Why financial services matter in the fight against climate change

As extreme weather events increase in intensity and frequency, building up the resilience of the poorest communities – often the most exposed to climate change – is critical. And financial services have a role to play.

For poor families the impact of extreme weather, such as floods and droughts, often lead to the loss of livelihoods. This in turn forces families to resort to damaging coping mechanisms, including skipping meals, taking children out of school and borrowing money at high rates. It leaves them even more vulnerable to the next disaster.

Financial services won’t prevent disasters, but services like insurance can help lessen the risk to the most vulnerable communities.

Take for example livestock farmers in Ethiopia. In the early months of 2017, a drought devastated herds in many parts of the country. Insurance expert, Enock Sing’oei reported on the sight of malnourished livestock and carcasses along the road as he made the two-day drive from Addis Ababa to the town of Yabello in southern Ethiopia. Sing’oei is an ILO Impact Insurance Fellow – part of an ILO programme that places insurance professionals with companies that provide services to low-income communities.

In Yabello he was due to meet farmers who had lost their livestock during the drought. These farmers were insured under the Index-Based Livestock Insurance (IBLI) programme which covers livestock farmers in case of drought. The level of drought is measured through an innovative index that tracks satellite observations of the amount of fodder that is available for livestock. The programme is active in Kenya and more recently in Ethiopia, where 1,400 farmers had already been insured when the drought hit.

Sing’oei is hosted by Kifiya Financial Technology. With the ILO’s support, the company is testing how a digital payment platform can be used to make financial and non-financial services affordable and accessible to poor communities, particularly through public–private partnerships. When the drought took place, Kifiya supported farmers to submit claims under the IBLI programme, which paid out a total of US$75,000.

This is one example of a product that helps protect low-income households and small businesses from the increasing threats of climate change. The ILO’s Social Finance Programme supports similar projects in various developing countries by working with the financial sector and governments to test new products and approaches that could benefit low-income households.

However, insurance is not the only financial service that can contribute to the Decent Work Agenda. Another ILO project addresses the impact of climate change by working with investors who want to generate financial returns alongside positive social and environmental results. It’s known as impact investing.

With investors increasingly aware of the need to consider social and envi­ronmental factors in the way they conduct their business and in selecting the projects they finance, it’s becoming a growing market. Yet, they often lack the knowledge needed to implement development principles effectively in their opera­tions. Consequently, the ILO works with impact investors to use the Sustainable Development Goals as a framework for measuring social, environmental and developmental impact – as we are doing with the Africa Agriculture and Trade Investment Fund, which aims to harness the potential of Africa’s agriculture for the benefit of the poor.

Through the combined efforts of such projects, the Social Finance Programme reached over 559,000 low-income households, smallholder farmers and small enterprises in 2017. You can find out more about these and other projects in our 2017 Annual Report.

Source: ILO

Craig Churchill
Craig Churchill
Chief, ILO’s Social Finance Programme