Lady sells her products, such as fruits and vegetables, at her market stall in Sangolqui, Ecuador /iStock

Inclusive green finance as a mechanism for social inclusion

By Dr. Margarita Hernández
Superintendenta de la Superintendencia de la Economía Popular y Solidaria de Ecuador

In collaboration with:

Carmen Merino, Analyst of Resolution Mechanisms; and

Carmen Iriarte, Computer Analyst for Strengthening and Resolution Mechanisms

The COVID-19 pandemic posed major social and economic challenges worldwide and more urgently, in developing countries. As a result, urgent relief is needed to reactivate general economy. However, above all, the most vulnerable and economically affected sectors, need to be prioritized and their resilience managed with both sustainable social inclusion and environmental responsibility.

In the same spirit, it should be noted that climate change constitutes a critical risk for Ecuador.  Its effects are evident in the melting of the glaciers in the  mountains, the increasing temperature throughout the country, changes in the regimes from the rain, the extinction of some of its natural water sources and, regardless of its magnitude, the El Niño phenomenon affecting the country. This, in turn, has resulted in rapid decrease, migration and even the risk of extinction of some of its flora and fauna species, as well as the proliferation of diseases and natural disasters such as floods and fires. All these events have aggravated poverty, unemployment, as well as inequality and insecurity that still persist in the country. This devastation is also accompanied by displacement and migration, which can reach alarming magnitudes because agricultural and maritime sectors are the ones affected by these environmental impacts.

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Globally, the cost of extreme weather events caused by climate change is estimated to reach USD5.6 billion by 2025.

Today, 25 percent of the planet's biodiversity is concentrated in the Andean countries. As a consequence, the Superintendencia de la Economía Popular y Solidaria de Ecuador (SEPS), whose principles consider social and environmental responsibility, believes the implementation of measures that help mitigate the effects of climate change is of utmost importance,  promoting  the development of green finance as the key to financing the transition to a low carbon economy and  dependence on non-renewable resources reduced. We also believe in enhancing adaptation to climate change, strengthening primary sectors, such as agriculture while preserving the natural environment.

The cooperative sector in Ecuador, which is highest in rural areas, accounts for more than 60 percent of the total microcredit portfolio in the country. These customers, located in rural areas where financial resources mainly revolve around agricultural activities, are a part of society most affected by climate change.

While SEPS, as a technical entity for supervision and control, is not immune to the effects of climate change and of its impact on both the environment and society as a whole, we have determined that one of our priorities is the mitigation and adaptation to these climatic risks, in order to promote a sustainable financial system capable of building greater resilience to climate change. With this in mind, SEPS is currently coordinating the implementation of inclusive green financing as a mechanism for social inclusion.

With the technical assistance of AFI, SEPS is developing an environmental and social risks management (ESRM) guidelines for its supervised entity. The guidelines will help in reducing transactional risks associated with economic activities of its partners and clients, while prioritizing environmental protection. Implementing such ESRM guidelines aims to establish a minimum standard of incorporating active evaluation of environmental and social issues. At the same time, it also enables us to assess the probability of default of credit/investments of cooperatives and other financial institutions to promote sustainable business practices in Ecuador.

Regulators are continuing to focus their green finance discussions on improving the quality, targets, and effectiveness of social programs and public spending as a response to climate change challenges posed by natural scarcity, financial instability, and the increasing vulnerability of citizens.

AFIs Inclusive Green Finance (IGF) workstream is part of the International Climate Initiative (IKI)  supported by the German Federal Ministry for the Environment, Nature Conservation and Nuclear Safety (BMU), based on a decision of the German Bundestag.