It is critical to emphasise the role that digital funding plays in boosting climate resilience as adaptation takes the front stage in the fight against climate change. In nations that are sensitive to climate change, where more than one-third of the population lacks access to banking, digital financing—the use of digital technology to deliver financial services—is not just a tool but a necessity. Access to capital made possible by digital funding is not only necessary but also a critical component of climate resilience. Each individual’s financial inclusion is a step towards a more resilient future.

Earlier this year, a team of economists collaborated to finish one of the most thorough studies on hurricanes’ economic impacts on the US to date. One of the most startling results was that companies in a hurricane’s path that solely had physical locations had a 56% decline in revenue for around three weeks. Those who had an online presence, however, saw a far smaller decline—only 23%. The obvious conclusion is that by participating in the digital economy, almost any company, from a corner store in Nairobi to a hardware store in North Carolina, may increase its resilience to climate change.

Global efforts to combat climate change have escalated in recent years. Governments are enacting laws to hasten the green transition, while sectors like energy and automotive are dragging supply networks to support clean technology. Two prominent examples are the United States Inflation Reduction Act, which aims to lower inflation by encouraging sustainable economic practices, and the European Union’s Carbon Border Adjustment Mechanism, which taxes imports from nations with laxer climate regulations in an effort to reduce carbon emissions. However, plans for climate action must incorporate policies that support financial and digital inclusivity. Although they are frequently lacking, these actions are essential for a thorough and successful response to climate change.

Digital finance offers a glimmer of promise in spite of the present difficulties. There are currently 1.7 billion unbanked persons worldwide, with women making up 56% of the overall unbanked adult population. Nonetheless, women are essential to climate resilience and financial inclusion. Women are less likely than males to use online banking and digital payments. Women are also more likely to be financially excluded, particularly if they work in the unorganised sector, such as home-based workers. On the other hand, women who have more faith in the financial system also own more bank accounts. Interestingly, prior research has shown that having women in leadership positions significantly improves a company’s financial success.

Issues in developing nations include a lack of knowledge about cashless policies. Therefore, in order to reduce poverty and accomplish the Sustainable Development Goals (SDGs), authorities in these nations should integrate financial innovations into national policy. For instance, financial institutions should invest in FinTech services that have the potential to generate greater profits. At the same time, individuals should be urged to embrace cashless payments as they provide a safer method of transaction. The public’s distrust of financial institutions is the reason for both industrialised and developing nations’ growing reliance on unofficial sources of funding.

Furthermore, having a low credit score makes people more likely to rely on unofficial funding sources since they are reluctant to interact with banks. It is advised that banks in developing nations expand and advertise modern financial goods and services, especially to small and medium-sized businesses (SMEs) and rural residents, since financial inclusion acts as a lubricant for the overall economic system. Infrastructure, security-enhancing financial instruments, financial knowledge, and local government cooperation are all crucial.

Additionally, we must acknowledge that climate change has the potential to undo the advancements made in financial inclusion, which by its very nature concentrates on hazardous and challenging-to-serve customers with economically viable models. It would be harmful to international efforts to meet the Sustainable Development Goals of the UN if financial inclusion were to decline. However, it will become more difficult for financial institutions to serve certain of their consumers if weather shocks are more severe and unpredictable. Providers will eventually be forced to leave value chains and regions susceptible to climate change by standard risk management. According to anecdotal evidence, this is already starting to happen. The CEO of a major microfinance institution (MFI) in Nigeria, for example, told CGAP that they no longer lend to customers in areas of Lagos that flood annually. In a similar vein, the CEO of an MFI whose clients were severely impacted by the floods in Pakistan last year voiced concern that they might be forced to leave the country entirely unless they can both improve their balance sheet and figure out how to protect themselves from the possibility of another calamity.

The truth is that there are now few choices available to financial service providers serving low-income areas for sharing and assuring their increasing climate risk, and the available solutions are typically expensive. A type of climatic redlining, in which specific clients are essentially shut out of the financial system due to their residence and place of employment, maybe the outcome. The practice of rejecting or raising the cost of services to people of particular locations based on their climate risk is known as “climate redlining.” Fragile and conflict-affected governments, like Somalia, are often among those ranked as the most climate-vulnerable, making them some of the most challenging settings. Only 35% of people in fragile nations possess a formal account, compared to 71% in non-fragile nations.

Through more accessible and cost-effective digital financial services, the global proliferation of financial and digital technologies has made it possible for those who are most in need of financial inclusion to have access to them. Digital financial inclusion is now being worked on and prioritised in several nations. Both rich and developing nations understand how digital financial inclusion may help lower poverty and strengthen their economies. Additionally, the global and local agenda for digital financial inclusion is a priority for the leaders of more than 50 nations and members of global financial sector standard-setting bodies (SSB).

Despite all of these efforts, developing nations continue to face problems, including a large number of unbanked people and poor community acceptance rates brought on by a lack of a technology foundation and lax financial inclusion regulations. In both developed and developing nations, there are still significant disparities that affect vulnerable populations, including low-income individuals, women, and those living in rural areas. These groups continue to confront low levels of digital literacy and financial incapacity to access and utilise digital financial services.

For government, regulators and policymakers:

1. The government’s policy framework does not adequately consider financial inclusion. The government should develop a systematic plan for digital financial inclusion and examine the factors influencing the level of digital financial exclusion in each nation.
2. Considering that most ICT policies are supply-driven and top-down, pro-poor financial products and services must be adapted to individual needs.
3. Digital inclusion programs that provide affordable and fast Internet connectivity in rural areas should be prioritised in government ICT projects.
4. The government must prioritise a digital financial inclusion plan based on financial literacy and digital skills. Possessing the appropriate digital skills and understanding how to utilise each financial service and product will significantly enhance access to financial opportunities, especially as the use of financial services expands beyond merely saving and withdrawing money.

For financial institutions or financial service providers:

1. The necessity of implementing a one-to-one mentorship program for financial service agents is to focus on vulnerable groups, educating them on essential skills for mobile and online engagement, aiming to combat financial fraud and associated risks.
2. Mitigating transaction costs incentivises low-income individuals to engage with financial services.
3. Reassess banking rules to consider rural consumers. Complicated banking procedures, such as identifying documents and maintaining a minimum account balance, often prevent rural consumers and previously excluded groups from accessing essential financial services.

Future climate initiatives must be based on digital and financial inclusion, emphasising the reduction of unbanked individuals and the establishment of digital infrastructure in areas vulnerable to climate change. To achieve this, governments, nonprofit organisations, and private businesses must collaborate to create innovative solutions. This approach would foster resilience while also helping local users improve their financial situation. We cannot effectively address poverty and climate change without tackling them together. While financial services and digital tools cannot prevent climate-related disasters, they can assist individuals in recovering from these shocks. Strengthening the economic resilience of the most climate-vulnerable households benefits both local communities and the global economy as a whole.