Climate change poses risks to the real economy. This may drive a retrenchment of the financial sector away from serving the least profitable and most climate-exposed clients, namely low-income, rural households, and micro, small, and medium enterprises. Moreover, new reporting and disclosure requirements for increased environmental due diligence, along with other necessary regulatory actions, can unintentionally exacerbate financial exclusion if they are not implemented with a risk-based approach.
This working paper outlines how inclusive green finance policies can enhance financial stability by creating a more resilient real economy and reducing the risks facing the financial sector. It offers suggestions for governments on their regulatory and policy responses, including for financial instruments that mitigate climate risk without exacerbating financial exclusion; reduce transaction costs linked to climate risk management and green financing; and scale up affordable green finance.