This paper analyzes how climate change may impact the stability of financial systems and – particularly – access to financial services for groups that often have difficulty with such access, including micro- and small enterprises (MSEs) as well as low-income households and those in rural areas. The authors emphasize three challenges: environmental risks, such as extreme weather and desertification; risks related to shifts in renewable energy technology and associated changes in consumer preferences; and policy and regulatory risks. The authors suggest that these challenges can create a feedback loop of “spiraling vulnerability,” whereby economic damage caused by environmental and technological change causes financial institutions to increase the prices of their services or to stop providing them at all. This then causes governments to tighten their regulation of private financial institutions, ultimately causing the most vulnerable clients to be excluded from the financial sector because financial institutions find it even less profitable to serve them.
Alternatively, the authors argue that government officials can support a “virtuous cycle of growth” by implementing “policy instruments for mitigating climate-related risks, reducing transaction costs linked to climate risk management and green financing, and scaling up affordable green finance.” Among the recommended actions for governments and private institutions are to partner to set disclosure standards for emissions reporting and to boost funding for MSEs that address environmental challenges. Governments also can offer incentives to encourage private financial institutions to boost their outreach to MSEs as well as rural and low-income customers.
This is summary of a paper by Peter Knaack and Peter Zetterli, published by CGAP (Consultative Group to Assist the Poor), August 2023, 16 pages, available at: https://www.cgap.org/sites/default/files/publications/WorkingPaper_Climate%20and%20Regulation.pdf.
By Rohit Dayanand, Research Associate
Additional Resources
CGAP homepage
https://www.cgap.org/
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