Finance Inclusion: The Underestimated Force Driving Climate Adaptability

Climate Resilience Through Unnoticed Financial Inclusion

In a world where climate change poses a significant threat to households, businesses, and financial systems, the importance of economic resilience for sustainable growth cannot be overstated. One solution that is gaining traction is investing in inclusive finance.

Inclusive finance, which encompasses microfinance institutions, cooperatives, inclusive fintech platforms, and community-based insurers, has decades of experience reaching low-income households and small enterprises. This sector offers a way to safeguard the long-term viability of emerging markets in a climate-disrupted world by equipping households and small firms to withstand shocks.

Evidence of this can be seen in countries like Ghana and Bangladesh. In Ghana, insurance reduced the rate of missed meals in climate-affected farming households by eight percentage points. In Bangladesh, a pilot of a contingent line of credit boosted yields by 36% and increased incomes.

The GEMS database, covering loans made to 10,000 private counterparties in emerging and developing economies, shows average default rates of 3.6% between 1994 and 2023 for all emerging markets and sectors. Interestingly, in lower-middle-income countries, the default rate was 4.4%, which is significantly lower than the implied default rate of 14.6% as suggested by sovereign credit ratings. This suggests that inclusive finance institutions have strong repayment histories, portfolio stability, and adaptive capacity.

However, investment in these institutions is not flowing in sufficient amounts. Sophie Sirtaine, managing director of CGAP, calls for breaking down institutional silos between experts in climate, fragility, and social protection, and those in inclusive finance to bridge this gap.

Sirtaine also emphasises the need to rethink resilience in a way that leaves no one behind and empowers everyone to take charge of their own resilience. Well-designed financial products, such as insurance and contingent lines of credit, measurably improve resilience.

The Schwab Foundation for Social Entrepreneurship's 2025 report introduced the concept of Impact Credits, tradeable units that reward verified social progress much like carbon credits price pollution. This could potentially incentivise more investment in inclusive finance institutions.

Mitchell stresses the importance of enhancing existing systems, such as scaling microinsurance linked to early warning systems, adapting social protection programs to climate realities, and funding community savings groups directly.

South Korea's Social Progress Credit program has already mobilised $360 million in verified social value and disbursed $52 million in rewards to over 400 social enterprises. This program could serve as a model for other countries looking to invest in inclusive finance.

Inclusive finance aligns with the regulatory shift towards double materiality, where companies must demonstrate not only financial performance but also their impact on people and the planet. As climate change continues to pose a threat, investing in inclusive finance offers a promising avenue for building resilience and ensuring sustainable growth.