Financial inclusion and countries’ climate objectives are deeply interconnected. Financial inclusion outcomes, such as financial resilience, build on individuals’ and businesses’ ability to manage and respond to risks (including climate risks). At the same time, financial services are critical for climate resilience and adaptation, and sustainable growth. For example, microinsurance helps smallholder farmers recover from crop losses caused by extreme weather, while loans enable businesses to invest in sustainable and climate-resilient technologies.
Therefore, there is an opportunity to link countries’ financial inclusion and climate goals in national policy frameworks and strategies to more effectively advance climate-related outcomes for low-income populations. Yet despite this clear interdependence, most national policy frameworks still treat financial inclusion and climate goals separately.
Why Alignment Is Needed
Over the past two decades, National Financial Inclusion Strategies (NFISs) have guided countries in setting and achieving financial inclusion goals. With the growing pressure of climate change, especially on low-income populations, a few jurisdictions such as Kenya and São Tomé and Príncipe have incorporated climate resilience and adaptation objectives into their NFISs. Other jurisdictions, such as Jordan, Malawi or Tonga, have incorporated measures with financial inclusion implications into their Green or Sustainable Finance Strategies and Disaster Risk Finance (DRF) Strategies, such as promoting agricultural insurance, developing adaptive social protection, or mobilizing finance for sustainable growth. Yet these efforts remain fragmented, with little alignment across NFIS, Green/Sustainable Finance, and DRF strategies. The result is policy overlaps, missed opportunities to advance financial inclusion, or to address climate resilience and adaptation objectives, and risks of unintended outcomes such as financial exclusion.
How can countries effectively link these strategies?
A Framework for Inclusive Climate Finance
CGAP’s risk and vulnerability layering framework for inclusive climate finance offers an approach for identifying how policymakers can respond to various climate risk and vulnerability contexts. By differentiating climate risks according to their intensity and considering the different needs based on customers’ vulnerability to these risks, the framework helps to identify what type of interventions are most needed (Figure 1):
Low climate risks & low vulnerability: Focus on strengthening the ecosystem so financial service providers (FSPs) can manage climate risks and offer climate-responsive services on a commercial basis.
Moderate climate risks & medium vulnerability: Focus on providing incentives and de-risking tools to help FSPs serve vulnerable customers, in addition to strengthening the ecosystem.
Severe climate risks & high vulnerability: Focus on directly supporting affected households and businesses through social protection and post-disaster financial tools.
The proposed measures are not siloed from each other but essentially build on each other. Ideally, there should be interventions that address all levels and combinations of climate risks and vulnerability.
Figure 1: CGAP’s risk and vulnerability layering framework for inclusive climate finance identifies three different, but overlapping, approaches (referred to as “roles”) for governments to support inclusive, climate-resilient, and climate-responsive financial systems.