Why financial inclusion is so critical to climate resilience

The global climate focus is now shifting to include more resilience and adaptation.

Much of the discourse, activity and funding revolves around planned adaptation that supports policy goals like government crisis response capabilities, disaster risk financing and resilient infrastructure. While such efforts are foundational, they are not enough.

We must put equal emphasis on supporting people in their autonomous adaptation —that is, empowering and supporting individuals on the frontlines of climate change to make the choices and take the steps that enable them to cope with and adapt to a changing climate. This is where inclusive financial services play a pivotal role.

Financial services and climate resilience

There is a growing body of evidence that people with a digital bank account receive more financial support after a shock and must cut back on consumption less than others. Lending has been shown to be crucial for investments in climate adaptation. Households with more savings avoid negative coping mechanisms in disasters, resulting in better food security and poverty outcomes. Insurance improves recovery from shocks and increases investment in livelihoods, driving higher incomes.

By empowering people to take the actions they need and that align with their best interests, inclusive finance is an important enabler in any just transition, strengthening climate adaptation from the ground up.

Three in four adults today have access to a financial account. But there are still 1.4 billion unbanked individuals on the planet. Four in five live in climate-vulnerable countries.

More than a third of the population in climate vulnerable countries are unbanked, compared to one in ten people in the rest of the world. This underscores the importance of expanding financial inclusion in climate vulnerable countries and communities.

But we will need to do more. CGAP research shows there is still much to learn about how to maximize the role of financial services in bolstering climate adaptation and resilience, not least for women. Green Climate Fund’s (GCF) experience in providing millions of people with increased resilience against climate change also emphasizes the need to provide solutions adapted to local needs and that integrate consideration of how to give people access to finance.

Long-term adaptation to water scarcity for a cassava farmer in Nigeria is very different from the urgent coping response to a cyclone by an urban market trader in Bangladesh — and requires different solutions from the financial sector. And yet beyond agricultural index insurance, very few financial products and services have been developed to support the climate adaptation and resilience of poor and vulnerable people. Better understanding what combinations and features of services best build resilience for different risks, contexts, livelihoods and resilience strategies is a vital — yet absent — agenda for the financial community.

Climate resilience is becoming hard to achieve

We must also recognize that climate change could undo progress made on financial inclusion, which inherently centres on clients who are risky and difficult to serve with commercially sustainable models. A reversal in the progress made on financial inclusion would be harmful to global efforts to achieve the UN’s Sustainable Development Goals. GCF is committed to using its public resources to help protect the most vulnerable people in the most vulnerable countries from climate impact, whether through early warning systems or climate-resilient infrastructure. But public funds are not enough. We need to support local private sector entrepreneurs with programmes like the Acumen Resilient Agriculture Fund.

But as weather shocks grow more severe and less predictable, it will become increasingly difficult for financial institutions to serve some of their clients. Standard risk management will force providers to gradually retreat from climate-exposed geographies and value chains. Anecdotal evidence suggests that this is already starting to happen. For instance, CGAP spoke with the CEO of a large microfinance institution (MFI) in Nigeria, who said they no longer lend to clients in certain parts of Lagos, since these now flood every year. Similarly, the CEO of an MFI whose clients were heavily impacted by last year’s floods in Pakistan worried that, unless they can both replenish the balance sheet and find a way to insure themselves against the risk of another such calamity, they may have no choice but to withdraw from the country entirely.

Financial and climate stakeholders must collaborate

The reality is that financial service providers serving low-income communities do not currently have many options for sharing and ensuring their growing climate risk — and the options that do exist tend to be costly. The result could be a form of climate redlining, where certain customers are effectively excluded from the financial system because of where they live and work.

Some of the most challenging environments are fragile and conflict-affected states, such as Somalia, which are frequently among those rated as the most climate-vulnerable. Formal account ownership in fragile countries is only half of that found in non-fragile contexts: 35% vs 71%, respectively.

Conflict-affected states are frequently among those rated as the most climate-vulnerable, such as Somalia.

Solving these challenges calls for new ideas, new approaches and new partnerships between organizations that care about the climate resilience of low-income and vulnerable people.

Just as inclusive finance evolved from a grant-oriented space to a multi-billion-dollar industry, we now need a major market-building effort for the financial sector to unlock and amplify the autonomous adaptation responses of the vulnerable in the face of the climate crisis, even in the most challenging contexts.

The monumental scale and urgency of this challenge present a clear call to action for both stakeholders working on financial inclusion and those working on climate change: Let us join forces and work towards a future where inclusive finance empowers people living in poverty to build climate resilience.

Source: World Economic forum