Exclusion Risks in Climate Finance Regulation: An Analytical Framework

This paper provides an analytical framework for financial sector authorities (FSAs) in emerging markets and developing economies (EMDEs) to examine how climate-related financial regulation could disproportionately affect access to credit among vulnerable groups in EMDEs, with the aim of identifying measures to not only minimize the exclusionary risks of regulation, but also fuel the virtuous cycle between stability, climate resilience and financial inclusion. 

The framework comprises six impact pathways through which climate-related financial regulation can reduce the ability or the incentives for FSPs to serve these segments.

• Regulation can impose additional credit underwriting requirements and limit or discourage lending to certain activities and sectors, introducing new customer eligibility barriers.
• Regulation can lead to increased costs for FSPs and customers.
• They could lead to reduced access to funds for FSPs to meet the climate adaptation and resilience needs of vulnerable groups.
• FSPs may experience increased capacity constraints, leading to conservative practices and exclusionary risk management approaches. 
• Uncertainty about the scope and outcome of increased supervisory scrutiny in the face of new, complex regulation may prompt FSPs to engage in over-compliance, favoring larger, less risky borrowers. 
• Increased reputational and litigation risks stemming from non-compliance or grey areas in the regulation may lead FSPs to adopt risk-avoidance behaviors, disproportionately impacting highly vulnerable segments.