Climate Risk and Financial Inclusion: : Climate risk is no longer a problem confined to large corporations. The effects of climate change are non-discriminatory. Businesses of all sizes are vulnerable, but Micro, Small, and Medium Enterprises (MSMEs), are particularly exposed and stand to suffer the most.

What’s striking is that despite their vulnerabilities, MSMEs have historically taken a back seat when it comes to integrating Environmental and Social (E&S) risks into their strategies. A common perception persists: "If our businesses are not the primary contributors to global emissions or biodiversity loss, why should we bear the burden of fixing the problem?"

Here is the reality, climate risks are already here, and they are hitting vulnerable groups the hardest.

This article explores the growing vulnerability of MSMEs to climate risk, the systemic barriers to accessing green finance, and the policy blind spots . It ends with a call for climate finance strategies that are inclusive, tailored, and truly accessible for the businesses that need them most.

Climate Shocks and MSME Resilience: A Growing Vulnerability

MSME's form the backbone of many developing economies, providing employment, fostering innovation, and supporting livelihoods at the grassroots level. However, the growing frequency and intensity of climate shocks pose a serious threat to their resilience and continuity.

Climate shocks disrupt MSME operations in several direct and indirect ways. For example, flooding can block transportation routes, making it impossible for workers to get to their workplaces or for goods to reach markets. Droughts can strain water-dependent sectors, affecting productivity and increasing operating costs. Such disruptions may seem localized or but their cumulative effect on the economy is significant. This is especially when resources meant for development are continually diverted to emergency response efforts.

The most affected sectors tend to be those that are already vulnerable and highly interdependent. The services sector, which contributes approximately 55.4% to the GDP, is especially exposed due to its reliance on infrastructure and human capital. Agriculture, contributing around 22%, is directly impacted by changes in rainfall patterns and rising temperatures. Meanwhile, manufacturing (17%) is often hampered by supply chain interruptions and energy constraints that are exacerbated during climate events.

The Financial Exclusion Trap and the barriers to Climate Finance for MSMEs

Accessing finance has always been a major hurdle for Micro, Small, and Medium Enterprises (MSMEs) under traditional models. This challenge becomes even more pronounced when it comes to climate or green finance. Despite growing awareness of the importance of sustainability, MSMEs find themselves locked out of the very resources that help them build resilience.

One of the core barriers lies in the stringent requirements set by financiers. To access green capital, MSMEs must demonstrate sound governance structures, comprehensive policies, robust procedures, and clear reporting mechanisms. These conditions are important for accountability and demand significant investment that most MSMEs simply do not have.

As a result, many MSMEs find themselves stuck in a financial exclusion trap—unable to access climate finance. This creates a vicious cycle, where only a small proportion of well-resourced MSMEs benefit, while the majority remain excluded.

This exclusion not only undermines the broader goals of climate resilience and inclusive development, but it widens the gap between vulnerable communities and sustainable growth opportunities.

Policy Blind Spots: Are Regulations Keeping Up?

Kenya has made commendable progress in developing regulations aimed at promoting financial inclusion, particularly for MSMEs. However, a critical question remains—are these regulations keeping pace with the real needs on the ground? While the intention is clear, there appears to be a disconnect between policy formulation and practical impact, particularly when it comes to stakeholder engagement.

Policies must be designed based on real needs, grounded in the actual challenges faced by MSMEs. This means moving beyond a top-down approach and engaging MSMEs, financiers, civil society, and local communities in the policy-making process. Only then can we ensure that regulations are not just theoretically sound, but also practically effective.

Moreover, awareness and capacity-building efforts must be scaled up. Many MSMEs lack information on existing financial instruments, compliance requirements, and how to align with national climate goals. Without this knowledge transfer, even the most progressive policies will fall short of their intended impact.

Green Compliance and the Burden of Transition

As the world shifts toward sustainable development, (MSMEs) are being called to align with green standards and environmentally responsible practices. The transition to green business models is essential but the cost and complexity of compliance present a significant burden for MSMEs.

Green compliance often involves meeting rigorous environmental, social, and governance (ESG) criteria, all of which demand financial investment, technical know-how, and time. For large corporations, this transition is challenging but manageable. For MSMEs, it can be overwhelming.

Many MSMEs operate on thin margins and lack the human or financial resources to navigate compliance frameworks. The cost of energy-efficient equipment, sustainable raw materials, or environmental audits can be prohibitive. As a result, the very enterprises that are most vulnerable to are also the least equipped to transition.

Gaps and Opportunities: A Call for Tailored, Inclusive, and Accessible Climate Finance Strategies for MSMEs

The challenges MSMEs face at the intersection of climate risk and financial exclusion are many. From the escalating impact of climate shocks to the steep barriers of accessing green finance. MSMEs are navigating a complex terrain with limited support.

There exists regulations and frameworks, they often fall short in addressing the realities leaving a significant policy and implementation gap.

There is need for climate finance strategies that are tailored, inclusive, and accessible. It means designing financial instruments that recognize the informal nature of many MSMEs, easing compliance burdens through simplified processes. Investing in awareness and capacity-building initiatives that empower MSMEs to align with green practices and rethinking stakeholder engagement, ensuring that MSMEs have a seat at the table in shaping policies that affect them.

With the right support mechanisms blended finance models, technical assistance, and inclusive regulation, MSMEs can shift from being climate victims to climate actors.

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Article by: Shalon Amunga, ESG Associate