Climate Science and Policy » microfinance

From Global Agreements to Micro Insurance, the Way for an Effective Adaptation

Ian Burton — Fri, 07 May 2010 16:11:23 +0000

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It is going to be more and more imperative that countries around the world and people everywhere (nobody is excluded from this) will need to learn to cope with the impacts of climate change. What is really needed is money to help strengthen the capacity and the ability of poorer people with lower livelihoods through education and intermediate levels of technology to strengthen their livelihoods and their economy. “We should be able to help strengthen the capacity and the ability of poorer people with lower livelihoods” Prof. Ian Burton says. Micro insurance would help people in the period of risk and it could be provided in a manner which would encourage people to take adaptive actions. “It is an idea both of spreading risks and of helping to promote the idea of adaptation” Prof. Burton explains.
Watch at the video interview with Ian Burton at the International Workshop The Social Dimension of Adaptation to Climate Change in Venice

After Copenhagen: Adaptation and International Negotiations

In the last five years or more the profile of adaptation in the negotiations has become more and more important. People are realising that the issue of controlling the emissions of greenhouse gases is going to be very difficult and it is going to take a long time for political, economic, and technical reasons

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I firstly think that the discussions and negotiations on adaptation are going very well compared to the discussions of mitigation on greenhouse gases, which are stalled in a very difficult place. In the last five years or more, the profile of adaptation in the negotiations has become more and more important. I think one reason for that is that the people, the negotiators, and the countries are realising that the issue of controlling the emissions of greenhouse gases is going to be very difficult and it is going to take a long time for political, economic, and technical reasons. Therefore it is going to be more and more imperative that countries around the world and people everywhere (nobody is excluded from this) will need to learn to cope with the impacts of climate change. I think this was very well reflected in the Copenhagen negotiations, although no specific conclusions were reached at that time.

Risks and Dangers for Adaptation Investments

What is really needed is money to help strengthen the capacity and the ability of poorer people with lower livelihoods through education and intermediate levels of technology to strengthen their livelihoods and their economy. But the large amount of money that the Copenhagen Accord promises for poorest countries could become lumpy investment if handled by large institutions only for large projects

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One of the things that was said at Copenhagen is that the Copenhagen Accord (the political agreement, not the binding agreement that we had hoped would emerge) made a promise on behalf of the rich donor nations that there would be somewhere around 20 to 30 billion dollars a year made available for adaptation within the next 2 or 3 years, rising by 2020, to a hundred billion dollars a year. This is almost the equivalent of all the amount of foreign aid that is given today. A huge amount of money was promised to help especially the poorer developing countries and the small island states adapt to climate change. You can be sceptical about that. If that order of money came about it would be extraordinarily difficult to manage it in an effective way. In consequence, it would probably be handled to very large institutions that are used to handling large sums of money like the World Bank, for example. Typically they spend their money on large investments. I think that the danger of giving a large amount of money that is suggested for the purposes of adaptation in very poor countries at the moment, is that a lot of that adaptation will be going to very large engineering projects: seawalls, big dams for irrigation, and so on. What is really needed is money to help strengthen the capacity and the ability of poorer people with lower livelihoods through education and intermediate levels of technology to strengthen their livelihoods and their economy. I’m afraid that large amounts of money would then go because it is more efficient to manage large amounts of money by giving it out in big chunks. That’s what I mean by lumpy investment. While we will need some of that, no doubt, I think that there is a danger that we will get altogether too much of it.

Adaptation to Climate Change: Micro Insurance and Its Opportunities

It is an idea both of spreading risks and of helping to promote the idea of adaptation.
Most of the activities of the livelihoods of poor people in poor countries are not covered by insurance. In the same way we did with microfinance, micro insurance would help people over the period of risk and it could be provide in a manner which would encourage them to take adaptive actions

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What we’ve seen in the developing world in the last 20 years or so, is something called the development of microfinance. This was developed initially by the Grameen Bank in Bangladesh and has spread quite widely among developing countries. It gives very small amounts of capital, which the private capital market does not supply. It gives small amounts of capital for people to invest in small villages and domestic industries, which can strengthen people’s livelihoods, increase their capacity to adapt to climate variability in change, and gradually increase their wealth and opportunities. Now you can expand microfinance by including an insurance element at a very low level. Most of the activities of the livelihoods of poor people in poor countries are not covered by insurance. There is virtually no insurance industry in those countries and certainly not at the rural level. If you could start in the way that we did with microfinance, micro insurance would help tied people over the period of risk with the experience of drought, flood, or some other adverse climate effect. Moreover, you could provide that insurance in a manner, which would encourage them to take adaptive actions. In other words, if the micro insurance were to be provided by some form of public or private cooperation, there could be a public element that helps to provide the insurance at an affordable rate for the people until such time as their resources and their wealth has sufficiently increased to be able to afford to pay the full actual rate of the premium themselves. It is an idea both of spreading risks and of helping to promote the idea of adaptation.

Related content:

the web page of the International Workshop The Social Dimension of Adaptation to Climate Change (Venice, February 18^th – 19^th, 2010) with keynote speakers’ papers and presentations;

the Grameen Bank’s web site;

visit the CMCC video Channel on Youtube or visit CLISP video section

Microfinance and Adaptation Strategies to Climate Change (video)

Shardul Agrawala — Mon, 01 Mar 2010 17:00:41 +0000

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What do we mean when we talk about adaptation to climate change? And in which way could Microfinance play an effective role for strategies to face Global Warming impacts in developing countries?
Shardul Agrawala – OECD Environmental Directorate and co-author with Maëlis Carraro of the presentation Adaptation to Climate Change: What role for Microfinance? – answers to Climate Science&Policy’s questions during the International Workshop “The Social Dimension of Adaptation to Climate Change” in Venice.
Microfinance – Mr. Agrawala explains – is essentially the provision of loans and other financial services to the poor sections of the society; its effectiveness in responding to Climate Change impact demands attention to small project with a focus on local programs, specially in Developing Countries. The way in which the international community will be able to deliver loans for this small project is a big challenge for our the future and our capability to face Climate Change impacts.

What is Microfinance

It is essentially the provision of loans and other financial services to the poorer sections of society and has a very important role to play in facilitating responses to the impacts of Climate Change

When we’re talking about adaptation to climate change what we want to do is to facilitate actions by a whole range of actors in society to undertake the adjustments they need to take to respond better to the risks exposed by climate change. Obviously some of those measures would involve very large-scale investments, for example, building sea walls, dikes, or damns and reservoirs. But a lot of the actions will need to be taken by vulnerable sections of the society. In this particular context, Microfinance is essentially the provision of loans and other financial services to the poorer sections of society. Microfinance has a very important role to play in facilitating many of the actions that these sections of society need to take to respond to the impacts of climate change. As such it is a very good delivery mechanism when we are talking about delivering adaptation finance, and a very good mechanism to reach one segment of society, which is particularly vulnerable to the impacts of climate change.

Microfinance and Global Funding

The challenge is not only about estimating costs of impacts of Climate Change, but it is also about how to reach the most vulnerable sections of our societies

The short answer is that at present no link has been made between the discussions at the international level on financing for adaptation and there are no strategies in grounds like Microfinance. A lot of the focus in the last couple of years has been on estimating what the global costs of adaptation might be. Recently, there has been a lot of emphasis on scaling up financing at the global level to deliver adaptation finance. What we have not talked about so far is how to allocate this global financing, and particularly how we make sure that a significant section of this financing actually reaches some of the most vulnerable sections of society. So, it is in this context that Microfinance is quite important. But as far as I am aware, much of the policy debate at the international level has still been focused on the question of scaling up financial resources and they have not yet come down to addressing the appropriate delivery channels. I think this is more of a forward-looking research that we have done and hopefully it can add one more idea to the international discussion. While it is quite important to look at issues of global financing we also need to start actively addressing the issues of how to make that finance reach the right people. I would also say that Microfinance could be a potentially attractive vehicle to reach the poor, but it’s not the only vehicle, nor is it suited for all purposes. At a minimum it merits for the consideration by the global policy community.

Adaptation and Microfinance: Some Examples

Bangladesh: in a country that is particularly vulnerable to the impacts of climate change, there are lending programs encouraging people to build houses that are more resistant to frequent floods and monsoon winds

Currently the financing for Microfinance projects is not coming from any climate change related funding. These projects are funded by entities called Microfinance Institutions, which at times receive start-up subsidies or other funding from government agencies as well as international donor agencies. But if you are talking about specific projects, there are actually several projects, for example in Bangladesh, a country that is particularly vulnerable to the impacts of climate change. There are examples of lending programs, which Microfinance institutions have funded now, that are encouraging farmers to adopt more soil varieties, which are giving loans to people to build houses that are more resistant to frequent floods and monsoon winds. These are examples of measures, which would also be good adaptations to current climate risks, as well as some of the impacts of climate change.

Enhancing Microfinance Effectiveness

The keyword is synergy and we need, above all, is introducing Microfinance into the international debate, promote a global discussion on lending programs

I think we need to do several things. First of all, when we are talking about the international policy discourse, we need to introduce the idea of Microfinance into that discourse. As I said at the moment, Microfinance is not even a part of the discussion in adaptation finance. First we need to introduce this idea at the international level. But the other thing we need to do is reach out to existing Microfinance institutions and perhaps have a broader discussion with the lending programs. There might be a lot of synergies between what they are doing and what might be needed by adaptation climate change. But there might also be cases where they might not be exploring all possible opportunities on what they could do to facilitate adaptation. In a small subset of cases there might be activities which Microfinance lending is supporting right now which may actually enhance the vulnerability of society to longer-term impacts of climate change. So, in those cases there might also be some adjustments, which might be needed to exist in lending activities so that the projects that they support are resilient to the impacts of climate change.

Related Content

the web page of the International Workshop The Social Dimension of Adaptation to Climate Change (Venice, February 18^th – 19^th, 2010) with keynote speakers’ papers and presentations;
IPCC, Outline of the Working Group II Contribution to the Fifth Assessment Report Climate Change 2014: Impacts, Adaptation, and Vulnerability (pdf);
Microfinance Focus, the monthly digital magazine focused on the microfinance sector