वित्तीय क्षेत्रको विकास तथा वित्तीय समावेशीता

 

                                                                                                                                              

नेपाल राष्ट्र बंैक समाचार, वैशाख २०७८, वर्ष ४५ अङ्क ८ मा प्रकाशित

Inclusive Green Finance

Inclusive Green Finance

            *Amish Dhungel

Green Finance

Green Finance refers to initiatives that promote green investments. It means more capital flows to sustainable sectors like renewable energy, clean transportation, sustainable water management, etc. It aims at increasing financial flows to sustainable development priorities that have positive and durable environmental externalities. 

The objective is to generate environmental benefits as part of a strategy to attain inclusive, resilient, and sustainable development. The crux is to achieve sustainable economic growth with better managed environmental and social risks. As such green finance covers a wide range of financial product offerings including banking, investment, and insurance products such as green bonds, green investment funds, climate risk insurance, etc.   

The concept of Green finance gained global attention after the declaration of the United Nations Sustainable Development Goals 2015 and the Paris Climate Agreement 2016.  

Financial Inclusion

Financial inclusion is a multi-faceted concept that relates to the access, usage, and quality of financial products and services to households and businesses. It means that individuals and businesses have access to meaningful and affordable financial products and services. It ensures that customers regardless of their geographical location, ethnic, social-cultural, educational, or economic background have access to suitable financial products, ensuring fairness in service delivery, at a reasonable cost.

Financial inclusion has become a favorite buzzword of government and regulators because of the role it plays in reducing poverty, boosting prosperity, and achieving macroeconomic stability. Basically, financial inclusion is measured in terms of access of people and business to a bank account. Having a bank account means that people can save, send, and receive payments and are connected with a wide range of services that the financial industry offers. Such an account serves as a starting point for the users to facilitate day to day living, make use of wide varieties of financial services, make immediate and long-term financial plans, etc.

Inclusive Green Finance (IGF)

Globally, green finance and financial inclusion have been gaining popularity. Nepal also has started to witness green finance practices. Besides these, global attention has been shifting towards developing and adhering to the concept of Inclusive Green Finance (IGF). Before we delve into the concept of IGF, let us go through the following news:

 · In 2017, the seasonal flooding in South Asia affected more than 16 million people, causing death casualties of about 500 people. Amongst others, Nepal, Bangladesh, and India were severely hit displacing many families, causing severe food shortages, etc.

·  The heat wave in India killed 90 people in the summer of 2019. The temperature reached 49 degrees Celsius in the northern part of the country reaching very close to all-time record of 51 degrees Celsius in 2016.

· Recurring landslides and floods caused a big loss of life and properties in the Sindhupalchowk district of Nepal. As many as 74 people lost their lives and 41 people were reported to be missing in the district as per a report on September, 2020.

It is well understood that climate change has been a major cause of extreme weather conditions around the globe. Climate change has been threatening the food supply, forced people to abandon their homes, jeopardizing the health of the victims, etc. In most of these unfortunate events and the news listed above, it is poor and vulnerable people who have to face hardship. And as most of the poor people have a heavy reliance on agriculture for food and income, the harsh climatic condition can be devastating leading to the deepening of poverty.  

With climate change and global warming, the frequency of events such as landslides, flooding, storm, etc, and the magnitude of losses from these are increasing. This has pushed millions of people below poverty lines. Such disasters propagate inequality and poverty, which reinforce each other, creating a vicious cycle whereby the poor population suffers more as they are overexposed; have less capacity to cope and recover. In most of the cases, due to inadequate post-disaster social protection, such population will face a permanent impact on health, job, education; forcing them into poverty traps. As such climate change not only threatens long time effort of the government to reduce poverty but also causes an extra burden on the low-income population.

We can conclude from the above that:

·      Poor countries are more affected by climate-related disasters as they are less prepared and have a poor support system,
·      Mostly the victims of such incidents are people from poor and vulnerable levels, 

·      Victims are pushed back into the poverty trap and there is a high chance that they will be financially excluded

How Inclusive Green Finance (IGF) is gaining momentum

Inclusive Green Finance is a new policy area popularized by Alliance for Financial Inclusion (AFI) member institution to adopt policies, regulation, and national strategies to "mitigate or build resilience to sweeping environmental, health, social and economic effects of the climate change".

IGF combines the concept of green finance and financial inclusion policies to develop integrated inclusive green finance (IGF) policies. It makes use of the financial services and digital finances to mitigate the shocks from climate change, thus enhancing the resilience of the vulnerable population against the climate related economic shocks.

It is no doubt that financially included population are habituated in saving, credit, insurance, making transaction, use of digital channels, etc. The financially included population is better positioned to undue financial shocks. For eg, families with a higher rate of savings can smoothen consumption even after the shock and withstand the increase in food prices. Similarly, access to micro-credit can assist the poor household to enhance resilience via access to fertilizer, improved seeds, etc. Likewise, micro-insurance and weather-based insurance can provide security to poor families. Besides, in the aftermath of the crisis, access to a bank account can enable poor people to reach out for subsidies or grants from the government or donor agencies. Similarly, in the presence of robust digital financial inclusion, post-disaster social payments can be made in no time. A recent example is the use of digital finance by the policymakers to enhance the resilience of the population as against economic distress caused by Covid 19. Similarly, micro-credit, micro-insurance, etc can be made available to the poor population with the usage of Digital Financial Services in no time.

It is understandable that when low income and vulnerable people are financially included, they better prepare themselves to withstand climate-driven events like floods, cyclones, landslides, etc. Besides these, when the bank and financial institutions(BFI) arrange for green finance products like solar powered energy systems, clean stoves, subsidized lending in agriculture and animal husbandry, etc, it will ensure that the bottom of the economic pyramid population is included to ensure green financial inclusion. Thus financial initiatives such as micro-lending, savings, micro-insurance, clean energy lending, green lending, etc that aim to protect the poor and vulnerable population from unwanted environmental and climate change hazards is known as inclusive green finance. In another world, inclusive green finance can also be understood as 'scaling-down' of the green finance initiatives to include the bottom of the economic pyramid.

Besides all these, effective implementation of IGF initiatives will ensure overall financial and microeconomic stability, mitigate the risk of high inflation emanating from climate change, and other environmental risks. 

Framework of Inclusive Green Finance

The concept of green finance and inclusive green finance has also been gaining the attention of the policymakers throughout the world. Though these two concepts are relevant and inter-related to each other, the term green finance caters to the financing needs of large scale green investment, contrary to the inclusive green finance, that advocates for green finance initiatives to include poor people and enhancing their resilience to climate change.

IGF started as a new policy area in September 2017 as Alliance for Financial Inclusion (AFI) member countries adopted the Sharm El Sheikh Accord on Financial Inclusion, Climate Change, and Green Finance. This was further developed as Nadi Action Agenda laying down priority areas for AFI's work on Inclusive Green Finance. The framework aims to guide central banks and other stakeholders towards promoting Inclusive Green Finance. The accords is built upon Maya Declaration that enables AFI member countries to make concrete financial inclusion targets, implement policy changes, and share policy updates on financial inclusion.

IGF is categorized into four types known as the 4P framework which includes promotion, provision, protection, and prevention. Within these the whole range of activities that financial regulators can take under inclusive green finance can be classified.

4P framework on IGF

 

         Promotion

Promotion-related initiatives incentivize the private sector to offer financial products and services for green projects or related climate action activities to the qualified beneficiaries. It includes initiatives such as moral suasion, awareness-raising, capacity building, interagency coordination and collaboration, data collection, etc. For e.g., Bangladesh published a Quarterly report on Green Banking Activities of Banks and Financial Institution and Green Refinance.

   Provision

Provision policies help ensure that qualified beneficiaries avail financial resources for the green projects and other climate-related activities. Such measures involve provisioning of lending quotas, provision of refinancing, creation or investment fund, etc. For e.g., Nepal Rastra Bank has made it mandatory for BFI to lend 10% of their portfolio to energy projects. Similarly, it also has subsidized loans for biogas, waste treatment plants, solar energy, etc.

Protection

Measures such as climate-related insurance and risk management products, credit guarantees, social payments, and other mechanisms are used to reduce potential financial risk. For e.g., the Central Bank of America subsidizes approximately 50% of insurance policies of agricultural climate insurance products. Similarly, Central Bank of Nigeria absorbs 50% of the loss if a small farmer defaults on a loan.

Prevention

Similarly, policies are also adopted to avoid undesirable outcomes by lowering financial, social, and environmental risks. For e.g., the Environmental and Social Risk Management Guidelines issued by the Nepal Rastra Bank, 2018 can be referred to as one of the prevention interventions. The guideline aims to establish the Environmental and Social Risk Management Framework as the standard process for evaluation and integration of environmental and social issues in the functioning of banks and financial institutions (BFIs) and requires BFIs to develop and implement an Environmental and Social Management System (ESMS) consistent with local environmental, social laws and regulation.

  

The guidelines focus on assessing air emissions and air quality, water use and conservation, wastewater and water quality, solid wastes, labor and working conditions, biodiversity and ecosystem services, culture, and natural heritages, etc. Such guidelines have been issued by other countries like Brazil, Pakistan, Bangladesh, Paraguay, etc. 

National Strategies

Besides requiring member institutions to execute various activities under 4P's framework, AFI also emphasizes its member institutions to link their financial inclusion goals with climate change via a national strategy. Such strategies might be incorporated into National Financial Inclusion Strategies or other financial sector strategies.

Most of the AFI member countries have done so, some of them being Fiji, Rwanda.  Similarly, countries like Nepal, Bangladesh, Nigeria, Morocco, etc have planned to link financial inclusion and climate change. For e.g., our neighboring country Bangladesh in its First Strategic Plan (2010--2014) has made a connection between financial inclusion and climate change. It gave due importance to the need for agriculture and SMEs. The second strategic plan (2015-2019) aims to promote socially responsible, inclusive, and environment-friendly finance for sustainable development. As such development of national strategies and the propagating of such strategies in the policies and practices is important.

Conclusion

Climate change can threaten our progress in financial inclusion and other achievements in the financial sector. In quest of developing a resilient system, we need to spearhead the policies and practices to mitigate the impacts of climate change. For a developing country like ours which is at high risk for climate change-induced disasters, with 39.1% of the population still assumed to be outside of the financial channel and 18.7% of the population below the poverty line, it is high time for us to respond with strategies, policies, and regulations to move forward towards inclusive green economies.

As such central banks, supervisors/regulators, and governments should aim in developing a financial system that is resilient and well prepared to absorb climate-related shocks. As guardians of financial stability, it is no doubt that central banks should have more concerns for inclusive green finance. Appropriate policies and proper cooperation with counterparties, regulators/supervisors in other countries, and with global policy-making body like AFI is necessary to achieve IGF.

As an evolving field of study with huge importance, IGF is certain to gain momentum in the future. As such IGF initiatives should be able to garner adequate collaboration and coordination among the stakeholders at the international level, ensure knowledge/experience sharing, capacity building of the authorities, etc. All these will enable us to move towards a resilient financial system for the bottom of the pyramid.

References:

Pictures/graphics credit: AFI

• www.afi-global.org
• Guidelines on Environmental & Social Risk Management (ESRM) 2018, Nepal Rastra Bank
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• Sustainable Development Goals | United Nations Agenda 2030‎
•  www.unescap.org

Published in Upahar(Magazine of Economics and Management), Souvenir of Rastriya Banijya Bank Limited, 2077

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