Why inclusive finance must be central to the climate response
SOPHIE SIRTAINE / SEPTEMBER 18, 2024
As we approach the high-level week of the United Nations General Assembly and the UN climate change conference COP29, the global climate agenda is being defined by intense discussions around climate finance. But largely missing from this debate is the question of who has access to this funding.
The need to channel climate finance into the hands of those most affected by climate change is well recognized. The issue is at the heart of the loss and damage talks and was central to UN Secretary-General António Guterres’s speech on World Environment Day, where he underscored how it’s “a disgrace that the most vulnerable are…struggling desperately to deal with a climate crisis they did nothing to create,” and argued that “the global financial system must be part of the climate solution.” It has also been key to COP negotiations ever since the Warsaw International Mechanism on Loss and Damage was established in 2013.
There is a clear global call for more climate finance to go to help support LMICs, for it to fund adaptation, and for it to go directly to those who need it most. Yet, the world is far from achieving this vision. Roughly $4.8 trillion has been channeled into climate action, but 75 percent of this has been invested in high-income countries and it’s estimated that less than 10 percent reaches local levels.
The answer, however, might be within our reach. In a recent paper from CGAP, we argue that inclusive finance can be the most effective way to distribute climate finance at the grassroots level and enable a just transition and truly global climate action.
Financial services are a critical enabler for any climate action that people want to take. Savings and credit products equip people to invest in cleaner technologies, adopt more sustainable practices, and build more resilient livelihoods. Remittances and government payments are crucial in helping households live through climate shocks and avoid negative coping mechanisms. Insurance solutions strengthen risk management, unlock investment in livelihoods, and help affected people rebuild their lives after a crisis.
Conversely, without access to finance, people affected by climate change cannot adequately anticipate, confront, and recover from climate shocks, nor can they adapt to increase their resilience and improve their livelihoods. It is therefore essential that this finance be accessible to all who experience climate impacts, including those in LMICs who are disproportionately vulnerable.
This opportunity was highlighted in our paper by World Bank President, Ajay Banga, and Her Majesty Queen Máxima of the Netherlands, who is the UN Secretary-General’s Special Advocate for Inclusive Finance for Development. They said that “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 cornerstone of climate response.”
Inclusive finance is a mature, low-risk, high-impact channel that climate funders should take advantage of. The inclusive finance sector is already a well-established ecosystem, effectively and safely directing large volumes of financing from impact investors, intermediary funds, and development financial institutions to low-income populations through heavily regulated financial institutions. Inclusive financial services providers (FSPs) have existing relationships in low-income communities, a deep understanding of customers’ needs, and expertise on how to meet those needs with financial solutions. They also have strong internal controls to prevent misallocation or misuse of funds and are carefully supervised by banking regulators. This allows them to deploy capital efficiently and effectively where it is needed most.
Inclusive FSPs have done this at scale for decades. One example is the mobile money (MM) revolution: in 2012, there were 30 million active users of MM worldwide, while today there are 1.8 billionaccounts processing $1.4 trillion a year. Most of those are held by unbanked, low-income users.
What’s more, inclusive finance providers have established a solid track record of serving low-income segments effectively and delivering positive outcomes, which has been proven by numerous evaluations. By contrast, existing climate finance for LMICs has been challenging to disburse, with large ticket sizes and years-long disbursement processes. The disbursement ratio for adaptation-related development assistance is just 59 percent, compared to 91 percent for overseas development assistance in general. The Green Climate Fund and other such funders are routinely criticized for cumbersome processes that often take five years or more before any money is disbursed.
Inclusive FSPs have a unique role to play in broadening the base of climate action to all 8 billion people living in the world today. They are the most effective way to convert large tickets of climate finance into small-ticket funding that reaches low-income households directly, with relatively light additional risk assessments and rapid turnaround time.
Inclusive finance can also help alleviate the global climate finance gap. It has a proven track record in mobilizing private capital for development action, having transformed the sector from nongovernmental organization driven and grant oriented 30 years ago to a massive commercial industry today. Global lending by inclusive FSPs is now over $180 billion a year.
It is time for inclusive finance to take its essential place in the climate agenda. As global negotiations on climate finance unfold, the question of how to reach and empower the people most affected must be front and center. Inclusive finance offers a powerful means to ensure that climate action is within reach for every person on our warming planet.