Community based adaptation (CBA) to climate change is gaining wider popularity in developing countries, and yet little is known about its effectiveness in reducing the vulnerability of marginalized groups. Integrating the concept of adaptive capacity within an environmental entitlement framework, this study explores whether and how community institutions can enhance the adaptive capacity of socially marginalized groups. Using the case study of a community forestry user group (CFUG) in the middle hills of Nepal, this paper shows that in the context of socio-economic heterogeneity at the wider societal level, it is unrealistic to expect CBA to work successfully for the marginalized groups, unless a concurrent attempt is made to overcome the socio-cultural drivers of marginalization. A key to addressing this is to acknowledge that interactions among different socio-economic groups in community based institutions vary to different extents. Based on this finding, we recommend that CBA initiatives should focus on addressing the intra-community distribution of vulnerability, and be better aligned with efforts to enhance social inclusion.