8 Billion Reasons: Inclusive Finance as a Catalyst for Climate Action

"Inclusive finance has a unique and critical role to play in ensuring that climate finance makes its way into the hands of the most vulnerable and empowers them to act… Given the increasing scale and frequency of climate shocks, now is the time for united action to make inclusive finance a corner-stone of climate response, creating a more sustainable future for those most affected by climate change."

— H.M. Queen Máxima of the Netherlands, United Nations Secretary-General’s Special Advocate for Inclusive Finance for Development, and Ajay Banga, President, World Bank Group

We cannot tackle poverty effectively without tackling climate change. As the climate crisis accelerates, the lives and livelihoods of billions of people are increasingly at risk. 3.3 billion people live in regions classified by the Intergovernmental Panel on Climate Change (IPCC) as “highly vulnerable” to climate change. In short, making progress on poverty and global development goals is now deeply intertwined with action on climate change: there can no longer be a separation between these agendas.  

Most of the global conversation on climate change centers around commitments, investments, and actions by national governments, multinational corporations, and industrial sectors. This is vitally important for tackling climate change and poverty—but also proving to be woefully insufficient. The hundreds of millions of people living in poverty rarely have the opportunity to benefit directly from national and regional efforts. This can exacerbate inequalities and leave low-income communities disempowered from taking action for themselves.  

Inclusive financial services are a crucial tool for bridging this gap and putting tools, resources, and opportunities into the hands of those who are most affected by climate change and who need them the most. It does this in four key ways: i) Directly empowering people to take grassroot climate action, ii) enabling greater collective impact, iii) channeling climate finance where it is most need, and iv) complementing public sector-led climate efforts.  

However, many opportunities have yet to be realized. Few financial services providers (FSPs) currently offer products tailored to climate resilience and adaptation for low-income customers. Beyond agricultural index insurance, there are relatively few examples of financial solutions that have been developed specifically to meet clients’ needs for climate adaptation and resilience. Most FSPs are currently uncertain about what the needs look like and therefore how to meet them through more tailored financial solutions.  

The private sector needs to increase its role in promoting inclusive finance for climate adaptation, resilience, and a green transition. The emergence of innovative financial services business models, coupled with the increasing cost competitiveness of green technologies, serves as an example of how the private sector can drive both climate impact and returns. 

Worryingly, climate change also poses risks to inclusive finance. Climate change is starting to undermine global progress on financial inclusion. As climate change steadily increases the risk of serving low-income people, FSPs face increasing pressure to pull back from climate-exposed areas and value chains – pressure which will only mount with time. Severe climate impacts can also have major implications for lenders’ balance sheets overnight, as demonstrated by recent disasters such as the devastating floods in Pakistan in 2022.

Private, public, and philanthropic sectors must all step up to the challenge. Overcoming barriers to private sector investment will be instrumental in developing and scaling inclusive finance that enables climate action. This will require resolve, focus, and resources from FSPs and investors. It will also require well-developed, inclusive, and thoughtfully regulated financial systems where FSPs have the capacity, incentives, data, funding, and risk tolerance to offer an array of suitable services to a broad customer base.  

Together we must embark on a new course that leverages inclusive finance to increase climate action. CGAP’s initial findings have identified the need for collaborative action in at least five distinct areas:  

1. Understanding Customer Needs: Better understanding what customers, notably women, really need to bolster their climate resilience, adaptation, and participation in the just transition. 
2. Scaling Up Markets: Developing financial products and services that respond well to these needs while also being commercially viable; building markets that can deliver them at scale; and generating the data and information investors need in order to identify and support inclusive green financial solutions, including the provision of more impact and patient capital.  
3. Managing FSPs’ Climate Risk: Helping all financial services providers –including banks, MFIs, fintechs, and other emerging providers– manage their own climate risk to avoid having to withdraw from climate exposed sectors as shocks and stresses grow. 
4. Creating Effective Enabling Environments: Creating enabling environments that unlock private investment for climate adaptation, resilience, and the just transition; at the same time, ensuring that policy and regulatory efforts do not create unintended exclusionary effects that undermine both financial inclusion and financial stability.  
5. Establishing Adaptive Social Protection Systems: Evolving and expanding social protection systems, which offer an existing conduit for providing climate finance to the most vulnerable populations but are not yet fit for that purpose.