The Heat Is On: How financial literacy can help combat climate change
A formidable goal. An onerous timeframe. The fate of humanity hangs in the balance.
The Paris Agreement laid it out clearly: to limit global warming to 1.5°C, greenhouse gas emissions must peak before 2025 at the latest and decline 43% by 2030. Otherwise we will need to contend with higher sea levels, fiercer storms, animal and plant extinctions, melting ice, wildfires, and more people dying from heat, smog and infectious diseases. An existential crisis is in the making.
While some progress is being made, it’s not nearly enough. We need to use every tool in our arsenal to combat this looming climate catastrophe. Financial literacy is one often-overlooked tool in this regard.
Whilst the link between financial literacy and climate change isn’t immediately obvious, a closer look reveals important connections and correlations that could help us leverage this tool.
Financial decisions like the purchases we make have a significant impact on the environment. For example, the types of products we buy and the way we consume resources can contribute to greenhouse gas emissions and other kinds of pollution. Financial literacy can help people make conscious consumption decisions about the products they buy and the resources they consume, leading to more sustainable living practices.
Research has shown that individuals with higher levels of financial literacy are more likely to make environmentally conscious financial decisions, such as purchasing energy-efficient products, and reducing their carbon footprint. However, without financial literacy, individuals may find it challenging to understand the financial implications of their environmental decisions, limiting their ability to make informed choices.
Financial literacy can also play an important role in promoting sustainable living. A report by the Organisation for Economic Co-operation and Development (OECD) found that individuals with low levels of financial literacy were less likely to have insurance or emergency savings, leaving them financially fragile and thus more vulnerable to the financial impacts of climate change. Low-income and marginalized groups are especially at risk here.
By educating people on personal finance, insurance and budgeting, they can make informed decisions that lead to sustainable lifestyle choices. This includes everything from choosing appropriate financial products, using public transportation, and reducing energy consumption.
Green investments have become an essential aspect of investment and financial planning. However, having a good understanding of financial literacy is a prerequisite to making any investment decisions.
It’s crucial to have a clear understanding of how to calculate returns, determine risks, and create a balanced portfolio. This knowledge helps in making informed decisions regarding green investments.
Green investments can provide financial benefits while also making a positive impact on the environment. These investments include renewable energy technologies, green infrastructure, eco-friendly technologies, and sustainable agriculture. By investing in these companies, we can play an active role in reducing carbon emissions and promoting a sustainable future.
There’s a reason airlines ask us to put on our own oxygen masks before helping anyone else. This is because helping others is way more effective when our own survival isn’t in question.
People who are struggling to make ends meet, or pay off debt may not have luxury of focusing their attention on long term environmental goals, no matter how great the existential threat. They are forced to prioritize immediate financial concerns and focus on their day to day survival.
In their provocative book Scarcity, Sendhil Mullainathan and Eldar Shafir say that in the context of money, ‘Scarcity diminishes mental bandwidth, making us less insightful, less forward thinking, less controlled.’ This reduced bandwidth they argue is the reason for poor financial decisions. And it’s not a big leap of logic to see how a feeling of scarcity can adversely affect environmental decisions as well.
Financial literacy can help build financial resilience which translates into a sense of financial security and wellbeing. This enables people to engage in a wider perspective and make environmentally-conscious decisions.
The Missing Link
Financial literacy helps individuals develop conscious consumption habits and sustainable living practices. It also helps garner interest in green investments and gives individuals a sense of financial wellbeing that allows them to create a sustainable future and be better world citizens.
Understanding how the issues of financial literacy and climate change are intertwined not only allows us to make meaningful progress on both but also allows us to see the bigger picture of how our financial decisions impact the environment and how financial literacy can be the missing link in our fight against climate change.
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