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Highlights
- Building financial systems that are able to address the climate adaptation and resilience needs of low-income and vulnerable populations requires a coordinated effort among public and private sector stakeholders across inclusive finance and insurance, disaster risk finance, climate and environment, agriculture, social protection, and other sectors.
- This CGAP Working Paper presents governments and development funders with an overview of the role of inclusive finance in enabling investments in climate adaptation and resilience.
- It also introduces a diagnostic process to identify market gaps and opportunities, and identifies three key roles that governments and development funders can play in strengthening financial systems to respond to their customers' climate adaptation and resilience needs based on risk severity and customer vulnerability.
Executive Summary
As global temperatures rise and climate-related shocks and stresses become more frequent and severe, businesses and households around the world need access to finance that helps them prepare for, cope with, and recover from damage and loss. Financial systems must therefore become more inclusive, more resilient to climate risks, and more responsive to the climate risk management needs of financial services providers (FSPs) and their customers—especially women, farmers, and low-income households, those most often overlooked and most vulnerable to climate risks.
Without strong financial systems to support climate adaptation and resilience, there is a growing risk that FSPs will retreat from high-risk areas, worsening financial exclusion and deepening inequality. Supporting climate goals requires a systematic approach to building financial systems that can respond to the breadth of climate risks and the needs of various customer segments.
Limited private sector investment in climate adaptation and resilience stems from uncertainty about which types of investments are effective and the value their returns bring. Governments and development funders therefore play a vital role in enabling, incentivizing, and complementing the private sector. While many are already strengthening financial systems’ resilience, current efforts often overlook the importance of inclusion for climate risk management at the grassroots level. This gap is not due to a lack of commitment, but rather to limited resources and tools for identifying market gaps and designing effective interventions.
A more systematic approach is urgently needed.
This paper outlines how governments and development funders can leverage financial and nonfinancial tools to foster inclusive financial systems that enhance climate adaptation and resilience. It lays out a framework that defines three key roles they can play, and identifies relevant interventions. Finally, the paper introduces a diagnostic process to guide effective action for building financial systems that are inclusive, climate-resilient, and climate-responsive.