Climate change is reshaping financial risk, yet conventional credit models too often penalize the very populations most in need of support. Farmers, small businesses, and low-income households in climate-vulnerable regions face higher costs, stricter terms, or outright exclusion — even when they invest in adaptation.
This article makes the case for climate-responsive finance with retooling risk models; scaling adaptive products; and aligning regulators, financial institutions, and development partners to build resilience. Ultimately, financing resilience is not just a social good — it is the strongest safeguard for the financial systems themselves.
Our world is on track for a 2.7°C rise by 2100. Over the past 50 years, the planet has faced an average of one disaster every day or two, linked to weather, climate, or water hazards, according to the World Meteorological Organisation (WMO). The number of such events has increased fivefold over this period, with 11,778 disasters recorded between 1970 and 2021. The economic toll has also mounted — with estimated losses of USD 4.3 trillion suffered over this period, with costs rising each decade.
Akhand Tiwari
The World Bank's Findex 2025 report confirms what we at MSC have witnessed firsthand: Climate shocks have become routine for low-income communities. In low-income countries, 35% of adults reported experiencing a natural disaster or weather shock in the last three years. Two-thirds lost income or assets, and the poorest 40% were one-third more likely to be affected than others.
The cost of climate change is very much a financial one, as the developing countries, already vulnerable, are staring down future losses of USD 1–1.8 trillion annually by 2050 due to escalating physical climate risks.
As economies face the strain, financial institutions — especially banks — face it too. The growing physical risks impair the solvency of borrowers and reduce the value of collateral, increase default correlations, and create more systemic credit risk. To manage this risk, the Bank of International Settlements (BIS) suggests incorporating physical climate risks into banks' credit risk models. This integration of physical climate risks into credit risk frameworks is designed to improve how banks evaluate loan performance in climate-affected geographies and sectors, and thereby reduce their exposure to underpriced climate risk.
But there is a catch. Existing models classify vulnerable borrowers — farmers, small firms, informal workers, low-income households — as inherently riskier. If adopted blindly, this suggestion from BIS could entrench this exclusion.
Banks respond to this classification with higher rates, tougher covenants, or outright loan denial, often ignoring borrowers’ adaptation efforts. Vulnerable populations are then locked in cycles of using high-cost informal debt to finance recovery, having insufficient resources to further adapt, and stagnation. This happens because high interest rates trap them in debt cycles, diverting income from productive uses. With no savings or credit buffers, they remain unable to invest in adaptation or upward mobility, perpetuating stagnation. At the macroeconomic level, this not only hurts climate adaptation but also a country’s economic growth.
Ayushi Misra
Financial institutions often do not have climate-change-responsive products for climate vulnerable populations. For many customers, climate change has become a barrier to economic growth, as financial institutions often avoid serving them or lack appropriate products tailored to their needs. We found evidence of this in Bangladesh, where customer savings withdrawal increased and credit decreased following climate events.
This means that climate-vulnerable customers, often least responsible for climate change, face a triple financial hit:
Many borrowers acknowledge their climate risks and even invest in resilience measures such as building flood defenses, raising homesteads and vegetable plots, or responding to drought with boreholes and water tanks. Yet, when they approach financial institutions, either for working capital after making such investments, or for credit to finance these resilience measures in the first place, they often face higher interest rates or outright refusals, since financial institutions rarely see such activities as directly income-generating.
In contrast, “climate-safe” borrowers, those in resilient geographies or with access to existing adaptive infrastructure, may enjoy lower rates, preferential loan terms, and access to green finance.
Over time, this bifurcation of risk-based lending will concentrate capital in resilient geographies and/or among resilient borrowers while starving high-risk areas of the financial resources needed to adapt. If credit risk models only account for climate risks without requiring a plan to address borrowers’ vulnerabilities or considering their adaptation plans, it will worsen their challenges. This underscores the urgent need for adaptive, flexible financial products that (i) respond to shocks, and (ii) balance the risk protection of both borrowers and lenders with affordable credit.
A pivot from exclusionary risk models to financing adaptive measures and supporting high-risk borrowers, rather than sidelining them, will help reduce the huge, estimated, financial impact. For example, the U.K.'s Institute and Faculty of Actuaries project Global GDP losses of up to 50% between 2070 and 2090. Practical tools like the Climate Vulnerability Index can help unlock this capital, as can integrating climate risks into lifetime customer value, credit scores, and loan appraisals. Financial institutions should use climate risk models not just to redirect capital but to segment customers more effectively. With geolocation and sectoral data, banks can target vulnerable groups, farmers, small firms, and urban informal workers; and offer financial products that adjust to their circumstances, including flexible repayment schedules, weather-indexed credit, and microinsurance.
To better serve low-income communities, lenders can combine community-based lending models with digital data (such as mobile payments and satellite imagery) to assess creditworthiness beyond collateral. Public guarantees and blended finance can lower risk and attract private capital. Climate-smart credit lines, linked to adaptation actions (like water harvesting or crop diversification), can incentivize resilience. For this, institutions do not need to overhaul their product suites. Many providers can strengthen climate relevance simply by refining how existing products are positioned, structured, and supported. For instance, MSC’s 3R Strategy offers one practical pathway to do this. Institutions can repurpose existing products toward climate use cases; rejig them with flexible, season-aligned structures and early-warning protocols; and reinvent purpose-built offerings like disaster loans, emergency savings, and climate-smart agriculture loans. Finally, embedding financial literacy and insurance bundling within such products ensures sustainability and long-term inclusion.
This shift can be accelerated through blended finance and carbon finance, both critical tools to strengthen climate resilience, which are undergoing reform to improve how they perform. Blended finance, which uses a mix of public and private financing, while designed to de-risk climate investments, has been hampered by inefficiencies in multilateral climate funds. Carbon finance — instruments that channel funds toward emission reduction or carbon offset projects — was meant to add a revenue stream, but lost credibility after weak standards led to a race to the bottom, and is now being restructured to restore trust and effectiveness. Both mechanisms, despite their current deficiencies, hold significant potential if their governance frameworks, use cases, and applicability are diversified to better align with local contexts, emerging technologies, and adaptive financing models.
Alongside these, regulators can leverage RegTech (regulatory technology) to help financial institutions meet climate-related regulatory requirements efficiently, and SupTech (supervisory technology) to harness data and analytics for early warning, monitoring, and supervision of climate risks. Together, these tools enable the integration of borrower-level climate data into early warning systems, detecting emerging distress early, and ensuring lending frameworks foster equitable and resilient outcomes.
Financing low-income communities and their adaptation requires not just loans based on a better understanding of their characteristics and needs; it also involves changes in other parts of the financial system. Scaling resilience requires guarantee funds, supportive regulation, and post-disaster mechanisms like moratoriums or loan restructuring. A promising innovation is the use of pre-approved disaster loans, released automatically in anticipation of extreme events, triggered by predictive models such as Google Flood Hub.
Governments, development partners, climate scientists, and civil society must coordinate to deliver affordable credit, insurance, and advisory services for low-income communities, reinforced by digital tools, capacity building, and policy incentives. In the end, though, customer resilience is the strongest safeguard for financial systems.
Akhand Jyoti Tiwari is a Senior Partner at MSC, with two decades of experience at the intersection of strategy, innovation, climate action, and inclusive development. His leadership has enabled MSC to forge high-impact partnerships, unlock new business opportunities, and expand its footprint across Asia, Africa, and the Pacific. A trusted advisor to governments, development partners, and private sector leaders, Akhand guides organizations in navigating complex transitions toward sustainability, inclusion, and resilience.
Ayushi Misra is a Sector Lead at MSC and manages work on financial policy, regulation, and inclusive service delivery. She focuses on advancing financial inclusion for low- and middle-income segments through inclusive product and policy design, impact investing, SME finance, and financial sector strategy. Ayushi has contributed to developing climate lending frameworks, sustainable credit lines, and risk-sharing mechanisms for green and inclusive growth.