The 4P Framework of Inclusive Green Finance – Policy responses to climate change

By Klaus Prochaska, Inclusive Green Finance, AFI

In late 2018, hundreds of thousands of “yellow vests” took to the streets of France to protest a fuel tax hike aimed at cutting carbon emissions. While some argued the increase was a reasonable step taken by a country at the forefront of climate action, the protesters claimed that France’s low-income population would be hardest hit. Demonstrations continue to this day, offering a reminder that policies for climate action cannot ignore the interests of low-income groups.

Many countries represented in the AFI network are particularly vulnerable to a changing climate. Recognizing this, AFI member institutions have adopted policies that target low-income groups and micro, small and medium enterprises to mitigate and build resilience against the impacts of climate change. The recent AFI report on “Inclusive Green Finance – A Survey of the Policy Landscape” takes stock of the current global state of these policy practices.

Policies are categorized into the “4Ps of inclusive green finance” – provision, promotion, protection and prevention –, offering financial regulators an intuitive way to think about the full range of policies they can adopt for inclusive green finance.

Provision. Provision policies help governments ensure that financial services are provided to qualified beneficiaries, either directly by the state or private sector actors fulfilling a government mandate.

For example, Bangladesh Bank, Nepal Rastra Bank and the Reserve Bank of Fiji introduced mandated lending quotas on green finance. The State Bank of Pakistan set up a refinancing facility for green lending while the Reserve Bank of Vanuatu established a refinancing facility for the reconstruction of businesses affected by Tropical Cyclone Pam in 2015.

Promotion. Promotion policies allow governments to create incentives for the private sector to offer financial services to qualified beneficiaries.

For example, Bangko Sentral ng Pilipinas used moral suasion to nudge commercial banks to recognize the business case for green lending. Bangko Sentral ng Pilipinas has also sought to fill knowledge gaps on green lending and investment primarily through capacity-building activities. Meanwhile, Bangladesh Bank collects and shares data on green finance in quarterly review reports on its green finance activities. Data collection and dissemination are powerful tools to create benchmarks for measuring performance. Lastly, Reserve Bank of Vanuatu lowered the reserve requirement for commercial banks and reduced its base interest rate to incentivize banks to lend to affected low-income people after Cyclone Pam.

Protection. Protection policies reduce financial risk by “socializing” potential losses through insurance or social payments, or by giving exceptional access to an individual’s assets.

For example, the Central Bank of Nigeria (CBN) established revenue index insurance that provides automatic payouts to farmers based on predicted crop yields using satellite data on precipitation. Central Bank of Nigeria also offers credit guarantees of up to 50 percent of losses to lenders if smallholder farmers cannot repay loans. Elsewhere, the Government of Fiji used mobile-enabled government to person (G2P) payments for the disbursement of its “Help for Homes” initiative to people affected by Tropical Cyclone Winston. Lastly, in the wake of Cyclone Pam, the Government of Vanuatu allowed people the early withdrawal of up to 20 percent from their retirement accounts to rebuild their homes.

Prevention. Prevention policies aim to avoid undesirable outcomes rather than addressing them after the fact.

For example, AFI member institutions including Bangladesh Bank, Banco Central do Brasil, State Bank of Pakistan, Nepal Rastra Bank and Banco Central de Paraguay have enacted Environmental (and Social) Risk Management Guidelines, or E(S)RM, which assess and address social and environmental externalities as well as the risks associated with a financial institution’s activities. By requiring that attention be paid to the byproducts, secondary effects and unintended consequences of financing, an E(S)RM policy not only creates an environment for more holistic finance, but also lowers financial, societal and environmental risk.

While AFI members have enacted a broad array of policies, we are still at the beginning of a trend of central banks playing an increasingly important role in the area of climate change. Even though financial services are essential for low-income people, financial regulators so far have not been systematically involved in the formulation of national climate strategies, like National Adaptation Programs of Actions. As inclusive green finance evolves as a policy area, AFI will continue to catalogue new and emerging policy practices that, over time, will build a body of knowledge to support peer learning in its network and provide guidance on policy implementation.

Read the AFI special report to learn more how financial inclusion builds resilience to climate change.