> Posted by Rachel Morpeth, Analyst, CFI

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People make their way out of a flooded neighborhood after it was inundated with rain water following Hurricane Harvey.

The devastating effects of Hurricane Harvey colored headlines across the nation. Two weeks later, Houston, Texas remains partially submerged. The resulting financial damage will likely exceed that of Hurricane Katrina, which struck the Louisiana coast in 2005. Harvey is taking Katrina’s title as the most catastrophic storm in America’s history. A Politico headline, however, poignantly suggests another message that perhaps we should all be taking away: “Harvey Is What Climate Change Looks Like.” Harvey is classified as a “500-year flood,” meaning a flood of this magnitude has a 1-in-500 probability of occurring in any given year. Yet this is Houston’s third 500-year flood in three years. Harvey’s successor, Hurricane Irma, has also caused death and devastation, while heavy flooding in South Asia has resulted in the deaths of over 1,200 people across India, Bangladesh, and Nepal.

Economic activity generates greenhouse gases that impact climate change, and climate change, in turn, affects economic activity. In the case of Harvey, the South Texas Cotton and Grain Association has estimated $150 million in crop losses. As natural disasters continue to occur with increasing frequency, financial service providers (FSPs) must ask themselves: what economic ramifications should be anticipated, especially in rural communities, and what can be done to overcome these obstacles?

Some of the consequences of climate change include drought, reduced food security, flooding, fires, landslides, and crop failure. Accordingly, it’s the agriculture sector that suffers a large brunt of climate change’s effects. Although humans have little immediate control over extreme weather patterns, there are steps we can take to buttress our economic well-being while determining how to reduce greenhouse gas emissions over time. For example, by financing innovative agricultural techniques, such as drainage systems, drought-resistant seeds, crop rotation, and vertical farming, FSPs can encourage new methods that will allow the populations most vulnerable to climate change to continue to thrive.

FSPs no doubt have a plethora of challenges to navigate, including many that appear more direct and immediate – market competition, client satisfaction, institutional funding, political instability, and so forth. It would be easy to dismiss climate change as a factor that cannot be controlled. However organizations are recognizing that it is not something to be ignored, and have started to develop solutions. Let’s take a look at a few examples.

Asobancaria, the banking association in Colombia, launched an initiative in 2016 backed by the country’s government called Protocolo Verde, which, among its activities, uses “green bonds” to finance projects in the environmental sector. These include clean transportation, green buildings, bioenergy, and energy efficient resources. Elsewhere in the region, the Inter-American Development Bank implemented EcoMicro, a program that partners with financial institutions to help them provide green financial products to rural communities. Among its products, EcoMicro has designed loans for projects ranging from solar panels to smaller installments such as energy efficient refrigerators.

The United Nations has adapted two programs that focus on green microfinance. The first program is the Microfinance for Ecosystem-based-Adaptation to Climate Change (MEbA), which is working to improve the resilience of agricultural workers and rural populations in Latin American and the Caribbean that are particularly susceptible to the impacts of climate change. In addition to developing new financing solutions for MFIs to offer to lessen these impacts, they are also working to detect knowledge gaps among MFIs and their clients.

The second UN program is called CleanStart, which finances clean energy and technical assistance in six nations across Africa and Asia. CleanStart co-invests in innovations from financial institutions, distributed energy service companies, and providers of financing for clean energy. Energy consumption is a major household expense in these regions; for example, a Ugandan household might spend $20 per month on energy, a whopping 40 percent of the average monthly income. Furthermore, because women and girls still take on most of the domestic responsibilities, they are disproportionately affected by the health impacts of dirty energy. By investing in efficient, quality energy, CleanStart is able to reduce the expensive costs associated with nonrenewable energy, and also improve household productivity in impoverished communities.

Harvey is not a one-off occurrence. It is part of an alarming, growing trend. Landscapes are changing before our eyes. During California’s drought, I remember watching agricultural lands turn to desert in just a few short years of driving between UCLA and my home near the Bay Area. As the ramifications of climate change become increasingly visible, FSPs will have to not only improve the efficiency of their own practices, but also continue to develop innovative products and services that aim to mitigate their impacts. FSPs can have a powerful influence on these climate developments by supporting financial markets that encourage the creation of environmentally-friendly and sustainable services that will allow societies to prosper.

Have you read?

The Green Digital Finance Alliance Launched by Ant Financial and the United Nations

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What to Consider When Investing in “Green” Microfinance