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the views or policies of the Asian Development Bank (ADB), or its Board of Directors, or the governments they represent. ADB does not guarantee the source, originality, accuracy, completeness or reliability of any statement, information, data, finding, interpretation, advice, opinion, or view presented, nor does it make any representation concerning the same.
Draft: 12 November 2010
HOW CAN THE POVERTY-CLIMATE AGENDA BE A NEW INVESTMENT AREA FOR PRIVATE BANKS?
By: Malini Thadani, HSBC India
Background Paper for Conference on the " The Environments of the Poor”, 24-26 Nov 2010, New Delhi 1
INTRODUCTION The Millenium Development Goals clearly establish a link between poverty alleviation and sustainable development stating that the welfare of people depends among others on the capacity to increase their income through improved access to resources and production factors. Livelihoods of poor rural populations greatly depend on the natural resources they can access to from their immediate environment. Degradation of these resources leading to irreversible situations is often associated with extreme poverty levels. These negative environmental effects have in turn a disproportionate negative impact on the poor. Rising temperatures, changing weather patterns, falling land productivity, erratic rainfall, are creating pressures of survival on communities at the bottom of the pyramid. Increasing globalization and local economic growth will, in addition, create more stress on scarce natural resources, in the process creating a skewed equation for communities whose livelihoods are resource-dependent. Sustainable reduction of global poverty and combating and adapting to climate change are among the most important global challenges of the 21st century. A report titled Too close for comfort, issued by the HSBC Climate Centre of Excellence in December 2009, maps the vulnerability of G-20 member states to climate change, and presents a case study of India, some of the findings of which are as follows: • India is experiencing a huge loss to life as well as assets due to climate-related disasters. Based on the disaster loss estimates for the last two decades (1988-2008), India loses USD1.76bn annually due to climate change-related disasters. The report suggests that under the climate change scenario, food grain production in India could fall significantly by about 18m tonnes annually. The biggest production fall is estimated to be in rice, followed by wheat and coarse grains. Per capita food grain production in India is currently estimated at 0.21 tonnes annually, which is estimated to decrease by 21-25% by 2020. According to the report, per capita water availability is projected to decrease by 15%, bringing increased water stress by 2025. The report estimates that climate change-related disabilities in the form of flood disabilities, malnutrition and diarrhea caused a loss of USD2.3bn in 2000, which is expected to rise to USD3.9bn in 2020.
For more information, see the conference website: http://www.adb.org/Documents/Events/2010/EnvironmentsPoor/default.asp
In developing countries as a whole (especially China and India) as many as 200 million people, including some from urban areas, were affected each year of the 1990s, on average, by climaterelated disasters (floods, droughts, extreme winds, etc.). The poor tend to suffer the most as they are least able to take defensive measures against adverse environmental trends. Climate variability is being increasingly recognised as a significant impediment to reducing poverty. This suggests that when we think about eradicating poverty, we should think about creating economic opportunity that is sustainable over the long term. Economic opportunity is not a solution in itself, rather, it is a context in which individuals can create their own solutions, and manage their assets in ways that generate sustainable incomes and options. Policies and programmes need to build the resilience of communities through interventions in water, energy, livelihoods and natural resources management. The role of financial institutions and banks is specifically important in developing and implementing new low-carbon business and innovation models and technologies necessary for the seminal changes which lie ahead. While public sector banks have an extensive reach and presence across the country, which enables them to create much larger impact through their lending, investments and social programmes, private and multinational banks are better positioned to use innovation, research and capacity building to create climateresilient communities and inclusive sustainable growth. As a foreign bank in India, HSBC realizes that without educated, entrepreneurial individuals operating in thriving sustainable societies, our business would not have a future. For HSBC, this means there is a clear case for investing in financial inclusion and protecting the environment which we believe are essential building blocks for innovation and enterprise. Using examples from HSBC’s sustainability practice and strategy, this paper focuses on three key areas: Capacity building and innovation for the climate-poverty agenda Bottom of the pyramid approaches for inclusive sustainable growth Surveying risk and building opportunity: The role of research in understanding the financial impacts of energy, water and climate risks HSBC aims to move towards a climate-resilient and low-carbon economy by helping develop and/or support models that can be sustainable, create jobs, reduce poverty, lower carbon emissions, and prepare for the worst effects of climate change. CAPACITY BUILDING AND INNOVATION FOR THE CLIMATE-POVERTY AGENDA Banks are implementing strategies that enhance the economic opportunity impact through inclusive business models and strategies. These include developing human capital, building institutional capacity and shaping public policy. In some cases, these strategies are funded through business development and operating budgets, but in many situations they are supported by corporate philanthropy and social investment. In India, examples of how HSBC has adopted this approach in the environment and climate change space have been given below:
Creating inclusive business models in the energy sector Energy efficiency assumes significance for India in the current environment of shortages, and concerns over climate change. Increased energy efficiency enhances energy security, in the process leading to sustainable economic growth. Between 2003 and 2016, India’s energy demand is expected to climb by 60 percent because of accelerated industrialization, urbanization, and population growth. Meeting this greater demand only by increasing supply will lead to adverse environmental, economic and security impacts. The Indian government recognizes conservation as an essential part of its national energy strategy. The potential for energy savings is enormous: an estimated 183.5 billion kWh per year, based on reports prepared by the Asian Development Bank and the Indian Bureau of Energy Efficiency (BEE). Growing concerns for more sustainable development and poverty alleviation have also focused attention on the potential role of renewable energies in the sector. The World Energy Council argues that the use of traditional energy sources by the poor (mainly combustion of wood fuels) combined with using inefficient technologies and appliances results in wastage of wood resources. In addition, the use of crop residue and animal waste as fuels can be to the detriment of soil quality and agricultural and livestock productivity, as these resources often have alternative applications as soil conditioners, organic fertilisers and livestock fodder. Furthermore, adverse health effects of the smoke from the burning of traditional fuels in inefficient appliances are significant, especially among women and children. Finally, the significant time spent by women and children in collecting and using traditional fuels could be spent on more productive tasks or education. One way to address the need for renewable energy of the poor is to offer microloans to suppliers or buyers of renewable energy sources. MFIs can lend directly to poor households so they can purchase renewable sources of energy (biogas stoves, solar cookers, solar power/energy panels, efficient cooking stoves) for cooking, lighting etc. Alternatively, they can finance dealers/suppliers of renewable energy sources to expand their business and reach the poor. An example in this space is that of the HSBC- Spandana partnership in India. A special grant from HSBC has enabled Spandana, a large MFI, to receive technical assistance from a USbased support agency to develop and roll out a clean energy product portfolio (beginning with solar torches) that will suit the needs of its clients. The support agency will in turn link the MFI's microfinance clients to the global carbon credits markets and enable them to trade aggregated credits earned by adopting clean energy. As a direct outcome, rural communities are receiving the opportunity to meet their energy needs by gaining access to clean energy sources. This is a first of its kind initiative that connects rural markets to the carbon credit market. In order to enable social enterprise in the energy sector, HSBC has also partnered with Husk Power Systems (HPS) to provide initial grant for setting up the Rural Power University. HPS employs local people, uses carbon-neutral technology, bamboo poles and sells electricity that saves its consumers money. The grant will provide the operational, training and the infrastructure support to implement the HPS Franchise Model, where local entrepreneurs can
set-up HPS plants. HPS was founded in 2007 and since then it has electrified over 90 villages / hamlets (over 100,000 people) using Rice Husk powered Gasifier - Generator Systems in 5 districts of Bihar. However, it is essential that renewable energy technologies expand the choice of energy for poor people. By focusing on renewables alone we are in danger of restricting the already very limited choice of poor people. If renewables are promoted to the exclusion or detriment of expanding other options for the poor, then we are limiting development options for the poorest people on earth (ITDG Powering Poverty reduction 2004) Building SME capacity on low carbon technologies Financial institutions assume the risk of companies and plants, and can exercise considerable influence over investment and management decisions which could be brought into play for the benefit of the environment. An area where financial institutions, particularly the commercial banking sector, have great potential in impacting economic opportunity is in its relationship with Small and Medium sized Enterprises (SMEs). More than half of the workforce in the country is part of the unorganised sector that is employed with SMEs. SMEs are also the backbone of the Indian economy, accounting for a large part of the country’s GDP. However, this sector demonstrates limited engagement with climate change issues for a number of reasons: differing priorities, working capital needs for growing business and revenues, staying competitive, among others. For SMEs, there is a need to invest in low carbon infrastructure which will lead to micro and macro level benefits such as improved health of staff, and the opening up of the sector and opportunities for credit intervention. Simultaneously, there is a need to build risk appetite and knowledge capacities for the financial sector to work with clean technology, renewables and emerging environmental issues around low carbon. Public-private partnerships play an important role in this regard. Under the aegis of the Earth Sciences Forum, a public-private partnership between HSBC and the Ministry of Science and Technology and the Ministry of Earth Sciences, Government of India, clean technology workshops for SMEs have been held to create industry awareness and promote adoption of clean technology amongst SMEs in India. The Living Business Awards supported by HSBC in association with TERI is another initiative that recognises SME efforts in sustainability. The programme is aimed at enabling SMEs to participate in the wider movement for sustainable business growth by building their capacities in corporate social responsibility and sustainability, and the awards is a means to recognise and share best practices in sustainable business practices adopted by this sector. These are, however, small beginnings, and innovation in renewable energy and clean technology is required to help reduce the dependence on carbon intensive fuels of all sections of society. Industry will indeed have a large role to play in helping communities cope with climate change and an equitable resource management regime will help correct the imbalance, and allow collaborations in microfinance and renewable energy, for instance, to serve the needs of the poor. Developing human capital through training HSBC seeks to address climate change through the HSBC Climate Partnership, a 5-year global programme that supports some of the world’s leading charities to tackle the causes and impacts of climate change. In India, the bank has established the India Regional Climate Centre at Sirsi (one of the global biodiversity hotspots of the world) in association with Earthwatch and the Indian Institute of Sciences, where select employees undergo training to become Climate Champions. This is a unique training course on climate change, sustainability and leadership
that combines outdoor forestry research with facilitated learning sessions to develop the capacity of employees to lead change at HSBC. On return, Climate Champions are expected to design and implement a climate change related business project. Previous Climate Champions have been instrumental in reducing carbon emissions in their office, developing new green products for customers and inspiring others to change their behaviour.
BOTTOM OF THE PYRAMID APPROACHES FOR INCLUSIVE SUSTAINABLE GROWTH Banks have an important role to play in improving access to financial services for the poor. The poor, on the other hand, require sustainable livelihoods to effectively utilise these services. The recognition of these inter-linkages is crucial to expand economic opportunity for the poor in a sustainable manner. This is where banks have potential to create what Michael Porter and Mark Kramer have called “shared value”, or value for both business and society. Water and land conservation are key environmental concerns of today. Inclusive sustainable growth requires innovative models that link livelihoods to these concerns, and have the community as central to the growth and development process. Examples of HSBC’s initiatives in two areas- water and land conservation- have been used to demonstrate the role of banks in creating a pro-poor green climate in India. Linking livelihoods to water and land conservation Population growth, urbanisation and changes in consumption patterns will transform how we will produce and consume in the decades to come. We will have to manage and adapt to these new situations, and building more resilient water management systems will be key to doing so. India’s huge and growing population is putting a severe strain on all of the country’s natural resources. Most water sources are contaminated by sewage and agricultural runoff. India has made progress in the supply of safe water to its people, but gross disparity in coverage exists across the country. Although access to drinking water has improved, the World Bank estimates that a startling 21% of communicable diseases in India are related to the use of unsafe water. One way of addressing this problem is by implementing good management practices and developing and putting in place ‘no regret’ measures that help farmers cope with changes in the climate. The key here is to strengthen the adaptive capacity of our entire land and water management systems, including both natural and man-made production systems. Solutions to our water challenges would also have to be people centric. While it is our negligence that can create a crisis, only a change in the way we act can alleviate much of the problems related to water. In Vittalwadi, a tribal village in one of the most backward districts in Maharashtra, HSBC is working with WOTR (Watershed Organisation Trust), a not-for-profit organisation, to address the issues of land degradation and water scarcity. Implemented in resource-fragile and rain-fed areas, the programme equips communities to implement practices for watershed development, natural resource management, afforestation and water conservation. Here, Banjaras (largely belonging to the Scheduled caste, scheduled and nomadic tribes) are being supported to harvest rain in check dams and appropriately access groundwater through drainage line treatment, thus increasing irrigation potential. By promoting the adoption of new and improved
agricultural practices and technologies, and formation of women Self Help Groups (SHGs) for savings, credit and social development activities, the programme is also enhancing agricultural production and creating livelihood and social development platforms. A unique feature of this programme is the installation of an automated weather and hydrological data collection station at the village to monitor data and help develop models based on cropping patterns and land and water use patterns. In Gujarat, HSBC is supporting the ANaRDe Foundation (ACIL - Navasarjan Rural Development Foundation) on a project that will provide clean drinking water to the village of Vankaneda. The project entails the installation of a Reverse Osmosis water purification plant, which will effectively purify underground water by removing bacteria and dissolved salts, improve the health of the villagers by preventing water-borne diseases, and reduce the amount of time spent by the villagers to collect potable water (in the area, women on an average travel approximately 2-3 kms daily to procure water for their needs), allowing them more time for productive activities. The maintenance of the water-treatment plant will be undertaken by otherwise unemployed youth and the project will be managed by a women’s self-help group, while being overseen by the ANaRDe Foundation. This innovative ownership and management structure will ensure longevity and sustainability of the project. The plant will provide water at Rs.2 per 10 litres, which amounts to Rs.60 per family per month. Yet another example is a community-led effort to improve water security of poor communities in the Marwar region of Rajasthan (a densely populated region where climatic extremes such as droughts are a regular phenomenon). Here, HSBC has partnered with the Jal Bhagirathi Foundation on a project that implements traditional water harvesting techniques and builds community institutions for their management. Changing weather patterns will affect crop patterns, and farmers will need to diversify crops and adopt sustainable agricultural practices to mitigate the consequences of climate change and sustain their livelihoods. With N M Sadguru Water and Development Foundation in Dahod, Gujarat, HSBC is supporting an innovative model that links livelihoods and climate change by bringing about dual output - carbon sequestration and income generation for the rural poor. Communities have directly benefited through projects in agro-forestry, floriculture, rain-water harvesting and vermi-composting. The agro-forestry and fruit orchards have started producing a steady annual income for farmers, estimated to increase every year, and simultaneously help sequester carbon in the region. In a span of one year, 708 villagers were trained on sustainable agro-forestry practices and natural resources management; 1,61,870 seedlings were planted, 20 nurseries, 100 vermi compost units, 614 fruit vegetable and seasonal flower cultivation plots were planted and developed; and farmers’ income from seasonal flower cultivation plots increased by 4-6 times from .1 ha land. By supporting community- centric models that enable diversification in crop management systems, adoption of sustainable agro- forestry practices, and better management of water systems, the bank links natural resource management with the creation of sustainable livelihood opportunities and reduction in health costs, thus creating an inclusive model for the expansion of economic and social opportunity for the poor. The Sadguru association is also a good example of public- private partnership at the grassroots level, with benefits of expanded impact and improvement in the efficiency of service delivery and management of natural resources.
Surveying risk and building opportunity Certain economic sectors may become more or less profitable as the environment changes due to global warming, or as certain economic activities are increasingly regulated to mitigate their climatic impacts. This has wide reaching consequences for communities and people employed in such climate-sensitive sectors, especially the poor. The role of research is critical in understanding the financial impacts of such risks, especially in the sectors of energy, and water, much in advance, so that sectors can create sustainable solutions while adapting to a changing climate. The HSBC Climate Change Centre of Excellence, established in 2007, is one such example of a research centre that stimulates greater understanding of the scientific, regulatory and economic dimensions of climate change. With a team of analysts based primarily in Bangalore, the Centre has pioneered a new macro research agenda on climate change that has become integrated with other key outputs from HSBC Global Research. The resulting Climate Service has been quickly recognised by our investing clients as a leading source of expertise. In addition, the Centre has supported other parts of the Group to understand the physical and policy risks of climate change, as well as the opportunities flowing from the shift to a low carbon economy. Early this year, the Centre, in a partnership with World Resources Institute (WRI) – an environmental think tank, jointly published three reports that analysed the impact of climate change on food and beverages (F&B), power, and real estate sectors in Southeast Asia. The reports also carried case studies on Indian companies.
SUMMARY Today, climate change is a business reality and represents a clear and unprecedented challenge for human society. However, it also is our greatest opportunity. While private banks can focus on how best they can address environmental needs of their customers in the area of clean technology and energy efficiency, in communities, they can help build climate adaptation and resilience through water harvesting and community afforestation projects. At the policy level, public-private partnerships and collaborations will help drive the clean technology and lowcarbon agenda. As banks continue to deepen their engagement with environmental issues, employees will form an important mainstay of active learners and volunteers who, through their contribution and diligence in community efforts, ensure that they are able to ‘walk the talk’. The microfinance business can also be explored as an avenue to engage rural communities in adapting to renewable energy, and social enterprises will ensure that capacity building support creates investment grade environmental entrepreneurs that serve the bottom of the pyramid. I would like to conclude by saying that the role of institutions like ADB in facilitating platforms for sharing of inclusive business model innovations, and in providing technical assistance, grants, advice and knowledge towards the aim of reducing poverty and improving the quality of life of people is critical. I would like to extend my appreciation to ADB for giving me an opportunity to share HSBC’s experience in addressing the poverty-climate agenda, and I hope it has given you an indicator to the role private and multinational banks can play in this space. Thank you.
Too close for comfort- The HSBC Climate Vulnerability Assessment – mapping risks for the G20 in 2020, HSBC Global Research, 2009 The Role Of The Private Sector In Expanding Economic Opportunity Through Collaborative Action- A Leadership Dialogue, Harvard University, 2007 Urban Infrastructure for Poverty Reduction and Environmental Sustainability: The Role of the Bilateral Development Banks, Issue Paper 2006 Improving rural poor access to renewable energy through secondary crops biomass production Document prepared for the Biomass-Asia Workshop Panel Session on Future Collaboration for Asian Biomass Utilization, 2005 www.centerforfinancialinclusion.org www.microfinancehub.com