Why inclusive finance must be at the heart of the climate response？

As the United Nations General Assembly and the high-level meetings of the United Nations Climate Change Conference COP29 approach, the global climate agenda is hotly debated around climate finance. However, this debate has largely ignored the issue of entitlement to the allocation of funds. It is generally recognized that climate finance should be prioritized for those most affected by climate change. This is not only the core issue of the damage and damage negotiations, but also the focus of UN Secretary-General Antonio Guterres' message on World Environment Day. "It is a shame that the most vulnerable are doing all they can to deal with a climate crisis caused by nature, not man," he stressed, noting that "the global financial system must be part of the climate solution."

First, since the establishment of the Warsaw International Mechanism for Loss and Damage in 2013, this mechanism has become the focus of negotiations at the COP. There is a growing global call for more climate finance to support low - and middle-income countries in tackling climate change and direct funding to those who need it most. However, the reality is still far from this vision. While approximately $4.8 trillion is spent globally on climate action, 75% of that money goes to high-income countries, and less than 10% reaches the local level. Fortunately, a solution seems to be at hand. A recent paper from CGAP argues that inclusive finance may be the best way to effectively distribute climate finance to the grassroots, contributing to equitable transition and global climate action.

Second, financial services are crucial in driving any climate action. Savings and credit products enable people to invest in cleaner technologies, adopt more sustainable lifestyles, and enhance the resilience of their livelihoods. Remittances and government payments are essential to help households withstand climate shocks and avoid negative coping mechanisms. Insurance solutions strengthen risk management, free up investment in livelihoods and help affected people rebuild their lives after a crisis. Without financial support, communities affected by climate change will not be able to effectively predict, respond to and recover from climate change, nor will they be able to adapt to build resilience. It is therefore critical to ensure that all those affected by climate change, especially vulnerable groups in low - and middle-income countries, have access to the necessary finance.

Moreover, inclusive finance is a mature, low-risk, and far-reaching channel that climate funders should take seriously. The inclusive finance sector has built an effective ecosystem to channel money from impact investors, intermediary funds, and development finance institutions to low-income people through heavily regulated financial institutions. Inclusive financial service providers have strong networks within low-income communities, a deep understanding of their customers' needs, and the ability to effectively meet those needs through financial means. At the same time, they have established strong internal controls to prevent misallocation or misuse of funds and are subject to strict supervision by banking regulators, which allows them to efficiently and effectively allocate funds to where they are most needed.

In addition, inclusive financial providers have a proven track record of serving low-income populations and achieving positive outcomes, as evidenced by numerous assessments. By contrast, current climate finance for low - and middle-income countries is often difficult to disburze, with large amounts of money and lengthy disbursement processes. For example, the allocation rate for adaption-related development assistance is only 59 per cent, compared with 91 per cent for general overseas development assistance. Funding agencies such as the Green Climate Fund have been criticised for their cumbersome processes, often taking five years or more to complete the disbursement of funds.

Taken together, inclusive financial services have a unique role to play in broadening the base for climate action to reach 8 billion people worldwide. They are the most effective way to convert large amounts of climate finance into small amounts that directly benefit low-income households, with relatively light additional risk assessments and faster turnaround times. Inclusive finance can also help close the global climate finance gap. Inclusive finance should now be high on the climate agenda. As global climate finance negotiations advance, reaching and empowering those most affected must be a top priority. Financial inclusion provides strong support to ensure that everyone can take action in the growing climate challenge.