Key Definitions and Terminology for Digital Finance for Climate Resilience
November 3, 2021 - 2 mins read
The recently launched Digital Finance for Climate Resilience (DF4CR) Framework for Action presents a vision for a new ecosystem at the intersection of digital finance and climate resilience, and a set of ambitious actions that could enable emerging solutions to reach over 1 billion people by 2030. This post presents a glossary of key terms and definitions that are most relevant for this emerging sector – including terms related to digital finance, climate change and resilience, fintech, and financial inclusion. This set of terms was identified by the DF4CR Task Force and through a consultative process with industry stakeholders as those most critical to understanding the context of DF4CR, along with DF4CR business models and technologies, and the potential impact of DF4CR. The purpose of this dictionary is to develop shared language about the intersection of digital finance and climate resilience.
| Term | Definition |
|---|---|
| Adaptation (to climate change) | Action that helps cope with the effects of climate change - for example construction of barriers to protect against rising sea levels, or conversion to crops capable of surviving high temperatures and drought. |
| Adaptation SME [1] | A company providing technologies, products and/or services that: address systemic barriers to adaptation by strengthening users’ ability to understand and respond to physical climate risks and related impacts and/or capture related opportunities, and/or; contribute to preventing or reducing material physical climate risk and/or the adverse associated impacts on assets, economic activities, people or nature. |
| Agroforestry | Intentional integration of trees and shrubs into crop and animal farming systems to create environmental, economic, and social benefits. [2] |
| Artificial intelligence (AI) [3] | Computer systems that are able to perform tasks normally requiring human intelligence, such as visual perception and speech recognition. |
| Big data | The aggregation of large amounts of increasingly complex data from many different internal and external sources, unlocking opportunities for real-time business insights. |
| Blockchain | A shared database of trusted transactions distributed across large peer-to-peer networks, also known as distributed ledger technology. The encrypted, distributed nature of data on the blockchain and system of consensus makes it inherently secure, immutable, verifiable and transparent to store transactions. |
| Carbon sequestration [4] | The process of storing carbon in a carbon pool. Anthropogenic activities removing CO2 from the atmosphere and durably storing it in geological, terrestrial, or ocean reservoirs, or in products. It includes existing and potential anthropogenic enhancement of biological or geochemical sinks and direct air capture and storage, but excludes natural CO2 uptake not directly caused by human activities. |
| Climate change [5] | A change in the state of the climate that can be identified (e.g., by using statistical tests) by changes in the mean and/or the variability of its properties and that persists for an extended period, typically decades or longer. Climate change may be due to natural internal processes or external forcings such as modulations of the solar cycles, volcanic eruptions and persistent anthropogenic changes in the composition of the atmosphere or in land use. Note that the Framework Convention on Climate Change (UNFCCC), in its Article 1, defines climate change as: ‘a change of climate which is attributed directly or indirectly to human activity that alters the composition of the global atmosphere and which is in addition to natural climate variability observed over comparable time periods.’ The UNFCCC thus makes a distinction between climate change attributable to human activities altering the atmospheric composition and climate variability attributable to natural causes. |
| Climate equity [6] | The principle of fairness in burden-sharing and a basis for understanding how the impacts and responses to climate change, including costs and benefits, are distributed in and by society in more or less equal ways. It is often aligned with ideas of equality, fairness and justice and applied with respect to equity in the responsibility for, and distribution of, climate impacts and policies across society, generations, and gender, and in the sense of who participates and controls the processes of decision-making. |
| Climate fintech [7] | Digital financial technology which catalyzes decarbonization and/or adaptation and resilience to climate change. |
| Climate justice [8] | Safeguarding the rights of the most vulnerable people and sharing the burdens and benefits of climate change and its impacts equitably and fairly. Justice that links development and human rights to achieve a human-centred approach to addressing climate change. This definition builds upon the one used by the Mary Robinson Foundation – Climate Justice (MRFCJ, 2018). |
| Climate migration | The displacement and migration of human populations from climate vulnerable or climate impacted areas to less risky areas. |
| Climate resilience | The strengthening of a system to withstand climate-related shocks or stressors. […] Climate resilience is the capacity of a system to cope with, or recover from, those effects, while retaining the essential components of the original system. [9] |
| Climate shocks [10] | Climate-related, acute events that can keep or bring households into poverty, including: natural disasters (such as floods that cause asset loss and disability); health shocks (such as water borne illness in post-disaster scenarios); and crop losses and food price shocks (due to drought or crop disease) |
| Climate smart agriculture (CSA) [11] | An approach that helps to guide actions needed to transform and reorient agricultural systems to effectively support development and ensure food security in a changing climate. CSA aims to tackle three main objectives: sustainably increasing agricultural productivity and incomes; adapting and building resilience to climate change; and reducing and/or removing greenhouse gas emissions. |
| Development finance institution (DFI) | Government development banks, and also non-governmental microfinance organizations that match grants to attempt to promote community development, decentralization of power, and local empowerment. |
| Digital credit | Loans accessed through a digital channel, via a mobile device, or through a third-party agent. Digital credit is a growing way of accessing electronic money with backend customer evaluation and automated customer interactions. |
| Digital financial services (DFS) [12] | Basic financial services offered through mobile phones, point-of-sale devices, and networks of small-scale agents. Services offered digitally can dramatically lower costs for customers and service providers, but raise concerns of data protection and privacy. |
| End user / End customer | Person or organization that actually uses a product, as opposed to the person or organization that authorizes, orders, procures, or pays for it. |
| Exposure [13] (to climate risks) | The presence of people; livelihoods; species or ecosystems; environmental functions, services, and resources; infrastructure; or economic, social, or cultural assets in places and settings that could be adversely affected. |
| Extreme weather event [14] | An event that is rare at a particular place and time of year. Definitions of rare vary, but an extreme weather event would normally be as rare as or rarer than the 10th or 90th percentile of a probability density function estimated from observations. The measurement of what is considered extreme weather will vary based on a location’s baseline weather and climatic conditions. |
| Financial inclusion [15] | A state in which all people who can use them have access to a full suite of quality financial services, provided at affordable prices, in a convenient manner, and with dignity for the clients. Financial services are delivered by a range of providers, most of them private, and reach everyone who can use them, including disabled, poor, rural, and other excluded populations. |
| Financial service provider (FSP) [18] | An organization that provides financial services including basic credit, savings, insurance, and payments services. |
| Fintech [16] | Digital technologies that have the potential to transform the provision of financial services spurring the development of new – or modify existing – business models, applications, processes, and products. In practice, the term “fintech” is also broadly used to denote the ongoing wave of new DFS. Examples of these technologies include web, mobile, cloud services, machine learning, digital ID, and Application Programming Interfaces (APIs). |
| Food security [17] | A situation that exists when all people, at all times, have physical, social and economic access to sufficient, safe and nutritious food that meets their dietary needs and food preferences for an active and healthy life (FAO, 2001). |
| Global warming [19] | The estimated increase in global mean surface temperature (GMST) averaged over a 30-year period, or the 30-year period centered on a particular year or decade, expressed relative to pre-industrial levels unless otherwise specified. For 30-year periods that span past and future years, the current multi-decadal warming trend is assumed to continue. |
| Greenhouse gas (GHG) [20] | Those gaseous constituents of the atmosphere, both natural and anthropogenic, that absorb and emit radiation at specific wavelengths within the spectrum of terrestrial radiation emitted by the Earth’s surface, the atmosphere itself and by clouds. This property causes the greenhouse effect. Water vapour (H2O), carbon dioxide (CO2), nitrous oxide (N2O), methane (CH4) and ozone (O3) are the primary GHGs in the Earth’s atmosphere. Moreover, there are a number of entirely human-made GHGs in the atmosphere, such as the halocarbons and other chlorine- and bromine-containing substances, dealt with under the Montreal Protocol. Beside CO2, N2O and CH4, the Kyoto Protocol deals with the GHGs sulphur hexafluoride (SF6), hydrofluorocarbons (HFCs) and perfluorocarbons (PFCs). |
| Hazard (climate-related) [21] | The potential occurrence of a natural or human-induced physical event or trend or physical impact that may cause loss of life, injury, or other health impacts, as well as damage and loss to property, infrastructure, livelihoods, service provision, ecosystems, and environmental resources. |
| Impact investor | Individuals, companies, and funds that make investments into other companies, organizations, and funds, with the intention of generating social and environmental impact alongside financial returns. |
| Impacts (climate-related) [22] | The consequences of realized risks on natural and human systems, where risks result from the interactions of climate-related hazards (including extreme weather and climate events), exposure, and vulnerability. Impacts generally refer to effects on lives; livelihoods; health and well-being; ecosystems and species; economic, social and cultural assets; services (including ecosystem services); and infrastructure. Impacts may be referred to as consequences or outcomes, and can be adverse or beneficial. |
| Inclusive fintech | Fintech innovations and business models specifically focused on serving and addressing the needs of underserved, low income, or financially excluded populations. |
| Index insurance [23] | An innovative approach to insurance provision that pays policy holders on the basis of a predetermined index (e.g. rainfall level) for loss of assets and investments resulting from weather and catastrophic events. Because index insurance does not necessarily require the traditional services of insurance claims assessors, it allows for the claims settlement processes to be quicker and more objective. Before the start of the insurance period, a statistical index is developed. The index measures deviations from the normal level of parameters such as rainfall, temperature, earthquake magnitude, wind speed, crop yield, or livestock mortality rates. |
| Insurtech | Insurance technology that enables automated underwriting and digital policy issuance, particularly of micro-scale insurance, as well as digital payouts. |
| Intergovernmental Panel on Climate Change (IPCC) | An intergovernmental body of the United Nations responsible for advancing knowledge on human-induced climate change. |
| Internet of things (IoT) | The network of physical objects that are embedded with sensors, software, and other technologies for the purpose of connecting and exchanging data with other devices and systems over the Internet. |
| Machine learning | A type of artificial intelligence that provides systems the ability to automatically improve from experience without being explicitly programmed. |
| Material physical climate risk [25] | The risk of financial and/or non-financial losses occurring due to performance failures, performance delays or incomplete performance of an economic activity/assets resulting from climate-related hazards. Materiality is location- and context-specific. |
| Microfinance | A type of banking service that is provided to unemployed or low-income individuals, or groups who otherwise have no other access to financial services. Ultimately, the goal of microfinance is to give low-income people an opportunity to become self-sufficient by providing a way to save money, borrow money and get insurance. |
| Microfinance institution (MFI) | A type of financial institution that seeks to provide credit to extremely low income and excluded populations, effectively and safely. |
| Mitigation (climate- related) [26] | Reduction in emissions of greenhouse gases into the atmosphere or absorption of greenhouse gases from the atmosphere. |
| Mobile banking [27] | The provision of financial services via mobile phones as an alternative delivery channel. Mobile banking supports payment transactions including money transfers and in some cases loan repayments. |
| Mobile money | Mobile money refers to financial transactions and services that can be carried out using a mobile device such as a mobile phone or tablet. These services may or may not be linked directly to a bank account. |
| Net zero emissions | Net zero emissions are achieved when anthropogenic emissions of greenhouse gases to the atmosphere are balanced by anthropogenic removals over a specified period. Where multiple greenhouse gases are involved, the quantification of net zero emissions depends on the climate metric chosen to compare emissions of different gases (such as global warming potential, global temperature change potential, and others, as well as the chosen time horizon). |
| Non-governmental organization (NGO) | A non-profit, citizen-based group that functions independently of a government. NGOs, sometimes called civil societies, are organized on community, national and international levels to serve specific social or political purposes, and are cooperative, rather than commercial, in nature. As nonprofits, NGOs rely on a variety of sources for funding, including membership dues, private donations, the sale of goods and services, and grants. Despite their independence from government, some NGOs rely significantly on government funding. |
| Pay-as-you-go (PAYGo) | An asset financing model that breaks down the cost of a product or service into small, manageable payments, typically offered on a flexible repayment basis, where embedded technology can remotely disable and tie usage of the product to proof of payment. |
| Person-to-person (P2P) transfers | Transaction systems that allow users to send one another money, typically from their mobile devices. P2P transfers are typically a subset of Remittances. |
| Physical risks (from climate change) [29] | Risks from climate change that encompass both: acute risks: i.e., those that are event-driven, arising from extreme weather events such as cyclones, hurricanes, or floods; and chronic risks: i.e., those arising from longer-term shifts in climate patterns (e.g., sustained higher temperatures) that may cause sea level rise. |
| Precision agriculture [30] | The combination of monitoring crops with satellites, thermal imaging, and sensors to help farmers more precisely optimize yields, reduce fertilizer and pesticide use, as well as improving water efficiency in irrigation. |
| Private equity | Capital that is not noted on a public exchange. Private equity is composed of funds and investors that directly invest in private companies, or that engage in buyouts of public companies, resulting in the delisting of public equity. Institutional and retail investors provide the capital for private equity, and the capital can be utilized to fund new technology, make acquisitions, expand working capital, and to bolster and solidify a balance sheet. |
| Productive use renewable energy (PURE) asset | Equipment that provides agricultural, commercial and industrial activities, powered by renewable energy sources, which generate income. |
| Program related investment (PRI) | An investment made by a foundation to support charitable activities that involve the potential return of capital within an established time frame. Program related investments include financing methods commonly associated with banks or other private investors, such as loans, loan guarantees, linked deposits, and even equity investments in charitable organizations or in commercial ventures for charitable purposes. |
| Public-private partnership (PPP) | A partnership between the public sector and the private sector for the purpose of delivering a project or a service traditionally provided by the public sector. |
| Race to Resilience [31] | An international campaign launched at the Climate Adaptation Summit to mobilize businesses, investors, cities and civil society to strengthen the resilience of 4 billion people in vulnerable communities by 2030. |
| Race to Zero [32] | A global campaign to rally leadership and support from businesses, cities, regions, investors for a healthy, resilient, zero carbon recovery that prevents future threats, creates decent jobs, and unlocks inclusive, sustainable growth. The campaign mobilizes a coalition of leading net zero initiatives, representing 733 cities, 31 regions, 3,067 businesses, 173 of the biggest investors, and 622 Higher Education Institutions. These ‘real economy’ actors join 120 countries in the largest ever alliance committed to achieving net zero carbon emissions by 2050 at the latest. Collectively these actors now cover nearly 25% global CO2 emissions and over 50% GDP. |
| Remittance | An amount of money transferred or sent from one party to another, usually across geographies or cross-border. Remittances can be personal money transfers made to family and friends, as well as business payments. |
| Risk (climate) [33] | The potential for adverse consequences where something of value is at stake and where the occurrence and degree of an outcome is uncertain. In the context of the assessment of climate impacts, the term risk is often used to refer to the potential for adverse consequences of a climate-related hazard, or of adaptation or mitigation responses to such a hazard, on lives, livelihoods, health and well-being, ecosystems and species, economic, social and cultural assets, services (including ecosystem services), and infrastructure. Risk results from the interaction of vulnerability (of the affected system), its exposure over time (to the hazard), as well as the (climate-related) hazard and the likelihood of its occurrence. |
| Small-scale farming [34] | Definitions vary on geography and other parameters considered (i.e. size of land worked, number of workers),but typically a farm is considered small-scale if the farms vary from less than 0.5 to over 2 hectares in some Asian and African countries, while in Latin America they range from over 2 hectares to over 5 hectares. |
| Sustainable development | Development that meets the needs of the present without compromising the ability of future generations to meet their own needs. |
| Sustainable Development Goals (SDGs) | A universal call to action to end poverty, protect the planet and ensure that all people enjoy peace and prosperity. These 17 Goals build on the successes of the Millennium Development Goals, while including new areas such as climate change, economic inequality, innovation, sustainable consumption, peace and justice, among other priorities. The goals are interconnected – often the key to success on one will involve tackling issues more commonly associated with another. |
| The Paris Agreement [28] | The Paris Agreement commits governments to act to keep global temperature rise to well below 2C above pre-industrial levels, and to pursue efforts to limit temperature rise even further to 1.5C. |
| The United Nations Framework Convention on Climate Change UNFCCC [35] | The agreement formalizes the intentions of UN member countries to collaborate on climate change. Each participating country has a designated national authority that represents the country on climate issues. |
| Venture capital | Startup, growth equity capital or loan capital provided by private investors (the venture capitalists) or specialized financial institutions (development finance organizations or venture capital firms). Typically the venture capital firm gives funding to the startup company in exchange for equity in the startup. This is most commonly found in high growth technology industries like biotech and software. A person who deals in venture capital is a venture capitalist, and usually works for a venture capital firm. Also called risk capital. |
| Vulnerability (to climate risks) [36] | The propensity or predisposition to be adversely affected by climate shocks. Vulnerability encompasses a variety of concepts and elements including sensitivity or susceptibility to harm and lack of capacity to cope and adapt. |
Footnotes
[1] Adaptation SME Accelerator Project (ASAP): Adaptation Solutions Taxonomy (2020)
[2] USDA https://www.usda.gov/topics/forestry/agroforestry
[3] IPCC Glossary https://www.ipcc.ch/sr15/chapter/glossary/
[4] IPCC Glossary https://www.ipcc.ch/sr15/chapter/glossary/
[5] IPCC Glossary https://www.ipcc.ch/sr15/chapter/glossary/
[6] IPCC Glossary https://www.ipcc.ch/sr15/chapter/glossary/
[7] Adapted from New Energy Nexus, Climate Fintech Report (2020) and DF4CR Task Force (2021)
[8] IPCC Glossary https://www.ipcc.ch/sr15/chapter/glossary/
[9] Joint MDB/IDFC (2018) A Framework and Principles for Climate Resilience Metrics in Financing Operations https://publications.iadb.org/publications/english/document/A_Framework_and_Principles_for_Climate_Resilience_Metrics_in_Financing_Operations_en.pdf
[10] The World Bank Group (2016), Shockwaves: Managing the Impacts of Climate Change on Poverty
[11] https://www.fao.org/climate-smart-agriculture/en/
[12] Center for Financial Inclusion: Financial Inclusion Dictionary https://www.centerforfinancialinclusion.org/financial-inclusion-glossary
[13] IPCC 2018: https://www.ipcc.ch/site/assets/uploads/sites/2/2019/06/SR15_AnnexI_Glossary.pdf
[14] IPCC Glossary https://www.ipcc.ch/sr15/chapter/glossary/
[15] Center for Financial Inclusion: Financial Inclusion Dictionary https://www.centerforfinancialinclusion.org/financial-inclusion-glossary
[16] World Bank, 2020: https://pubdocs.worldbank.org/en/230281588169110691/Digital-Financial-Services.pdf
[17] The State of Food Insecurity in the World 2001. Food and Agriculture Organisation of the United Nations (FAO), Rome, Italy, pp. 49–50
[18] Center for Financial Inclusion: Financial Inclusion Dictionary https://www.centerforfinancialinclusion.org/financial-inclusion-glossary
[19] IPCC Glossary https://www.ipcc.ch/sr15/chapter/glossary/
[20] IPCC Glossary https://www.ipcc.ch/sr15/chapter/glossary/
[21] UNFCCC Climate Technology Centre & Network (CTCN, 2017) https://www.ipcc.ch/site/assets/uploads/2018/02/WGIIAR5-PartA_FINAL.pdf
[22] IPCC Glossary https://www.ipcc.ch/sr15/chapter/glossary/
[24] https://www.ipcc.ch/
[25] EU Technical Expert Group on Sustainable Finance (2020), Taxonomy Report Technical Annex: https://ec.europa.eu/info/sites/info/files/business_economy_euro/banking_and_finance/documents/200309-sustainable-finance-teg-final-report-taxonomy-annexes_en.pdf
[26] IFC’s Definitions and Metrics for Climate-Related Activities. https://www.ifc.org/wps/wcm/connect/topics_ext_content/ifc_external_corporate_site/climate+business/resources/ifc-climate-definition-metrics
[27] Center for Financial Inclusion: Financial Inclusion Dictionary https://www.centerforfinancialinclusion.org/financial-inclusion-glossary
[28] https://unfccc.int/process-and-meetings/the-paris-agreement/what-is-the-paris-agreement
[29] Task Force on climate related financial disclosures 2017: https://assets.bbhub.io/company/sites/60/2020/10/FINAL-2017-TCFD-Report-11052018.pdf
[30] GSMA (2019), Mobile Industry Impact Report: Sustainable Development Goals
[31] https://racetozero.unfccc.int/race-to-resilience/
[32] https://unfccc.int/climate-action/race-to-zero-campaign
[33] IPCC Glossary https://www.ipcc.ch/sr15/chapter/glossary/
[34] IFAD (2020): Examining the Climate Finance Gap in Small Scale Agriculture
[35] http://cdm.unfccc.int/DNA/index.html
[36] IPCC 2018: https://www.ipcc.ch/site/assets/uploads/sites/2/2019/06/SR15_AnnexI_Glossary.pdf
