) 2015, the G20 agreed, and encouraged non-G20 ­countries highlighted ten action areas that were considered to be to fully develop credit infrastructure for Small and ­Medium most important to advancing financial inclusion. Three Enterprises (SMEs), improve SME financial capability out of the ten action areas are related to agribusiness and through targeted learning and support interventions, and rural SME Finance: a) accelerate and replicate successful enable competition through an enabling regulatory envi- policy reforms that facilitate the expansion of financial ronment. The sub-group has therefore taken a closer look services and investments to SMEs, b) establish the SME at recent developments in agricultural and rural finance Finance Forum as global center for good practice knowl- through working papers on: a) agricultural value chain fi- edge exchange and promotion, and c) improve financial nance, b) gender finance, c) ICT solutions in agricultural access through the SME Finance Compact, SME Finance finance, and d) agricultural insurance. After discussion Initiative, and key development achievements. and dissemination of the results of this study, further questions that the subgroup wanted answered include: 8 CLIMATE SMART FINANCING FOR RURAL MSMES: ENABLING POLICY FRAMEWORKS »» What are the implications of climate change for Micro, Governmental policy can have a crucial role in fomenting Small and Medium Enterprises (MSMEs) in rural areas, finance and investment in MSMEs. Policies that address in particular with regard to financing climate smart the financial bottlenecks they face are particularly technologies?(1) important for the longer-term nature of climate smart in- ­ vestment. The objective of this document is to provide a »» What innovative financial approaches and initiatives synthesis of the finance and investment problems MSMEs are there? face for adaptation when it comes to climate smart solutions needed and mitigation required and then to ­ »» What are common success criteria for approaches/ ­ offer policy options for promoting climate smart adaptation projects that have reached a larger scale? for risk mitigation as well as fomenting investment in green technologies for MSMEs. »» What policies are needed to address this issue? This policy paper therefore elaborates policy options that 1.2 DOCUMENT STRUCTURE would be relevant for policy makers striving to achieve the Agenda 2030 sustainable development goals and the This paper reviews existing policies incentivizing and ­ Addis Abeba Action Agenda on Financing for Develop- ­ regulating rural MSME climate smart financing and ment. In 2015, the United Nations introduced the 2030 ­ provides synthesis and illustrative evidence regarding Agenda for Sustainable Development. It consists of 17 performance and results of these policies. The review of Sustainable Development Goals (SDGs) with 169 targets experiences, literature, and lessons drawn from case and aims on stimulating action in areas of critical impor- study examples representing diverse approaches and tance for humanity and the planet. Policies for sustainable scenarios for promoting climate smart MSMEs serve to financing of MSME resilience to Climate Change and formulate policy options. These options will be designed MSME adoption of new climate mitigation business to help overcome market failures that prevent rural models contribute to several SDGs. In particular they con- ­ MSMEs from adapting climate smart practices change tribute to Goal 2 (End hunger, achieve food security and and prevent them from accessing climate smart financing. improved nutrition and promote sustainable agriculture), Goal 6 (Ensure availability and sustainable management of water and sanitation of all), Goal 9 (Build resilient infra- structure, promote inclusive and sustainable industrialization and foster innovation) and Goal 13 (Take urgent action to combat climate change and its impacts). Policy options elaborated in this paper can be adopted and tailored by countries according to their national circumstances as with different country settings, as the associated cost and benefits of proposed actions also differ. 1.1 OBJECTIVE – ENABLING POLICY ­ FRAMEWORKS FOR CLIMATE SMART ­ FINANCING FOR RURAL MSMES Rural MSMEs are vital to the health of the rural economy and global food security. These MSMEs, which include primary producers, processors and traders, face increasing income and asset loss risks due to the changing climate in general and more frequent disasters in particular. They are often not equipped to absorb the economic effects of losses climate change may bring. This affects not only the families themselves, but also the communities within which they operate, the buyers and processors and con- sumers, and the food security systems in general. G20 GLOBAL PARTNERSHIP FOR FINANCIAL INCLUSION (GPFI) 9 The paper is structured as follows: Chapter 2 focuses on the need for addressing climate change and measures for risk reduction that rural MSMEs must adopt. First, it sets the stage by addressing the issues surrounding rural and agricultural MSMEs and constraints they face for finance and investment. It then assesses the gaps for climate smart MSMEs. The following section describes climate smart adaptation and mitigation solutions for MSMEs. It does this by highlighting some of the current understand- ing of the climate financing problem as well as relevant lessons learnt from the sustainable energy financing area, followed by potential ways forward with discussion and policy implications. Chapter 3 follows a similar format but with a focus on the opportunities that can be realized from new technologies and efficiencies that can be gleaned from “green” finance and investment. It then addresses the financial bottle - necks inhibiting scale-up of this adaptive investment. Chapter 4 also presents examples of promising solutions that have been implemented or initiated, along with the policy implications. Chapter 5 presents a summary of policy analysis method- ologies and applications in a number of cases and exam- ples. The final Chapter 6 provides a policy assessment and outlines how policy can promote financing and investment for MSME climate smart adaptation. This ­ includes catalytic insurance solutions for rural MSMEs, ­ opportunities for innovation and areas for public support, such as education, raising awareness and data improvement. These policy options are then summarized into a Policy Toolbox with applications and examples to facilitate policy discussion. Annexes of eleven case studies are presented in Chapter 7 to illustrate and more comprehensively explain examples of implementation of climate smart financing and the policies and stakeholders involved. ­ 10 CLIMATE SMART FINANCING FOR RURAL MSMES: ENABLING POLICY FRAMEWORKS 2. Rural MSMEs adopting climate smart solutions With climate change, 100 million persons are expected to fall into extreme poverty due to more disasters and changes in production due to climate. Micro, small and medium enterprises (MSMEs) are among the hardest hit. (DFID, 2015) G20 GLOBAL PARTNERSHIP FOR FINANCIAL INCLUSION (GPFI) 11 Interventions regarding climate change can fall into three their communities and countries exposed and vulnerable categories. to the risks of climate change, jeopardizing the development progress they have already made. The combined costs of a. Building MSME resilience through adaptation and ­ providing financial services to rural MSMEs, combined mitigation measures with the risks outlined in Section 2.2, and the unfamiliarity of the underlying climate smart solutions, explain why the b. Strengthening MSME resilience and economic ­ market for climate smart rural MSME finance is nearly opportunity through good risk management ­ ­ nonexistent and indicates a possible need for policy inter- techniques and appropriate technologies. ventions. c. Providing MSME relief through insurance and Increasing climate change resilience of rural MSMEs disaster relief requires action on multiple fronts. These enterprises ­ need to: a) understand the risks; b) assess what it means Post-disaster response in any form is very expensive in for their situation; c) accept that change is needed; d) ­ financial as well as the human and social costs of lives, ­ prioritize actions to undertake, and e) take the actions livelihoods and assets that may be lost. Slow on-set disas- needed. They must either have the human and financial ters such as temperature rises affecting flooding, drought, the resources to address the actions needed, or have diseases, etc. are less dramatic than sudden ones but also access to acquire those resources. These adaptation ­ have devastating effects. Hence, a forward-looking focus measures taken may reduce climate risks directly or for addressing the effects of climate changes necessitates ­ transfer the risk through insurance and guarantees. In ­ ocus preventative actions that reduce risks. Naturally, this f ­ addition, they could also choose to capitalize on new requires adaptation and mitigation measures to reduce business opportunities that arise as a result of climate risk and build resilience, as addressed below. It also must change and/or build from their actions for climate change go beyond and take the opportunity to promote new MSME adaptation. technologies and business models that build resilience through improved efficiencies and practices. For example, improved energy technologies or water management not 2.2 RISK REDUCTION NEEDS only help MSME resilience and growth, but also contribute to a global good for climate change. MSMEs, as private enterprises, choose to invest in climate smart measures either to reduce the physical effects of climate risks directly, transfer the risk through insurance, 2.1 RURAL MSME CHALLENGES ­ or to capitalize on a new business opportunity that has FOR ADAPTATION arisen as a result of climate change. The most visible need for MSMEs to adapt their practices to a climatic change “If things continue to worsen, some 40 percent of the land reality is to reduce their risks. They can diversify their pro- that’s currently growing maize in Africa will be barren by 2030. duction or their suppliers, they can prepare for drought Any time there’s an extreme weather event, the amount of through investing in irrigation, they can seek insurance damage to low-income countries in Africa will be much greater coverage and/or a plethora of many other technological, than to the high-income countries in Europe and elsewhere. business change or risk mitigating alternatives. However, We want to put adaptation on the table as one way of ad- without the resources to change and/or the awareness of dressing directly the justice issues that we have to tackle.” the risks, they most likely will remain operating as is with (Jim Yong Kim, World Bank, 2015) increasing vulnerability to the climate risks. Becoming more resilient to climate change is a considerable Rural MSMEs already encounter a harsh business environ- challenge for MSMEs in developing countries and emerging ment with many uncontrollable risks. They often lack economies. Rural MSMEs are burdened by the combination ­ access to reliable infrastructure of roads, electricity and of various risks and transaction costs, which are also the storage, for example, which increases their vulnerability leading barriers to their adoption of climate smart solu- and costs of operation. They are usually price takers, tions. In addition, these firms lack the necessary resources ­ affected by market and weather factors they cannot con- and are often unaware of both the risks and opportunities trol and are not able to hedge against. Climate change associated with climate change. This leaves them and increases those risks and a natural disaster leads to not 12 CLIMATE SMART FINANCING FOR RURAL MSMES: ENABLING POLICY FRAMEWORKS only a major loss for production but the whole MSME sup- 2.2.2. AWARENESS ply chain of goods and everyone involved being affected. The result are systemic ripple effects – both throughout Climate change risk is relatively new and without a track the value chain and throughout the sector and region – record for reference. For MSMEs, the lack of awareness since weather events, for example, can be widespread, and information is a prominent barrier in investing in leading to an increase in poverty for all involved. ­ climate solutions since the extent of the risks are not known and the potential returns on their investment are MSMEs’ already high risks for buyers, financiers and in­ not evident. However, many of these enterprises become vestors as well as for their own livelihoods become even convinced to make climate change adaptation invest- higher and stifle innovation and investment and their ments once they understand how climate change can ­ access to funding. The tools for reducing risk through risk ­ affect their individual business and when quantitative reduction, such as through new drought tolerant seed, or effects of loss and damages on their balance sheets or ­ risk transfer such as insurance, are not available to many. income statement can be demonstrated. 2.2.1. LIMITS OF TRADITIONAL RISK Financiers are also not aware of the risk to their portfolios MANAGEMENT from the effects of climate change, especially on their ru- ral enterprise clients. They also do not recognize potential Informal risk management arrangements, which can work opportunities resulting from climate change (including for traditional individual level risks, frequently do not pro- slow onset events), which can influence their portfolio tect MSMEs from climatic risks. Poor households and their with positive (increased lending and new products and informal community support networks cannot cope when markets) and negative effects (increase in defaults). many are affected with income and asset losses (e.g. re- gional droughts or floods). The highly systemic, covariate 2.2.3. RISK IDENTIFICATION nature of many of these catastrophic losses makes them especially difficult to manage. Local finance also becomes Risk and uncertainty come in many forms for MSMEs, and scarcer when everybody is seeking to borrow and few include both standard agricultural risks and financial risks. have money to lend. Local markets for crops, feed and Standard agricultural risks occur all along the value chain, livestock work against MSMEs when they all are trying to including typical weather-related production risks such as buy or sell at the same time. For example, because many drought, flooding, pests and diseases, all of which bring MSMEs try to sell livestock in drought periods, they force about variations in production quality and quantity. In ad- animal prices down, and then when they try to restock in dition, MSMEs face regulatory risks through changes in post-drought years, prices rocket. Local food prices can food safety regulations and environmental regulations as also spike when regional shortages arise, and many well as industry demand changes – all of which can have MSMEs may lose important assets (e.g. livestock) that an adverse effect on profitability. Normal financial risks make subsequent recovery slow and difficult (Dercon and include variability of input and output prices as well as Christiaensen, 2007) . financing costs affected by interest rate fluctuations, ­ credit assessments and exchange rate volatility, etc. Covariate risks are a problem for not only producers but for everyone along the value chains. Input suppliers and Climate change adds a new layer to the usual risks. More financial institutions can be faced with widespread extreme climate variations can lead to changing weather defaulting on loans and unpaid bills. Agricultural traders ­ patterns, increased temperatures and prolonged and processors lose when they face a shortage of raw droughts and floods. These variations may reduce yields ­ materials, and rural shopkeepers and small businesses and lower both the quality and quantity of production. suffer when local incomes, and hence demand for their With increasing temperatures, there is higher risk of services, fall. Some of the most dramatic evidence of the ­ product spoilage, or quality, as exemplified with the case failure of traditional risk management comes from studies of coffee rust disease shown below. Increased water scarcity, of severe drought, showing that in percentage terms, essential for agricultural production, is another side effect. income losses can far exceed initial production losses ­ because of a resulting collapse in local agricultural em- ­ ployment and wages, non-farm income and asset prices. G20 GLOBAL PARTNERSHIP FOR FINANCIAL INCLUSION (GPFI) 13 Coffee Rust Disease »» Insufficient clarity from government policies to promote resilient rural MSMEs. Coffee Rust disease, which has caused USD 1 billion in damage to coffee plants across Latin America and the Caribbean since 2012. Rust is not a new coffee disease but could not thrive in colder temperatures and, as 2.3 TRANSACTION COST HURDLES many of the higher quality coffees are grown in high altitude, rust was not a concern. However, with climate change warming the region, the The combination of small scale operations and often fungus has been able to flourish, wiping out over half of the one million ­ remote locations put rural MSMEs at the greatest disad- acres of coffee crops grown in the region. This has led to many job losses vantage among MSMEs and large businesses. It creates and a huge reduction in farmers’ incomes, in turn leaving them unable additional challenges and costs for marketing their own to afford the maintenance required to counteract the disease. products as well as for obtaining necessary inputs and services, especially considering the poor rural infrastruc- ture in most low-income countries. Nothing illustrates this point better than the statistics that farmers in Africa pay Due to a growing global population with shifting ­consumption more than twice as much for fertilizer as farmers in Europe patterns, 60% more food will be required by 2050 (CGIAR, (Nature, 2012). This is the case not only for financial inter­ 2017). Un­ fortunately, these increasing risks are taking mediaries but also often for input providers, off-takers place at a time when food and water demand is also r ­ ising. and other market participants, potentially multiplying the The need to make food production more efficient and in- transactions cost disadvantage faced by MSMEs and crease productivity is critical. In addition, the agricultural ­ creating considerable need and opportunity for related industry produces one of the highest levels of Green innovation. With globalization and the evolution of global House Gas (GHG) emissions. Therefore, any measures that­ value chains (GVCs), the requirements and specifications MSMEs can implement to optimize farm practices and imposed by lead firms are frequently applied in the form ­ reduce risks and emissions simultaneously are important. of standards and certifications. While this reduces the transaction cost of regulatory compliance and risk man- In review, there are both demand (rural MSMEs) and sup- agement for buyers and lead firms, they can represent a ply side (financial institutions) issues that affect MSMEs’ modern significant barrier to rural MSMEs’ participation in ­ abilities to respond, and together they prevent the emer- value chains. Climate change generally tends to exacerbate gence and scale up of financial solutions to improve resil- and accentuate these structural, additional, transaction ience. The key issues that prevent rural MSMEs from tak- cost hurdles that rural MSMEs face. ing actions to become more resilient are: Transaction costs also make it particularly challenging for »» Lack of information and understanding of the incentives rural MSMEs to obtain financing. The MSMEs’ transaction and benefits to adopt climate resilient practices in rural cost burden is considered a risk for lenders. In addition, space and in agriculture. FIs face increased transaction costs themselves when dealing with rural MSMEs, translating into higher than »» Lack of capacity and understanding of how climate average administrative costs for small loans. ­ risks affect the MSME. »» Lack of access to finance (proper financial solutions and products) due to lack of collateral, credit history, financial records, familiarity with financial institution procedures, systemic risks, etc. »» In addition, lack of financial education and literacy is keeping many rural MSMEs outside financial markets. »» Insufficient access to suitable insurance products as well as the affordability of insurance for rural MSMEs limits the demand for insurance. 14 CLIMATE SMART FINANCING FOR RURAL MSMES: ENABLING POLICY FRAMEWORKS 2.4 CLIMATE SMART SOLUTIONS FOR 2.4.2. CLIMATE SMART PRACTICES AND RURAL MSMES TECHNOLOGIES 2.4.1. HOLISTIC APPROACH TO ACHIEVING Risk reduction for MSMEs can be achieved both through CLIMATE SMART MSMES investment changes and through practice changes, which commonly go hand in hand. New seeds and farming The diversity of rural MSMEs and their operating contexts, practices, such as changes in inputs are required for pro- ­ their level of resources and market segment, including duction adaptation. While the private sector invests in new their positions in their value chains, means that a blanket technologies for improvement where it is profitable, response is not viable. While some important constrain- ­ governmental interventions, such as in Mexico, are also ing factors such as transactions costs are common across needed in order to reach low-income areas which need all rural MSMEs, others are not. Hence, public and private in­vestment but lack the conditions and capacity to attract interventions require a close look at market segments and it. contexts and should be developed in consultation with those involved. The types of MSME and their risks are There are many practical examples of investing for resil- ­ different based upon their context and resource base, the ience, as solutions are very heterogeneous, depending sector or industry and the transaction linkages and role on sectors, regions and types of business. Where water within their value chains. The risks of one MSME also conservation is a critical issue, irrigation methods such as affect other MSMEs and agribusinesses connected with ­ drip irrigation can help conserve water. The reuse of that MSME through value chain relationships. The ­ treated wastewater from food production and rainwater following holistic approach for support is recommended: ­ harvesting also helps preserve water. For example, farm- ers in the Philippines are taught how to harvest rainwater »» Technical assistance and awareness raising to pro- from a small type of water reservoir as a climate change mote climate resilient solutions amongst rural MSMEs, adaption measure. A fish processing company in Morocco showcases to understand benefits, and demonstrat- invested in water recycling treatment due to expected ing impacts on the grounds. Systematic risk analysis to droughts and higher water prices based on a thorough develop tailor made adaptation solutions. In addition, climate assessment. financial education and literacy can have positive effects for choosing the right financial solutions and ­ products. MasAgro – Comprehensive policy frameworks and »» Capacity building to agribusiness and value chain ­programs to promote climate smart agriculture in Mexico leaders to disseminate climate resilient solution to MSMEs. The 10-year, Ministry of Agriculture-funded Sustainable Modernization of Traditional Agricultural (MasAgro) program in Mexico aims to achieve »» Capacity building to financial institutions to understand a sustainable increase in production and maize and wheat yields, mainly these technologies, ability to develop the right financial among low-income farmers in rain-fed areas. The program combines products, and assessment of investments/projects ­ research on seed enhancement, climate smart agronomic practices and that promote climate resilient technologies accessible provides capacity building for farmers and extension agents, inputs and by rural MSMEs. crop input financing. A central aspect of the program is the building of a network of networks (e.g. 41 innovation platforms) that facilitates peer- »» Information systems and analysis of agro-climatic­ to-peer learning.(2) risks and development of suitable insurance products for various types of rural MSMEs. Some government support may also be needed to start agricultural or catastrophic insurance, at least in the beginning. Diversification, crop rotation, improved seeds and no-till agriculture are some of the many common agronomic »» An enabling government policy environment to ­ensure adaptations for reducing climatic risks. In addition, diver- ­ adequate incentives and the direction of government sifying along the value chain can play a role in risk reduction policies towards climate smart practices. as well. For example, improving the supply chain with ­ respect to transport, storage and marketing can reduce post-harvest losses as well as greenhouse gas emissions. G20 GLOBAL PARTNERSHIP FOR FINANCIAL INCLUSION (GPFI) 15 Climate Expert – Adaptation strategy based on Climate 2.4.3. ADDRESSING TRANSACTION COSTS Risk Assessment for MSMEs Organization The semi-arid coastal region of Souss-Massa in Morocco is affected­ MSMEs which are organized and integrated in commercial by increases of average temperatures, changing rainfall patterns, market systems and value chains are able to reduce trans- droughts and a sea level rise. Several awareness raising workshops actions cost, achieve economies of scale and be more based on real case studies attracted private sector companies to­ competitive. This is critical in order to have the capacity to conduct individual climate risk assessments. Multipliers, such as access financing for climate smart investments. Aggrega- ­ business associations (CGEMs), are now integrating climate resilience tion is especially important for reducing the high costs of approaches on the n ­ ational level within regular programs for their transactions for financial institutions and for reaching 88,000 company ­ members. Such programs can be built by trained smallholders and remote enterprises with services, as ­consultants who a ­ re able to execute vulnerability assessments for SMEs. well as for improving MSMEs’ economies of scale for obtaining inputs, marketing and financial services. ­ The Climate Expert methodology entails a practical 4-step approach ­ using working materials that help companies analyze climate change In addition, producer organizations often have access to risks and opportunities and generate strong adaptation strategies on some form of capacity building and information sharing cost-benefit basis.(3) for their members, often through support of government or non-governments development agencies. They have a convening power, which is therefore also useful for build- ing awareness of the risks and implications of climate Information and communications technology (ICT) invest- change and advocating for addressing needed changes. ment has been proven to promote awareness and practice change as well as service support and delivery. Among It is important to take heed of an organization’s capacity many examples, in Ghana, Farmerline (4), a local company, (for carrying out procedures) and to be realistic in assess- provides personalized voice alerts that communicate crit- ing such capacity so as to avoid creating expectations ical information related to price, weather and farming that the organization cannot reach or fulfill. For example, techniques, direct access support lines for advice, and whereas a producer organization may be effective in data collection. Scale-up and replication of such technol- ­ arranging training and inputs, they may not have the ogies across the globe are relatively low-cost solutions for ­ c apacity to handle or manage loans. improving climate smart practices and in reducing risk and improving access to finance. Aggregation Transaction costs are recognized as a critical bottleneck, both for rural enterprise activities as well as financing ones. Aggregation is one way to help address this chal- Scale-up through Training of Trainers (ToT) in Bangladesh lenge, especially for small producers, in order to help them achieve economies of scale in financing and in the In Bangladesh, the Ministry of Industry is working to accelerate the in- production and marketing cycle. Organized groups, such corporation of climate risk management tools and training concepts into as producer organizations, can also be essential for the regular training offered by various training institutes and managed c apacity development to meet standards and new tech- ­ by the Ministry. It uses a TOT approach conducted for resource persons nologies needed for smallholders’ competitiveness. Yet, and partner institutes who then provide training for entrepreneurs, while aggregation is recognized as an important part of mainly women.(5) the solution (World Bank, 2010), it is also a fact that in many developing countries there are relatively few well-­ organized groups, such as producer organizations, with adequate governance and capacity. This significantly in- creases the risk for conventional financing, which may or may not be best done through the PO, or alternatively through VC financing or individual lending from FIs. 16 CLIMATE SMART FINANCING FOR RURAL MSMES: ENABLING POLICY FRAMEWORKS Aggregation is critical from a climate change perspective framework types. Another example is the GAFSP Private for two reasons. First, aggregation - if managed well - can Sector Window which pulls in private financing into IDA lead to higher efficiency resource use and improved countries with blended finance approach. productivity through access to better inputs, information ­ and technical advice and in many instances to storage, To address the challenges, it is important for policy makers cooling and other infrastructure that can help reduce to consider the demand side of the private entrepreneur waste. Second, due to the transaction cost problems, as well as the supply side of the financier within three rural MSMEs can have a better chance of obtaining in­ ­ ­dimensions: formation about and access to relevant climate smart solutions, and related financing, when participating in »» Awareness raising – demonstrating the need for action some form of aggregation. for MSMEs and financial institutions Innovations of Distribution »» Business advisory support – identifying, assessing and Innovations that provide additional relief from the trans- selecting options for action action cost burden of commercial entities interested in serving rural MSMEs are especially critical for climate »» Financial advisory incentives – supporting investment smart development given the important role of climate decisions smart inputs, technologies and know-how not commonly available in rural areas. Few private insurers have the re- quired distribution networks in rural areas of developing 2.5 FINANCIAL NEEDS ASSOCIATED ­ countries, so they often work through an intermediary C LIMATE SMART RURAL MSME WITH ­ with an existing network of their own (e.g. a microfinance SOLUTIONS institution, supermarket, bank, input dealer, agro-­ processor, or NGO), or they work with groups of MSMEs. Climate smart adaptation and financing is also needed­ For example, Fresh Co in Kenya, SFS in the Philippines, for green investments. As discussed above, there are and Pioneer and NWK AgriServices in Zambia (see case ­ numerous financial constraints for MSMEs, and financial study 7.6), use private input dealers to market their in­ instruments alone are not sufficient and need to be within surance. Examples of the aggregator approach are the a broader framework of promoting additional solutions in Zambian National Farmers’ Union in Zambia (which arranges parallel to, or part of a package of, measures that aim to insurance for groups of its members), and Agroasemex in enhance the resilience of rural MSMEs. Mexico which reinsures MSMEs’ self-insurance funds. To address the problem of collecting premiums and making 2.5.1. FINANCING CONSTRAINTS payouts in a timely and cost effective manner, some insur- ers are taking advantage of mobile phone and mobile As noted above, rural MSMEs often already lack sufficient banking technologies. A good example is the ACRE financial resources and climate risk makes it even harder ­ program in East Africa, which enables MSMEs to pay their for them to access finance. Climate change can disrupt insurance premiums and receive payouts via the M-PESA production as well as the whole value chain, making mobile banking system. There are many donor attempts financing more risky. Financial risks also increase as input ­ to foster aggregation mechanisms. We believe that any costs can fluctuate when there is a shortage due to such attempts should be market driven, that is, foster and ­ weather variations, and outputs can be very dependent promote markets with “market pull mechanisms” rather on the prevailing climate during the growing season. In than publicly funded projects that either displace or addition, the difficulty of getting bank financing increases ­ counter market forces. However, with thin or non-existent as banks perceive higher credit risk due to this unpredict- markets for some products, such as insurance, these ability of the MSME’s income. Reducing uncertainty is an market based mechanisms cannot take off. This is where ­ important part of improving access and reducing the cost market based business modeling approaches come in, of financing. that is, public funds target and help to develop scalable and replicable models. The G7 InsuResilience Initiative, MSMEs and financiers alike lack the necessary know-how for example, through its global implementation project to assess their climate risk and insurers specialized on carried out by GIZ, systematically develops business assessing and pricing climate risks are most often not ­ models for three aggregator types as well as public policy available. For financial institutions and investors, their G20 GLOBAL PARTNERSHIP FOR FINANCIAL INCLUSION (GPFI) 17 concern about climate risk is both for individual clients An example is “el Niño” and “la Niña” climatic effects that and for systemic risks across sectors. They may choose to trigger droughts, floods and hurricanes. These MSMEs avoid the risk by not financing or excessively cover the are unprepared to handle the losses of product, procure- risks by increasing the cost of finance to MSMEs or the ment, property damage and other effects of such events. collateral required. Some of the risk avoidance is due to lack of information on how to adequately assess the risks, 2.5.2. INADEQUACY OF MSME FINANCIAL ­ for example across a region or sector. This makes access PRODUCTS FOR CLIMATE SMART ­ to finance even more costly for rural MSMEs. It is particu- ADAPTATION larly difficult to address risk assessment for slow onset events and the influence they have on their portfolio. This Most of the sources of finance flowing to rural and agricul- strongly affects longer-term finance, thus exacerbating tural MSMEs are in the form of short-term value chain the existing shortage of such financing. ­ finance, either internally between buyers, traders and sellers or from financial institutions to one or more of the The current state of financing available in rural areas fits most secure value chain enterprises or companies, which only a small segment of the agricultural households and in turn can help supply financing, often in kind, to its suppli- agro-enterprises. Poor micro-level agriculturalists are too ers or buyers. The limitation is that this type of financing is poor and small to be attractive to financial institutions, tied to the value chain commodity or product and is and the somewhat larger agro-SMEs fall into the category ­ generally short term. This does not provide an adequate of the “missing middle”, being too large and with distinc- avenue to finance investments, especially ones of a tive cash flow needs to fit within microfinance initiatives longer-term nature. As shown below, in order to address and too risky and small for the formal sector. Many are this issue, it is helpful to look at the various actual and profitable and do grow, albeit slowly over time, mainly potential sources and then work to adopt or combine ­ with their own reinvestment. However, they are never­ them to provide the financing needed for climate smart theless vulnerable to setbacks such as can occur with investments. ­ climatic or other disturbances or outright disasters.­ SOURCES OF RURAL AND AGRICULTURAL MSME FINANCE Type of finance Existing models Recipients of financing Working capital 1. Conventional banking and lines of credit 1. Well-established SMEs with conventional 2. Microfinance credit union finance collateral 3. Value chain finance and trade finance 2. MSMEs with regular cash flows and needing short-term financing 4. Digital and mobile finance 3. Producers and MSMEs in organized, 5. Self-finance competitive value chains relationships ­ 4. Emerging option in some areas to all MSMEs for short-term MF and money transfers 5. Personal/family savings and assets Medium term 6. Conventional banking finance 6. Well-established SMEs with collateral finance (2-5 7. Value chain finance 7. Available to some MSMEs in value chains with years) 8. Self-finance regular cash flows 9. Mezzanine finance 8. Personal savings and assets 9. Well-established medium enterprises with collateral and investor linkages Long term 10. Banking long term finance 10. SMEs with strong mortgage assets finance (>5 11. Investment funds 11. Medium enterprises with strong mortgage years) assets and cash flows, particularly export oriented Equity and 12. Co-investors 12. Integrated VC partnerships venture capital 13. Investment funds 13. Medium enterprises and organizations capable 14. Private-public investment of mezzanine and equity finance 14. SME organizations qualifying for blended finance and private-public collaboration 18 CLIMATE SMART FINANCING FOR RURAL MSMES: ENABLING POLICY FRAMEWORKS 2.5.3. LIMITED ACCESS TO INSURANCE e ­ xample is the ACRE program in East Africa, which enables MSMEs to pay their insurance premiums and ­ Insurance is an effective risk-sharing instrument. How­ receive payouts via the M-PESA mobile banking ever, five challenges lead to its failure in obtaining wide - ­system. spread outreach for effective risk management for MSMEs in most countries: »» Public goods and first mover problems. Although private insurers are actively engaged in most of the ­ »» The demand problem. Few insurance schemes for weather index insurance programs, they have rarely MSMEs have achieved scale without being heavily initiated programs. This suggests there may be impor- subsidized and/or the insurance is made compulsory tant public roles that need to be met, without which (e.g. for bank borrowers in India). Otherwise, relatively the private insurers face high set-up costs and barriers few MSMEs seem willing or able to purchase insurance to entry. There is also a first mover problem: the high products, so there seems to be a lack of demand initial investment costs in research and development (Binswanger-Mkhize, 2012). This can result because of index insurance products might not be recouped MSMEs do not properly understand the risks and/or given the ease with which competitors can replicate they may be willing to purchase insurance but are such products if they prove profitable to sell. Private financially not able to do so. ­ insurers may be particularly wary of this issue; unlike public insurers, they are not subsidized and may miss »» The Index problem. A fundamental requirement for the opportunities that public insurers have as early ­ insurance is the availability of an index that correlates movers. highly with the agricultural risk to be insured, and for which there is a suitable and reliable database to 2.5.4. LIMITS OF INFORMAL RISK SHARING perform actuarial calculations and objectively deter- ­ mine when an insured event has occurred. The index There are various types of financial solutions. Financial also needs sufficient spatial granulation (geographical reserves are a simple but important risk reduction tool. ­ detail) to minimize basis risk. These can be daunting These include savings, stand-by lines of credit and requirements in countries and regions with limited contingency funds. There is also informal risk financing. ­ weather stations, or where the data is unreliable or Financial help from family, friends, traders, solidarity ­ released too late to be useful for determining payouts. groups and community organizations provide a layer of protection against losses. Religious funds, credit groups, »» difficulties The distribution problem. There are serious ­ and kin-support networks provide reciprocal means and costs in marketing index insurance to large through which individuals can help each other in times of numbers of MSMEs, and in collecting their premiums ­ need. Sharecropping also emerged in many societies as a and making payments. Few private insurers have the way of sharing risks between landlords and tenants. In required distribution networks in rural areas in devel- pastoral areas, reciprocal arrangements between ­spatially oping countries, so they often work through an inter- dispersed communities enable mobile or nomadic mediary with an existing network of their own (e.g. a grazing practices that reduce the risk of livestock having ­ microfinance institution, supermarket, bank, input insufficient forage in any one location. Studies of dealer, agro-processor, or NGO), or they work with ­ traditional risk management practices show they are sur- groups of MSMEs that can be insured as single entities prisingly effective, even in many drought prone areas. (e.g. farmer associations and mutual funds). For While these should be considered and strengthened, it is example, Fresh Co in Kenya, SFS in the Philippines, ­ noted that they are very limited for longer, larger-scale and Pioneer and NWK AgriServices in Zambia, use and systemic effects of climate change. Nevertheless, the private input dealers to market their insurance. ­ local organizations do offer an avenue for awareness ­E xamples of the aggregator approach are the ­Zambian building on climate change and its solutions. National Farmers’ Union in Zambia (which arranges in- surance for groups of its members), and Agroasemex 2.5.5. LACK OF UNDERSTANDING AND DATA in Mexico which reinsures MSMEs’ self-insurance funds. To address the problem of collecting premiums Constraints in awareness and understanding of climate and making payouts in a timely and cost effective risk for MSMEs have also been issues for Sustainable manner, some insurers are taking advantage of mobile Energy Finance (SEF) (see also Section 4.2.1 – “Lessons ­ phone and mobile banking technologies. A good learned from SEF”). The main issues that financing for G20 GLOBAL PARTNERSHIP FOR FINANCIAL INCLUSION (GPFI) 19 ­ustainable energy projects faced, at least in the early s There are some significant differences between the expe - stages, also included the lack of awareness and capacity riences to promote SEF solutions and financing solutions to evaluate technologies, profits and cost-benefits. First, for rural MSMEs. First, SEF projects target medium and energy and resource efficiency was not considered part larger companies with financial information, assets and of their core business so investments in this area were not acceptable collateral. For rural MSMEs the lack of assets, considered as critical or strategic, and business decision collateral and financial information for banks to process makers underestimated potential energy savings. Second, loans can be a much higher hurdle compared to SEF pro- cleaner production, increase in energy efficiency and jects. A second difference is that for SEF projects, the ­ renewable energy projects could not find financing cash flow calculations (to show the repayment capacity), ­ because financial institutions did not have experience due to the adoption of new technologies, was challenging with evaluating such projects and often lacked longer- at the beginning but soon there was a methodology to term finance. Lending against potential savings from calculate. For rural MSMEs, particularly in the agricultural these investments or generation of revenues, instead of sector, cash flows to help quantify the costs and benefits conventional collateral, was outside their core lending from adopting climate smart investments can be more business model and their capacity to assess. As with challenging, particularly since these cash flows have ­ climate risk, SEF also poses uncertainties such as perfor- ­ fluctuations in commodity prices and weather conditions. mance risks of the new technologies, services or new Therefore, the level of uncertainties and errors or equipment to generate the promised savings or revenues. deviations in forecasting cash flows can be much higher ­ for rural MSME climate smart investments compared to SEF investments. 20 CLIMATE SMART FINANCING FOR RURAL MSMES: ENABLING POLICY FRAMEWORKS 3. Climate smart rural MSME opportunities and business models G20 GLOBAL PARTNERSHIP FOR FINANCIAL INCLUSION (GPFI) 21 The daunting challenges of climate change risk are, how- the higher computing power to analyze it. The increasing ever, not without opportunities. Climate smart finance amount of big data being collected in the field in real-time and investment will importantly be able to open new is allowing more research to be done on climate ­variability, ­opportunities, for example sustainable energy ­production pests, soil and diseases.(6) Precision agriculture or satellite that improves overall efficiency and income. farming, based on observing and measuring farming ­ conditions using technology such as remote sensors, “Mainstreaming” climate change considerations throughout GPS, etc. is a growing area and can help farmers choose financial institutions’ operations, and in their investing and appropriate crops, fertilizers and irrigation systems. lending activities, will enable financial institutions to deliver These advancements and opportunities will increase better, more sustainable, short-term and long-term results – ­ financing needs even more. both developmentally and financially. (European Bank for Reconstruction and Development, 2016) 3.2 OPPORTUNITIES FOR FINANCIAL ­ INSTITUTIONS AND INVESTORS TO FUND CLIMATE SMART TECHNOLOGIES ­ 3.1 OPPORTUNITIES FOR CLIMATE SMART AND GREEN BUSINESS MODELS FOR ­ GREEN BUSINESS MODELS FOR MSMES MSMES There is an array of potential products, technologies and The financial industry benefits when its clients invest to approaches to help MSMEs take advantage of new upgrade their technologies and business models, “green” business models. The many practical examples of especially when these new investments improve their ­ investing for resilience show to be very heterogeneous, ­ efficiency and lower their risks. This is the case for MSME depending on sectors, regions and types of business. climate smart investments. The opportunities come in various Water conservation, for example, not only improves forms. First, there is a growth in the financial institution’s resilience, but irrigation investment, such as drip irrigation, ­ lending or investment portfolio for MSMEs. Second, the can improve the business returns as well as conserve MSMEs’ upgrades and changes lower their risks from water. Investment in rainwater harvesting and the reuse of ­ climate change production and marketing risk, such as ­ treated wastewater in the Philippines is a different type of fewer production losses, fewer storage losses and example with a similar objective, as is the example of a fish improved product quality, etc. Third, the investments ­ processing company in Morocco investing in water improve their efficiencies and hence their bottom line. For ­ ­ recycling treatment due to expected droughts and higher example, investments in improved water use lowers­ water prices based upon a thorough climate risk assess- costs of production and adapting green energy can lower ment (see example in Section 2.4.2. – “Climate smart operational costs throughout the value chain, especially practices and technologies”). ­ on the agribusiness and processing end of the value chain. Diversification, crop rotation, improved seeds and no-till agriculture are some of the many common agronomic Two other very important opportunities arise for financing adaptations for reducing climatic risks. Also, improving ­ climate related investments. First, there is a whole new the value chain processes with respect to transport, ­ industry of carbon trading and financing. This is an s torage and marketing can reduce post-harvest losses ­ opportunity for financiers and MSMEs to develop and ­ while reducing greenhouse gases. However, all of these fund business opportunities that previously did not exist. opportunities require additional investment. Second, climate smart adaptation is a global public good since it has global benefits to all. Hence, international Another opportunity for MSMEs of a different type is investors and donor agencies naturally want to support ­ created by data, sometimes called “big data.” As men- ­ such investment and may be willing to offer concessional tioned earlier, while there is limited historical data on the funding, guarantees and other incentives to encourage correlation between crop yields and climate, this is ­rapidly such investment, which is an opportunity for the financial changing with data becoming more available, along with industry. 22 CLIMATE SMART FINANCING FOR RURAL MSMES: ENABLING POLICY FRAMEWORKS 3.3 NEW OR ADDITIONAL FINANCING ­ There are a growing number of other financing NEEDS AND OPPORTUNITIES FOR ­ mechanisms. Small-scale funds are being set up by entre- ­ UPGRADING TO GREEN MSME ­ preneurs to exploit new green technologies and those BUSINESS MODELS that prove promising will become bankable and eventual- ly be scaled up. Green bonds are another growing area of Social as well as governmental requirements and/or climate smart finance, however, not necessarily for ­ incentives can create new financing needs and MSMEs. Green bonds are standard bonds but whose opportunities. On the governmental side, water or energy ­ ­ proceeds are earmarked for green or climate-friendly use requirements can stimulate or even force change: for projects. There is no binding international standard which example, China uses progressive agricultural water classifies a bond as a green bond. Nevertheless, there are pricing, incentives for water conservation, and grants to ­ several private led standards which are increasingly support water saving facilities and technical assistance. gaining acceptance in the market (see for example ICMA ­ New investment in water reduction technologies and green bond principles). ­ improvements may then be required. Farmers and agri- businesses who adopt new technologies, and therefore Carbon markets are another source of financing for adap - increase water efficiency, have dual benefits: a) save on tation projects with mitigation co-benefits. These markets water bills, and b) generate additional earnings by selling are created from the trading of carbon emission the extra water quota (see Annex). allowances to encourage countries and companies to ­ limit their carbon dioxide (CO2) emissions. It is a results-­ ­ Investment needs by companies can be expected for based financing instrument that monetizes the removal or developing services (engineering, consulting, forecast- ­ reduction of GHG emissions. These reductions can then ing, modeling, monitoring and risk management), and be purchased from industrial facilities that emit above data and technology development (climate and weather their GHG emission allowances under their applicable modeling, sector specific data aggregation and analysis). emission trading scheme. Many international or domestic Another financing need is for investments in companies carbon market schemes recognize the GHG offsets from that provide products and solutions in sectors such as activities implemented by smallholder farmers or their ­ water, agriculture, healthcare, energy, coastal area and ­ aggregators under a programmatic approach, e.g. adop- finance. Examples include: Water – companies develop - ­ tion of drip irrigation to substitute flood irrigation would ing water efficiency software, meters, water infrastructure provide mitigation benefits besides improvement to development, and reuse and desalination technologies; ­ climate resilience in drought prone regions. In addition, food and agriculture – companies developing drought some governments collect proceeds or levies on carbon resistant seeds, drip irrigation and precision agriculture; ­ market transactions, such as the China Clean D ­ evelopment healthcare – companies in sub-segments such as vaccine Mechanism Fund, and provide funding and support to and treatment pharmaceuticals and products addressing ­ climate resilience projects with the proceeds. tropical disease vectors; extreme weather event-resilient facilities and management systems; energy – companies Finally, there are a growing number of exchange traded-­ in sub-segments such as extreme weather-resilient gener- funds (ETFs) that focus on green investments in funds that ation and energy distribution; coastal areas – companies in invest in green MSMEs. An ETF is an investment fund sub-segments, such as early warning systems and climate traded on a stock exchange and which holds assets such ­ resilient materials; financial services – accompanies in as stocks, bonds or commodities, most of which track an sub-segments such as climate-related risk insurance, risk index. Green ETFs focus on companies that offer environ- assessment and parametric insurance (GARI) .(7) mental friendly technologies and which enable investors to make environmentally sound investment decisions. The awareness or opportunities for “green“ financing is also growing. Financial leasing (lease to buy), for example, lends itself well to helping cash strapped MSMEs needing equipment and new technologies since they can access finance with no up-front payments and lower cost payments that match the term of use of the asset they are ­ purchasing. Leases also allow more loan security as there is easier repossession in case of default.(8) G20 GLOBAL PARTNERSHIP FOR FINANCIAL INCLUSION (GPFI) 23 4. Financial solutions for MSME adaptation to climate change and MSME green business models There are both demand (rural MSMEs) and supply side ­ limate One critical element of all solutions for supporting c (financial institutions and investors) issues that often ­ change adaptation and green investment is the availabili- ­ prevent the emergence and scale up of financial solutions ty of accurate and timely data. Accessible “open” data to improve resilience in the rural space. Demand may be supported by governments can provide timely weather latent and need to be viable for financing, and financiers forecasts, disease and plague information, food forecasts may need assistance to be able to address financing for food security and investment guidance, and be availa- demands and opportunities resulting from climate ­ ble for insurance assessments. For instance, a govern- change that are not a part of their current financing port- ment program in Uganda used SMS messaging to inform folio. farmers about a disease affecting the banana crop, reach- ing 190,000 people in the first five days and helping prevent an epidemic. ­ 24 CLIMATE SMART FINANCING FOR RURAL MSMES: ENABLING POLICY FRAMEWORKS 4.1 FINANCIAL SOLUTIONS FOR MSME ­ Risk assessment and promotion of technology adaptations CLIMATE SMART ADAPTATION FOR ­ can also be led by the financial institution as illustrated in RISK MITIGATION Bolivia. Successful financing for rural MSMEs requires both ap - propriate delivery systems as well as financial instruments. As noted in section 2, organization and aggregation of Sembrar Sartawi Agricultural Risk Financial Solution, MSMEs can lower transaction costs benefitting both Bolivia MSMEs and rural service providers. The costs of financing and loan supervision, as well as some risks, can be re- Sembrar Sartawi comprehensively addresses risk in financing small duced through working with organized groups, especially farmers and agro-enterprises with tailor designed, value chain linked at the micro and small enterprise level. ­financing, improved inputs and technology linkages, together with pro - vision of technical assistance, market risk information and partnerships 4.1.1. DATA, INFORMATION AND COMMUNICATIONS for securing markets. While many financial institutions would stop with TECHNOLOGY SOLUTIONS that risk analysis, this institution’s approach is more comprehensive and uses GIS technology collaborating with the National Climate Service to Technological development and access to mobile phones create risk map layers with relevant time-series data. It also manages and services, even in some of the most remote areas of systemic risk through geographical and ecosystem diversification the world, provide an important tool for information and ­(Hernandez, 2016). knowledge sharing at much reduced transaction costs. The same mobile device can also enable data collection and financial services. Mobile financial services and the trends towards digitization of both business-to-person 4.1.2. GUARANTEE MECHANISMS and government-to-person payments for rural MSMEs can reduce the time and cost associated with traditional The use of guarantee funds has been found to be an ef- cash payments, including insurance, and results in improved fective financial instrument, if guarantees are prudently security and transparency. For unbanked, digitizing pay- provided, to consider for some of the longer-term, uncer- ments also offer the potential to create a financial identity, tain investments required for climate adaptation. A guar- a step towards a broader access to financial services, such antee is one type of blended finance instrument that is as savings and credit. often employed by donors to credit enhance lending. There are several ways guarantee funds can be utilized. Improvement in climate information and analysis reduces One way is to extend the term of a loan through a guaran- risks of climate change adaptation for agricultural finance tee. If the lender views the borrowers as particularly risky for both the financiers and the MSMEs across the value for a long-term investment, a donor can guarantee the ex- chains. Agri-tech companies, like S4 Agtech below, provide tension in tenor to enable the borrower to receive a loan data information and analysis for decision-making tools to that matches the capital expenditure and reduces month- improve agricultural yield and manage risk. ly payments. Another type is a partial credit guarantee (PCG) that represents a promise of full and timely debt service payment up to a predetermined amount. The pay- outs under the guarantee covers creditors, often irre- S4 Agtech, Argentina (formerly Solapa) spective of the cause of default. The guarantee amount may vary over the life of the transaction based on the bor- S4 Agtech, an agricultural IT company, provides a platform to help rower’s expected cash flows and creditors’ concerns re - ­ f armers analyze their crop strategy and yield by combining market data garding the stability of these cash flows. with sensory and GIS data. It integrates multiple sources of information by geo-referencing it and mapping production data against Google maps. The company creates and manages proprietary indicators from multiple sensors; and geo-localizes and embeds the information on the biological processes. It offers its data analytics to financial services providers, agricultural suppliers, large food suppliers, and other agri- ­ businesses. The company provides its services to help clients improve their production processes and protocols.(9) G20 GLOBAL PARTNERSHIP FOR FINANCIAL INCLUSION (GPFI) 25 IFC Partial Credit Guarantee Climate smart agriculture and the role of agricultural insurance in Zambia – survey and simulation request The IFC program “Commercializing Energy Efficiency Finance (CEEF)”. Its objective was to encourage financial intermediaries to finance energy Farmers try to manage risks associated with severe weather events by efficient and renewable energy investments. At the time, local financial implementing several risk reduction strategies including the adoption institutions were not lending for these types of projects due to the­ of CSA practices. Using household-level data collected by the Central small project size and relatively high transaction costs, coupled with a Statistical Office of Zambia and the Indaba Agricultural Policy Research perception of high credit risks because of very little experience with Institute (IAPRI), it was found that nearly 30% of cotton farmers use ­energy efficiency project finance. ­minimum tillage techniques, 33% use soil and water conservation ­s tructures, and about 10% engage in practices that keep the soil covered after harvest. To estimate the impact of insurance on CSA adoption, and evaluate the costs of supporting the adoption of CSA, a simulation mod- Portfolio guarantees cover a proportion of the losses on el has been baselined using information obtained from a detailed the package of loans (or projects) as a whole. A ‘first loss’ household dataset and included access to an insurance product modeled guarantee covers part of the first tranche of losses—for ex- on the NWK AgriServices contract (see case study on weather index in- ample, 100 percent of losses up to a value of 10 percent of surance in Zambia). Results indicate that access to insurance increases the portfolio as a whole. A ‘second loss’ guarantee would cotton farmers’ use of CSA practices by about 8% given low coverage cover a second tranche of losses—for example, 90 percent levels offered. With access to weather insurance covering 50% of expect- of losses between 10 percent and 20 percent of the port- ed revenues, the use of CSA increases by 51%. Additionally, having folio, etc. Since the guarantor has very little control over ­access to insurance decreases the costs of programs that aim to incentiv- the projects or loans being originated, a second loss ize CSA adoption, and is particularly effective when combined with a di- guarantee provides more incentives to the originator to rect payment for CSA adoption and use. An insurance subsidy of 50% can keep to an agreed upon underwriting standard. In other double farmers adoption rate of CSA, but only at relatively high coverage words, this model is most efficient if a proportion of the levels. Overall, insurance has modest impacts on increasing CSA alone, first loss is kept with the originator of the loans. but can complement other activities designed to increase CSA as well. Guarantee funds for climate risk adaptation have found it Policy implications of these results are that well-designed premium sub - necessary to have some level of subsidy due to the nature sidies could generate three benefits: 1) increased adoption of CSA, 2) of the investment. This can be through use of public funds enhanced agricultural growth and 3) more resilient smallholders and invested into the guarantee scheme, start-up support, agricultural systems. Targeting and smart design of the subsidies are key premium subsidy and first loss coverage. for their effectiveness. The modeling results also demonstrate that ­ subsidies could be cost effective, particularly as insurance coverage in- 4.1.3. INSURANCE AND RISK TRANSFER FOR ­ creases. Besides the direct impact on reducing smallholder losses when RESIDUAL RISK a severe weather event occurs, expansion of insurance can also increase the effectiveness of other projects and programs aimed at increasing Insurance is a critical instrument to reduce risk and im- adoption of CSA practices, additionally reducing their vulnerability to prove willingness to provide or incur debt. For climate severe weather events.(10) risks, insurance and especially index-based products are particularly relevant to broaden the scope for insuring against named perils, opening the way for writing identi- cal contracts for larger numbers of MSMEs who can be While insurance can enhance the reach of the private served by the same index contract. Indexed approaches ­ sector and reduce its administration and transactions to insurance offer a promising solution to many of the costs, private insurers have had only limited success by risks of climatic insurance with its often-widespread ef- themselves in scaling up insurance. Most insurance fects. However, to implement this solution, investment is schemes of any size involve various kinds of public-private needed on many fronts, including data collection, weath- or non-profit private partnerships. This is in part because er stations, research, training, start-up support and likely the use and understanding of agricultural insurance of all ongoing support. types is low, and hence, well-conceived public support and participation needs to be one of the solutions for in- creasing participation and improving the quality and scale of the services. Sometimes, the expansion of insur- 26 CLIMATE SMART FINANCING FOR RURAL MSMES: ENABLING POLICY FRAMEWORKS ance is even forced, as in some cases such as India, where Kukua low-cost, solar weather stations rural and social sector obligations imposed by India’s In- surance Regulatory and Development authority spurred Kukua has developed replicable models of low-cost, solar weather sta- investment by in­surers in rural and social sectors that are tions that are connected to the internet and operating across five African otherwise not attractive, given transaction cost levels in countries. Through a grant from the European Union, Kukua is currently rural areas. rolling out 70 weather stations in Nigeria with the International Institute of Tropical Agriculture (IITA). In partnership with Foreca, a leading fore- The use and understanding of agricultural insurance of all casting company, Kukua is able to make localized weather forecasts that types is low, and well-conceived public support and par- can empower smallholder farmers and through partnering with Agri- ticipation is one of the solutions for increasing insurance SeedCo, a leading African seed company, can reach over 3,000 small- uptake and improving the quality and scale of the ­services. holder farmers with weather-based interventions in the pilot phase.(11) The private insurance sector has become active in provid- ing a reinsurance market to underwrite some of the tail end risks of the portfolio of agricultural insurers. Reinsur- 4.1.4. FINANCING CONTINGENCY FUNDS ance is more accessible to insurers who sell insurance products because the insurance is based on a reliable Insurance solutions cannot only be at the MSME level. In- and independently verifiable index. There is a large inter- terventions must also address macro risks in a proactive national reinsurance market that could easily absorb manner rather than emergency response. Countries and ­ rograms much more agricultural risk if suitable insurance p donors can create catastrophic risk insurance pools at the could be established on a commercially viable basis. macro level to share risks. The highly covariate nature of the payouts for index insurance poses a challenge to a pri- Private insurers have sought to expand their market in vate insurer. The insurer can hedge part of this risk by di- ­recent years by developing and underwriting index-based versifying its portfolio to include indices and sites that are products. Sometimes insurers use their own networks to not highly and positively correlated, an approach that sell insurance directly to MSMEs, but more often in devel- works best in large countries. Most often, it is also neces- oping countries they work through other players along sary to sell part of the risk in the international financial or value chains who sell directly to MSMEs. For example, reinsurance markets. they may link up with agro-processors, input suppliers, or seed companies that offer MSMEs insurance along with Lessons from Sustainable Energy Finance (SEF) for credit, seeds, fertilizer, or contract farming arrangements. financing green MSME business models They may also link up with microfinance organizations and Useful lessons and potential solutions for financing cli- banks that offer MSMEs insurance along with loans or mate smart adaptation can be drawn from the SEF experi- ­savings accounts. ence to date in climate financing and other areas of fron- tier finance with uncharted pathways. Many of these Subsidies may be warranted to kick start insurance mar- lessons drawn from 10 years of SEF financing of sustaina- kets for non-poor MSMEs, for example, by offsetting ble energy, started as a new, longer-term finance with un- some of the initial set-up, administration and reinsurance certainties of return income flows. Key features of an ena- costs. These subsidies may also be a part of the strategy bling environment that assisted the promotion of to assist farmers in adapting to climate change, where the sustainable energy finance are as follows: subsidy is set to cover the part or all of the difference in the premium rate between pre- and post-climate change »» Fiscal incentives such as subsidies (e.g. equipment) scenarios. and tax credits for Cleaner Production (CP), Energy Efficiency (EE) and Renewable Energy (RE) investments ­ »» Policies to promote RE as a country strategy to pro- mote energy diversification G20 GLOBAL PARTNERSHIP FOR FINANCIAL INCLUSION (GPFI) 27 »» Specific public funding and/or first loss capital 4.1.5. WORKING WITH FINANCIAL INSTITUTIONS through commercial banks for CP, EE and RE projects Financial institutions benefited significantly from capacity »» Market awareness raising on new technologies for CP, building and technical assistance to build internal techni- RE and EE cal skills to assess SEF investment projects, develop ­ specific tools for financial analysis of such projects, create »» Targets for EE and cleaner energy production new loan products focusing on this market sub-segment, and find ways to select clients initially by “mining” their »» Guidelines by banking regulators to promote “green” existing client list of companies particularly in energy lending and assessment of environmental and social intensive sectors. IFC and other multilateral and bi-lateral ­ risk in bank lending operation development financial institutions and agencies like GiZ helped local financial institutions in various countries in »» Appropriate pricing of energy (and water) three important areas: A main issue to address for financing for sustainable »» Tailored financial products such as lines of credit and ­ energy projects in the early stages was the lack of aware- loans, guarantees and shared-risk products and ness and capacity to evaluate technologies for cleaner ­venture capital production, energy efficiency and renewable energy by MSMEs and larger corporations. Models for lending »» Advisory services to develop internal capacity, identify against potential savings or generation of revenues from and analyze project pipeline, including market analysis these technologies instead of collateral was outside their and product development, training of credit officers core lending business model (challenging and lack of and risk and marketing staff, and tools to add value c apacity to assess) and they had uncertainties (e.g. per- ­ with low transaction costs formance risks of the new technologies or new equipment to generate the promised savings or revenues). Increasing »» Alliances to build pipeline primarily with ESCOs, in the penetration of SEF across various markets depend- ­ vendors and technology provides, and project devel- ed on adopting a programmatic approach that involved: opers a) working with financial institutions; b) working on the market development side; and c) working on the enabling »» Multi-lateral and bi-lateral development in which environment. ­ financial institutions used various financial products to support sustainable energy finance through local banks/financial institutions---the financial intermedia- tion model FINANCIAL PRODUCTS FOR SUSTAINABLE ENERGY POTENTIAL USE Risk Sharing Facilities (funded or unfunded) Risk management and exposure Credit Lines Liquidity Long term credit lines Liquidity matching/liquidity Sub-debt/mezzanine financing Risk appetite/financing shortfall Investing in sustainability-focused private equity funds Risk capital for climate friendly projects/companies Trade guarantees Trade risk mitigation 28 CLIMATE SMART FINANCING FOR RURAL MSMES: ENABLING POLICY FRAMEWORKS The ability of project finance to tap into “soft” money for China Utility-based Energy Efficiency Finance Program the lines of credit and on risk sharing facilities and blend it (CHUEE) with commercial funding played an important role in financing sustainable energy projects, at least in the early ­ The large CHUEE program was started in 2006 under the request stages of promoting sustainable energy finance. This from China’s Ministry of Finance (MOF) to IFC to support the im­ blended finance for lines of credit and/or a first loss sharing plementation of energy efficiency (EE) and renewable energy (RE)­ in risk sharing facilities helped a lot in the beginning to projects in China. While banks in China have been highly liquid they fund early projects. and access to EE/RE credit was limited especially for were risk averse ­­ SMEs due to lack of ­access to finance and lower awareness for EE/RE.­ 4.1.6. WORKING AT THE MARKET LEVEL By June 2016, projects directly supported by IFC’s China Climate­ Finance Advisory program have: reduced annual CO2 emissions by about The SEF work at the market level was to raise the aware- 22 ­million tons; ­mobilized over USD 2.3 billion to finance over­­ ness of various stakeholders about the existence of 231 EE/RE projects. In addition, CHUEE partner banks have become technologies and show potential for energy savings and/ ­ more confident on China’s green lending market, CHUEE SME partner or generation of renewable energy. It also provides in­ banks have issued over 1500 green loans independently, which helped formation to allow end-users to make informed decisions to mobilize ­another USD 12 billion and achieved more CO2 emission about energy use, and promote partnerships between reduction. ­ ­ Cumulatively, beyond I ­FC’s Risk Sharing Facilities (RSFs), ­ financial institutions, vendors of energy efficiency equip - ­ Is have n IFC’s eight partner F ­ reen ­ ow provided over USD 100 billion to g ment (and/or renewable energy equipment), and project projects, according to China’s Banking Regulatory Commission. developers. An important element in working at the market level is the creation of aggregation mechanisms to ­ Over the last 10 years, CHUEE has constantly been supporting the mar- enable the financing of smaller investments particularly ket move to the next level. From helping raise awareness of the general focusing on smaller companies. business case of EE/RE financing, IFC has since supported FIs move into new EE/RE market opportunities such as: waste energy recovery, bio - 4.1.7. WORKING AT THE ENABLING ENVIRONMENT ­ mass, solar, building efficiency, SMEs, ESCOs, and carbon among others. LEVEL Policies, regulations and incentives played a very impor- tant role in promoting sustainable energy finance. One of In Bangladesh, with assistance from IFC, the Central bank the key issues is the pricing of the resource, which can be and high-level officials in the financial sector developed energy but also can be water. Policies that reduce consid- landmark Environmental Risk Management Guidelines to erably the cost of the resource reduce the incentives of help integrate environmental risk considerations in credit users to economize and/or find other alternative sources. risk management for all types of financing as well as to provide an incentivize to banks to increase lending for Fiscal incentives and/or policies for promoting renewable “green” projects and activities. The IFC launch of a energy for diversification played an important role in Sustainable Banking Network in 2012 was followed by an ­ countries such as for example Brazil, Chile and Honduras. online knowledge exchange tool and platform for bank- In China, energy efficiency and cleaner production targets ing regulators and associate partners in order to promote were important to promote sustainable energy finance. environmental and social risk management and green As shown below, the mobilization of Chinese government credit in banking lending. funds to complement international development funds to share first losses was also one of the key success factors for their sustainable energy finance programs. Some ­ governments in countries with high energy-intensive sectors have provided subsidies for energy efficient ­ equipment and renewable power generation technolo- gies. In Thailand, government activities played a key role in raising awareness. G20 GLOBAL PARTNERSHIP FOR FINANCIAL INCLUSION (GPFI) 29 4.2 SEF LESSONS FOR FINANCING CLIMATE ­ launch of an Environmental Risk Management Guidelines SMART INVESTMENT OPPORTUNITIES ­ for the Sustainable Banking Network and development of IN RURAL MSMES knowledge exchange platforms as a tool for banking reg- ulators and associate partners were all key interventions Cleaner production, energy efficiency and renewable for promotion of the SEF. energy can play a key role also among the types of invest- ­ ments needed for rural MSMEs to become climate smart. Key lessons from financing sustainable energy projects The organizations of forums, development of Environ- that can apply also in promoting financing for climate mental Risk Management Guidelines in Bangladesh, smart rural MSMEs are summarized below. TARGET POTENTIAL INTERVENTIONS BASED ON THE LESSONS FROM SUSTAINABLE ENERGY Financial institutions • Technical Assistance and development of skills to assess opportunities for climate smart agricultural investments • Assistance to develop internal processes and financial products to serve climate smart rural MSMEs • Exploring linkages with vendors, project developers, etc. • Mobilizing lines of credit, risk sharing/guarantees, blending finance for on-lending to rural MSMEs • Assistance in developing a pipeline of bankable projects early on Market • Market scoping studies • Sector vulnerability assessments • Awareness creation, promotion of climate smart solutions for rural MSMEs and evidence based case studies • Diagnostic Climate Risk Assessments for MSMEs Enabling Environment • Fiscal incentives and policies to promote climate smart investments • Availability of public funds for risk sharing or dedicated lines of credit which can also crowd in private sector funding • Climate change related targets • Regulatory guidelines for promoting climate smart financing 4.3 OTHER INNOVATIONS FOR GREEN ­ pay back the ESCO’s capital investment and the remain- GROWTH FINANCING AND INVESTMENT ing savings are then shared between the client and the ESCO. In a variation of the model, the client pays a fee to One innovation for financing that can be used if there is a the ESCO for the energy efficient solution and the savings regular income flow is that of an Energy Savings Company are guaranteed to always exceed the specified fee. In (ESCO). This company provides design, installation, mainte- these models, the up-front investment is kept on the ES- nance and servicing of energy efficient solutions for a spec- CO’s balance sheet and becomes an operating expense ified period, normally between five and twenty years. The for the client, hence saving it any initial capital outlay. energy savings generated from the project are first used to 30 CLIMATE SMART FINANCING FOR RURAL MSMES: ENABLING POLICY FRAMEWORKS 5. Policy implications for ­ supporting MSME adaptation ­ to climate change G20 GLOBAL PARTNERSHIP FOR FINANCIAL INCLUSION (GPFI) 31 Policy is an important driver of change. Climate smart G4INDO IT Platform, Indonesia adaptation and risk mitigation policies need to empower, ­ provide an enabling environment for change, provide The Government of Indonesia embarked on a policy to bring crop ­ incentivizes to build capacity and facilitate financing and insurance to all of Indonesia’s farmers. A program started in 2014 helps ­ investment. Blended finance, partial guarantee schemes 200,000 smallholder farmers improve rice crop harvests and gives crop and insurance support are useful tools to promote and insurance policies to assist farmers protecting them from losses caused ­ incentivize financial institutions to lend and also rural by bad weather and disease. It uses state-of-the-art remote sensing MSMEs to be able to borrow – if prudently implemented/ ­ technology (radar and optical images) combined with hydrological data granted. Private financial institutions also deemed to play of concrete river basis with crop growth models in a digital platform that an important role to promote market-driven financing. allows the insurer to monitor crop growth and assess abnormalities. Thus, the various public financing schemes should aim to ­Insurance expertise is available to advise on the most suitable insurance “crowd in” private financial institutions. products for small farmers, client registration practices and claim regis- tration and processing.(12) There are several policy lessons learnt and implications that arise from the discussion above. These are summa- rized below: 5.2 POLICY IMPLICATIONS FOR ­ 5.1 POLICY IMPLICATIONS FOR ­ PROMOTING FINANCIAL MODELS FOR AGRICULTURAL RISK REDUCTION RISK MITIGATION AND ADAPTATION ­ BY ­M SMES »» Government support is essential for investment in research, technology and systems including work on ­ »» Support awareness raising campaigns for insurance disaster resistant crops, loss reduction and other risk and anything else that helps ensure that MSMEs’ reduction methods. ­ climate smart agricultural projects are more bankable and are considered a better credit risk for financial »» Support or provide vulnerability studies for priority ­institutions sectors. »» Promote new insurance products such as livestock »» Regulations that promote production resilience, such insurance, weather insurance and technology risk in- ­ as diversification, tolerant seeds, etc. should be surance for equipment like solar panels, etc. promoted. In particular, regulations on certification, ­ product differentiation, disease control and monitoring »» Support leasing as much as possible by enabling legal are needed. rights and a collateral registry, especially for move- able assets »» Support investment in public infrastructure that re- duces MSME risk, such as flood control, watershed »» Support and enable climate smart technical assis- management and early warning systems. tance as much as possible »» Co-invest with private sector investors and MSMEs »» Support improvement of credit scoring models for through matching grants and credit enhancement to MSMEs/rural credit rating systems provide incentives for adaptation investment. »» Establish or support financially and environmentally »» Strengthen capacities of individual businesses, business sustainable guarantee mechanisms to share risks and multipliers and banks in assessing their risks and enhance finance and investment for climate smart ad- developing adaptation strategies. ­ aptations 32 CLIMATE SMART FINANCING FOR RURAL MSMES: ENABLING POLICY FRAMEWORKS 5.3 POLICY SOLUTIONS FOR PROMOTING »» Facilitate initial international risk pooling or access to AN ENABLING ENVIRONMENT AND reinsurance: The highly covariate or “systemic” nature REGULATORY FRAMEWORK FOR ­ of the payouts for index insurance poses a challenge CLIMATE SMART RISK MANAGEMENT to a private insurer. Government can facilitate national FOR RURAL MSMES and international risk sharing. Policies need to empower MSMEs to take their own risk »» Provide smart subsidies: There are good arguments management decisions and not weaken the incentives of for subsidizing insurance for poor MSMEs, especially if MSMEs to reduce these risks. this helps them to graduate from more costly types of public disaster aid programs, or to access game »» Build/support weather stations and data infrastruc- changing credit, technologies or markets. Subsidies ture and data systems: Weather requires a reliable might also be warranted to kick start insurance mar- weather station infrastructure, and these must be kets MSMEs, for example, by offsetting some of the ­ sufficiently dense to avoid excessive basis risk of initial set-up, administration and reinsurance costs. ­ index-based insurance. There is need to collect, main- tain, and archive data and to make it available on a »» Compensate MSMEs for the climate change induced timely basis in relation to insured events. premium delta: Subsidies would assist MSMEs to adapt to the impact of climate change on risk and »» Support agro-meteorological research and good therefore premium levels. This subsidy would be set to product designs: These investments should be target- cover the difference in the premium rate between pre- ed at feasibility studies and pilot tests of new products and post-climate change levels, thus compensating with the involvement of local private-sector partners. MSMEs for the climate change “delta” in premiums. »» Establish a legal and regulatory environment for »» Support diagnostics in climate risk assessments for enforcing contracts that both buyer and seller can ­ MSME to target adaptation risks on the individual level. trust; this is a fundamental prerequisite for MSME insurance. Additionally, laws and regulations need to ­ be consistent with international standards to improve the chances of insurers gaining access to global markets for risk transfer. ­ G20 GLOBAL PARTNERSHIP FOR FINANCIAL INCLUSION (GPFI) 33 5.4 POLICY IMPLICATIONS FROM SEF FOR ­ 5.5 POLICY IMPLICATIONS FOR ­ AN ENABLING ENVIRONMENT FOR PROMOTING GREEN MSME BUSINESS ­ FINANCING CLIMATE SMART MSMES MODELS Features of an enabling environment, as drawn from sus- tainable energy finance, may include: »» Public funds and public-private blended finance are important to leverage private funding, including for »» Fiscal incentives such as subsidies (e.g. equipment) green business models and tax credits for CP, EE and RE investments »» Support to FinTechs as market innovators and enablers »» Policies to promote RE as a country strategy to promote for climate smart financing especially in the rural areas energy diversification is observed to be effective for promoting green MSME business models »» Specific public funding and/or first loss capital through commercial banks for CP, EE and RE projects »» Support for financially and environmentally sustainable Guarantee Schemes are effective in order to facilitate »» Market awareness raising on new technologies for CP, the longer term nature and level of uncertainty of RE and EE ­ repayment flows »» Targets for EE and cleaner energy production »» Guidelines by banking regulators to promote “green” lending and assessment of environmental and social risk in bank lending operation »» Appropriate pricing of energy and water 34 CLIMATE SMART FINANCING FOR RURAL MSMES: ENABLING POLICY FRAMEWORKS 6. Conclusions for policy makers G20 GLOBAL PARTNERSHIP FOR FINANCIAL INCLUSION (GPFI) 35 6.1 POLICY ANALYSIS AND DESIGN Care is needed when “prescribing” specific policies based on the current state of understanding and considering the Supporting climate smart rural MSMEs from a policy per- inherent complexities of this topic. Instead, a broader pol- spective is a mostly unchartered territory, an issue that is icy analysis methodology design that takes a toolbox ap- complicated further by the shortage of empirical evi- proach is presented with the aim of assisting policy mak- dence and track record for many climate smart rural solu- ers in carefully considering appropriate policy options. tions. This warrants utmost care and caution when consid- The most relevant experiences of practical applications at ering policy design. Nonetheless, there is significant hand are those related to the area of rural sustainability policy experience in related fields that can, and should be and sustainable energy efforts discussed earlier. There- drawn upon. This includes experiences with rural devel- fore, the toolbox approach, shown below, builds on those opment, agriculture and MSME promotion policies, as lessons and experiences. well climate change. Second, climate change adaptation is highly context specific. As a result, assumptions about the replicability of specific policy solutions need to be dil- igently examined. It should also be highlighted that in addition to domestic policies and instruments, international public finance also plays an important role to catalyze additional resource mobilization from other sources, public and private, as noted in the Addis Ababa Action Agenda, which consti- tutes an integral part of the Agenda 2030 for Sustainable Development. 36 CLIMATE SMART FINANCING FOR RURAL MSMES: ENABLING POLICY FRAMEWORKS 6.2 POLICY TOOLBOX – POLICY OPTIONS POLICY TOOLS POTENTIAL POLICY APPLICATIONS POLICY EXAMPLES ­I NSTRUMENT OPTIONS MAKERS CAN SUPPORT   TYPE LEGISLATIVE/ Codes, ­ Property rights or royalty systems Policy interventions to both REGULATORY zoning rules, including land and other rural protect ownership and usage rights permitting, assets as well as intellectual and royalties while seeking reporting, impact property changes that promote climate assessments smart and sustainable impact Regulatory requirements or Regulations that can promote value The Sustainable Banking Network incentives to encourage financial chain sustainability and transpar- (SBN) is a community of financial institutions and agribusiness and ency sector regulatory agencies and other companies active in the rural Regulations and reporting banking associations that aim to economy directly or through their guidelines for environmental advance sustainable finance value chains to assess and report efficiency assessments and through the sharing of best environmental and social risks in standards practices. their operations by issuing Promote green lending through guidelines and reporting standards guidance and reporting Promote standards, certification and programs that help ensure MSME access and affordability for the adoption of standards and certification Insurance regulatory guidelines Provide an enabling legal and and/or incentives that encourage regulatory environment for MSME insurance coverage for MSMEs climate risk insurance affected by climate risks Improving the legal and regulatory environment for contract enforcement of buyers and sellers so insurance can be offered. ECONOMIC/ Government Government financial support for Facilitate, as applicable, initial FISCAL taxation/tax catastrophic risk insurance international risk pooling or access incentives, programs that facilitate risk to reinsurance (government funding/grant, insurance accompanied by risk Partner among development led internation- strategic prevention measures to vulnerable agencies and governments to al/national investments and households and MSMEs to support support reinsurance to mitigate actions) subsidies, their risk reduction and risk insurance risks to facilitate transfer strategies insurers to service micro and small rural households and enterprises. Public grants for technical Capacity building for banks/FIs and Global Index Insurance Facility is a assistance to build the capacity of MSMEs good example of donor/public market actors so that the private Positive impacts of private funds to promote feasibility sector is better able to respond to adaptation activities on other studies, pilot applications, legal/ the changing market conditions actors can be provided by technical regulatory work for introducing created by climate change guidelines or adjusted training index based insurance solutions in programs various countries in Africa, Asia and Latin America and the Caribbean. Supporting climate change specialists to work alongside the Capacity building with local agricultural and building capacities financial intermediaries through for vulnerability and risk training, information about market assessments potential and the economics of climate smart projects, tools for Strengthen capacities for assessing climate smart projects multipliers such as business and support in pipeline develop- associations ment. Strengthen the capacity of MasAgro Productor: Financial aggregators support mechanisms via FND and FIRA at state and federal levels G20 GLOBAL PARTNERSHIP FOR FINANCIAL INCLUSION (GPFI) 37 POLICY TOOLS POTENTIAL POLICY APPLICATIONS POLICY EXAMPLES ­I NSTRUMENT OPTIONS MAKERS CAN SUPPORT TYPE AGREEMENT/ Utility pricing, Utility pricing policies to Review and revision of water and In the case of sustainable energy INCENTIVE guarantee encourage adaptation to climate natural resource costs and design finance, long term feed-in tariff programs, risks, particularly utility pricing related pricing structure to commitment help ensure the BASED insurance risk/ related to energy and water as to ­ encourage improved efficiency and predictability of project revenues ­ ublic cost sharing, (Private - P encourage conservation and conservation and therefore can serve as a key ­ artnership / P Investment of efficient use of resources Feed-in tariffs to make prices paid enabler of financing for the collaboration) public savings by utilities predictable investment. Public sector financial support for Direct public funding and credit Use of credit guarantees and climate smart risk financing, risk guarantee schemes to promote special lines of credit to promote sharing, blended finance investments by MSMEs to adapt ­ investments. (Although guarantees ­ instruments and climate insurance, and mitigate climate risks and lines of credit are not specific through public-private partnerships Indirect public funding or risk to climate smart, various programs sharing, through private financial do promote such MSMEs and intermediaries (including funds), agribusiness investments in and particularly focusing on longer general, e.g. FINAGRO in Colombia, term finance for climate smart FIRA in Mexico.) MSME investments Guarantee mechanisms supported by public funds. Support to MSME insurance, such as upfront investment cost sharing co-investment Government financial support for Facilitate as applicable initial For example, CCRIF for the catastrophic risk insurance to international risk pooling or access Caribbean, ARC in Africa and a catastrophic, multi-year, climate ­ to reinsurance similar scheme for Pacific islands. risk insurance programs that Partner among development Also, schemes in Mexico, Peru and provide risk insurance accompanied agencies and governments to Mongolia, amongst other countries by risk prevention measures to support reinsurance to mitigate focus on protecting vulnerable vulnerable households and MSMEs insurance risks to facilitate populations. At a country level, to support their risk reduction and insurers to service micro and small Mexico and Peru public support to risk transfer strategies rural households and enterprises. promote catastrophic insurance for family agriculture. Provide financial support in the form of premium cost sharing and/ or reinsurance capacity (public funds for risk sharing) to promote insurance solutions. Grants, guarantees, insurance and Temporary incentives and support The mobilization of Chinese other financial enhancements to to mobilize funding for climate government funds to complement increase the expected risk-adjusted smart MSME investments to help international development funds to return of investments for climate establish track record for risk share first losses was one of the smart activities, especially ones assessment. key of success factors for the where the lack of track record creation of the Chinese sustainable results in high risk perception. energy finance market MasAgro Productor: Financial support mechanisms via FND and FIRA at state and federal levels Blended funds (grants with Matching grants or co-investing to Various countries use matching commercial finance) to promote mobilize funding for facilitating grants to encourage private sector climate smart MSMEs’ practices climate smart technology stakeholders invest in longer-term investments, such as upfront cost projects that could promote barriers to reach strategic or most climate smart agriculture. For vulnerable MSMEs and sectors/ example, in Mexico, the federal regions, including like irrigation, local governments promote energy efficiency, storage, irrigation and improved storage mechanization, works to control through matching grants and floods. incentives for private capital to ­ Investments, i.e. through a fund the non-grant component guarantee to the financers of the adaptation investment or longer term credit lines 38 CLIMATE SMART FINANCING FOR RURAL MSMES: ENABLING POLICY FRAMEWORKS POLICY TOOLS POTENTIAL POLICY APPLICATIONS POLICY EXAMPLES ­I NSTRUMENT OPTIONS MAKERS CAN SUPPORT TYPE AGREEMENT/   Climate smart “pull mechanisms”, Providing incentives to mobilize The G7 InsuResilience Initiative INCENTIVE such as competitive R&D grants to innovation and learning, including (launched by Germany/BMZ in spur innovations, including the experiences from matching grants, 2015) aims for reaching an BASED support of pilot projects and scale or partial guarantees. additional 300 million beneficiaries Public (Private - ­ up strategies for new technologies through sovereign risk transfers, ­ Partnership / and approaches and 100 million beneficiaries of collaboration) climate risk insurance through insurance market scale ups by 2020. For the market creation purpose, it deploys a series of “pull mechanisms” to facilitate market entry of insurers, including capital injections loans, premium subsidies and a challenge fund (KfW/CIF), along with technical assistance for new products and business models (GIZ). MasAgro Yucatan, scoping project: Experiences on sustainable rural development and biodiversity conservation in the Yucatan peninsula Aggregation and transaction cost Government supporting Hungary’s Ministry of Education reduction aggregations mechanisms and/or ­ created an awareness campaign aggregators of rural MSMEs and related online platform for through various financial and energy efficiency improvement in non-financial tools publicly owned schools. Rural Government playing an active role municipalities in particular had in aggregation and transaction cost significant challenges accessing reduction through its convening financing. By standardizing the power and by leveraging upgrades, organizing the market technology and pooling USD 250 million in prospective investments (with an IFC risk-sharing), all major banks, ESCOs and technology vendors were interested in a market segment that they previously would not touch. The winning consortium of local bank/ESCO/ technology vendors to implement the upgrades was selected through a competitive tender. Public Private Dialogue and Private Public Partnerships Government or international Collaboration Multi-stakeholder consultations development organization convening relevant stakeholders Government playing the role of for sharing of lessons and coordinator and honest broker to experiences. facilitate systemic collaborative solutions In Costa Rica awareness raising and trainings on climate risk analysis and adaptation strategies are implemented by the Ministry of Tourism with several stakeholders from tourism business, banks and public sector (chamber of tourism/ eco-tourism). Basis is the Climate Expert Approach, developed by PSACC Program G20 GLOBAL PARTNERSHIP FOR FINANCIAL INCLUSION (GPFI) 39 POLICY TOOLS POTENTIAL POLICY APPLICATIONS POLICY EXAMPLES ­I NSTRUMENT OPTIONS MAKERS CAN SUPPORT TYPE AGREEMENT/ Establishment of agroclimatic Build knowledge for business In Kenya, outbound messaging INCENTIVE information systems to collect, multipliers such as business provides personalized voice alerts analyze and disseminate informa- association, chambers, business that communicate critical BASED tion that would enable decision service provider, including on green information related to price, Public (Private - ­ making business models. weather and farming techniques. ­ Partnership / Provide central and target group Mobile surveys allow farmer-based collaboration) tailored climate data (E.g. organizations to conduct surveys Establishing a Climate Data Center) to capture the impact of their interventions. The company’s Plan, collect, analyze and process support line gives farmers direct climatic information to be used by access to expert advice. various stakeholders to map, quantify and analyze risks and use All content is provided in local this information to take decisions languages. It helps these on climate smart investments. The small-scale farmers (less than 1.2 Government could also use such hectares) increase their yields by information for policy making adopting improved farming related to climate smart rural ­ practices and aims to reach 500,000 MSMEs and agriculture. by 2019, many of whom are women. Establish protocols for sharing data MasAgro Movil: Mobile phone- amongst public entities and sharing based, comprehensive information data and feedback mechanisms and decision support for farmers with the private sector. (pilot stage). Improved infrastructure for Building weather stations and data MasAgro Productor: Online measuring climate phenomena infrastructure and data systems. producer data collection and Support for improved quality of sharing platform, used also for data to collect and make available adoption tracking; Platform to all on a timely basis. Conservation Earth, linked to SIAP Creation of awareness raising Foster understanding among MasAgro Productor (Take It To the programs to disseminate Financial Institutions that: a) Farmer), 2011-2022: Promotion of information around technologies ­ climate change will affect theirclimate smart agricultural and investments that promote portfolio and, b) an increase ofpractices (focus water use climate smart investments for adaptation investments is efficiency, soil health) developed MSMEs to assist in stimulating the expected. Promote experience under MasAgro Trigo and Maiz and demand side for financing and exchange between FIs nationally other sources, via certified address incomplete information. and internationally. technicians and innovation hub Financial literacy campaigns to Raising awareness among MSMEs networks in 30 Mexican states; increase awareness and knowledge about the benefits of climate smart Greenseeker and Green Sat decision regarding characteristics and solutions. This may include support tools for extension agents functioning of debt instruments training, demonstration projects, and farmers and potential debt traps. media, etc. Morocco is promoting climate smart Raising awareness among MSMEs of approaches with focus on risk the effects of financial decisions management through its private can help to better deal with sector organisation building on climate change and, more awareness raising, training and generally, uncertain events. capacity development. 40 CLIMATE SMART FINANCING FOR RURAL MSMES: ENABLING POLICY FRAMEWORKS 7. Annexes: Case Studies The following are a number of diverse cases of mature The cases collected for this paper fall into two main cate- ­ interventions collected in order to attempt to analyze the gories: those related to access to climate finance and extent to which the above policy tools have proven effec- those related to insurance. The analysis of these cases tive in fostering the development of climate resilient rural clearly revealed the need for comprehensive interven- MSMEs. Due to time constraints, the number of cases is tions. At the very least, access to finance related tools, limited and therefore the ability to extrapolate from their such as risk sharing facilities, needs to be applied in com- analysis is also limited. We envision a later phase of this bination with technical assistance to both partner FIs as paper that will build a robust database of relevant cases well as to other market players. Partners are very sensitive and examples which will be able to support a more to the transaction cost of such new initiatives, especially in ­ nuanced analysis with greater potential in systematically the initial years when the profitability of the new climate applying findings to the design of new interventions. smart lending activities is often very limited. Therefore, G20 GLOBAL PARTNERSHIP FOR FINANCIAL INCLUSION (GPFI) 41 interventions need to take into account such transaction »» High transaction costs associated with EE project de- costs when actively engaging partner FIs, especially when velopment and finance; it comes to TA support provided and/or potential fees charged for TA support. The transaction costs arising »» Lack of medium- to long-term finance needed to allow from the administration of risk sharing facilities is a critical EE projects to be self-financing through savings. area that has undermined their efficacy and some built-in flexibility is highly recommended to enable timely adjust- Tools applied to address above barriers ments. »» Risk sharing with local FIs; The policy analysis also reveals the importance of aggre- »» Technical assistance for capacity building for FIs, gation and supporting aggregators in the market, which ESCs, project developers, and project hosts. at times is a lesson learnt. Awareness raising is revealed to be an important high impact policy tool but its design Intervention needs to carefully consider the local context. 14 FIs and 41 project developers and ESCs participated in CEEF and a total of 829(6) projects were financed with CEEF risk sharing support, none of which defaulted. The 7.1 COMMERCIALIZING ENERGY EFFICIENCY ­ program achieved significant progress toward the objec- FINANCE (CEEF) tive of expanding the availability of commercial financing for energy efficiency (EE) projects in the target markets. Highlight summary CEEF is estimated to have led to USD 330 million of ENER- CEEF, via partner bank CSOB, supported a (i) biogas energy GY EFFICIENCY investments, annual reductions of system investment in a rural MSME pet food factory, using 310,500 tons of CO2, and annual energy savings of 1,956 sorrel produced next to the factory; (ii) biomass gasifica- terajoules. The technical assistance provided by the CEEF tion investment in a rural carpentry MSME that used the program led to substantial capacity building in the FIs as waste wood from making windows and doors as fuel. well as in the Energy service companies and project de- velopment companies. The commercial EE financing ac- Background tivities of the participating FIs increased substantially be- IFC’s Commercializing Energy Efficiency Finance (CEEF) cause of the program, and the FIs have developed new Program was launched in April 2003 with the support of financing products tailored to the EE market. Further- the Global Environmental Facility (GEF). The CEEF program more, the EE financing activities of these FIs continued represented the expansion of the 1997 Hungarian Energy after the end of the CEEF program, thereby demonstrat- Efficiency Co-financing Program (HEECP) into the other ing the sustainability of the program. countries. The CEEF program was successfully completed in 2008. The CEEF program interventions effectively addressed challenges and market failures related to both the uncer- Barriers /problems the intervention aimed to over- tainty and transaction cost aspects of information and come awareness barriers, both the uncertainty and transaction »» Weak credit and unfamiliar risk of Energy Efficiency cost aspects of technology adoption barriers, and both (EE) investments and energy service companies, re- the uncertainty and transaction cost aspects of the access sulting in high interest rates and/or shorter tenors than to finance challenge. Production related uncertainties needed, if financing available at all; and transaction costs were partially addressed by reduc- ing energy cost in highly energy intensive MSMEs. »» Lack of collateral value of EE related equipment; »» Lack of relevant expertise and capacity in local FIs; »» Poor capability on the part of project hosts and Energy Service Companies (ESCs) to prepare bankable proj- ects; 42 CLIMATE SMART FINANCING FOR RURAL MSMES: ENABLING POLICY FRAMEWORKS Policies applied. 7.2 PHILIPPINES: SUSTAINABLE ENERGY ­ Economic / fiscal FINANCE (SEF II) »» Grants to provide technical assistance (TA). GEF and bilateral donors funded TA to FIs, MSMEs and ESCOs, Highlight summary which was implemented and administered through lo- Partner FIs facilitated USD 3 billion worth of investments cal offices and staff. Seminars and training programs in contrast with the target of USD 200 million. were also part of the TA. The flexibility of the TA pro - gram was key to its success. BACKGROUND Sustainable energy finance promoted with the overall Agreement / incentive-based goal being to increase access to local sources of financing »» Utility pricing policies. Energy price liberalization for Sustainable Energy (SE) projects in order to stimulate (was not implemented in coordination with the project private sector investment and reduce Green House Gas but played a key role in the economics of the climate (GHG) emissions. The main objective of the Program is to smart upgrades). strengthen the capacity of partner Financial Institutions (FIs) in developing and managing a SE portfolio. Parallel »» Financial support for climate smart risk financing, risk to that, it aims at assisting end-users, as well as service sharing and climate insurance. Risk sharing was the and technology providers in implementing SE projects. key financial instrument to support local FI lending This program was preceded by SEF I which had no risk and in addressing risk perceptions and lack of track sharing element. record. IFC also made changes to improve the flexibil- ity of the risk sharing tool to make it more user friendly Barriers /problems the intervention aimed to over- and aligned with partners FIs’ operations, which was come key to the success of the risk sharing tool in achieving »» Weak credit and unfamiliar risk of renewable energy its objective. projects »» Aggregation and transaction cost reduction. Technical »» Lack of relevant expertise and capacity in local FIs assistance and advisory support for ESCOs since these serve as aggregators and help address transaction »» Lack of awareness and information in the market cost for FIs and MSMEs. »» Limited private sector participation »» Public private dialogue and collaboration. Ongoing periodic meetings and structured consultations with Tools applied to address above barriers all relevant stakeholders to inform the program. »» Risk sharing with local FIs Information / communication-based »» Technical assistance and capacity building of FIs’ as »» Awareness raising programs. Various forms of aware- well as other market participants ness raising efforts and demonstration projects. »» Regulatory advisory »» Awareness raising Intervention SEF II is expected to have facilitated the financing of SE projects amounting to USD 200 million, saved 77,500 MWh from Energy Efficiency (EE) projects, generated 350,000 MWh from RE, and avoided 600,000 MT of GHG emissions. In addition, it should have facilitated the development of at least 200 SE projects in the partner FIs’ ­ pipeline; assisted service and technology providers in providing audit/training/ consultancy services to around 100 SE projects; developed an energy efficiency policy G20 GLOBAL PARTNERSHIP FOR FINANCIAL INCLUSION (GPFI) 43 note for the DOE, and assisted relevant government 7.3 SRI LANKA: PORTFOLIO APPROACHES ­ agencies in streamlining the registration, licensing and TO DISTRIBUTED GENERATION ­ permitting for RE projects; and produced SE evaluation OPPORTUNITIES (PADGO) tools and materials used by at least 150 partner FI account officers, end-users, service and technology providers. 
 Highlight summary Sri Lankan banks were averse to funding renewable ener- Policies applied gy projects because of their inherent risks. The Portfolio (i) Partnerships with existing partner FIs to develop port- Approach to Distributed Generation Opportunities (PAD- folios for SE projects; (ii) Established relationships with GO) helped them gain experience in such financing, end-users, service and technology providers to increase which increased their confidence and risk appetite. The the number of projects and project proponents that will increase in risk appetite, along with higher credit supply, require access to local financial markets; (iii) Playing con- led to more investments in newer renewable energy tech- vening as well as catalyst roles for regulatory improve- nologies such as bio- mass, waste-to-energy and solar ment and participating in or leading market awareness photovoltaic (PV) while maintaining the investment raising activities to create conditions for greater private ­ momentum in traditional technologies such as mini-­ sector participation. 
 hydropower projects. PADGO also supported some emerging technologies through the risk-sharing facility. 
 Economic / fiscal »» Grants to provide technical assistance (TA): TA to FIs Background and other market participants. Seminars and training The PADGO project was launched by the International programs were also part of the TA. Finance Corporation (IFC) and the Global Environment ­ Facility (GEF) to encourage distributed generation »» Grants to support project development, including through renewable energy sources among people with energy audits. ­ very little or no access to electricity, predominantly in ­ rural areas. PADGO was operational between 2008 and Agreement / incentive-based 2015 and this case study is based on its independent third »» Support for climate smart risk financing, risk sharing: party evaluation report. RSF has played a decisive role in the growth of partner banks’ climate smart portfolios. Barriers /problems the intervention aimed to over- come Information / communication-based »» Weak credit and unfamiliar risk of renewable energy »» Awareness raising programs: innovative approaches, projects such as field trips, etc. that have proven highly effec- tive. »» Lack of relevant expertise and capacity in local FIs Tools applied to address above barriers »» Risk sharing with local FIs »» Technical assistance for local FIs and other market par- ticipants »» Sector studies Intervention Risk sharing facilities with 2 local FIs were implemented which led to the implementation and financing of 10 distributed generation projects and the development of­ ­ 2 new financial products for renewable energy. An ­ additional 19 loans and 20 distributed energy generation projects were supported via the technical assistance program. The program led to financing of over USD 80 ­ 44 CLIMATE SMART FINANCING FOR RURAL MSMES: ENABLING POLICY FRAMEWORKS million. The uptake of the risk sharing facility was lower 7.4 MASAGRO, CLIMATE SMART ­ than expected but overall the program achieved its AGRICULTURE IN MEXICO (13) ­ t argets for financing generated. Highlight summary PADGO achieved the objectives set out for the program. The climate smart agriculture (CSA) concept reflects an Some key lessons of PADGO include the importance of: (i) ambition to improve the integration of agriculture devel- maintaining flexibility and ability to adjust to changes in opment and climate responsiveness. It aims to achieve external and internal environment; (ii) when developing a food security and broader development goals under a market for relatively newer technologies, a rounded changing climate and increasing food demand. CSA offering of investment services and advisory services is ­ initiatives sustainably increase productivity, enhance re- ­ necessary; (iii) addressing transaction cost and working silience, and reduce or remove greenhouse gases (GHGs), with ESCOs/aggregators. and require planning to address tradeoffs and synergies between these three pillars: productivity, adaptation, Policies applied and mitigation. Mexico introduced CSA through a large- »» Risk sharing with local FIs scale program, MasAgro, with a focus on adaptation. The program has reached 300k farmers and trained 10k farm- »» Technical assistance for capacity building for FIs ers and introduced smart nutrition, smart mechanization, smart resource management and smart communication. »» Sector assessments Participating farmers produced 67 percent more rain-fed maize (1.6 t/ha above national average of 2.4 t/ha), had »» Project development support 25+ percent reduction of postharvest losses and a 50+ percent reduction in nitrogen use. For maize, they saved »» Energy audits 60+ percent in soil preparation costs and generated 23 percent more income for rain-fed maize farmers. »» Awareness raising and capacity building targeting the tea sector Background Agriculture is the third most important economic activity, Economic / fiscal contributing 3.18 percent to the country’s gross domestic »» Grants to provide technical assistance (TA): TA to FIs product (GDP). This low percentage is due to a diversified and other market participants. Seminars and training economy that is transitioning into secondary (industry programs were also part of the TA. and manufacture) and tertiary (tourism and services) ­ activities. Roughly 22 percent of Mexico’s population lives »» Grant to provide market studies. Assessment of the in rural areas (almost 24 million people), with a little under market for high potential climate smart solutions such half (44 percent) of the rural population actively employed as biomass and high potential market segments such in agriculture. Mexico encompasses four main agricultural as the tea sector. regions: irrigated, maize–bean, dryland-mixed, and coast- al plantations. The two systems with the largest land area »» Grants to support project development, including are the irrigated region (north) and the maize–bean ­region energy audits. (central and southwest). Agreement / incentive-based Barriers / problems the intervention aims to over- »» Support for climate smart risk financing, risk sharing: come support Risk sharing was the key financial instrument to ­ Mexico’s agriculture sector faces several challenges. local FI lending and in addressing risk perceptions Although the country is the world’s eighth largest food ­ and lack of track record. The importance of flexibility producer, national food production does not meet the in- was a key lesson learnt. ternal demand for basic products, such as yellow maize, rice, oilseeds, and wheat. Productivity, competitiveness, Information / communication-based and profitability in Mexico have stagnated. Sixty percent »» Awareness raising programs: for the tea sector of agriculture production is obtained in irrigated land, G20 GLOBAL PARTNERSHIP FOR FINANCIAL INCLUSION (GPFI) 45 while rain-fed plots are increasingly exposed to climate synergistic investment and interaction between stake- change effects. In northern Mexico, farmers are vulnera- holders in the agricultural supply chain. Up to 180 institu- ble to extreme climate events, such as drought and frost. tions collaborate with MasAgro, including federal and Smallholder farmers in Mexico are highly vulnerable to state government entities, 35 private seed companies, climate variability and change. Their vulnerability is relat- and 33 research institutions across the world. MasAgro’s ed to lower than average crop yields (e.g., average maize efforts have led to the adoption of CA throughout the yields are less than half those of commercial farmers), country, either as demonstrative platforms or at full-scale small land tenure size (73 percent of farmers own less than implementation. Central Mexico has the highest rates of 5 hectares), reliance on rain-fed systems (90% of subsist- adoption; states, such as Guanajuato, Michoacán, ence farmers, in comparison to 63 percent of commercial ­ Queretaro, and Jalisco have an uptake rate of up to 50 farmers) and thus dependence on regularity of environ- percent. The total uptake area in these states is 36,547 mental conditions for production is high. Fewer resources hectares, primarily in maize systems. MasAgro Productor (finances, savings healthcare, subsidies, tools, and inputs) tracks CSA adoption process via an Online producer data are available to help cope and adapt to climate impacts. collection and sharing platform and the Platform Conser- The percentage of farmers implementing CSA practices is vation Earth. Conservation agriculture has increased often low (see Table 1). farmers’ profitability through higher productivity and low- er input costs. The next steps for MasAgro are to replicate Tools applied to address above barriers the program at different scales and in other regions in the CSA technologies and practices present opportunities for country and the world. The knowledge hubs model will addressing climate change challenges, as well as for eco- likely surpass its agricultural development goals to be nomic growth and development of agriculture sectors. ­ applied in other spheres, such as environmental con­ For this profile, practices are considered CSA if they main- servation or the provision of weather forecasts through tain or achieve increases in productivity as well as at least information and communication technologies. one of the other objectives of CSA (adaptation and/or ­ mitigation). Farmers in Mexico have begun to adopt a Policies applied to promote CSA variety of CSA techniques: agroforestry and organic ­ Legislative / Regulatory production in coffee, silvo-pastoralism, bio-digesters, ­ »» Climate Change General Law LGCC (2012) energy efficiency, renewable energy, improvement of in- ­ tensive systems environment, improved fodder, genetic »» National Climate Change Strategy ENACC (2013) improvement in livestock, crop rotation in maize, wheat, and beans, and conservation agriculture practices in Economic / fiscal maize and wheat. The percentage of farmers implement- »» Climate change special program PECC ing CSA practices is often low. Along with field practices, such as the ones mentioned above, there are also im­ »» Sectoral program for agriculture, livestock and portant ongoing programmatic activities worth noting in ­ fisheries PSAGP (2013-2018) by SAGARPA (Ministry of Mexico, such as payments for ecosystem services, Agriculture). It promotes: sugarcane green harvest, ­ sustainable forest certifications, pilot projects of REDD+8 crop rotation, irrigation, protected agriculture, live- activities, insurance against natural disasters, loans, stock vulnerability information, efficient machinery, guarantees, and farmers organizations. ­ bio-fertilizers, fuel efficiency, small dams, water reservoirs, soil improvement, cogeneration of energy, ­ Intervention bio-fuels, bio-digesters, thermic solar systems, photo- Conservation Agriculture (CA) (a bundle of practices in- voltaic systems, organic fertilizers, natural disaster risk cluding no-tillage, crop rotation, crop association, and insurance for states and municipalities (CADENA improved varieties) is being promoted in a joint effort be- program for the attention of natural disasters), and ­ tween the International Wheat and Maize Improvement development of Nationally Appropriate Mitigation Actions ­ Center (CIMMYT) and the Secretariat of Agriculture, Live- (NAMAs) in livestock production, among others. stock, Rural Development, Fisheries and Food (SAGARPA) through the Sustainable Modernization of Traditional Information / communication-based Agriculture (MasAgro) program. MasAgro disseminates ­ »» GHG inventories CA technologies through innovation hubs that promote 46 CLIMATE SMART FINANCING FOR RURAL MSMES: ENABLING POLICY FRAMEWORKS 7.5 CATASTROPHE INSURANCE FOR MSMES ­ Barriers / problems the intervention overcomes BY IFMR HOLDINGS IN INDIA (14) »» The demand of the MSME sector for finance (INR 32.5 trillion) is met only partially (30%) Highlight summary IFMR Holdings (“IFMR”) was incorporated as a private lim- »» Only 7.3% of the enterprises of the MSME sector have ited company with the mission to achieve complete finan- access to formal sources of finance cial inclusion in India. It operates, incubates, invests in and provides strategic direction to commercial compa- »» Economic losses resulting from a disaster are only nies that have significantly scalable business models, as ­insured partially well as furthers IFMR Trust’s mission of financial inclusion. IFMR currently has a network of 100 plus originators that »» Poorly structured insurance, e.g. delays in claim settle- serve 20.5 million end-clients in 481 districts across India, ment including 0.7 million that are served by IFMR directly through its remote rural operations. IFMR believes that »» Tools applied to address above barriers access to finance supported by well-functioning markets is critical for low income households, and intends to lever- »» Customer centric approach targeting low income age its network to introduce new and innovative financial ­ individuals and small enterprises solutions for these households. Developing the Natural catastrophe risk insurance (“Cat insurance”) solution for »» ­ atastrophe Innovative product design aiming to build c financially excluded households in India is one such idea risk protection solutions that IFMR has started working with in collaboration with BMZ/GIZ InsuResilience project. »» A potential digitally enabled technology platform that can enable deep customer centricity in delivery Background ­models Natural disasters remain a major driver of poverty in India but Catastrophe Insurance in India is particularly un- Intervention der-developed. India is prone to natural catastrophe risks IFMR designs lifecycle products in collaboration with and was the Top 3 disaster hit country in 2015. 60 percent Financial Product manufacturers for their customers, ­ of people globally affected by floods reside in India. Over reconciling risks and goals that are prevalent in certain ­ 40 million hectares (12 per cent of land) in India is prone to stages of life. By putting the customer first, the financial floods and river erosion. Of the 7,516 km long coastline, well-being of the respective customer segments is maxi- close to 5,700 km is prone to cyclones and tsunamis which mized. again drive coastal floods. According to the World Re - sources Institute (WRI), India tops the list of 163 nations IFMR, Weather Risk Management Services and GIZ are affected by river floods in terms of number of people currently jointly developing an insurance product for (around 4.85 million people). Every year, the lives of 4.85 ­ natural catastrophe risks to be integrated into IFMR’s life- million Indians are disrupted by floods (USD 14.3 billion of cycle solution, along with savings products that will also gross domestic product at Risk). The Chennai Floods in protect the customer’s saving goal against disruptions December 2015 led to economic losses of USD 2.2 billion. emerging from risks like life/accident/health. This design is guided by specific design principles, e.g. the product A survey of 500 SMEs registered in the Chennai District shall not be credit-linked, will cover multiple perils (flood, suggested inadequate sources of finance and insurance drought, cyclone, in some parts earthquake). The cover- as a key issue for the high losses. age of income is as important as the coverage of assets since the customers, who are mostly laborers, farmers/ The Indian MSME sector is an important pillar for the farm laborers and shopkeepers, depend for their liveli- national economy. 50 million MSMEs – of which many re- ­ hoods on labour income and other income sources which side in rural areas – employ 111 million people. The sector are all affected by extreme weather events. Immediate accounts for 37 percent of GDP and 40 percent of exports. early recovery cash payments, thanks to the natural However, their financial needs are served insufficiently. ­ c atastrophe insurance payout, then protects the few Thus, MSMEs are not equipped to absorb the economic ­ assets of the customer because he/she does not have to effects of losses related to extreme weather and natural sell those assets to get back on his/her feet. events, exacerbated by climate change. G20 GLOBAL PARTNERSHIP FOR FINANCIAL INCLUSION (GPFI) 47 IFMR envisages solving the delivery challenge through­ 7.6 WEATHER INDEX INSURANCE IN ­ a technology-enabled wealth management platform ZAMBIA (15) approach, with data- and analytics-backed product de- ­ sign that can enable true digitization. Highlight summary NWK AgriServices, a large cotton contract farming oper- Policies applied / policy implications ator offers a weather index-based and funeral expense Legislative / regulatory insurance scheme to smallholder cotton farmers who take »» Adequate regulation. An enabling regulatory frame- part in NWK’s outgrower scheme. The product is d­ esigned work supports the development of innovative insur- to help cover the costs of inputs when bad weather strikes. ance products Background »» Rural sector obligations. The insurance regulator re- The vast majority of Zambia’s smallholder farmers is de- quires all insurers to underwrite a certain share of their pendent on rain-fed agriculture and therefore exposed to portfolio in rural areas, which incentivizes insurers to the impacts of severe weather events, including droughts, develop also rural business erratic rains throughout the growing season, and floods. Smallholder cotton farmers in Zambia often contract with Fiscal/Economic cotton ginning companies, such as NWK AgriServices, at »» The natural catastrophe product will not be subsi- the beginning of the cropping season. They receive in- dized, but some MFIs under the IFMR capital platform puts such as seeds and pesticides and pay for the inputs might use existing crop insurance products for the at the end of the season at crop delivery. NWK then farmers in their portfolio. The government of India and ­ deducts the costs of the inputs from the proceeds for the state governments highly subsidize these area-yield delivered cotton. In very poor years, then, farmers will re- index based crop insurance products through the ceive very little income or even incur debts after the costs PFMBY program (USD 4 billion in premiums, 40 million of inputs are deducted. The weather-index insurance farmers covered) product thus covers the costs of the inputs supplied by NWK AgriServices, ensuring debt free earnings through- Information / communication-based out good and bad seasons for farmers. The evidence from »» Delivery platform. IFMR’s vision of such a technology four consecutive seasons shows that this “safe farming” platform is to create a bridge between financial prod- cover in combination with the funeral expense insurance uct manufacturers and existing distribution networks enables farmers to farm more cotton and reduces their (IFMR Originator) like Micro-Finance Institutions, en- incentives to side-sell their crop. abling them to become more deeply customer centric in their approach Barriers / problems the intervention aims to over- come »» Trainings and awareness campaigns. IFMR Origina- Smallholder farmers are often reluctant to invest in their tors shall receive regular trainings, and benefit from farms and crops since they perceive it as too risky, so they the Government’s general awareness programs and underinvest in cash crops and overinvest in food crops biometric ID creation for all Indian adults and assets such as livestock. Side-selling, whereby farm- ers may receive inputs on credit from a company but after harvesting break their contract agreement and sell their produce to another company often occurs. They are then likely to default on their input loans at the end of the sea- son. As a result, the contract farming operator will not contract with the smallholder in the next season. Tools applied to address above barriers Weather index-based agricultural insurance Agricultural insurance gives farmers the necessary confi- dence to invest in their farming businesses as the risk of production loss is reduced. This, for instance, may result 48 CLIMATE SMART FINANCING FOR RURAL MSMES: ENABLING POLICY FRAMEWORKS in the cultivation of two hectares instead of one. More­ The life insurance / funeral cover pays out in the event of over, the risk of side-selling and credit default can be an insured farmer’s death from 1 January to 31 August. ­ reduced through agricultural insurance as the farmer Initially, there were reservations against the product due receives a payout after a bad weather event has occurred ­ to social taboos, but after farmers saw the benefits, the with which she is able to pay back the loan. insurance became well received. Now there is a high de- mand for life insurance not only to cover the farmer but Life insurance / funeral cover also to cover other family members and dependents. In the case of the death of the farmer, the family receives a payout that covers the loan as well as funeral expenses. Policies applied / Policy implications This reduces the financial burden of the surviving rela- Legislative / Regulatory tives. »» Enabling policy framework Intervention »» Support for the types of expected benefits govern- NWK AgriServices started with an agricultural insurance ments might expect when adopting insurance pilot in the 2013/2014 growing season. Since then, the regulations that provide a sufficient enabling environ- ­ project scaled up with 52,000 insured farmers out of the ment to spur greater insurance coverage and range of approximately 70,000 farmers who were under contract ­products in typically under-served rural environments. with NWK AgriServices during the 2015/2016 growing season. The agricultural insurance is offered to farmers on »» Contract farming legal and regulatory framework. This a voluntary basis and is linked to a life insurance product. is important to frame the contract farming operator – The specific feature of the weather index-based product farmer relationship and allow for proper recourse and is that the insurance premium is pre-financed by NWK market conditions to allow farmers to switch from one AgriServices and recovered at the end of the season when operator to the other. the farmer delivers the cotton. It is this feature that proba- bly results in the high take-up rates as farmers’ liquidity Economic / fiscal constraints at the beginning of the season prevent them »» Pre-financing of insurance premium. The NWK from buying insurance. Contract farming operators have AgriServices case study shows that pre-financing of proven to be good distribution channels for agricultural the premium by either government or companies­ insurance because the insurance powers their business can be an effective tool for increasing agricultural models and directly impacts their top-line revenues, ­insurance coverage. thanks to farmers producing more, and as the bottom-line because of less side-selling losses. In addition, farmers Information / communication-based trust NWK AgriServices and their field staff. »» Risk awareness raising programs and trainings The weather index-based product is based on satellite es- »» Awareness raising programs for the main risks that timations of rainfall using Dekadel (10-day) data from farmers face and trainings on how these risks can be TAMSAT. It was designed using a participatory process transferred through insurance was key in this success- with information collected from agronomists from NWK ful agricultural insurance program. AgriServices, agricultural research institutions such as the Indaba Agricultural Policy Research Institute (IAPRI) and a wealth of information collected from farmers via focus group discussions. G20 GLOBAL PARTNERSHIP FOR FINANCIAL INCLUSION (GPFI) 49 7.7 ACCELERATING PRIVATE SECTOR ­ Tools applied to address above barriers AGENCIES FOR CLIMATE RESILIENCE »» Sector specific climate vulnerability risk assessment TRAINING IN BANGLADESH (16) by using Climate Expert (CE) methodology Highlight summary »» Training Programs Accelerating the strategy focuses on the incorporation of climate risk management tools and training concepts into »» Training of Trainers (TOT) the regular training offered by the various training insti- tutes managed by the Ministry of Industry in Bangladesh. Intervention The result is: a) climate adaptation trainings that include Since one year testing, two partner institutes BSCIC and knowledge building on climate change risks in business, BIM have provided training to more than 300 entre­ showing adaptation strategies and integrating a devel- preneurs, TOT conducted for the resource persons, and oped and tested climate finance module and b) climate development of navigation training for inland water trans- change adaptation integrated into the standard training port sector. Two case studies were conducted to develop program of two public owned institutions that offer train- adaptation strategy for companies in the Inland Water ing to the private sector. The “Private Sector Adaptation Transport sector and Agro-Processing sector. For to Climate Change (PSACC)” program has been in ­ instance, the case study for a water transport sector’s ­ partnership with BSCIC (Bangladesh Small & Cottage company showed that climate challenges in the inland ­ Industries Cooperation), BIM (Bangladesh Institute of water transport sector might encompass heavier storms, Management) and SME Foundation in respect to develop- stronger currents due to changing and intense rainfall ing training concepts for integrating climate change per- patterns as well as less water and lower lean flows due to spective into existing training formats. Both institutes longer drought periods. The assessment proved that ship (BIM and BSCIC) are in a process of incorporating the accidents can be related to those extreme weather events training concept into their curriculum. Based on PSACC’s and business activities and transport routes have to close. recommendation and advisory input, the Ministry of In- As this is cost-intensive, ship owners are convinced to dustry had incorporated the topic “promotion of climate support trainings for captains and crew navigation in resilient industry” into Bangladesh Industrial Policy 2016. changing climate conditions. Additional financial support will be necessary. Background Bangladesh is one of the pilot countries out of the BMZ Policies applied / Policy implications funded Global Program “Private Sector Adaptation to Legislative / Regulatory ­ Climate Change (PSACC)”. In Bangladesh, SMEs absorb »» Results from the global program were the basis for the 70 to 80 percent of industrial workers and constitute over Ministry of Industry to conventionalize the promotion 95 percent of business, while the capital intensive­ of climate resilient industries industry cover just three to four percent. It was decided to start awareness on adaptation and possible adaptation Information / communication-based strategies together with relevant private sector organiza- »» Ongoing periodic meetings and structured consulta- tions to understand specific needs in adaptation and tions with all relevant stakeholders to inform the mobilize SMEs towards climate resilient. ­ ­ program, especially the water transport sector, of better navigation due to climate change issues ­ Barriers / problems the intervention aims to over- come »» Knowledge sharing on private sector adaptation with- »» Knowledge Gap for SMEs on how to adapt in state owned private sector organizations »» SMEs do not have capacities to invest in resilience »» Sectoral Vulnerability Assessments, case studies, train- ing curriculum, and use of a Climate Risk Management »» No specific financing options for SMES who need to approach invest in resilience 50 CLIMATE SMART FINANCING FOR RURAL MSMES: ENABLING POLICY FRAMEWORKS 7.8 JOINT ACTIONS FOR MOBILIZING ­ Tools applied to address above barriers TOURISM ACTORS FOR CLIMATE ­ »» Climate Risk Assessment Tool RESILIENCE IN COSTA RICA (17) »» Training Program Highlight summary Ministry of Tourism in Costa Rica developed a “resilience” »» Risk sharing with local FIs package for SME tourism. It consists of: a) Awareness ­ raising based on a vulnerability study for selected pilot »» Technical assistance for capacity building for FIs, ES- destinations, b) development of evidence with real case COs, project developers, and project hosts studies in the pilot destinations, c) training programs for consultants and resource persons, d) standardized Intervention climate risk assessment for tourism enterprises and ­ The program is still in progress. On the national level 18 ­ development of individual adaptation strategies, e) now consultants and multiplier organizations, including the starting matching financial needs with local banks offers. Ministry of Tourism (Instituto de Turismo, ICT), and the The creation of a steering committee with different Chamber of Ecotourism (CANAECO) were trained and ­ members of the tourism sector significantly contributed several assessments are now in progress conducted by to the success of the project throughout the pilot phase. the trained consultants. As a result, ICT is planning to inte- Ongoing discussion on integrating the climate risk grate the Climate Expert Approach into their Certification ­ assessment into the certification system of the country. for Sustainable Tourism (CST) that is awarded to tourism companies in 5 levels, covering several aspects of sustain- Background ability. In two pilot destinations, awareness raising work- Costa Rica is one pilot country of the BMZ funded Global shops reached several companies and local multiplier Program “Private Adaptation to Climate Change (PSACC)”. ­ organizations. CANAECO is now planning to conduct an Tourism accounts for 8.1 percent of the country’s GDP, additional awareness-raising event among its members representing 13 percent of direct and indirect jobs. Since and conduct further assessments as a result of the ­training the beginning of the 2000s, tourism has generated more program. In addition, a Lab of Financing will be ­established income for the country than the export of bananas and to discuss financing concerns of SMEs with financial s ­ ector. coffee together. Different approaches for SMEs were tested. After analyzing relevant sectors and their vulnera- ­ Policies applied bilities, the tourism sector was chosen for intervention Regulatory/Economic/ Fiscal due to its high economic relevance and vulnerability. »» Risk Assessment Approach is discussed for being inte- PSACC is working on the demand side (preparation of the grated in national tourism certification system market) but also addressing financial gaps in adaptation finance for the SMEs. Information / communication-based »» Consultative Committee as platform for ongoing Barriers the intervention aimed to address ­ periodic meetings with all relevant stakeholders »» Vulnerability assessments for different destinations necessary to clearly address needs and start aware- »» Climate Adaptation Trainings are disseminated to ness raising relevant trainers (ToT), several case studies established ­ for attracting demand side »» Lack of knowledge in general as to what adaptation is »» Establishing a Lab of Financing Private Sector between »» Evidence in successful adaptation is still lacking as Financial Sector (supply side) and Enterprises (de- only few cases exist - more examples would be necessary mand side) »» Traditional banks in Costa Rica still do not understand the concept of adaptation to climate change and in general commercial banks do not offer very favorable interest rates for SMEs »» Small capacity of business management that many SME show is mostly a hindrance to successful financing G20 GLOBAL PARTNERSHIP FOR FINANCIAL INCLUSION (GPFI) 51 7.9 RISK-SHARING MODEL TO FACILITATE »» Tools applied to address the barriers CLIMATE SMART FINANCING IN CHINA (18) »» Risk-sharing mechanism under a PPP model to facili- Highlight summary tate rural lending A risk-sharing model that effectively enhances MSMEs’ access to rural credit has drawn much attention in China. »» Public financial support to facilitate climate smart This model is implemented through a Public-Private-­ ­ investment through a guarantee fund Partnership (PPP) whereby: (i) governments establish guarantee funds; (ii) insurers underwrite credit insurance, Intervention or Payment Protection Insurance (PPI); (iii) agricultural This risk-sharing mechanism could have several highlights ­ insurance provides another layer of protection; and (iv) as presented below: ­ financial institutions share the rest of credit risk. Through this model, MSMEs who have neither collateral nor credit »» The professional risk carriers, i.e. insurers, are in- history are able to get loans from formal financial institu- volved. Insurers are believed to have better expertise tions, invest in climate smart activities and enhance their and knowledge than other institutions in managing adaptation to climate change. risks. It makes the whole mechanism steady and ­ robust; Background Thanks to the legislative improvement on land rights as »» Agricultural insurers have very broad networks in rural well as other favorable agricultural policies over the past areas, i.e. 93% of townships being covered, which is years, rural MSMEs, in the forms of farmers’ associations, much higher than banks’ networks (CIRC, 2016) . These rural enterprises called “Dragon-Head Enterprises”, family can be ­leveraged to overcome the information asym- farms and others are in full swing and changing the land- metry when underwriting the loan; scape of rural China. Unlike the traditional small holders who plant staple food for self-consumption, these MSEMs »» It encourages MSMEs to invest in innovation and adopt are more engaged in marketing and value chain develop- new technology. Innovation and new technology (i.e. ment as their livelihoods heavily, if not exclusively, rely on drought resistant seeds) actually present high risk. agriculture. MSMEs alone may be unable, or are unwilling, to take all the risks; Despite generally having higher returns from agriculture than traditional smallholders otherwise do, they actually »» The guarantee funds, either proportionally or based face higher climate risk, among other risks, and this on excess of loss, enhance insurers and FIs’ confi- ­vulnerability is increasing in the context of climate change. dence, reduce their risks and eventually kick off the MSMEs have incentives to take measures to prevent, program; mitigate and reduce risks, but their financial difficulty has ­ always been a barrier. This issue was addressed in recent »» MSMEs do not need collateral or credit history, although years by a risk sharing mechanism among governments, agricultural insurance is the pre-requisite. insurers and financial institutions (FIs). This risk-sharing model has developed fast in recent Barriers/problems the intervention aimed to over- years. For instance, in Jiangsu province, the Provincial come Government leveraged RMB 600 million (around USD 86 »» Formal financial institutions traditionally serve big million) in loans prioritizing disaster risk reduction and re- ­ clients such as state-owned enterprises and do not covery through a USD 10 million guarantee fund. In this have enough experience working with rural MSMEs program, People’s Insurance Company of China (PICC) provides credit insurance and agricultural insurance and »» FIs are not particularly interested in small clients due The Postal Savings Bank of China issues the credit (China to the high transaction costs Post News, 2016). In Gaoyou, Yangzhou, PICC carries 80% of credit risks and China Agricultural Bank co-shares the »» FIs are not willing to provide credit to rural MSMEs remaining 20%, supported by a 7 million RMB (USD 1 because of the high risk and the lack of collateral and/ ­ ­ million) guarantee fund as last resort. At the same time, a or credit history of rural MSMEs weather index insurance (WII) covers the loan applicants (Gaoyou Government, 2016 ). 52 CLIMATE SMART FINANCING FOR RURAL MSMES: ENABLING POLICY FRAMEWORKS With the Anxin Agricultural Insurer in Shanghai, it only action costs for acceptance is low. The implementation takes three days for MSMEs to get the loan from Shanghai presents a medium level of uncertainty though, as this is a Rural Commercial Bank if the amount is less than RMB 1 new market with new clients and a new model. Insurers million (USD 143,000). In Longhua, Hebei province, this and FIs are still in the process of learning. However, with model is extended to poverty alleviation: an aggregator the improvement of clients’ data and credit history, insur- (e.g. rural enterprise or farmers’ association) is eligible for ers and FIs will be able to better assess and manage the additional RMB 50,000 credit (about USD 7,200) with a risks. The transaction costs can be significantly reduce possible interest discount every time it recruits a poverty thanks to economies of scale and the participation of household (Chengde Poverty Alleviation and Agricultural ­aggregators. Development Office, 2016). Policies applied The risk-sharing model overcomes the market failure and Agreement / incentive-based effectively leverages climate smart financing. The »» Public sector financial support for climate smart risk ­ efficiency is fairly good because: a) compared to direct financing, risk sharing and climate insurance, through subsidies or allowances, this model avoids the “leakage” public-private partnerships in the process of distribution; and b) much of the climate smart investment (e.g. risk reduction, prevention) and in- »» Guarantee mechanisms supported by public funds, surance are ex-ante, which is believed to be more efficient private financial intermediaries and risk carriers co- than ex-post measures. This risk-sharing model also has a share the risks, making loans accessible to MSMEs for positive long-term impact because it can enhance MSMEs’ climate smart investment. Climate insurance is pro- financial literacy, increase awareness on climate smart moted through governmental premium subsidies to ­ investment and build resilience against the climate provide additional protection change. Regarding sustainability, it is the private sector, with its professional expertise, that manages the risks »» Public Private Dialogue and Collaboration. Govern- without much intervention from government except dur- ment playing the role of coordinator and honest ing the initial setup of the guarantee fund. Therefore, it broker to facilitate systemic collaborative solutions ­ shall be sustainable, although there is a strong need for insurers and FIs to regularly review, assess and manage Information / communication-based the risks. »» Establishment of database system to collect, analyze and disseminate information that would enable deci- The risk sharing mechanism effectively overcomes the in- sion making formation shortage and therefore reduces the transaction costs related to information. This model is viewed as a »» Plan, collect, process and analyze data (e.g. client data, new market opportunity for insurers and FIs, so the trans- agro climate data) for risk assessment and management G20 GLOBAL PARTNERSHIP FOR FINANCIAL INCLUSION (GPFI) 53 7.10 AGRICULTURAL WATER PRICING ­ »» Remove Trade Barrier and Liberalize “Climate Smart” REFORM IN CHINA (19) Market so that investors could get economic return from the climate smart investment Highlight summary China has completed Agricultural Water Pricing reform Intervention pilots and is expanding the pilots to national wide reform. The key intervention of this round of agricultural water This national reform is implemented through: (i) govern- pricing reform includes (State Council, 2016): ment grants to support water saving facilities and techni- cal assistance; (ii) water quota allocations to counties and »» Given the water quota a county receives, the county villages; (iii) progressive water pricing; and (iv) market lib - government takes the overall responsibility to decen- eralization for water permit trading. Farmers who adopt tralize it to villages, WUA, and eventually individual new technologies and therefore increase water efficiency water users; have dual benefits: a) save on water bills, and b) generate additional earnings by selling the extra water quota. »» Government and/or its agencies is the preliminary entity for water pricing, which shall take into consider- ­ Background ation the cost, affordability and scarcity of water China’s Agricultural Water Pricing was commenced in ­ resource and so on; 2007, starting from water planning and water right alloca- tion. When the water right decentralization to each county »» Differentiated prices applied for different crops types was completed, the Chinese government began to pilot and activities: water consuming crops, high-value agricultural water pricing, starting from 2 counties in 2014 prices; added cash crops and livestock shall pay higher ­ and expanding to 80 counties in 27 provinces in 2015. Good practices and lessons were elicited and in 2016 »» Progressive water pricing is adopted; China launched the nation-wide Integrated Reform on ­ Agricultural Water Pricing. »» Ground water price shall be higher than run-off water; Barriers/Problems the intervention aims to over- »» Water prices are to be reviewed and improved on a come regular basis. »» Water resources in China are scarce, and the temporal and spatial distribution is very uneven; Along with the price signal, other incentives and meas- ures are in place to promote water saving: »» Climate change, coupled with water pollution, is ac- celerating the shortage of water resources; »» Encourage water right trading. The trading includes those traded between government agencies, and »» The price for agricultural water was very low, leaving those among water users and WUAs little incentives for water saving, and contributing to poor maintenance of water infrastructure; »» Government purchases back unused water quotas at higher prices »» The price was based on irrigation areas instead of ac- tual volume of water used; »» Awards to water-saving farmers who adopt water-­ saving technologies, or change crops to save water »» Some local governments deliberately charge very low water fee to attract investment; »» Arguments or even conflicts happen between villages As China just launched the nation-wide reform in 2016, it and/or individuals due to unclear water rights. might be too early to draw conclusions. The pilots demon- strate very positive outcomes. In Cangzhou, Hebei prov- Tools applied to address the barriers ince, SMEs and farmers use Smart Cards (chip card) to pay »» Government funding/grants to reduce start-up cost for irrigation costs. The water fee is reinvested into wa- such as drip irrigation or pipelines ter-saving irrigation, infrastructure maintenance, and to cover the cost of WUA. The Head of WUA reported that »» Utility pricing providing incentives for MSMEs to adopt previously the water consumption was about 80 m3 per new technologies and efficient use of water resources 54 CLIMATE SMART FINANCING FOR RURAL MSMES: ENABLING POLICY FRAMEWORKS mu, and now it has been reduced to 50 m3 per Mu. (Hebei ers resist the reform initially, but once the demonstrations Daily, 2016). In Liangzhou, Gansu, differentiated water show that this is a fairer, more transparent mechanism, prices for different crops are implemented: irrigation for that eventually allows them to save on water bills, farmers green house, high efficiency water-saving irrigation as would be willingly to adopt it. Then the transaction costs well as eco trees enjoys 50% of price discount; while using will be significantly reduced thanks to economies of scale. traditional practice to irrigate water-consuming crops like Regarding implementation, there is little financial support wheat, corn, and barley would have to pay 50% of extra required from externals, so the uncertainty and transac- cost. In Zhangye, Gansu, manufactories’ water permits tion costs are also quite low as well. have ceilings but they could invest in water saving irriga- tions in rural areas in return for extra water permits. In Mi- Policies applied anyang, Sichuan, farmers are motivated to invest in irriga- Legislative / regulatory based tion infrastructures. Farmers self-organized to improve Property rights and usage rights identified to reduce the water channels by replacing the soil-floor with concrete. confusion and uncertainty of the climate smart invest- This in turn saves farmers 30% of water (Sichuan Daily, ment, and to promote climate change adaptation 2016 ). Agreement / incentive-based The water pricing effectively incentivizes MSMEs to invest »» Blended funds (grants with commercial finance) to in climate smart activities and in turn helps them adapt to promote climate smart MSME practices, through climate change. The utility pricing and water permit trad- ­ co-investing by public funds and MSMEs that facilitate ing are both market oriented. Water pricing creates few climate smart investment. The blended funds help to distortions and is fairly efficient. Much of the collected overcome the upfront cost barriers, and have the water fees are reinvested in better infrastructure and chance to demonstrate the investment return from therefore lead to long-term positive welfare gains. In ad- new technologies. This is particularly important for dition, it increases farmers’ awareness and changes their ­ regions and areas where awareness is low. behavior and farming practices, which would have long- term impact too. Once set up, this mechanism would »» Utility Pricing policies. Very immediate, but also fun- function smoothly without much invention required and damental, ways to encourage conservation and effi- thus prove sustainable as well. cient use of resources. The Agricultural Water Pricing provides clear price signals Information / communication-based to farmers; therefore the transaction cost related to »» Awareness Campaign Programs. Various forms of awareness is low. Farmers, however, are concerned that awareness raising efforts are in place such as media the water quotas allocated to them would be reduced if reports, demonstration projects, public campaign, they consistently save water. Therefore, it is critical to im- training, and field visits. prove the legislative framework to enhance farmers’ con- fidence. Besides, it may not be surprising that some farm- G20 GLOBAL PARTNERSHIP FOR FINANCIAL INCLUSION (GPFI) 55 7.11 GAFSP PRIVATE SECTOR WINDOW The Public Sector Window assists strategic country-led or regional programs that result from sector wide country or Highlight summary regional consultations and planning exercises (such as Improving agricultural performance in low-income coun- ­ ustralia, CAADP in Africa). It is funded by eleven donors - A tries is the most effective way of reducing poverty and the Bill & Melinda Gates Foundation, Canada, Germany, hunger. In addition, studies have shown that growth orig- Japan, Ireland, the Netherlands, South Korea, Spain, the inating from the agricultural sector has been two to four United Kingdom and the United States. times more effective at reducing poverty than growth originating in other sectors. The Private Sector Window is managed by the Inter­ national Finance Corporation (IFC) who co-invests its The Global Agriculture and Food Security Program (GAF- funding along GAFSP. It aims to provide innovative and SP) is a multi-donor fund established in 2010 by the World affordable financing solutions through loans (including Bank Group at the request of the G20 in the wake of the longer-term loans), credit and/or first loss guarantees, risk food price crisis. The program aims to put policies in sharing facilities and equity that support private sector place to help people from the poorest countries in the activities for agricultural development and food security. world strengthen food and nutrition security. Allocations Its investments cover the entire value chain from farm are determined by a Steering Committee composed of a ­ inputs to processing with an aim to increase farmer balance of representatives from donor and recipient productivity and promote resource efficiency. It attempts ­ countries, civil society organizations, and multilateral or- to address market failures by providing funding to pro- ganizations, following advice from a technical committee jects in the agricultural sector with high developmental of independent experts. Eligible countries must demon- impact and good potential financial sustainability that strate a high level of need and submit a comprehensive, may not attract commercial funding due to their higher technically sound project proposal. perceived risks. Through the use of blended finance, it can offer financing on more favorable terms and/or lower Background the perceived risks for its private sector partners. It GAFSP picks up where emergency funding leaves off and ­ couples this with technical assistance and provides on- works with countries in a sustainable way so that they can the-ground training and advice for businesses and farm- be more resilient to future climate, political and market ers in improving farmer productivity, strengthening shocks. standards, reducing risks and mitigating climate change effects. Of the USD 356 million, USD 331 million is for its Barriers/Problems the intervention aims to over- lending activities and USD 25 million is used for technical come assistance. The PRSW is funded by six countries - ­Australia, GAFSP focuses on agricultural productivity growth, link- Canada, Japan, the Netherlands, the United Kingdom ing farmers to markets, as well increasing their capacity and the United States. and technical skills. GAFSP is country-led, supporting countries’ priorities reflected in their national agriculture Policies applied and food security investment plans, and provides a Agreement / incentive-based ­ platform for coordinated donor financing around country »» GAFSP fosters public-private partnerships. programs and sustainable private sector investment. »» Blended finance, i.e. using public sector funds to Tools applied to address the barriers leverage private sector funds in the form of lower ­ GAFSP is already setting a new standard for development interest rates, partial credit guarantees, risk sharing ­ effectiveness. It stresses country ownership, good gov- facilities, etc. ernance, inclusivity, high-quality projects, and intensive monitoring and evaluation of factual results. Information / communication-based The GAFSP PSW projects have demonstration effects and Intervention therefore lead to replications, thanks to targeted commu- GAFSP is divided into two distinct financing windows: the nication campaigns. Public Sector Window (PSW) and the Private Sector ­ Window (PRSW). To date, USD 1.59 billion has been pledged of which USD 1.241 billion is for the Public Sector Window and USD 356 million is for the Private Sector ­Window. 56 CLIMATE SMART FINANCING FOR RURAL MSMES: ENABLING POLICY FRAMEWORKS Endnotes (1) The inclusion of rural Microenterprises with SMES is important given the large number and importance of ­ micro-level agricultural households and the fact that climate adaptation anywhere in the agricultural value ­ chain includes, and is affected by, their vulnerability to climate risks. (2) Written by Victor Kommerell (CIMMYT). (3) Written by Angelika Frei-Oldenburg and Sylvia Maria von Stieglitz, Mohammed Rahoui (GIZ Germany, Morocco), ­ Global Program on Adaptation of Private Sector (PSACC) on behalf of German Federal Ministry of Economic ­ Cooperation and Development. (4) http://farmerline.co/services/ (5) Written by Abu Yousuf (GIZ Bangladesh), Global Program on Adaptation of Private Sector (PSACC) on behalf of ­ German Federal Ministry of Economic Cooperation and Development. (6) Big data is a term for data sets that are so large or complex that traditional data processing applications are ­ inadequate to deal with them. (7) Global Adaptation and Resilience Investors Working Group (GARI). (8) However, one caveat is that the country needs a good legal and enforcement system. (9) http://www.s4agtech.com/ (10) Written by Nancy McCarthy (LEAD Analytics Inc.) (11) https://www.kukua.cc/ (12) Of these, 72 were individual and 757 were portfolio based. Portfolio based risk sharing was an innovation ­ developed to address the particularly high transaction cost associated with small loans. (13) Writen by Victor Kommerell (CIMMYT). (14) Written by Vipul Sekhsaria (IFMR Holdings). (15) Written by Saskia Kuhn, Ulrich Hess (GIZ), Agrotosh Mookerjee and Joseph Kakweza (Risk Shield Consultants). ­ Technical Assistance for NWK AgriServices for the insurance implementation is supported by GIZ Global Project ­ InsuResilience, implementation component . (16) Written by Abu Yousuf, Angelika Frei-Oldenburg (GIZ), Global Program on Adaptation of Private Sector (PSACC) ­ on behalf of German Federal Ministry of Economic Cooperation and Development, 2017. (17) Written by Janina Wohlgemuth, Angelika Frei-Oldenburg (GIZ), Global Program on Adaptation of Private Sector (PSACC) on behalf of German Federal Ministry of Economic Cooperation and Development, 2017. (18) Written by Weijing Wang, GIZ Consultant. (19) Written by Weijing Wang, GIZ Consultant. 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