BY LUCY CONGER
Microenterprise and the informal economy often go hand-in-hand. When people consider icroenterprise, they tend not to focus on issues that concern larger businesses such as corporate governance, environmental impact, and fair treatment of labor.
Clearly, microenterprises are not subject to the pressures corporations face from shareholders and public scrutiny that demand principled treatment of employees and adjacent communities and minimal damage to the environment. But that is beginning to change. Microfi nance institutions (MFIs) are pressing microentrepreneurs to run clean businesses and treat their workers fairly. The aim is to reduce the so-called social and environmental risks of microenterprises—activities that may have an adverse impact on human health, social equity, or the environment.
The Inter-American Development Bank (IDB) through its Multilateral Investment Fund (MIF) is supporting initiatives to promote awareness of harmful practices and provide training for practical problem-solving for thousands of informal businesses in Latin America and the Caribbean. “Many funders like the IDB and the Netherlands Development Bank (FMO) require that their contracts take these issues into account and that organizations develop a strategy to address them,” says Tomas Miller, senior investment offi cer in MIF.
Problems that are being addressed include use of forced labor and child labor and production on lands owned by indigenous peoples without their consent. Activities such as trade in protected wildlife, commercial logging in virgin forests or areas rich in biodiversity, and production and trade
in weapons and ammunitions are also considered off-limits. Other risks slated to be eliminated include production or trade in illegal products and in hazardous or banned products such as unsafe pesticides and herbicides.
In the microenterprise world, the most widespread social risks are child labor and faulty labor conditions such as noisy, dirty or dangerous working environments. Many small-scale enterprises such as brick-making, metalworking, auto repair and painting tend to involve handling dangerous machines, hemicals, solvents and pesticides. A number of handcrafts trades such as glass-blowing, textile dying and leather tanning cause water pollution. According to studies by the IDB, businesses with the highest environmental risks include dry cleaning, chemical industries, jewelry-making, mining, charcoal-making, farming with pesticides, and unregulated forestry.
These problems typically occur on a small scale with microenterprises, but need to be resolved even when only one family is affected. “For an individual farmer the incorrect use of chemicals is dangerous for himself and his farm,” says Anton van Elteren, senior environmental specialist with FMO, the Netherlands Development Bank.
In urban areas, hazardous practices occur on a larger scale. Microenterprises in cities are often located close together, and the environmental impact of each business is compounded because they are so concentrated.
Donors have targeted managers for training in risks because “there must be a commitment by the senior management of the microfi nance institution and suffi cient incentives for it to permeate the organization,” says the IDB’s Miller.
Persuading small businesses—often operating on a shoestring—to hire only adult workers, upgrade their machinery and workshops, and halt the use of toxic chemicals is a challenge. “Shortterm goals often are of paramount importance, but practical suggestions can be made, explaining, for example,
that if machinery is dangerous for the hands and you lose your fi ngers,the business will be hurt,” says van Elteren.
Loan officers at MFIs are the key to success in the effort to improve the business practices of microenterprises. A typical loan offi cer is in direct contact with some 300 microentrepreneur clients and makes frequent on-site visits to their businesses. These professionals can advise businesses on how to treat employees, conserve water, handle toxic waste, and tackle other social and environmental risks in their enterprises.
FMO has developed an innovative toolkit specifi cally for MFIs that provides practical guidance for environmental and social risk management. FMO is also providing training in developing countries to the senior management of MFIs who are expected to train loan offi cers in how to persuade and teach microentrepreneurs to combat social and environmental risks. “We hope the loan officer can help the individual businessperson become aware of environmental and social risks, and learn how to tackle the problems,” says van Elteren.
FMO training courses began in 2007, but it is still too early to assess whether microenterprises are turning around their practices, says van Elteren. Nonetheless, FMO’s approach has been received as a valuable tool by many MFIs.
MFIs have strong incentives to develop strategies that incorporate the education of microentrepreneurs in environmental and social risks. “In the contracts we sign with MFIs, there is a list of exclusions of activities that pose a high social or environmental risk and that should not be fi nanced,” says Miller.
Investment funds that work with MFIs are also under pressure to support policies and strategies for coping with environmental and social risks in microenterprise, notes FMO’s van Elteren. “If we fi nance an investment fund that finances MFIs, we expect the fund to drive this policy.”