CLIMATE CHANGE

Building financial resilience with climate-smart innovation

The Mastercard Center for Inclusive Growth and the CIFAR alliance launch a new resource to advance fintech innovation for climate resilience and adaptation.

Building financial resilience with climate-smart innovation

December 14, 2023

By Laxita Gautam, Avni Patel and Carolina Zuluaga 

In the coastal villages of eastern Kenya, small-scale fishers have long relied on the ebb and flow of the Indian Ocean. Here, the ocean provides sustenance and livelihoods for thousands of fishers and their families. But the uncertainties of the market, fluctuating fish populations and the ever-changing weather of the Kenyan coasts create income volatility for these small-business owners. The lack of accessible financial services further compounds these challenges, leaving thousands of fishers in Kenya and millions across Africa with limited resources and tools to navigate these uncertainties. 

Enter VUA Solutions, a Kenya-based startup that harnesses the power of fintech to support underserved fishers in building financial resilience. Tailored to the specific needs of small-scale fishers, VUA's platform offers affordable and responsible financial services while also promoting climate resilience and adaptation. The platform empowers fishers to use and monitor digital payments, savings, and loans and facilitates connections with dealers and partner financial institutions. Now these coastal communities have a tool to weather financial challenges and build a more resilient future. 

VUA is one of seven flagship products featured in the new Climate Smart Innovation Hub (CSIH) product gallery, a collaboration between the Climate Innovation for Adaptation and Resilience (CIFAR) Alliance and the Mastercard Center for Inclusive Growth. The gallery features tech-enabled banking and financial service solutions that meet the adaptation and climate resilience needs of vulnerable communities and ecosystems. The solutions and products featured in the gallery aim to tackle one of the biggest barriers to climate adaptation: access to relevant digital financial products. 

More than 80% of the world's unbanked population resides in the most climate-vulnerable economies. There is also a disparity in financial resilience, with 58% of adults in those economies lacking financial resilience, as compared with 25% in economies less vulnerable to climate change, according to an analysis by the Center for Financial Inclusion. Financially underserved communities living and working in climate-vulnerable economies need easy access to climate-smart financing tools and solutions that foster sustainable economic growth.  

“With climate change impacting vulnerable communities today, it is more important than ever to bring more diverse players into the conversation,” says Tyler Ferdinand, co-lead for the CSIH and climate innovation strategist with BFA Global, “from innovators focused on climate-smart products, such as microinsurance, to savings products for fishers to investors looking to add value in this emerging field.” 

Promoting climate-smart innovation 

The Climate Smart Financial Products gallery features more than 70 solutions from around the world. The gallery also spotlights seven flagship financial products, dubbed “Star Products.” The featured products represent the diversity of the impacted population — covering coastal, urban and rural areas — as well as a range of financial tools including credit, savings, payments and insurance. The products don't just drive financial resilience; they also promote environmental sustainability. 

For example, the VUA platform supports sustainable fishing practices by bolstering the sustainability and growth of value-chain players such as middlemen and traders who use sustainable fishing methods that are designed to catch only big fish. 

Another solution, Ecosistema Jaguar, is focused on supporting regenerative agriculture in Colombia. Serving as a contact center for the agrifood sector, Ecosistema Jaguar provides essential solutions that actively contribute to financial inclusion and promote regenerative farming practices. Meanwhile, in Egypt, Bekia facilitates the exchange of post-consumer waste (e.g., plastic and paper) for a financial incentive, benefiting both households and businesses. By offering users a way to monetize their waste, Bekia promotes an eco-friendly approach to waste disposal.  

The product gallery educates investors on what climate-smart financial products are, what types of services are most popular, what business models work and what potential investment opportunities exist. The platform also helps product managers and innovators perform market analysis, showcase their products and find inspiration in successful products.  

The next steps toward climate resilience and adaptation 

Innovators around the world are working to innovate new climate-smart fintech solutions to support the most climate-vulnerable communities. However, the CSIH has identified several barriers and gaps that can be overcome by taking three key steps: 

  • Break down silos to address knowledge barriers

    While financial services are essential to building climate resilience, the intersection between the two is not commonly understood. It is important to build knowledge and guidance for investors and innovators in priority areas like sustainable business models, existing technologies and more — a feat the product gallery aims to achieve in collaboration with CIFAR Alliance. The CSIH also convenes entrepreneurs, climate and financial experts, financial service providers and investors that are passionate about a climate-resilient future driven by financial product innovation. 

    In addition, events like the Bogotá and Cape Town climathons for young entrepreneurs provide the support and push they need — a safe but competitive space to foster learning and cutting-edge innovation. These high-speed boot camps bring together climate adaptation and financial service talent and emphasize the need for quality solutions over quantity.

  • Build viable use cases and replicate 

    While several exemplary fintech products with highly innovative foundations already exist around the world, most of these businesses are startups, which is why evidence or use cases of financial sustainability are still not very prominent for them. The CSIH aims to build more evidence and replication of products with strong and clear adaptation narratives in the climate adaptation space. A deeper dive into such existing products with potential scalability can prove useful to building talent.

    Existing solutions are also limited to just a few climate-vulnerable sectors. For example, agricultural insurance is currently leading the charge for climate-smart innovation, given that industry's high vulnerability to climate change. Ferdinand says there is a clear need and opportunity to diversify climate-smart innovation into other underserved and vulnerable sectors, such as health, water management and urban infrastructure.

  • Catalyze investment in climate resilience and adaptation

    Mitigation often overshadows adaptation, with most investments in the sector still going to climate mitigation solutions rather than climate adaptation. According to the Climate Policy Initiative's Global Landscape of Climate Finance 2021, around $300 billion of the total adaptation funds in private finance have gone to mitigation, and only $1 billion to adaptation (on average). While mitigation is essential, Ferdinand says we must also bring forward solutions that can help vulnerable communities adapt to climate change and reduce the severity of negative impact. 

    The CSIH aims to contribute and support the CIFAR Alliance's goal of catalyzing $25 billion in investment per year to provide 1 billion people with access to climate-smart financial solutions by 2030 — a goal that could be achieved by committing portions of investment portfolios to climate-smart financial products and solutions. This is a role that extends to everyone in the investor community — from small, highly specialized venture capital firms investing domestically to international government agencies with broad mandates.

    Ali Schmidt-Fellner, who co-leads the CSIH with Ferdinand, emphasized the vital need for increased support in this space. “We'd like to see more catalytic capital deployed to de-risk new and existing innovations from entrepreneurs addressing these issues in their communities,” said Schmidt-Fellner, who also leads research and insights at the Center for Inclusive Growth “Beyond the innovation in agriculture, there is an opportunity for solutions that meet the needs of coastal and urban populations. It's not just about recovery but investing in coping and livelihood transitions. We're eager to see diverse players engaging and investing in this space.”

    Communities vulnerable to climate change encompass a diverse range, including those in low-lying coastal areas facing rising sea levels, arid regions susceptible to water scarcity and droughts, and densely populated urban centers grappling with extreme heat and infrastructure challenges. As these communities continue to face disproportionate impacts from climate change, collective action is urgently needed to unleash investment and technological innovation centered on the needs of these communities, to ensure an inclusive and sustainable future for all.

    If you'd like to join the Climate Smart Innovation Hub, you get in touch with us here.