Multifaceted effect of financial inclusion on carbon emissions: a review

Abstract

With growing international emphasis on achieving climate targets alongside inclusive economic growth, understanding the environmental implications of expanding financial services has become increasingly important. Financial inclusion, while recognized for advancing financial access and economic resilience, has received limited attention regarding its complex and often contrasting impacts on carbon emissions. This review aims to comprehensively examine how financial inclusion influences carbon emissions, identifying both the pathways through which it supports low-carbon transitions and the risks it poses for environmental degradation. The study employed a structured narrative review approach, synthesizing peer-reviewed literature, institutional reports, and documented country cases to categorize the mechanisms by which financial inclusion affects carbon emissions. Results indicate that financial inclusion promotes carbon mitigation by facilitating investments in circular economy initiatives, supporting climate risk insurance schemes, fostering behavioural shifts through financial literacy programs, and enabling the growth of green innovations. Conversely, it can contribute to increased emissions by accelerating deforestation, promoting unplanned urban growth, and financing carbon-intensive projects driven by short-term profit motives. Examples from India, Kenya, and Brazil illustrate these multidimensional effects in practice. The review concludes that while financial inclusion offers substantial potential for supporting climate resilience and sustainable development, its environmental risks must be managed through well-defined policies. It recommends integrating Environmental, Social, and Governance (ESG) criteria into financial systems, expanding green financing instruments, and enforcing sustainable lending frameworks to align financial inclusion initiatives with national and global climate objectives.