What is sustainable finance and how can it help?
Local communities have been participating in climate action initiatives on the ground through land restoration, carbon credit schemes, and sustainable land management. However, they still lack access to funding that would allow them to scale up such projects and businesses. Their local adaptation needs are also inadequately reflected in national policies or considered in decision-making processes.
Sustainable finance, also known as green finance, means making investment decisions that consider social and environmental impacts rather than just financial returns. This approach can provide financing mechanisms that are aligned with the needs of local communities and smallholder farmers while delivering innovations that support local climate action.
Sustainable finance solutions include:
- Green funds: funding bodies that invest in low-emission and climate-resilient development
- Blended finance: different forms of public and private capital that combine to catalyze more funding for projects that contribute to sustainable development, while providing financial returns to commercial investors
- Microfinance: financial services offered to low-income individuals or groups who are typically excluded from traditional banking
- Green bonds: a financial instrument where securities (or bonds) linked to a specific climate-related or environmental project, are issued to investors
- Index insurance: an innovative approach to insurance provision that pays out benefits based on a predetermined index such as temperature for loss of assets due to weather and catastrophic events
- Guarantees: an agreement under which the guarantor agrees to pay (part of) an amount due on a loan, equity, or other instruments in case of non-payment, thereby reducing the risk of investment
- Alternative financing mechanisms, such as the Mesoamerican Territorial Fund: are managed directly by Indigenous Peoples and local communities to protect their traditional lands and forests
The session Sustainable finance for local climate action held during GLF Climate: Frontiers of Change presents multiple players who elaborate on ways to help local communities and smallholder farmers access climate finance through four key messages:
- Support local communities and smallholder farmers with climate action in a way that is appropriate to the local context.
- Investors should contextualize the design of financing mechanisms and funds by ensuring that they are suitable for the communities that should benefit from them.
- Make available more innovative financing mechanisms, such as blended finance, to fund climate adaptation and mitigation to the benefit of local communities and smallholder farmers.
- Adapt policies and funding flows to match local needs.