<p>Isabelle led global efforts to keep clients first in financial inclusion. She came to the Smart Campaign with over 20 years of experience in financial inclusion and banking. Deeply motivated to reduce inequality and improve the lives of vulnerable people, she has devoted her career to spearheading innovative solutions that increase access to quality financial services and contribute to improving people’s lives. From 2007 to 2010, she managed Kiva’s early operations and developed its global strategy to maximize social impact. She helped to create the MIX in 2002, and led its strategic initiatives until 2007.</p>
<p>Isabelle holds a bachelor’s degree in economics from the University of Montréal, an MBA from McGill University, and a post-graduate degree in development economics from the Sorbonne and is fluent in English, French and Spanish.</p>


Former Vice President and Campaign Director, Smart Campaign

Isabelle Barrès

<p>Read Jessica&#8217;s full bio on the <a href="https://www.accion.org/bio/jessica-c-galimberti">Accion</a> website.</p>


Assistant General Counsel, Accion

Jessica  Galimberti

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Climate events have <a href="https://www.preventionweb.net/files/74124_humancostofdisasters20002019reportu.pdf?_gl=1*1u385s5*_ga*MTg2MTc5OTQ5MC4xNjczNDYxMzMw*_ga_D8G5WXP6YM*MTY3MzQ2MTMzMC4xLjEuMTY3MzQ2MTM2NS4wLjAuMA.." target="_blank" rel="noopener noreferrer">surged</a> in the past decade, and low-income people often feel the <a href="https://link.springer.com/content/pdf/10.1007/s41885-020-00060-5.pdf?pdf=button%20sticky" target="_blank" rel="noopener noreferrer">brunt of the impact</a>. There are three primary reasons for this: their higher exposure to hazards, greater vulnerability to negative impacts from that exposure, and fewer resources to rebuild and recover losses quickly.

Unfortunately, people who are poor often face higher exposure to <a href="https://www.sciencedirect.com/science/article/abs/pii/S092180090900322X" target="_blank" rel="noopener noreferrer">climate-related natural hazards</a> because of who they are or where they live, which determines the quality of their homes and hugely impacts their overall health. They also tend to rely on agriculture as their primary source of income, creating a <a href="https://www.sciencedirect.com/science/article/abs/pii/S0921800913003182?via%3Dihub" target="_blank" rel="noopener noreferrer">double hit</a> of loss of assets and loss of labor productivity and income when a natural disaster strikes.

While we cannot prevent climate-related events from happening -- and poverty itself increases vulnerability -- financial inclusion is a tool that can help people experiencing poverty build resilience to climate shocks.
<blockquote>People often face higher exposure to climate-related natural hazards because of who they are or where they live, which determines the quality of their homes and hugely impacts their overall health.</blockquote>
Comparing <a href="https://www.worldbank.org/en/publication/globalfindex/Report" target="_blank" rel="noopener noreferrer">Global Findex 2021</a> data on financial inclusion with <a href="https://gain.nd.edu/our-work/country-index/" target="_blank" rel="noopener noreferrer">data on climate vulnerability</a> reveals that over 1 billion unbanked adults, more than 80 percent of the world’s unbanked population, reside in the most climate-vulnerable economies.

<a href="https://www.weforum.org/agenda/2022/07/financial-resilience-promote-savings/" target="_blank" rel="noopener noreferrer">Financial resilience</a>, defined by the Global Findex 2021 as the ability to access additional funds of up to 5 percent of GDP per capita within 30 days during emergencies, is also an issue related to financial account access. In climate-vulnerable economies, 58 percent of adults lack financial resilience, compared to 25 percent in less climate-vulnerable countries.

Lack of financial resilience is an issue even when controlling for GDP per capita—wealthier yet climate-vulnerable economies have a higher-than-average share of adults who lack resilience. Adults in climate-vulnerable countries are less likely to depend on social networks for emergency money since many members of the same family or community might lose jobs or income simultaneously, making it difficult to help friends or relatives.
<h1>Two Pathways Toward Resilience</h1>
Research has found a positive correlation between financial inclusion and financial resilience, indicating that increasing access to financial services can benefit people affected by climate change.

There are two primary opportunities to leverage financial inclusion for greater financial resilience:
<h3>1. Increase account ownership among unbanked adults in climate-vulnerable economies.</h3>
According to Global Findex data, adults with bank accounts are likely to make and receive digital payments, save money, access formal credit, and store their money securely. These services can help individuals invest in preventative infrastructure (e.g., better housing), diversify their income sources, and access savings and remittances to recover from disaster-related losses. The COVID-19 pandemic offers many examples of <a href="https://www.gpfi.org/sites/gpfi/files/sites/default/files/5_WB%20Report_The%20impact%20of%20COVID-19%20on%20digital%20financial%20inclusion.pdf" target="_blank" rel="noopener noreferrer">how governments</a> were able to quickly and safely provide relief payments to individuals with bank accounts.
<h3>2. Encourage savings among individuals who already have bank accounts.</h3>
The Global Findex 2021 data consistently shows that individuals who rely on savings to manage financial emergencies are more likely to be financially resilient than those who rely on any other sources, such as friends and family, jobs, or selling personal assets. This finding holds true across all regions.

For some individuals, having a bank account can provide a secure location to store their money and increase their savings. However, incorporating design features that incentivize savings can provide an additional benefit that helps to boost savings balances and create a personally financed emergency fund, even before disaster strikes. These funds can be used for investments such as disaster-resistant housing and stress-resistant seeds or to diversify income streams. Individuals with readily available funds <a href="https://www.jstor.org/stable/24029292#metadata_info_tab_contents" target="_blank" rel="noopener noreferrer">may also be more willing to migrate</a> to less risky environments.
<blockquote class="pullquote--left">Individuals who rely on savings to manage financial emergencies are more likely to be financially resilient than those who rely on any other sources.</blockquote>
Increased access to credit through formal accounts could also benefit adults in climate-vulnerable economies, though only about 15 percent of adults in low- and middle-income countries use formal credit, on average.

While access to financial services cannot prevent climate-related events nor fully eliminate the factors that make poor adults more vulnerable to the negative impacts of climate change, it can enable them to better anticipate and respond to natural hazards. By coupling access to finance with programs that promote financial resilience, low-income individuals can reduce their exposure to the financial burdens of natural disasters.

<em>The Office of the United Nations Secretary-General’s Special Advocate for Inclusive Finance for Development (UNSGSA), under the leadership of H.M. Queen Máxima of the Netherlands, recently convened a working group on inclusive green finance consisting of members from the Alliance for Financial Inclusion, the Center for Financial Inclusion, and the Sustainable Banking and Finance Network. <i>The group produced a <a id="LPNoLPOWALinkPreview" title="https://www.unsgsa.org/publications/inclusive-green-finance-policy-and-advocacy-approach" href="https://www.unsgsa.org/publications/inclusive-green-finance-policy-and-advocacy-approach" data-loopstyle="link">policy and advocacy note</a> on inclusive green finance, along with an accompanying two-page <a id="LPNoLPOWALinkPreview_1" title="https://www.unsgsa.org/publications/summary-report-inclusive-green-finance-policy-and-advocacy-approach" href="https://www.unsgsa.org/publications/summary-report-inclusive-green-finance-policy-and-advocacy-approach" data-loopstyle="link">summary report</a>, which are available in the publications section at</i> <a href="https://www.unsgsa.org/" target="_blank" rel="noopener noreferrer">www.unsgsa.org</a> and will be presented at the <a href="https://globalrff.org/" target="_blank" rel="noopener noreferrer">Responsible Finance Forum 2023</a> on July 5-7 in Bengaluru, India.</em>

Climate Vulnerability and Financial Exclusion Go Hand in Hand – What Can Be Done?

It was a scorching hot February afternoon in Sempegua village in Colombia’s Zapatosa Marsh. Merciless rays of sunshine beat down as temperatures soared to 100 degrees Fahrenheit (38 degrees Celsius). Tired, skinny cows with ribs and hipbones jutting out foraged the dry pastures in search of feed. A group of cattle ranchers took a respite from the sweltering heat and sipped juice made from <em>uvita de playa</em>, a local Caribbean fruit, under the shade of a tree while recounting the good times when there was plenty for everyone. “Things are much worse than what they were 30 years ago. The government does not care. We are barely surviving, and on some days, we have no hope. All we have is the community for support,” said a cattle rancher.
<blockquote class="pullquote--left">A group of cattle ranchers took a respite from the sweltering heat and sipped juice made from <em>uvita de playa </em>under the shade of a tree while recounting the good times when there was plenty for everyone.</blockquote>
The men and women from the villages of Sempegua and La Mata in the Magdalena floodplains of Colombia -- <a href="https://www.dw.com/en/in-colombia-locals-fight-to-save-a-unique-disappearing-habitat/a-47300190" target="_blank" rel="noopener noreferrer">home to 32.5 million people</a> -- shared their experiences with me during a visit earlier this year. The Center for Financial Inclusion (CFI), along with <a href="https://www.nature.org/en-us/" target="_blank" rel="noopener noreferrer">The Nature Conservancy</a> and Accion, visited the Magdalena floodplains to understand how financial services can help community members manage the impact of climate change. CFI’s Green Inclusive Finance research team is working with climate NGOs and financial service providers in Colombia to uncover evidence and test promising solutions that help communities in the Magdalena floodplains develop resilience and adapt to climate change.

Livelihoods in this region are precarious, and the villages are wracked by climate shocks all year round. Summers are dry with long heat spells. Water levels recede, and there are fewer fish, a primary source of food. Community members must rise earlier and venture deeper into the wetlands to fish. The pastures become dry, leaving very little for cattle to forage on, and many ranchers are forced to sell their animals to survive. And when it rains, the Magdalena River overflows and inundates the villages, causing enormous damage to life, livestock, and livelihoods. The devastating floods caused by <a href="https://www.nature.org/en-us/about-us/where-we-work/latin-america/colombia/stories-in-colombia/climate-change-adaptation-for-communities-in-the-wetlands-of-the/" target="_blank" rel="noopener noreferrer">La Niña</a> in 2010 and 2011, impacting over 2.2 million households, are a case in point. According to <a href="https://www.strausscenter.org/wp-content/uploads/Country-Brief-Fragility-and-Climate-Risks-in-Colombia-2019.pdf" target="_blank" rel="noopener noreferrer">USAID</a> estimates, in the years between 2000 and 2016, Colombia experienced at least 56 climate-related disasters, including devastating floods.
<h1>Diversifying Livelihoods</h1>
Given the fragility of the traditional occupations of fishing and cattle ranching, community members have had to diversify their livelihoods by collecting local fruits, managing nurseries and community gardens, and selling local snacks and alcohol. Nearly everyone we spoke to was engaged in fishing, but it was no longer the preferred livelihood choice, given the rising expenses and the risk of being attacked by stingrays or crocodiles. Cattle ranching, the other traditional occupation, was also becoming more unpredictable. Ranchers mentioned having to sell livestock, challenges finding fertile lands for grazing, and conflict with an industrial farming operation, which was increasingly encroaching on the grounds where the cattle grazed.

But these means of supplementing their livelihoods are proving equally precarious. The forest where the fruits grow is replete with venomous snakes. Furthermore, the industrial farming operation owns much of the land, and the women picking fruits have no choice but to trespass. Despite the hardships, community members said they prefer living in the village where they can lean on one another for support. “Finding a well-paying job in cities is hard,” explained a man who had recently moved back from the city of Barranquilla. “We need land to do some productive activity, earn money, and pay off our debts.”

Several people said they have access to bank accounts but rarely use them beyond accessing conditional cash transfers via the government-run <a href="https://prosperidadsocial.gov.co/sgpp/transferencias/familias-en-accion/" target="_blank" rel="noopener noreferrer">Familias en Accion</a> program. The few salaried people used their accounts to receive their pay. We probed deeper to understand why existing financial systems do not work for the vulnerable and what needs to be changed.

Our discussions revealed three key areas where appropriately designed financial services could help:
<h1>1. Financial Services Must be Tailored to Needs</h1>
Several people we spoke with had taken loans from banks and microfinance institutions. However, the experience was often stressful. The loans had high interest rates, and when crops failed because of climate change, banks rarely provided flexibility on the loan terms. This rigidity made it difficult for farmers to meet their loan obligations, and they reported needing to leave their children behind in the village to work in the cities so they could repay their debts. According to them, financial institutions did not understand their predicament or provide any support to reduce the pressure. Consequently, many preferred the convenience and flexibility local moneylenders (<em>gota gotas</em>) offered, even though they were more dangerous and expensive. The <em>gota gotas</em> visited the villages daily and were willing to adjust the repayment schedule when customers with good repayment records faced challenges.
<blockquote class="pullquote--right">While community members desperately need financial services that allow them to save safely, conduct transactions, and access credit for their livelihoods, existing offerings do not meet their specific needs.</blockquote>
Despite their small and unpredictable incomes, community members said they dream of rebuilding or renovating their houses or sending their children to college, and they try saving whenever possible. However, most people prefer storing their money at home, despite the risks of floods or termite infestations that have destroyed their savings. Some women expressed a desire to learn more about saving in a more disciplined manner, and a community-based organization and partner of TNC called <a href="https://www.fundacionalma.org/" target="_blank" rel="noopener noreferrer">Fundacion Alma</a> responded by helping these women form their own savings group.

While community members were familiar with mobile money, not everyone owned mobile phones, and household members often shared phones. Even when they had phones, remembering passwords was a challenge. Furthermore, they frequently changed SIM cards to take advantage of promotions and offers from mobile companies, which required them to open new mobile money accounts. When they needed to withdraw or send money, they would travel to the nearest town and rely on an agent – who required a fee -- to facilitate transactions.

These anecdotes illustrate that while community members desperately need financial services that allow them to save safely, conduct transactions, and access credit for their livelihoods, existing offerings do not meet their specific needs.

Financial services could help residents of the Zapatosa Marsh transition to more climate-resilient livelihoods if the financial service providers were to adapt their offerings to better meet the needs and vulnerabilities of the communities, as CFI has outlined in its <a href="https://www.centerforfinancialinclusion.org/research/financial-services-to-mitigate-and-adapt-to-climate-risks">Green Inclusive Finance taxonomy</a>. The taxonomy lays out the various impact pathways through which financial services can help: mitigation, resilience, adaptation, and transition.
<h1>2. Financial Services and Skills-Building Can Multiply Impact</h1>
Even when community members had access to financial services, they had a minimal understanding of the features and terms associated with a product. For example, one woman mistakenly assumed that the credit life insurance covering her loan in the event of death would also cover loan defaults. Consequently, she was very disappointed when it did not help cover late payments related to the credit she used to buy her boat.

Most community members were skeptical about the utility of financial capability-building programs and felt these initiatives would have limited relevance given their volatile incomes. One exception was a salaried teacher who mentioned attending a financial education program offered by a bank that helped him learn how to budget and save money. However, community members were eager to participate in training that would equip them with skills to provide value-added services, such as making fruit juice or wine and accessing new markets.

While most people were familiar with WhatsApp and Facebook, they remained cautious about digital apps and preferred in-person programs where they would have opportunities to ask questions. By offering digital and financial education and supporting community members to start small businesses and access markets, there is a more significant opportunity to strengthen resilience and improve livelihood outcomes.
<h1>3. Consumer Protection is a Priority</h1>
“My husband and I took a home improvement loan. Since our earnings from fishing and collecting <em>uvita de playa</em> were insufficient, I moved to Valledupar and worked as a maid for a year to pay off the loan. But even after all our efforts, the loan still appears as red [unpaid] on the [credit] bureau,” explained one woman. Another person reported having a credit bureau record for a loan he never applied for or received. Others reported instances where they had to pay additional installments or fees or were victims of identity theft.

When asked about available recourse channels, most community members said it cost them too much time and money to travel to the bank in the city to sort out these problems, so they left them unresolved. Instead, they relied on <em>gota gotas</em> when they needed credit.

As weather patterns change, consumers face risks from newer sources that impact their financial lives at any stage of their interaction with financial services. <a href="https://www.centerforfinancialinclusion.org/research/consumer-protection">Consumer protection</a> is integral to building customer trust and is a cornerstone of a stable financial system.
<blockquote>Systemic changes are needed for financial services to support low-income, vulnerable communities in preparing for, responding to, and recovering from climate shocks while protecting them from additional harm.</blockquote>
Our visit to the Zapatosa Marsh exemplifies the area’s high vulnerability to climate change, which is already forcing the community to seek new livelihoods. These changes will only become more acute. Droughts and extreme floods in the region are expected to <a href="https://www.climatechangenews.com/2021/12/30/colombian-fishers-fighting-rights-protection-vital-wetlands/" target="_blank" rel="noopener noreferrer">intensify</a>. Entire villages risk being eliminated should there be <a href="https://www.reuters.com/business/environment/us-forecaster-says-el-nino-could-arrive-by-summer-2023-2023-03-09/#:~:text=March%209%20(Reuters)%20%2D%20La,and%20persisting%20through%20the%20fall." target="_blank" rel="noopener noreferrer">another El Niño</a>, which weather forecasters predict this year. With annual temperatures projected to rise by 1-1.5 degrees and precipitation to increase by <a href="http://documentacion.ideam.gov.co/openbiblio/bvirtual/019711/preliminares.pdf" target="_blank" rel="noopener noreferrer">5-15% by 2040</a>, the climate crisis is becoming increasingly real and urgent. Systemic changes are needed to enable the financial services sector to support low-income, vulnerable communities in preparing for, responding to, and recovering from climate shocks while protecting them from additional harm.

Acknowledging the urgent requirement for contextually relevant and responsible financial services in communities like the Zapatosa Marsh is vital. This situation provides a significant opportunity for organizations specializing in climate and inclusive finance to collaborate, acquire evidence, and test solutions to safeguard vulnerable communities from unintended adverse effects.

Colombian Wetlands Hard Hit by Climate Shocks - What Role for Financial Services?

The Intersection of Financial Inclusion and Gender during the COVID-19 Pandemic: Insights from Impact Investing

When the temperatures in a wheat field pass a threshold of around 104 degrees Fahrenheit (40 degrees Celsius), the seed starts to break down. <a href="http://www.icar-crida.res.in/Pubs/Heat%20wave%202022%20-%20Causes%20Impacts%20and%20way%20forward%20for%20Indian%20Agriculture.pdf" target="_blank" rel="noopener noreferrer">Photosynthesis stops working</a>, and growth stops. Wheat cannot grow in these temperatures. For the farmers of that wheat, reduced production means reduced incomes. During India’s 2022 heatwave, <a href="https://www.theguardian.com/world/2022/may/21/india-wheat-farmers-40c-heat-food-security" target="_blank" rel="noopener noreferrer">farmer incomes were reduced by as much as 50%.</a>

Periods of extreme heat can have a similar impact on urban environments. When summer temperatures reach a certain level, the livelihoods of many vulnerable groups – construction workers, day laborers, waste recyclers, miners, food vendors, and market traders – are hit. Working outside in the middle of the day becomes impossible. Foot traffic falls as people stay inside. Jobs that involve working around heat sources, like cooking and welding, become increasingly dangerous.
<h1>Understanding the negative impacts of extreme heat on household finances</h1>
The health implications of working in extreme heat are well known. Prolonged exposure to extreme heat can lead to heat exhaustion, cramps, dehydration, nausea, sunburn, dermatological issues, and other heat-related illnesses that impact health and the ability to work. The macro-level financial costs are also reasonably well-understood; for example, it is estimated that extreme heat and humidity <a href="https://www.mckinsey.com/capabilities/sustainability/our-insights/will-india-get-too-hot-to-work" target="_blank" rel="noopener noreferrer">could cost India’s economy USD $150-250bn, or 4% of GDP, by 2030</a>.
<blockquote class="pullquote--left">To understand what inclusive finance can achieve, we need a better understanding of how extreme heat impacts incomes and expenditures.</blockquote>
However, we know less about the impact of extreme heat on household finances. To understand what inclusive finance can achieve, we need a better understanding of how extreme heat impacts incomes and expenditures. I was excited to talk to Mahila Housing Trust (MHT), a grassroots development organization based in Ahmedabad, Gujarat, India. MHT provides microfinance and other services to groups of low-income urban women. Ahmedabad and the surrounding area are one of the hottest places on the planet, and its population is highly vulnerable to extreme heat. In response to the 2022 heat waves, MHT conducted focus group discussions with its members and found evidence of how extreme heat periods impacted incomes and expenditures.

On the income side, extreme heat had a significant negative impact on family income. This outcome was true for both home-based and non-home-based workers, particularly women. Home-based workers -- making papad, rolling beedi, sewing clothes -- tended to avoid working in hot afternoons, thus reducing their productivity. As a result, the average loss of income was 2,650 rupees (USD $33) over the five-month period.

As another example, the Arsht-Rock Resilience Center detailed how <a href="https://onebillionresilient.org/hot-cities-chilled-economies/" target="_blank" rel="noopener noreferrer">extreme heat impacts the income-earning potential of women</a> in the informal economy in Delhi:
<h4><em>In the Old Ahmedabad, New Delhi textile market, female workers pack and sew bales of clothes and transport them by carrying the parcels or using pedal rickshaws or carts. They are paid by parcel delivered. This work only begins after 1:00 p.m., which leaves them no option but to work in the scorching heat. They cannot miss a day’s labor without risking forgone wages.</em></h4>
At the same time as extreme heat causes incomes to fall, it causes expenditures to increase. For example, women interviewed by MHT had to spend more on electricity to run fans. In addition, they bought more cold drinks for their families to stay cool and hydrated. Additionally, without adequate health insurance systems, every medical treatment caused by extreme heat has a financial cost.
<h1>Climate change is increasing the probability and severity of extreme heat</h1>
March 2022 was the hottest in India since records began <a href="https://india.mongabay.com/2022/06/heatwave-takes-a-toll-on-north-indias-wheat-yield/" target="_blank" rel="noopener noreferrer">122 years ago</a>. Temperatures are the highest in urban areas, where a concentration of heat-absorbing buildings, concrete, and limited green spaces creates a “heat island” effect. High temperatures in India and Pakistan are not new, but climate change made the 2022 heat waves <a href="https://www.bbc.com/news/science-environment-61484697" target="_blank" rel="noopener noreferrer">30 times more likely</a>. <a href="https://www.mckinsey.com/capabilities/sustainability/our-insights/will-india-get-too-hot-to-work" target="_blank" rel="noopener noreferrer">As highlighted by McKinsey</a>, the probability of a lethal heat wave in South Asia is projected to grow dramatically over the coming decades.

<img class=" wp-image-45994 aligncenter" src="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2023/04/Extreme-Heat_Image.png" alt="" width="1349" height="550" />

The situation has been most acute in South Asia and parts of the Gulf -- such as <a href="https://www.nytimes.com/interactive/2022/11/18/world/middleeast/extreme-heat.html" target="_blank" rel="noopener noreferrer">Kuwait and southern Iraq</a> -- but this is a global phenomenon. Extreme heat threatens lives and livelihoods across parts of <a href="https://theconversation.com/heat-stress-is-rising-in-southern-africa-climate-experts-show-where-and-when-its-worst-198455" target="_blank" rel="noopener noreferrer">Southern Africa</a>, <a href="https://onebillionresilient.org/2023/01/20/freetown-on-the-frontlines-of-climate-action-the-citys-plan-for-extreme-heat/" target="_blank" rel="noopener noreferrer">West Africa,</a> and richer countries like the <a href="https://onebillionresilient.org/extreme-heat-the-economic-and-social-consequences-for-the-united-states/" target="_blank" rel="noopener noreferrer">USA</a> and Australia. Some estimates show that by 2050, between 700 million and 1.2 billion people will live in areas with a non-zero chance of lethal heat waves -- not factoring in air conditioner penetration. Furthermore, like most aspects of climate change, extreme heat will disproportionately impact those already economically and socially marginalized: women, informal workers, refugees, and <a href="https://onebillionresilient.org/extreme-heat-the-economic-and-social-consequences-for-the-united-states/" target="_blank" rel="noopener noreferrer">people of color</a>.
<h1>Small loans can help people adapt to extreme heat</h1>
The staff at MHT have been thinking about this for some time, and in the past five years, they have begun offering their members small loans to buy <a href="https://scroll.in/article/842568/with-a-touch-of-reflective-paint-women-in-an-ahmedabad-slum-are-beating-extreme-heat" target="_blank" rel="noopener noreferrer">heat-reflecting white paint</a> or roof panels to reduce heat absorption in their homes. These low-cost innovations -- which can cost as little as USD $75 -- can reduce indoor temperatures by <a href="https://www.bbc.com/news/world-48395221" target="_blank" rel="noopener noreferrer">up to 5 degrees</a> at the peak of the day. As such, they can be the difference between normal functioning and extreme discomfort while influencing the likelihood of elevated health risks. In addition, MHT supports other passive cooling adaptations, such as potted plants and increased ventilation.

To cope with rising temperatures -- without exacerbating the situation by increasing the use of ineffective air conditioners -- it is essential to invest in sustainable cooling technologies at every level. For example, in 2019, India’s government launched the India Cooling Action Plan (ICAP) to boost investments in energy-efficient, climate-friendly cooling solutions that do not cause a spike in electricity demand. However, further investment in sustainable cooling options is necessary, and a <a href="https://documents.worldbank.org/en/publication/documents-reports/documentdetail/099920011222212474/p15743300f4cc10380b9f6051f8e7ed1147" target="_blank" rel="noopener noreferrer">2022 report from the World Bank</a> outlines the role of concessional finance in supporting climate investment opportunities.
<blockquote class="pullquote--right">As households, businesses, and other organizations adapt to extreme heat, many financial service providers will also find the need to adapt.</blockquote>
As households, businesses, and other organizations adapt to extreme heat, many financial service providers will also find the need to adapt. For example, I recently spoke with another microfinance institution (MFI) in Ahmedabad that has experienced a spike in depositors a few minutes before closing; traders are waiting for the heat to abate before depositing their cash. As a result, the MFI extended its business hours into the evening to accommodate those unable to visit during the sweltering afternoons. Due to this extension, staff members work into the evenings, and cashing out must happen after dark. This behavior shift increases security risks and changes the nature of banking, which has historically been a daytime activity with strictly regulated business hours. Extreme heat will change how financial services are delivered, and the systems must adapt.
<h1>New forms of parametric insurance can help build resilience</h1>
Promoting adaptive behavior is important, but the residual risks are a loss of income, increased expenditures, and health costs. However, parametric insurance can help mitigate these risks. One form of parametric insurance is extreme heat index insurance, a relatively new concept that borrows from years of work on parametric insurance for another climate-related shock: <a href="https://www.climatepolicyinitiative.org/gca-africa-adaptation-finance/case_studies/agriculture-and-climate-risk-enterprise-acre-2/" target="_blank" rel="noopener noreferrer">irregular rainfall</a>. Similar to rainfall index insurance, heat index insurance is a risk transfer solution that triggers <a href="https://onebillionresilient.org/2023/03/07/fighting-extreme-heat-with-parametric-insurance/" target="_blank" rel="noopener noreferrer">an automatic payment to members’ bank accounts</a> when extreme heat thresholds are forecast or reached and it is deemed unsafe to work.

MHT developed a heat index insurance that supports low-income urban women and is piloting a new program in the summer of 2023. Market research conducted by MHT found that women would be willing to pay up to $2 per month for this insurance and designed the triggers to cover up to a few days of lost income. <a href="https://meetingorganizer.copernicus.org/EGU22/EGU22-7269.html" target="_blank" rel="noopener noreferrer">Early evidence</a> from the pilot suggests that the necessary preconditions for such a product are:
<h4>1. A clearly defined index and data sources</h4>
<h4>2. A strong local distribution channel</h4>
<h4>3. A strong capacity to deal with basis risk</h4>
As with all such innovations, it will need calibration. For example, should this cover only extreme or very high heat? How localized is the data, and how is the basis risk managed? How effectively can this work at the micro-level? Moreover, what is the role of subsidy/social protection in such schemes? The rising temperatures will soon create the conditions to test this product, answering some of these questions.
<h1>Over the long term, financial services will need to support transitions to new livelihoods</h1>
Extreme heat will render many jobs unviable, forcing people to seek new livelihoods. In 2019, the ILO estimated that <a href="https://catalogue.unccd.int/1206_wcms_711919.pdf" target="_blank" rel="noopener noreferrer">by 2030, heat stress would lead to the loss of 34 million jobs in India</a>, mostly in agriculture and construction. Those workers will need somewhere to go. Along with some regions of the Gulf -- such as Kuwait and southern Iraq -- parts of north India will be the first in the world to experience heat waves that exceed the limit of human survivability. As a result, people will migrate to new locations and livelihoods, and the number of <a href="https://www.unhcr.org/en-us/climate-change-and-disasters.html" target="_blank" rel="noopener noreferrer">climate refugees</a> will necessarily increase. Extreme heat will fundamentally alter geographies and demographics, and financial services must support these transitions.
<h1>A call to action</h1>
Temperatures are already rising across South Asia. In <a href="https://www.telegraphindia.com/my-kolkata/news/met-office-predicts-heatwave-in-kolkata-and-several-west-bengal-districts/cid/1929242" target="_blank" rel="noopener noreferrer">Kolkata</a>, they have already passed 104 degrees Fahrenheit (40 degrees Celsius) -- the temperature at which wheat seeds start to break down. Moreover, this year will likely be an El Niño year, bringing <a href="https://weather.com/en-IN/india/news/news/2023-02-28-extreme-heat-due-to-el-nino-could-hurt-india-gdp-food-and-power-sectors" target="_blank" rel="noopener noreferrer">higher late-summer temperatures and a deficient monsoon</a>.

There is little that the financial sector can do to mitigate these temperatures, but they can help people <a href="https://www.centerforfinancialinclusion.org/green-inclusive-finance-a-framework-for-understanding-how-financial-services-can-help-low-income-and-vulnerable-people-respond-to-climate-change">build adaptive capacity, become more resilient, and transition to less vulnerable livelihoods</a>. However, this will take some ingenuity. Financial service providers will need to understand their customers better and focus on how extreme heat and other climate risks affect real micro-level financial factors, such as incomes, expenditures, and assets and risk management of different low-income and vulnerable segments. Only then can financial service providers start to build financial products -- and a financial system -- that is truly responsive to climate-related risks.

&nbsp;

<em>The author would like to thank the Mahila Housing Trust staff for their insightful and valuable contributions to this blog post.</em>

Inclusive Finance and Extreme Heat: How Small Loans and Parametric Insurance Can Help Vulnerable Populations Manage Through Deadly Heat Waves

<span data-contrast="auto">A decade ago, </span><a href="https://www.cgap.org/topics/collections/digital-credit" target="_blank" rel="noopener noreferrer"><span data-contrast="none">digital credit models</span></a><span data-contrast="auto"> that catered to low-income consumers were relatively unknown and untested. A lot has changed since then. Data from the </span><a href="https://ccaf.io/" target="_blank" rel="noopener noreferrer"><span data-contrast="none">Cambridge Center for Alternative Finance</span></a><span data-contrast="auto"> shows that between 2011 and 2021, the number of digital lenders -- including those catering to low-income consumers -- has grown nearly ten-fold globally. </span><a href="https://www.imf.org/en/Publications/WP/Issues/2021/03/19/Digital-Financial-Inclusion-in-Emerging-and-Developing-Economies-A-New-Index-50271" target="_blank" rel="noopener noreferrer"><span data-contrast="none">Economies in Africa and Asia</span></a><span data-contrast="auto"> have significantly driven this growth within the emerging market context. This rapid growth has been accompanied by a rise in consumer protection challenges, which have been studied and </span><a href="https://www.cgap.org/topics/collections/digital-credit" target="_blank" rel="noopener noreferrer"><span data-contrast="none">reported extensively in the East African context</span></a><span data-contrast="auto">. </span><span data-ccp-props="{&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:259}"> </span>

<span data-contrast="auto">Catalytic capital — debt, equity, guarantee, or other instruments that assume disproportionate risk to return — is often seen as an important signaling device to attract further, timely investment in the target. As such, it can facilitate innovation and help organizations and companies build a track record in underserved markets.</span><span data-ccp-props="{&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:259}"> </span>
<blockquote class="pullquote--right"><span data-contrast="auto">Catalytic capital has spurred rapid growth in digital credit, but at the same time, digital credit has created significant concerns over consumer protection.</span></blockquote>
<span data-contrast="auto">However, the role of catalytic capital in influencing market-level incentives for digital credit has been less studied. In multiple markets, catalytic capital has spurred rapid growth in digital credit, resulting in an influx of investment. At the same time, digital credit has created significant concerns over consumer protection, and the supervisory capacity of local regulators has failed to keep pace with the risks emerging from the rapid growth of digital credit. </span><span data-ccp-props="{&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:259}"> </span>

<span data-contrast="auto">In our research, we focus on the role of catalytic capital in shaping market incentives as they attract capital to digital credit models. We conclude that the role played by catalytic capital differs depending on the stage of market development. At an early stage, catalytic capital investments can help prove business models, expand services to newer consumer segments, and/or attract capital to underserved geographies. As the supply of capital increases, markets shift to a growth stage. Catalytic capital investors, who are more impact-oriented, need to shift their roles as markets grow to one that addresses consumer risks that accompany an increased supply of capital. </span><span data-ccp-props="{&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:259}"> </span>
<h1><b><span data-contrast="auto">A helpful case study: Kenya -- the birthplace of digital credit </span></b><span data-ccp-props="{&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:259}"> </span></h1>
<span data-contrast="auto">Our research traces the role played by catalytic capital investments, mapping consumer risks that evolved to missed signals that catalytic capital investors could have used to build guardrails. We hope other markets on a similar growth path as Kenya can use this guidance.</span><span data-ccp-props="{&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:259}"> </span>

<span data-contrast="auto">Consumer risks rising from digital credit can be influenced through investor incentives, and they fall into three broad categories:</span><span data-ccp-props="{&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:259}"> </span>
<h3><b><span data-contrast="auto">High interest rates, indebtedness, and default risks</span></b></h3>
<span data-contrast="auto">Financial service providers often cite the high cost of funds in emerging markets as the underlying driver for high interest rates. Catalytic capital investors can play a crucial role in reducing the cost of funds by deepening domestic capital markets. As one positive example, Lendable and other funders, including FSD Africa, set up a fund offering a first-loss default guarantee. This structure mobilizes domestic debt investors, increases transparency, and reduces the cost of funds for end borrowers as the supply of on-lending funds in emerging markets becomes less constrained.</span><span data-ccp-props="{&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:259}"> </span>
<h3><b><span data-contrast="auto">Aggressive sales practices, exploitative terms and conditions, and deceptive fees</span></b></h3>
<span data-contrast="auto">As investments in digital credit models rise, there is a need to establish responsible market practices. Catalytic capital providers can play a role in working with industry associations and regulators to establish responsible market practices, and advocacy is one of the most powerful tools they can use. For example, community Investment Management (CIM) is an institutional impact manager that began operations in mature markets and is now expanding to emerging markets. CIM co-founded </span><a href="http://www.borrowersbillofrights.org/bill-of-rights.html" target="_blank" rel="noopener noreferrer"><span data-contrast="none">the Small Business Borrowers’ Bill of Rights</span></a><span data-contrast="auto">, identifying six fundamental financing rights of all businesses. The Small Business Borrowers’ Bill of Rights has now been adopted by the </span><a href="https://www.aspeninstitute.org/programs/business-ownership-initiative/small-business-borrowers-bill-rights/#:~:text=The%20Small%20Business%20Borrowers%E2%80%99%20Bill%20of%20Rights%20identifies,in%20order%20to%20uphold%20and%20protect%20those%20rights." target="_blank" rel="noopener noreferrer"><span data-contrast="none">Responsible Business Lending Coalition,</span></a> <span data-contrast="auto">a network of for-profit and non-profit lenders, brokers, and small business advocates.</span><span data-ccp-props="{&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:259}"> </span>
<h3><b><span data-contrast="auto">Data privacy issues</span></b></h3>
<span data-contrast="auto">With the emergence of technology-driven business models, using data to innovate is a crucial part of the DNA of digital financial services. Catalytic capital providers have a role in ensuring that companies respect data privacy without constraining innovation.</span><span data-ccp-props="{&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:259}"> </span>
<h1><b><span data-contrast="auto">Complementing catalytic capital investments for responsible market development</span></b><span data-ccp-props="{&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:259}"> </span></h1>
<span data-contrast="auto">While catalytic capital is crucial for innovations and expanding access, not everything is attributable to catalytic capital investors. While catalytic capital may enable market development, as the case of digital credit demonstrates, responsible market development does not automatically follow. Several other factors must be supported to complement investor incentives for responsible market development. Responsible market development needs investments beyond the firm level to enable market information, consumer awareness and capability, regulatory and supervisory capacity, and various other measures that can serve as checks and balances on firm behavior. </span><span data-ccp-props="{&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:259}"> </span>

<span data-contrast="auto">While investors can conduct firm-level due diligence to ensure client protection principles are respected, two of the three legs of the consumer protection stool require grant funding: regulation/supervision and building consumer awareness. Market actors need access to timely information and market research that informs them about potential market risks and which consumer segments might be particularly vulnerable. In addition, market conduct supervision that facilitates consumer protection needs investment that allows actors to test and invest in new tools that can capture consumer risks as they evolve. Therefore, traditional grant funding is needed to support responsible market development along with catalytic capital investments.</span><span data-ccp-props="{&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:259}"> </span>

<span data-contrast="auto">As a complement to catalytic capital investments, our research highlights six key lessons that can help support responsible market development:</span><span data-ccp-props="{&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:259}"> </span>
<h3><b><span data-contrast="auto">1. Recognize market growth indicators.</span></b></h3>
<span data-contrast="auto">This requires infrastructure investments that can contribute to responsible market development. Catalytic capital investors face four strategic decisions that will shift their role as the market develops: when to exit an investment, who would replace them, how will the investee company continue responsible behavior post-exit, and how to balance financial and social returns at the time of exit. Answers to these questions require agreement on a common set of indicators for market growth.</span><span data-ccp-props="{&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:259}"> </span>
<h3><b><span data-contrast="auto">2. Support initiatives that can help source market-level data.</span></b></h3>
<span data-contrast="auto">Surveys that provide information on trends in funding and areas of concentration are crucial to support funding decisions for underserved areas. We need investments in sector-level evidence gap maps and systematic data on the volume of investments made in digital credit by funders and instruments. </span><span data-ccp-props="{&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:259}"> </span>
<h3><b><span data-contrast="auto">3. Design Digital Public Infrastructure (DPI) that respects users’ privacy and security.</span></b></h3>
<span data-contrast="auto">This will have a cascading effect on newer business models because those using digital rails tend to build on existing infrastructure. Responsible market development can result from investing in the inclusive design of public infrastructure, respecting users’ privacy and security, and supporting regulations that ensure accountability.</span><span data-ccp-props="{&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:259}"> </span>
<h3><b><span data-contrast="auto">4. Invest in industry associations and networks to complement regulatory capacity.</span></b></h3>
<span data-contrast="auto">Industry associations and networks can play the role of effective shadow regulators, often with the ability to monitor and identify emerging risks with market development. However, building this ecosystem requires investments beyond catalytic capital.</span><span data-ccp-props="{&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:259}"> </span>
<h3><b><span data-contrast="auto">5. Build regulatory/supervisory capacity.</span></b></h3>
<span data-contrast="auto">Expanding new models requires testing tools that can detect new risks and initiatives that can bring together regulators to learn from “sister” networks in other markets. These initiatives can help augment the capabilities of market conduct supervisors but require traditional grant funding. </span><span data-ccp-props="{&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:259}"> </span>
<h3><b><span data-contrast="auto">6. Invest in mechanisms enabling consumer awareness.</span></b></h3>
<span data-contrast="auto">Consumer awareness is crucial to reinforce consumer protection, but extant investment instruments may lack the incentives to support such initiatives.</span><span data-ccp-props="{&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:259}"> </span>

<span data-contrast="auto">The detailed report can be accessed </span><a href="https://www.centerforfinancialinclusion.org/the-role-of-catalytic-capital-in-digital-markets-successes-pitfalls-and-lessons-learned"><span data-contrast="none">here</span></a><span data-contrast="none">,</span><span data-contrast="auto"> and a discussion on the role of catalytic capital in digital credit at Financial Inclusion Week can be </span><a href="https://www.youtube.com/watch?v=7y8x44tLk2I&amp;list=PL30fMMRd3G_4ysbJRWLiVICDCCHEKSTMY&amp;index=5&amp;t=5s" target="_blank" rel="noopener noreferrer"><span data-contrast="none">accessed here.</span></a><span data-contrast="auto"> </span><span data-ccp-props="{&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:259}"> </span>

Catalytic Capital and Its Role in Digital Credit

Report

As digital technologies transform financial inclusion, with new providers, products, and delivery channels reaching out to the financially excluded, the need increases for effective legal and regulatory frameworks to protect low-income consumers. A sound legal framework for consumer financial protection will support financial inclusion and innovation, allow new products and services to responsibly reach previously underserved consumers, and provide for empowered and capable regulators to oversee and enforce these frameworks.
<h2>Strengthening the Legal Framework for Digital Financial Services</h2>
The Handbook on Consumer Protection for Inclusive Finance presents updated and revised guidance for consumer financial protection regulators organized around the Smart Campaign's Client Protection Principles (CPPs). It expands upon a previous document, the Client Protection Principles: Model Law and Commentary for Financial Consumer Protection (Model Legal Framework) to reflect updated <a href="http://www.smartcampaign.org/about/smart-microfinance-and-the-client-protection-principles/digital-credit-standards">digital credit standards</a> from the Smart Campaign, new and emerging guidance from international organizations and collaborative working groups, and consultation with a broad range of experts regarding the unique characteristics of digital financial services (DFS), with an emphasis on digital credit.
<h2>Global Lessons and Model Legislation for Policymakers</h2>
In the Handbook, the Client Protection Principles are matched with legal provisions that promote the realization of these principles in practice. Expanded areas of the Handbook include the unique characteristics presented by DFS, new content around data privacy, fraud, and security, and product-specific recommendations. The tool is intended as a resource for financial consumer protection policymakers by providing model language, illustrative examples, and actionable recommendations. The aim is to support dialogue and foster collaboration between government and industry.

Handbook on Consumer Protection for Inclusive Finance

Related Work

The Center for Financial Inclusion and DLA Piper/New Perimeter are pleased to launch updated and revised guidance for financial consumer protection regulators tackling the risks and opportunities introduced by digital financial services.

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How do we ensure that the rapid growth of digital credit doesn't come at the expense of consumer protection? This blog post examines the role of catalytic capital in shaping market incentives and the need for impact-oriented investors to address consumer risks as markets mature.

Using the Handbook on Consumer Protection for Inclusive Finance

The Handbook on Consumer Protection for Inclusive Finance is a joint project between experts at the Center for Financial Inclusion at Accion and DLA Piper/New Perimeter, with support from Mastercard Foundation.

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A practical resource for regulators and policymakers on consumer financial protection

<p>In this webinar we discuss how the regulatory landscape is shifting with the advent of digital financial services, the challenges policymakers are facing, and the ways that the <a href="/handbook-on-consumer-protection-for-inclusive-finance">Handbook on Consumer Protection for Inclusive Finance</a> can help regulators and the entire inclusive finance industry to strengthen consumer protection frameworks.</p>


Webinar: Handbook on Consumer Protection for Inclusive Finance

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