Inclusion should be at the heart of our climate change commitments

By Johanna Nyman, Head of Inclusive Green Finance at AFI

So it’s official: global warming has passed the 1.5C threshold. The 2015 Paris Agreement set the goal of limiting warming to 1.5C. Less than a decade later, there is no wriggle room left.

While 1.5C is bad news, a two-degree rise would be even more devastating. Perhaps sensing bad news coming, at COP28 in December, countries committed to a new raft of commitments, including the creation of a Global Climate Finance Framework.

The focus on finance is welcome. To avoid 2C, the smart use of funds will be critical. Recognizing this, Article 2.1(c) of the Paris Agreement talks of “making finance flows consistent with a pathway towards low greenhouse gas emissions and climate-resilient development.”

A vague commitment is of little value

While countries happily (or otherwise) signed up to Article 2.1(c), there is no consensus on what it ultimately demands. What do “finance flows” mean? Domestic financing? Private financing? Development financing? All of these? What does making finance flows “consistent with a pathway” mean? There is plenty of scope here to interpret the clause as countries see fit. And with no common interpretation, there is no way of implementing or measuring it.

How should we interpret the Paris Agreement?

I recently contributed to an ODI report which calls for “equity and climate justice to be at the heart of Article 2.1(c) implementation, so that actions taken are not in direct contradiction with commitments to ‘leave no one behind’ in the pursuit of sustainable development.”

I provided insight from the AFI network of Global South central banks and financial regulators on how Inclusive Green Finance solutions are helping countries to mitigate and build resilience against the negative impacts of climate change, while supporting their transition to a low-carbon future.

Historically, green finance initiatives have concentrated on large-scale mitigation and climate-risk disclosures. However, increasingly there’s a recognition that financial inclusion – referring to access to financial products such as a bank account, savings, credit, payment systems and insurance – builds climate resilience and climate change mitigation, especially among micro and small enterprises (MSMEs) and vulnerable communities.

AFI members’ experience backs this up

Central banks are now playing an active role in supporting climate-sensitive economic sectors. In Egypt, the Central Bank offers subsidized interest rates to farmers to help them to adopt modern irrigation methods. The Bank has also facilitated green financing schemes for MSMEs, for instance, by requiring banks to allocate 25% of their portfolio to finance MSMEs, including renewable energy and climate-resilient irrigation.

Countries are also fortifying resilience by expediting the inflow of finance into disaster-affected communities and enabling off-grid communities to access finance. In Fiji, in the aftermath of Tropical Cyclone Winston, The Reserve Bank of Fiji, working in partnership with Vodafone, enabled the transfer of government-to-person funds directly through mobile money.

Inclusion must be central to climate commitments

Recent experience of central banks and financial regulators in developing countries makes it clear that in a transition to low-carbon societies, we mustn’t forget the ‘inclusive’ part of green finance. Efforts to implement the Paris Agreement should focus therefore not only on reducing greenhouse gas emissions and advancing climate mitigation goals (important though these are), but on climate resilience and adaptation.

A clear and explicit commitment to implementing Inclusive Green Finance would go a long way to preventing more bad climate news.