Webinar – Sustainability Disclosure Updates from Emerging Markets – Wednesday, 13 July 2022

Collective Experiences – Proposed approaches to expanding agriculture and SME financing via sustainable finance frameworks

Expanding finance to the agriculture and SME sectors has not yet been consistently integrated with sustainable finance frameworks, but could be in the future.

In particular, this could be used to encourage investment in improving the sustainability of these sectors, for example promoting environmentally friendly or green technologies within the agriculture sector or energy efficient equipment for SME business operators.

Mongolia and Nigeria have both developed tailored environmental and social (E&S) risk management guidelines for the agriculture sector.

This supports local financial institutions to be better able to assess the environmental and social risk of agricultural activities and can encourage increased sustainability within the sector. Developing sector-specific guidelines in this way is more common among SBN IDA members and may reflect that the financial sector in these countries needs specific guidance to address E&S issues in priority sectors due to capacity constraints.

World Bank research (World Bank Group, 2016) indicates that integrating agricultural and SME finance into sustainable finance frameworks could involve:

• requiring banks to develop a clear and effective agricultural or SME lending strategy, with particular focus on lending to improve the sustainability of the sector;
• encouraging banks to identify opportunities for expanding their lending to the agriculture or SME sectors; and
• ensuring banks manage and monitor their lending portfolios to the agriculture and SME sectors, and include this as part of their sustainable finance reporting requirements.

To support banks to deliver on the above, SBN members could:

• develop processes to classify those agriculture projects and portfolios that achieve positive climate outcomes as ‘climate-smart,’ based on a set of metrics;
• integrate agricultural and SME finance as components of sustainable finance frameworks, in particular focusing on improving the sustainability of these sectors;
• provide training to financial institutions to build capacity for agricultural finance and climate-smart agricultural finance, for example training staff on climate-smart interventions and the benefits of farmers adopting certain climate-smart practices and technologies;
• develop tailored environmental and social risk management guidelines to support banks to accurately assess risk when considering loans to businesses and to be informed about how they can encourage businesses in these sectors to be more sustainable through their lending practices; and
• collect and disseminate data on credit extended to these sectors, including credit extended for the purpose of improving sustainability in the sector.

Where SBN members are in the position to directly provide affordable credit to the agriculture and SME sectors, they should ensure that this credit is directed toward environmentally friendly investments.

For example, in Brazil (a middle-income SBN member country), the ABC Program established by national resolution established green credit lines to support agricultural businesses’ investments in low-carbon technologies and processes (Getulio Vargas Foundation Center For Sustainability Studies, 2014).