As they are mutually reinforcing and inextricably linked
Climate Change & Inequality
Climate change is one of the biggest threats to societal and economic stability, and has a compounding effect on other global crises, such as rising inequality. Nearly 4 billion people are vulnerable to climate change today, and the World Bank estimates that, in the next 10 years, an additional 130 million people will be pushed into poverty by the effects of climate change.
From 1960 to 2010, climate change decreased per capita wealth in the world’s poorest countries by 17 to 30%, and increased economic inequality between developed and developing countries by 25%. Further, developed economies are responsible for 92% of historic excess global emissions, and the poorest half of the world are responsible for only 10% of global emissions.
Climate change continues to exacerbate existing inequalities, because those who are disproportionately impacted and displaced by climate change are least responsible for its causes. Today, the richest 1% of people produce more than double the emissions of the poorest 50%. Mutually reinforcing and inextricably linked, addressing the climate crisis must occur simultaneously with efforts to reduce economic inequality.
Source: IMF
Climate Finance & Financial Inclusion
The connection between climate resilience and financial resilience is becoming increasingly clear to the climate finance community, not only with regards to the populations impacted, but also in terms of solutions to build resilience. Historically, low-income groups have had limited access to financial tools and resources, leaving them poorly positioned against the impacts of climate change.
Global investments have signaled an increasing prioritization of climate goals; from 2010 to 2020, total climate finance reached US$632 billion. Venture capital investments in climate technologies primarily remain in developed markets, and less than 5% represent deals in the Global South, indicating a gap for inclusive solutions that build resilience in low-income countries and communities. Currently, inclusive climate finance is categorized into four pathways: Mitigation, Adaptation, Resilience, and Transition.
Mitigation finance (towards limiting climate change, mostly through decarbonization) reached US$571 billion in 2020, representing 90% of total climate finance from 2010 to 2020. Most mitigation funds were sourced from the private sector.
Adaptation finance (towards adapting to the incoming effects of climate change, e.g., seawalls) commitments are small in comparison, totaling US$46 billion in 2020—the majority of which was funded by the public sector
Resilience finance (towards being able to deal with and recover from the effects of climate change, e.g., disaster insurance) is challenging to track independently of other climate efforts. However, climate-sensitive financial tools and services are necessary to build resilience for low-income groups. The share of global climate finance going to a combination of adaptation and resilience efforts is only 8% of what’s allocated to mitigation efforts (2020).
Transition finance (akin to mitigation finance but more specifically targeting high-emitting sectors) will become increasingly important to support those who can’t sustain their current livelihoods as the effects of climate change become more severe. Currently, transition finance is often bundled into other climate efforts.
To transform the global financial architecture toward more inclusive and sustainable ends, there must be a combination of efforts made at the country- and individual-level. Country-level climate finance reform involves distributing funding from rich countries and international organizations to developing countries—from the type of funding provided to the repayment schemes that follow. At the individual-level, inclusive climate finance involves innovative financial products, tools, and services that can both enhance inclusion and build climate resilience.
Inclusive Climate Finance at the Country-Level
At the country-level, funding distribution and the mix of available funding are two crucial components of inclusion, particularly for poorer nations. Recently, the Gates Foundation released a transition framework for Climate and Development Finance to guide the allocation of climate dollars to countries, depending on where they are in their economic transition, from low to high-income status. Encouraging flexible lending based on income status allows for more tailored approaches to developing countries with limited access to different mixes of financing. The framework touches on the following to make country-level climate finance more inclusive:
Climate Finance Distribution: Where traditional loans involve strict interest rates and repayment plans, grants and concessional loans are more flexible, making them more inclusive types of finance that should be prioritized for developing economies.
Sources of Finances: As economies grow, so do their sources of financing. Where developing countries are more reliant on official development assistance, developed economies have higher tax revenues to allocate to climate goals. Developed countries are also seen as more transparent and trustworthy, and are more likely to receive private capital flows.
Domestic Revenue Mobilization: In the medium-term, developing countries must raise financing through strong public financial management to reduce borrowing needs and narrow fiscal deficits. Tax revenues are one pillar of a robust mix of financing that can be mobilized toward climate objectives.
Catalytic Capital: Using public or philanthropic resources to spur private sector investment is crucial to accelerating climate finance flows to developing countries. This can be achieved when targeted development assistance is provided in tandem with additional guarantees to entice private capital, or when capital is strategically allocated to de-risk follow up investments in a sector.
Source: Climate and Development Finance
With the costs of borrowing increasing, climate-vulnerable countries face insurmountable debt. A new financial tool that can increase accessibility to climate finance for poorer countries are debt-for-adaptations swaps, where borrowing countries could have their debt forgiven if the money for repayment is instead put toward climate adaptation and resilience projects. These swaps have the potential to reduce debt burdens for developing countries while increasing funding to adaptation efforts for vulnerable groups, making them an inclusive and innovative tool for advancing climate action.
Inclusive Climate Finance at the Individual-Level
At the individual-level, delivering inclusive financial services is closely linked to building climate resilience. Formal financial products and services designed with climate risks in mind can protect vulnerable groups against climate shocks, and can increase the affordability and uptake of climate-smart technologies that are otherwise inaccessible to low-income groups. Such products include:
Insurance to protect the poor against droughts, floods, and crop diseases. Insurance products designed with climate at the forefront include the Weather Index Insurance (WII) and Rainfall Index Insurance. In Ghana, smallholder farmers (i.e., family-owned farms) who were offered weather insurance invested more on climate-resistant agricultural inputs, such as hybrid seeds and fertilizers, indicating that protection from weather-related risks increased confidence in smallholders to adopt innovative climate-smart products.
Microcredit and green loans enable low-income households to invest in climate-smart technologies (e.g., drought resistant seeds or cookstoves that emit fewer toxic fumes). In a survey of smallholders in six districts across Rwanda, 98% of 270 farmers agreed that financial literacy training about microloans improved their understanding and risk appetite toward investing in greener agtech (referring to technological innovations that improve efficiency, profitability, or sustainability across the agriculture value chain. Typically in the form of hardware or software).
Formal savings accounts enable low-income households to build assets to invest in climate adaptation products and smooth income fluctuations in the face of climate shocks. Access to formal savings accounts for farmers in Malawi led to a 13% increase in investments in green agtech, which subsequently increased crop yields by 21% that season.
Pay-as-you-go pricing can help poorer consumers save money and avoid debt. Uptake of clean cookstoves for rural women in Kenya increased once provided with the option to pay for 10% of the total cost upfront, and pay the rest over a three-month period. The pay-as-you-go model also allows low-income households to spend only on what they need, and reduce waste of resources like water or electricity.
Populations who face heightened climate change risks are also likely to be financially ill-equipped to adapt, react, or prepare for future climate impacts. Introducing these products and services to low-income individuals and vulnerable communities both enhance financial inclusion and build climate resilience.
To meet our climate targets, annual climate finance to developing countries needs to increase four to eight times by 2030. But as developed countries grapple with their own challenges (climate change, pandemic recovery, rising unemployment, etc.), climate finance provided to developing countries is shrinking. To allocate existing resources effectively and equitably, a more inclusive delivery of climate finance at the country- and individual-level is critical to adapt to climate change.
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