People around the globe are feeling the effects of climate change, but not all to the same degree. The world’s poorest are often hit hardest, from unrelenting drought in East Africa to deadly heatwaves in South Asia and severe flooding in South America.
Financing is essential to address these impacts. Adaptation strategies like buying drought-resistant seeds and installing irrigation to stabilize crop harvests, or reforesting and building seawalls to protect homes against floods, all require that people can save and borrow enough money. Coping with the aftermath of a storm or fire often involves relying on savings, insurance or remittances sent by family members. Replanting after a drought can be made easier by payouts from rainfall insurance. Getting access to clean energy often requires up-front investments to build power lines, install solar panels or switch to electrical appliances.
The low-income people on the frontlines of the climate crisis often don’t have access to these kinds of financial products. And when they do, the finance typically isn’t designed with climate risks or climate resilience in mind.
At the 2024 UN climate summit in Baku, Azerbaijan, governments agreed to triple the amount of financial support for climate action in developing countries, to at least $300 billion annually by 2035. But with global conversations focused on ramping up climate finance overall, an equally important question also needs to be answered: How can we get more of this finance to the individual people and communities that need it the most?
“Inclusive finance” could offer answers.
What Is Inclusive Finance?
Inclusive finance refers to efforts to expand access to everyday financial services — such as savings, credit, insurance, payments and remittances — as a way to reduce poverty and foster development. This involves tailoring financial products so they better meet the needs of low-income people — for instance, by offering microloans or microinsurance to clients who are poorly served, if at all, by mainstream banks.
Over the last half-century, this idea has developed into a large and vibrant ecosystem for delivering financing from commercial funders, impact investors, governments, humanitarian organizations and others to people in need. The inclusive finance sector now includes nearly 5,000 financial institutions in 147 countries that have extensive networks in low-income communities and understand their financial circumstances.
Using Inclusive Finance for Climate Action
This established system can offer a way to channel climate finance already flowing into developing countries directly to poor and vulnerable populations. Currently a relatively small amount of climate finance — less than one-fifth — ends up in the hands of local actors, in part because climate funders have found it challenging to deliver funds to the individual and household levels. Inclusive finance providers can help tackle this challenge by reaching vulnerable populations and offering services designed specifically with these people in mind.
The sector can also help mobilize urgently needed private capital for climate action. Global lending by inclusive financial services providers amounts to over $180 billion annually , and some of these resources could be channeled toward climate action at the grassroots — if financial institutions can work with clients and climate experts to develop solutions that work on the ground.
Early Examples Show the Way Forward
Early attempts are showing that financial innovation for climate impact can yield powerful results.
For example, the pay-as-you-go solar sector has enabled 490 million people , typically in low-income households, to access clean electricity from household solar kits that they could not afford to buy outright.
In Bangladesh, BRAC (one of the world’s largest microfinance lenders) created a contingent line of credit that offered farmers guaranteed access to emergency loans in the case of severe weather events like floods. Unlike insurance, the credit line didn’t require any payment upfront; farmers only paid if they needed to borrow from it. This added level of security gave farmers the confidence to invest in expanding their crop production despite climate risks. Most farmers suffered no flooding and never needed the credit, but saw substantially higher yields and incomes as a result of the higher investment. Farmers who were hit by floods and used the line of credit were better able to cope and saw lower reductions in household consumption as a result of the shock.
In India, the Self-Employed Women’s Association (SEWA) developed a heat index insurance product that triggers automatic payouts when it is too hot to safely work. The plan — targeted at informal workers like street vendors, construction workers and waste pickers, who may not have full workplace protections — has already generated payouts for tens of thousands of low-income women when temperatures rose to dangerous levels, allowing them to stay home without worrying about lost income or exposing themselves to major health risks.
The world needs far more of this type of innovation. Most financial institutions serving low-income people still offer standard savings, loan and insurance products, which aren’t always a good fit for the climate adaptation and resilience strategies they need to pursue. This deprives people of the ability to fully participate in global climate action and protect themselves from the implications of climate change.
Much More Attention and Innovation Are Needed
All of this represents an opportunity for the climate agenda as well as for inclusive finance stakeholders — if the two sectors can come together around the shared challenge of climate change.
Far more innovation is needed to fully align inclusive finance behind the climate effort, including, for example, on how to best provide anticipatory finance before climate disasters strike. Further experimentation could also build richer and more nuanced global knowledge on which types of financial services are most effective at driving climate action at the local level in particular contexts.
Clearly, inclusive financial services also have their limitations. Loans are not appropriate for every situation and could end up doing harm if deployed in an unscrupulous or careless manner. Climate insurance is difficult and increasingly expensive, sometimes prohibitively so. Many climate investments, such as those in more resilient infrastructure or public transportation, are necessarily large-scale and will continue to require big ticket projects by governments and their development partners.
Nevertheless, there’s a big opportunity for inclusive finance to foster local empowerment and drive grassroots climate action in low-income communities worldwide. To unlock this potential, governments should commit to getting a certain share of climate funding directly into the hands of affected people, including through inclusive financial services, to give them agency over their own climate action.
Meanwhile private actors, including financial institutions and their funders, should substantially increase their investments in developing and scaling better inclusive finance solutions to support resilience and inclusive green technologies. They should also integrate consideration of climate risks and opportunity into all their services.
And above all, people and organizations working in climate change and financial inclusion should make it a priority to start collaborating on this shared and critical agenda.
Taking these deliberate steps can help ensure that climate finance is not only large enough to tackle the enormous challenge, but inclusive enough to meet the needs of all people on our warming planet. As global climate finance discussions build on the high-level agreement in Baku to develop a more detailed climate financing agenda at the next UN climate summit (COP30 in Belem, Brazil), inclusion should be at the heart of the agenda.
