Vulnerable communities around the world are increasingly affected by climate change, creating a growing need to develop resilience to withstand climate shocks and adapt to resulting environmental and economic changes. MFIs and other financial service providers with a direct link to low-income populations are in a good position to help build individual and collective climate resilience, through both financial and non-financial services. Access to a full range of financial services can provide a cushion or safety net in the face of extreme weather events, while non-financial services provided by local MFIs, such as climate-smart technical trainings and market linkages, can help customers adapt to shifting economies. This is an active and growing area of research and experience, as the sector continues to learn about what kind of services can help clients build climate resilience most effectively.

Insurance is considered an important financial service for building climate resilience as it can help protect people and institutions against natural disasters and other harmful effects of climate change. Most insurance products that cover climate risk are focused on agriculture, helping protect livelihoods which depend on crops, livestock and fishing or aquaculture. However, there is increasing interest among insurance providers in covering climate risk for urban areas as well, particularly for flooding. As climate risks become more well-known, innovations such as parametric or index-based insurance and the use of satellite technology to determine payouts are being developed.

However, there are many challenges to making insurance work for low-income populations, especially in the context of climate change. From the demand side, customer uptake is a major issue for a variety of reasons including awareness, affordability and product fit. On the supply side, cost is a fundamental challenge for insurers, and is exacerbated by the increasing severity and frequency of risks brought about by climate change. Due to the difficulty of overcoming the economics of inclusive insurance in this context, there is an important role for governments and funders to play in figuring out how to pool risk and expand insurance coverage.

Financial inclusion can support the mitigation of greenhouse gas emissions and the transition to low-carbon economies in different ways. For example, financing and payment innovations such as pay-as-you-go business models can help make green technologies, like solar energy and cleaner cookstoves, more affordable for low-income people. Green agricultural loans can finance the equipment and training needed for more climate-smart farming practices which protect ecosystems. Financial services can also support the implementation of payments for ecosystem services (PES), which are programs that provide compensation to people and communities who are responsible for the preservation of biodiversity, watershed management and carbon removal. Many of these initiatives are quite new, however, and we are still learning how financial services can help low-income populations support climate change mitigation.