Climate Risk Financing - STUDY A Brief Analysis of Financial Coping Instruments and Approaches to Close the Protection Gap - Brot für die Welt
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Analysis 87
ST U DY
Climate
Risk Financing
A Brief Analysis of Financial Coping Instruments
and Approaches to Close the Protection Gap
ST U DY
Climate
Risk Financing
Published by
Brot für die Welt
Evangelisches Werk für Diakonie
und Entwicklung e. V.
Caroline-Michaelis-Straße 1
10115 Berlin A Brief Analysis of Financial Coping Instruments
Phone: +49 30 65211 0
kontakt@brot-fuer-die-welt.de and Approaches to Close the Protection Gap
www.brot-fuer-die-welt.de
Authors Thomas Hirsch (Climate and
Development Advice ‒ Lead Author),
Sara Jane Ahmed (Consultant on
Climate Risk Financing, Philippines),
Sabine Minninger
Editors Maike Lukow,
Antje Monshausen,
Nivene Rafaat (lingua transfair)
Legally responsible for content
Klaus Seitz
Photos Jens Grossmann (p. 5),
Stefan Hauck (p. 19), Christof
Krackhardt (p. 12), Thomas
Lohnes (p. 15), Christoph Püschner
(title), Frank Schultze (p. 13),
Carsten Stormer (p. 16), Thomas
Venker (p. 10)
Layout Katja Tränkner (Write Now)
Printed by Poppen & Ortmann KG,
Freiburg
Art. Nr. 129 700 520
Donations
Brot für die Welt
Bank für Kirche und Diakonie
IBAN: DE10 1006 1006 0500 5005 00
BIC: GENODED1KDB
March 2019
Content Executive Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Climate-Induced Economic Risks and the Relevance of Risk Financing . . . . . . . . . . . . . . . . . . . . 4 Instruments of Climate Risk Financing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Climate Risk Financing in the Context of the Insuresilience Global Partnership . . . . . . . . . . 13 The Remaining Climate Protection Gaps . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 New Options to Close the Climate Protection Gap . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 Concluding Policy Recommendations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 Abbreviations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 Glossary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 Bibliography . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Executive Summary
Executive Summary
This paper presents and discusses new and established coping instruments, require proactive advance planning
climate risk financing instruments and approaches and and upfront investments. Post-disaster financing instru-
how they could better contribute to closing the protection ments, such as donor assistance, budget reallocation,
gap in vulnerable countries. It provides information and tax increase or credits, are sources that do not require
new ideas to civil society organizations and policy- advance planning. However, the mobilization of post-
makers who are engaged in the broader debate on finding disaster resources contains an element of uncertainty
financing solutions to compensate climate-induced and takes more time. Countries usually combine a mix of
loss and damage following the principles of equity and different instruments for their risk financing strategies.
climate justice. A further aim is to address knowledge However, analysis shows that the protection gap remains
gaps and misconceptions about what can be expected considerable.
and what cannot be expected from risk financing instru- This paper identifies key challenges to closing the
ments. It is an analytical paper, presenting fact-findings protection gap and increasing the resilience of poor and
and some recommendations derived from research, but vulnerable people against climate risks. Affordability of
it is not a policy paper. climate risk insurance and the introduction of innovative
In terms of recommendations, Bread for the World climate risk financing instruments, for instance a contin-
(Brot für die Welt) supports the development of a fund gent multilateral debt facility providing convertible con-
or a new mechanism designed to compensate for cli- cessional finance (CCF) that does not lead to the further
mate-induced loss and damage that recognizes and indebtedness of vulnerable countries, are considered
follows the principles of equity and climate justice, as important approaches given that sufficient finance is
well as the “polluter pays” principle. Respective propo- mobilized to operationalize these instruments in a way
sals will be presented in a policy paper to be released at that at least partially compensates for loss and damage,
the end of 2019. with the priority being on letting polluters pay.
Climate-induced loss and damage are accelerating
against the backdrop of unhindered global warming. The This paper concludes with eight recommendations on
cumulated economic losses as a result of extreme how to move risk financing forward:
weather events amounted to US$ 3.47 trillion between
1998 and 2017 alone, with the Caribbean, Central • The mobilization and provision of climate risk financ-
America, South and Southeast Asia, Sub-Saharan Africa ing in the context of comprehensive climate risk mana-
and the South Pacific facing the highest macro-eco- gement approaches is a crucial prerequisite to closing When Typhoon Haiyan hit the Philippines in November 2013, thousands of people were killed and
injured. More than one million people lost their houses. The Philippines is among the countries that
nomic risks. the climate protection gap faced by vulnerable people are most vulnerable to climate change.
As a consequence, sustainable development in cli- and countries. Thus, it should be given significantly
mate vulnerable countries, particularly small island de- higher priority in international policy forums and
veloping states (SIDS) and least developed countries listed as a permanent agenda item, for instance at inter-
(LDCs), is being hampered by recurrent damages, thus national climate conferences (COPs ‒ Conferences • New, innovative climate risk financing instruments, • Regulatory harmonization towards one Vulnerable 20
increasing the risk of lower investments, stranded infra- of the Parties to the United Nations Framework such as a CCF, should be designed and tested. (V20) market for financial services and products should
structure investments, worsening credit ratings, higher Convention on Climate Change, UNFCCC), G20 sum- be strengthened to enable effective bundling and diver-
indebtedness and, ultimately, lowered adaptive capacity. mits and regular meetings held by multilateral develop- • The InsuResilience Global Partnership and its partners, sification across geographical areas to reduce costs
It is the role of comprehensive climate risk manage- ment banks. as well as other institutions, should focus heavily on such as premiums.
ment strategies, with risk financing its core pillar, to improving the accessibility and the affordability of
reduce these risks and to protect vulnerable countries • Options on how to mobilize new finance should be protection provided by climate risk insurance to the • NGOs should increase their engagement with climate
and people from losses that go beyond their risk absorp- developed, especially with regard to sourcing financing most vulnerable. risk financing by carrying out policy analysis and
tion capacity. from the main polluters, industrialized countries and research, and engaging with decision makers.
Risk financing instruments are, in the narrow sense, multilateral development banks for the offsetting of • Regional risk pools like African Risk Capacity (ARC),
categorized according to their sources (i.e. regional/ climate-induced loss and damage, by no later than CCRIF-SPC Caribbean Catastrophe Risk Insurance
national/international/risk transfer to third parties) and COP25. Facility (CCRIF-SPC) and Pacific Catastrophe Risk
whether they are ex-ante disaster or ex-post disaster in- Assessment & Financing Initiative (PCRAFI), with the
struments. Ex-ante disaster financing instruments, like • Climate vulnerable countries should establish climate support of developing partners, should work towards
calamity funds, catastrophe bonds or other climate risk risk financing strategies. the formation of broader, more diversified risk pools.
2 3
Climate-induced economic Risks and the Relevance of Risk Financing
Introduction
Climate-Induced Economic Risks
and the Relevance of Risk Financing
A widening range of disastrous, climate change-related, one ‒ France ‒ is an industrialized country (see figure 2). 800
sudden and slow onset events are increasingly causing Most of these countries belong to the group of low-
substantial socio-economic and financial risks that income or lower middle-income developing countries.
undermine sustainable development and provoke loss While some of these countries rank high in the long-term
and damage. It is the role of comprehensive climate risk climate risk index because single extreme disasters have
600
management and disaster risk financing strategies to had very severe and long-lasting economic implications
reduce these risks and to protect vulnerable countries (e.g. Puerto Rico), an increasing number of high-risk
and people from losses that go beyond their risk absorp- countries have been recurrently hit by climate extreme Number of relevant natural
catastrophes on the rise
tion capacity. Three main dimensions of socio-economic events in recent decades, for example the Philippines,
400
risk related to a rising number of climate disasters can Vietnam and Haiti. According to the latest scientific re-
be identified. port from the Intergovernmental Panel on Climate
Change (IPCC), what all climate vulnerable countries
have in common is that their exposure to climate hazards
Loss and damage leading to reduced is very likely to increase sharply with rising temperatures. 200
economic development and lowered What is more, a very rare one-in-250-year extreme event,
adaptive capacity for instance a massive cyclone, flood or drought, may be-
come a more recurrent one-in-50-year event, implying
Economic losses and damage due to climatological, that disaster risk prevention and reduction will become a 0
meteorological and hydrological extremes have been on much more pressing topic, and disaster risk financing
1980 1985 1990 1995 2000 2005 2010 2015
the rise since the 1980s, both in terms of the number of strategies an urgent necessity. Until recently, risk aware-
catastrophes and the extent of economic losses. Accor- ness has not been adequately cultivated in most coun-
ding to data provided by the Munich Re NatCatService tries. Despite climate-induced loss and damage in- Hydrological
Meteorological
(see figure 1), the cumulated economic losses as a result creasing year upon year, comprehensive disaster risk
Climatological
of extreme weather events between 1998 and 2017 financing and climate risk management, which leads to
Geophysical
amounted to US$ 3.47 trillion, and those for the year 2017 better preparedness and more robust resilience, backed
to as much as US$ 340 billion. up by risk insurance and other forms of risk transfer (see
If indirect damages such as dropping consumption glossary) to compensate for losses in the worst-case Figure 1: Direct economic loss and damage caused by extreme events (1980‒2017)
Source: Munich RE NatCatService online
are also included, the total losses would have amounted, scenario, are, in most countries, not yet well enough
on average, to as much as US$ 520 billion annually over established to withstand a major disaster event. Unless
the last decade (World Bank Group 2017). Accordingly, attitudes shift, the trend of increasing economic loss and
the loss in global GDP growth caused by climate-induced damage is likely to continue. The more climate risks in- write-downs. While in the climate change discourse infrastructure. Without additional protection measures,
disasters has reached average levels of about 0.4‒0.7 crease, the less a country can afford to disregard disaster stranded assets are mainly discussed within the context of the annual average economic losses resulting from a sea
percent. risk financing options to improve its protection. This will the fossil fuel industries, assets may also become stranded level rise of 20 cm would amount to as much as US$ 4.791
Climate change impacts are very unevenly distrib- become particularly relevant if the 1.5 °C temperature due to the physical risks of sudden or slow onset climate billion for Miami in 2050. The worst-case projection, with
uted. Disasters have a much more disruptive impact on threshold, which is now being considered by the IPCC events, which may affect their operations, e.g. sea level rise. sea level rise exceeding 20 cm, would see Miami facing
less advanced economies (World Bank Group 2012). (2018) as the new limit to avoid unmanageable climate Many low-lying coastlines, e.g. in river deltas, belong annual losses totaling US$ 228,589 million by 2050 (Stan-
Developing countries are usually more geographically ex- change, becomes reality. to the most densely populated regions on earth, which are dard & Poors 2015, p. 67). Without substantial invest-
posed to climate-induced hazards (being mostly located inhabited by more than one billion people. Most are situ- ments in comprehensive climate risk reduction, coastal
in the tropics and subtropics), have a higher socio-econo- ated in Asia and fall under the category of cities. Coastal communities and cities all over the world will face con-
mic vulnerability (see glossary), and a lower technical Increasing risk of stranded assets caused by communities and urban areas face growing financial risks siderable stranded assets, which will impact their entire
and financial capacity (to resist and to recover). Accor- climate extremes in vulnerable countries regarding their public and private infrastructure as a re- infrastructure. The stranded asset risk and cost would be
ding to the latest global climate risk index (Germanwatch sult of sea level rise. The credit rating agency Standard & passed on to either consumers/tax payers, the public sec-
2018), if we examine the effects of extreme weather events Assets must be protected from damage in order to retain Poor’s has analyzed the exposure of infrastructure in ten tor or investors/local banks that are looking to recover
for the period between 1998 and 2017, we see that five of their value ‒ the mere risk of potential damage being US coastal cities to a sea level rise of 20 cm by 2050. Stan- capital. To mobilize the necessary resources to signi-
the ten most affected countries lie in Central America caused by future climate extremes can lead to value loss. dard & Poor’s has concluded that substantial investments ficantly reduce the risks caused by climate change, and to
and the Caribbean, three in Southeast Asia and two in Such “stranded assets” are investments that have become in flood barriers are needed to avoid multi-billion assets make coastal cities and communities climate-resilient,
South Asia. Eight of the next ten most-at-risk countries worthless because they have lost value, become liabili- becoming stranded due to the flooding of houses, roads, high upfront investments are needed, which again put an
are in either of these world regions or in Africa. Only ties or been subjected to unanticipated or premature harbors, rail lines, bridges and other private and public extra financial burden on these communities.
4 5
Climate-induced economic Risks and the Relevance of Risk Financing
Worsening capital market access
caused by climate risks leading to higher
indebtedness and lower investment
Worsening conditions in terms of access to international
capital have become another huge concern, particularly
for climate vulnerable countries and SIDS. They feel they
are being penalized by the financial markets for being
vulnerable. Research findings from Buhr and Volz (2018)
conclude that for every US$ 10 paid in interest by these
countries, an additional dollar will be spent due to cli-
mate vulnerability. The study further shows that over the
past decade alone, a sample of developing countries have
had to pay US$ 40 billion in additional interest payments
just on government debt. Econometric modelling sug-
gests that climate vulnerability has already raised the
average cost of debt in a sample of developing countries
by 1.17 percent ‒ and a further increase is almost certain,
given that the underlying climate risks will intensify. Ac-
cordingly, it is estimated that climate change-induced
additional interest costs are set to rise to between US$ 146
billion and US$ 168 billion over the next decade (ibid). Countries most affected
by extreme weather events
Recognizing the importance of greenhouse gas
(1998‒2017)
mitigation and of resilience building through adaptation
in order to minimize climate disaster risks, the credit 1 Puerto Rico
2 Honduras
rating agency Moody’s has developed six indicators to
3 Myanmar
assess the possible climate risks of credit borrowers. They
4 Haiti
include the share of economic activity that comes from 5 Philippines
coastal areas, hurricane and extreme weather damage as 6 Nicaragua
a share of the economy, and the share of homes in flood- 7 Bangladesh
plains and drought-affected areas. In 2016, Moody’s pub- 8 Pakistan
9 Vietnam
lished assessment results, signaling that small islands
10 Domenica
could have GDP levels four percent lower by 2030
(Climate Analytics 2018) compared to a world with no
Italics: Countries where more than 90 percent
man-made climate change, which would impact these
of the losses or deaths occurred in one year or event
1‒10 11‒20 21‒50 51‒100 > 100 No data
countries’ economies as a whole. For example, Fiji’s recent
credit profile was determined by not only assessing exis-
ting debt and political stability, but also by including vul- Figure 2: World Map of the Global Climate Risk Index (1998‒2017)
Source: Germanwatch 2018
nerability to climate events and gradual climate change
trends (Libanda 2018). Many small island states are al-
ready rated below investment grade by Moody’s, making the polluters, which further reduces their financial Jackson (2018) pointed to the fact that climate disas- disadvantaged while developed countries stand to recei-
it difficult to maintain and attract new investments, scope to invest in sustainable development. Simon ters “can both cause governments to spend more than ve high ratings on their bonds simply because they are
including for climate risk management and adaptation. Zadek, Co-Director of the UN Environment Inquiry into they ideally should (i.e. more or less as much money as less vulnerable and have the technology, institutions and
Because of the climate risks they face ‒ for which the Design of a Sustainable Financial System, calls it they collect in tax over the long term) but can also reduce means to rapidly recover from climate shocks (ibid). The
they are not responsible ‒ poor and climate vulnerable “… blindingly obvious they’ll pay more. We’ve been growth.” He called it a “double-whammy effect on credit- more climate change accelerates, the higher the risk of
countries have to contend with lower credit ratings and pushing finance to recognize climate change as a risk. worthiness, as debt levels increase and with lower growth, being downgraded will become for climate vulnerable de-
are thus forced to make higher interest payments. They Now it has resulted in increased costs to climate vulnera- the ability to service that debt decreases” (ibid). He criti- veloping countries. Escalating climate-induced financial
are the ones having to cover these additional costs, not ble countries” (Jackson 2018). cized that developing countries would be highly risks will eventually erode their ability to attract
6 7
Instruments of Climate Risk Financing
Instruments of Climate
Risk Financing
In the narrow sense, risk financing instruments are cate- catastrophe (cat) bonds and other securitized instru-
gorized according to their sources and whether they are ments where the risk is transferred to capital markets. In
Risk assessment
Risk prevention ex-ante or ex-post disaster financing instruments (World any of these cases, the risk is ceded to a third party, and
& reduction Risk preparedness Bank 2012): Ex-ante disaster financing instruments, the sovereign state has to pay a premium (insurance) or
Climate risk & & emergency aid
impact modelling & Preventing hazards Risk financing like contingent credit lines, calamity funds, catastrophe interest (cat bonds) to the third party for agreeing to take
mapping from happening and Early warning, Resilient recovery bonds or climate risk insurance, require proactive advan- the risk. The higher the risk, the higher is the price to
reducing possible evacuation and contin- Financing adaptation ce planning and upfront investments. In turn, funds transfer it.
impacts (land use gency planning, etc. and disaster risk reduc- Rehabilitation & would be available almost immediately after a disaster Though financing resilience building ‒ including
planning, building tion; building reserves/ building back better
codes, coastal protec- calamity funds; catas- happened, e.g. to support relief operations and the first climate risk prevention ‒ reduction and preparedness are
tion, livelihood diver- trophe bonds, climate recovery phase. A climate risk financing strategy must the most crucial investments to reducing the impact of
sification, etc.) risk insurance, emer- take the critical time dimension ‒ when and how many climate disasters (apart from mitigating greenhouse
gency loans, conting-
ency credits, etc.
resources will be required for disaster risk reduction, gases). They are not categorized as disaster risk financing
emergency aid and resilient recovery ‒ into account. in the narrow sense: Risk financing is thus defined as in-
Ex-post disaster financing instruments, like donor vestments to address or compensate for residual loss and
relief and rehabilitation assistance, budget reallocation, damage that could not be prevented for different reasons.
Figure 3: Elements of existing comprehensive climate risk management
Source: Thomas Hirsch tax increase or conventional credits, are sources that do In terms of financing resilience building in the wider
not require advance planning or upfront investments. sense, multilateral climate finance instruments (inclu-
Mobilizing resources in such a way entails an element ding the Green Climate Fund (GCF), the UN Adaptation
commercial capital. This would ultimately include non- way to reduce disaster impacts over time is through of uncertainty and takes more time. Thus, these instru- Fund and the Global Climate Resilience Partnership
climate-related finance that is used to boost the economy investments in risk reduction and building resilience ments are more ideally suited to the reconstruction phase (GCRP)) could be used, in addition to resources provided
and to invest in sustainable development (Climate Ana- against disaster risks” (OECD 2017). Comprehensive and longer-term recovery programs with expenditures through bilateral assistance, national budgets and loans,
lytics 2018). In a worst-case scenario, poor, climate vul- risk management strategies in accordance with the “pre- that are due three or more months after the disaster including green bonds. Figure 4 provides an overview
nerable countries, particularly small ones, may end up vent ‒ reduce ‒ absorb” maxim are essential to reduce takes place. of risk financing instruments.
caught in a financial trap and highly indebted due to climate risks and vulnerabilities, and to enable climate- Some of the aforementioned instruments fall into
climate change, having lost their already limited ability resilient sustainable development (for further details, see the category of risk transfer instruments, like climate
to attract the investments necessary to overcome poverty. Brot für die Welt 2017, 2018). Figure 3 highlights the key risk insurance where the risk is transferred to an in-
Thus, without taking specific disaster risk financing steps in a comprehensive risk management approach. surer, or alternative risk transfer instruments, such as
measures, climate change may put vulnerable countries
at the ultimate risk of either ending up as fragile states or
becoming largely dependent on international support. Ante-disaster Post-disaster Financing
risk financing risk financing resilience building
To strengthen financial stability (see glossary) and to
avoid such a detrimental downward spiral of increasing
climate, economic and financial vulnerability (see glos- National sources Calamity fund/disaster Budget reallocation Own budget lines/
reserve fund national funds
sary), comprehensive climate risk management measu- Tax increase
res need to be established, an integral part of which Budget contingency Domestic credit
Domestic credit
needs to be a disaster risk financing strategy. Such a stra-
tegy, according to the OECD Recommendation on Disas- International Contingent debt facility Donor assistance Bilateral donor assistance
ter Risk Financing Strategies (2017), “should be anchored sources
External credits & bonds Multilateral climate funds
in an integrated framework of hazard identification, risk
External credits &
and vulnerability assessment, risk awareness and educa-
(green) bonds
tion, risk management, and disaster response and resili-
ent recovery”. It should consist of a mix of climate risk
Risk transfer to Climate risk insurance
financing instruments (see next chapter), reflecting an
third parties
approach that considers risk transfer tools as important Sovereign (regional)
climate risk pools
instruments to reduce the economic impacts of disasters, Sea level rise due to climate change is dangerous in Tuvalu
not as a silver bullet but as an integral component, and since the average height of the islands is less than two Catastrophe (Cat) bonds
metres. The frequency of tropical cyclones and king tides
thereby reduce the costs and increase the effectiveness of is also increasing due to climate change. Figure 4: Climate (Risk) Financing Instruments
even more crucial interventions: “The only sustainable Source: Thomas Hirsch
8 9
Instruments of Climate Risk Financing
International climate risk financing exposures faced by the policyholders in an insurance investors will lose the principal they invested and the
sources pool, the lower the costs of insurance coverage. Thus, issuer (often insurance or reinsurance companies, but
sovereign risk pools provide an effective mechanism to also states; for instance, the national government of
• Contingent credits: A contingency loan or a financial address losses from less frequent but severe disasters. Mexico or the State of Florida in the case of hurricanes)
guarantee will be initiated once a disaster-related The Caribbean Catastrophe Risk Insurance Facility ‒ will receive that money to cover their losses (for rein-
trigger has been breached. The World Bank Group Segregated Portfolio Company (CCRIF-SPC, formerly surance, see glossary). Catastrophe bonds were first
provides such contingent credit lines through their the Caribbean Catastrophe Risk Insurance Facility) issued in the 1990s after Hurricane Andrew.
contingent financing programs, allowing borrowers was the world’s first regional risk pool to use parametric
to rapidly meet financial requirements in case of a insurance (since 2007), followed by the Pacific Catas-
medium or large-scale disaster. Contingent credit lines trophe Risk Assessment and Financing Initiative Financing resilience building through
are agreed ex ante. (PCRAFI) (since 2013) and the African Risk Capacity climate risk management and adaptation
• Donor assistance: Post-disaster assistance provided by (ARC) (since 2014) (for further information, see
international donors for relief, recovery and reconstruc- Brot für die Welt 2017, p.22 f.). • Domestic sources: To finance climate adaptation and
tion. Donor assistance can be provided in the form of • Catastrophe bonds: Also known as cat bonds. These risk reduction, governments usually create own budget
grants, concessional loans or equity capital. This is an are capital market-based, risk-linked securities that lines (e.g. for a ministry for disaster management) or set
important source of risk financing, particularly for poor transfer an ex-ante defined set of risks (for instance up national climate change funds (e.g. the Bangladesh
countries and in the aftermath of medium or large-scale cyclone, flood or drought) to investors. Cat bonds are Climate Change Trust Fund ‒ BCCTF).
disasters. However, these funds usually require months usually used for insurance securitization to create risk- • Bilateral donor assistance: Grants or concessional
if not years to be raised and disbursed, apart from linked securities that transfer a specific set of risks from loans, e.g. for financing coastal protection, water
immediate support, which is usually minimal. an issuer or sponsor to investors. In this way, investors conservation (e.g. German International Climate Initia-
• External credits & bond issues: Resources mobilized take on the risk of a specified catastrophe or event tive ‒ ICI)
on capital markets, i.e. the most expensive form of cli- occurring in return for attractive rates of investment. • Multilateral climate funds: Grants or concessional
mate risk financing, particularly in the case of poor and Should a qualifying catastrophe or event occur, the loans (e.g. Green Climate Fund)
vulnerable countries with low credit ratings (see above).
Increasing water scarcity endangers the existence of people
living in Ukamba region in Kenia.
Risk transfer to third parties
Domestic climate risk financing sources • Climate risk insurance: Transfer of climate risks to an
insurer, guaranteeing a payout should a certain disaster
• Calamity fund/disaster risk reserve: Created by the occur; insurance premiums to be paid by the policy-
government before a disaster happens, providing re- holder reflect the risk: The higher the probability of a
sources for immediate relief and recovery in the case of disaster, and the higher the payout, the higher the pre-
recurrent, low to medium severe disaster events. Ex- mium; climate risk insurance can be parametric (pay-
amples: Calamity Funds/Philippines, FONDEN ‒ out is triggered automatically if a pre-defined para-
Mexico’s National Disaster Fund meter, for instance extreme wind speed, is breeched) or
• Budget contingencies: Set aside by the government be- indemnity-based. The latter ensures a better fit, i.e.
fore a disaster happens, serving as a budgetary reserve compensating payout (i.e. payout reflects actual loss).
to compensate for losses of recurrent, low to medium However, indemnity-based payouts are complex and
severe disaster events. costly. Climate risk insurance can be an efficient and
• Budget reallocation, tax increase and domestic effective protection mechanism against loss and
credits are ex-post disaster sources to mobilize additio- damage caused by extreme events that are not very
nal resources in the recovery and reconstruction phase; frequent but of an extreme magnitude.
mobilizing finance from these sources usually requires • Sovereign (regional) climate risk pools: Mutual risk
additional legal steps and thus takes more time as com- insurance, in most cases owned by the insured sover-
pared with ex-ante risk financing. These instruments eign states themselves. Risk pooling across countries,
should be used only once calamity funds and budget or even regions, can reduce insurance costs signifi- These people displaced by climate change from Shyamnagar, Bangladesh were seeking
shelter from Cyclone Aila on higher grounds.
contingencies have been exhausted. cantly: The more heterogeneous the risks and risk
10 11Climate Risk Financing in the Context of the Insuresilience Global Partnership
Climate Risk Financing in the Context
of the Insuresilience Global Partnership
Risk prevention & reduction Germany launched the InsuResilience Initiative at the In 2017, InsuResilience’s start-up phase came to an
+ retention
2015 G7 Summit with the aim of significantly improving end. The main features of its multi-actor partnership ap-
+ other forms of risk transfer
(such as combination ot the protection provided by climate risk insurance in the proach were finalised, and the implementation started by
national/regional insurance Global South: By 2020, 400 million additional poor and testing and putting into place the ideas developed.
Losses in Risk prevention & reduction pools, public financing, etc.)
proportion + risk transfer to insurance/ vulnerable people are to be provided with climate risk in- Testing approaches to the transfer of knowledge to devel-
to GDP in % Risk prevention reinsurance markets surance coverage. This should ensure a fivefold increase oping countries has been placed high on the agenda.
& reduction
+ risk financing in the number of people with climate risk insurance This includes supporting the creation of needs analyses
Risk prevention
within five years, with the greatest potential in Sub-Saha- and cost-benefit calculations for climate risk insurance,
14 & reduction Very low
+ retention frequency ran Africa, the Caribbean, the South Pacific and South data analysis, risk modelling and risk pooling, the
12 Low
frequency very high Asia (BMZ 2015). In the run-up to the establishment of creation of the necessary framework conditions, and rais-
10 Medium
moderate to severity InsuResilience, consultations were conducted with ing awareness about climate risk management, as well as
8 frequency
High high severity potential partner countries, insurance initiatives and de- evaluating lessons learnt from climate risk insurance ap-
moderate
6 frequency
severity velopment banks as well as with the private insurance proaches in consideration of their benefits for poor and
4 low
severity industry and NGOs. InsuResilience has always argued climate vulnerable people. A good impact assessment is
2
Probability that it will not be successful without broad participation particularly important, answering questions such as:
0 of occurrence
in years (Brot für die Welt 2017). By and large, climate risk in- How many people are actually protected? Are the most
0 20 40 60 80 100 120
surance is a little-known instrument beset with many vulnerable people being reached? And is their resilience
misconceptions and false expectations, for instance the being strengthened in the face of disaster? InsuResi-
Figure 5: Optimal sovereign disaster risk financing according to different risk layers.
Source: MCII, Climate Risk Adaptation and Insurance in the Caribbean Project, 2018 expectation that risk insurance would deliver fast bene- lience has developed the tools needed for monitoring and
fits to policy holders, or that insurance premiums would evaluation, but a standardized reporting system, covering
be paid back if no damage occurs. It thus takes time to all insurance systems and risk pools that work together
External credits and green, blue and The InsuResilience Secretariat is also active in this area increase understanding, develop targeted instruments with the Initiative, is still to be established (ibid).
resilience bonds (coastal resilience). and to widen protection. In this context it is crucial to
understand that climate risk insurance is not a suitable
Resources mobilized on capital markets is usually the risk transfer instrument either in the case of frequent
most expensive form of financing resilience building. Selecting the optimal mix of climate risk extreme events or in the case of slow onset events, such
financing instruments through risk layering as sea level rise, desertification or the adverse impacts of
Green bonds are a special category of bonds, intended to glacier retreat (see glossary).
encourage sustainability and to support climate-related or Climate risk layering is an approach used to design risk Affordable access to climate risk insurance has been a
other types of special environmental projects. If certified, financing strategies with an optimized mix of climate key concern of the InsuResilience Initiative from the out-
green bonds sometimes come with tax incentives such as risk financing instruments. The main selection criteria set. In 2017, a working group was established to develop
tax exemption and tax credits, making them a more at- for risk layering are the frequency and the severity of proposals for smart support. It has started to investigate
tractive investment compared to a comparable taxable disasters. Usually a bottom-up approach is suggested: the options that exist to make climate risk insurance more
bond. To qualify for certified green bond status, they have The government secures funds (i.e. a calamity fund, accessible for poor and vulnerable countries. The aim is to
to be verified by a third party, for instance the Climate budget contingencies) to deal with relatively frequent but enable countries to decide which solutions are appropriate
Bond Standard Board (for more information, see https:// less severe events (low risk layer). Contingent credits, in which context. Important principles for this under-
www.climatebonds.net/standard/governance/board). conventional credits, donor assistance and budget real- taking could include avoiding the creation of dependen-
locations, combined with risk transfer instruments, are cies and disincentives to do less in terms of disaster pre-
Resilience Bonds have become very attractive since they most appropriate to deal with moderate, less frequent vention, while underlining the exceptional nature of dis-
not only guarantee money flows (e.g. like cat bonds in the risks (medium risk layer). Risks of high severity and aster relief (ibid). Furthermore, it has always been rightly
case of losses) but also guarantee a structural improve- very low frequency should best be transferred to third stressed by InsuResilience that climate risk insurance
ment in an area of resilience building and thus lower the parties, including regional insurance pools (high risk coverage should follow the pro-poor principles as adopted
actual risk over time. Concrete examples are the “Blue layer) (for more information, see MCII 2016, World Bank by InsuResilience to provide guidance on designing
Forest Resilience Bond Idea” (http://www.blueforestcon- 2012, 2017). To reach a comprehensive risk coverage that climate risk insurance solutions that support closing the
servation.com/old4/) or the financing of marine re- ensures cost effectiveness, climate risk financing strate- climate protection gap of climate vulnerable populations.
silience building by The Nature Conservancy (TNC) gies should shrewdly combine different ex-ante and These principles include comprehensive needs-based The Caribbean country Haiti is regulary battered by
tropical storms such as Hurricane Matthew which hit this
(https://www.reinsurancene.ws/swiss-re-backs-innovati- ex-post risk financing instruments, as well as risk pre- solutions, client value, affordability, accessibility, parti- house in Les Cayes in 2016.
ve-coral-reef-insurance-solution/). vention and reduction measures, to leverage their costs. cipation, sustainability, and an enabling environment.
12 13Climate Risk Financing in the Context of the Insuresilience Global Partnership
the poor and vulnerable, and their micro, small and the V20 is currently developing the Sustainable Insu-
medium enterprises, at the core of the Partnership and rance Facility (SIF). The SIF, aligning with the objectives
strengthen this aspect within such a broad forum. of the Partnership, is envisioned as a V20-initiated tech-
Moreover, an assessment of the continued development nical assistance facility that enables country-level insu-
of the Partnership needs to take another important rance solutions aimed at medium and small enterprises
criterion into account: the extent to which the V20 for the financial protection of key economic sectors and,
remain involved. in particular, their value chains. A second objective will
be the de-risking of investments in renewable energy
and financial protection.
The road ahead: Strengthening cooperation Over time, the SIF would ideally substantiate the gra-
with the V20 climate vulnerable countries dual build-up of regional risk transfer solutions that con-
nect several, country-led initiatives across V20 econo-
The tiny island state Kiribati is particularly affected by climate change. Due to sea level rise, its 33 atolls are sinking. But to what extent has the InsuResilience Global mies, allowing pooling across different geographical are-
Coastal erosion and coral bleaching further endanger the life of the islands’ 95,000 inhabitants.
Partnership already managed to operationalize its poten- as and addressing the common market constraints and
tial to reduce the gaps in protection by increasing climate barriers the V20 face. Furthermore, the V20 strongly be-
risk financing, particularly to the benefit of climate vul- lieve that there is a need to not only come up with a broa-
Moving from a G7 to a G20 risk There are more differences to the initial G7 Insu- nerable countries? der range of finance instruments, but to also ‒ with inno-
insurance and risk financing initiative Resilience strategy. Whereas from a development coope- At least at the discourse level, the acceptance and vative linkages between existing financial instruments ‒
ration perspective, the G7 is viewed as a donor communi- readiness to provide (temporary) premium support has build the most cost-effective, complementary solutions
In 2017, Germany used its G20 presidency to place the ty with a long tradition of and vast commitment to inter- increased, as the discussion at the 2nd InsuResilience that provide resilience dividends. Over time, such shaped
issue of climate resilience high on the G20 agenda. On national development and climate financing, this is not Partnership Forum in Katowice, which took place back to climate and disaster risk financing architecture should
the recommendation of a study conducted by the World the case with the G20. In this respect, the InsuResilience back with the COP24 in 2018, showed. Apart from buil- develop into a wider agenda of economic resilience and
Bank (2017), the InsuResilience Global Partnership for approach cannot simply be transferred; it needs to be ding in-country climate risk insurance knowledge and financial stability in the face of climate change.
Climate and Disaster Risk Finance and Insurance Solu- embedded within a broader context. The approach to capabilities at all levels, putting this approach into practi- The launch of the InsuResilience Investment Fund
tions was initiated at the G20 summit and formally laun- building regional risk pools, with the aim of finding ways ce at a significant scale should be one of the top priorities (IIF) and the Solutions Fund (ISF), both initiated by Ger-
ched at COP22 in Bonn in 2017. The InsuResilience Glo- to reduce the cost of risk financing, is one of the features in 2019. Unless such steps are taken, climate risk insu- many under the auspices of InsuResilience and designed
bal Partnership brings together governments, internatio- that has gained in relevance. It presents an approach that rance will remain inaccessible for the climate vulnerable to be instrumental for the development of climate risk
nal organizations, and actors from civil society, the private could also be applied to South-South cooperation and to and the widening protection gap will continue to grow. insurance products, are steps towards that end (for
sector and academia. According to its understanding, it national initiatives in populous countries that face highly In terms of governance, it is an encouraging sign for further information, see https://www.insuresilience-solu-
particularly builds on collaboration between G20 and heterogeneous risk structures, such as India or China. enhanced cooperation between V20 and G20 countries tions-fund.org/en and http://www.insuresilienceinvest-
V20 countries. The V20 Group of Finance Ministers was The multi-stakeholder approach of the Insu- that the Minister of Finance of the Republic of the Mar- ment.fund). However, not only is climate risk insurance
founded in October 2015 to act as a high-level policy dia- Resilience Global Partnership brings together different shall Islands and the German Parliamentary State Secre- no silver bullet, the products and regional risk pools cur-
logue and action group pertaining to climate change and actors with partially divergent interests, such as stakehol- tary to the Federal Ministry for Economic Cooperation rently operating have yet to succeed in massively scaling
the promotion of climate-resilient and low-carbon deve- ders from multilateral development banks, governments and Development co-chair the Partnership’s High-Level up their protection shields for climate vulnerable people.
lopment. Despite its name, the V20 Group now spans from industrialized and developing countries, and actors Consultative Group (HLCG). However, the real litmus For instance, according to its first evaluation, the African
over 48 countries and represents over one billion people. from the humanitarian aid and development cooperati- test for successful V20-G20 cooperation on reducing regional risk pool, African Risk Capacity (ARC), founded
on sectors, academia and the insurance industry. The climate disaster risks will be whether it can produce in 2012 and operational since 2014, is struggling to main-
Compared to the 2015 initiative, the InsuResilience level of coordination that this involves is very high and concrete results in terms of reducing vulnerabilities tain ‒ let alone significantly enhance ‒ its protection
Global Partnership is broader in its scope: the difficult negotiations that led to the formation of the and fairly offsetting the climate-induced losses and ex- shield (E-Pact 2017). Aggressive steps are thus needed to
• Focusing on different climate risk financing solutions, InsuResilience Global Partnership illustrate how chal- tra financial burdens suffered by vulnerable countries. ensure InsuResilience meets its objectives, namely of
including but not limited to insurance lenging it is to agree on a coherent approach, with com- As stated in the HLCG, the V20 made it clear that its “closing the protection gap and increasing the resilience
• Has no quantified targets (e.g. 400 million people mon ownership of all actors involved. It therefore re- members need to protect critical infrastructure, indust- of poor and vulnerable people against climate risks and
additionally insured by 2020), and runs indefinitely, mains to be seen how well the approach can be imple- ries and small enterprises as their economic backbone disasters”, as jointly stated by the co-chairs of the High-
i.e. beyond 2020. mented. From the perspective of the vulnerable states, against climate change. To facilitate the necessary pro- level Consultative Group of the Partnership at its 2nd
the crucial question is whether the Partnership can pro- tection, the V20 endeavors to enable private sector forum in Katowice (see https://www.insuresilience.org/
The German government, however, still sticks to the vide them with added value. In fact, the success of the uptake of insurance in V20 economies. V20 national second-insuresilience-partnership-forum-in-katowice-
former benchmark of providing climate risk insurance InsuResilience Initiative will be measured on whether it markets, however, are often too small to be viable and the paving-the-way-to-effective-risk-financing-solutions/).
coverage to 400 million additional people by 2020. is able to place the primacy of climate risk insurance for risks faced are too distinct to be diversified. That is why
14 15The remaining Climate Protection Gaps
The Remaining Climate
Protection Gaps
To what extent are the climate disaster risk financing in- close the protection gap. This would also be a first im- vulnerable developing countries, are facing large-scale climate change, which they bear no responsibility for,
struments put forth in this paper suitable for closing the portant step to fulfilling human rights obligations and stranded assets that will impact their entire infrastruc- they also have to pay higher interest rates because of the
protection gaps ‒ and what are the main challenges? To to paving the way for the introduction of the polluter ture. Mobilizing the resources to enable resilience will accelerated climate risks they may face in future, which
answer these questions, we must reexamine the main pays principle into climate risk financing. overburden these states if they are left either alone or they also have played no part in causing. This market lo-
socio-economic risk dimensions related to climate • Better linking of social protection with climate resi- solely dependent on regular capital markets. These gic leads to a perpetuated discrimination that needs to
disasters. lience building: Adaptive and transformative social nations require financial support to build their resilience be addressed by the international community through
protection systems, with the support of climate risk at scales that far exceed the current climate finance levels new risk financing approaches aimed at compensating
financing mechanisms (e.g. international donor assis- (ACT 2018). This is an issue that must be addressed when for this unfair discrimination. Therefore, it is another
The main challenges in offsetting the tance, climate risk insurance, contingent debt facility), designing the future climate financing architecture. important issue to be addressed by:
economic loss and damage associated could mobilize several synergies that exist between so- • the UNFCCC, particularly the International Warsaw
with climate events cial protection and risk management if they enable Mechanism (WIM) in its discussions on comprehen-
counter-cyclical social expenditure to stabilize the The main challenges to avoiding sive risk management and on enhancement of finan-
Climate risk insurance has become the most promoted socio-economic situation in times of disaster. worsening capital market access as a cial support to address loss and damage,
instrument for the transfer of climate extreme event risk, result of climate risks • the consultations of the G20 and V20 on collaboration
particularly due to InsuResilience. Climate risk insu- Climate risk insurance is also limited to the hedging of and facilitation of support in addressing climate risks,
rance is an important instrument, yet it remains un- rare but very serious events that cause high levels of It is a fact that climate vulnerable countries already pay which disproportionally – and through no fault of their
known in many climate vulnerable countries. It may damage. It is neither suitable for insurance against significantly higher interest rates solely because they are own – affect V20 countries,
have the potential to avoid humanitarian disasters in the frequently recurring damage nor as coverage against climate vulnerable, and that the projected increase in • multilateral development banks and other relevant
aftermath of a climate-related extreme event by distribu- gradual damage, such as that caused by sea level rise. severe flooding and disastrous cyclones may further stakeholders in the international finance system in the
ting the burden across many shoulders, and if access and The more frequently extreme events occur, the more da- worsen their credit rating by an average of 20 percent ac- context of designing effective and efficient climate risk
affordability are ensured, it might even be the most effici- mage will be caused by less extreme but highly recurrent cording to simulated models (Buhr/Volz et al. 2018). This financing strategies, instruments and facilities, and
ent instrument to help the poor recover quickly from events ‒ as well as by sea level rise ‒ and the larger that further penalizes these countries and deprives them of • national political decision makers and stakeholders
an extreme event. Climate risk insurance essentially has specific area of the protection gap that cannot be closed fair conditions in accessing capital markets in order to from civil society and the business sector to overcome
two immanent limitations that restrict its coverage by risk insurance will become due to the instrument’s im- finance low carbon, climate-resilient, sustainable de- widely spread insurance illiteracy and to find natio-
against climate risks: manent limitations. If climate change continues unaba- velopment pathways. Not only do these countries suffer nally appropriate and fair solutions.
ted, the efforts and funding currently committed to insu- disproportionally from economic loss and damage due to
Affordability of climate risk insurance for the most rance also runs the risk of being lost. Due to the inverse
vulnerable is not ensured and will become even more relationship between greenhouse gas emissions and
limited if the frequency and/or magnitude of climate insurability, mitigation action must be scaled up signifi-
disasters further increase, as forecasted. There are a cantly to maintain the feasibility and potential of insu-
number of options to extend affordability and co- rance solutions. In addition, the use and benefit of com-
verage. These three are currently the most promising: bining insurance with other risk financing approaches
• Reducing insurance premium prices by bundling more previously discussed in this paper should continue to
diversified, large risk pools, preferably across a large find equal consideration and not be neglected to the
and diverse geographical area and including as many benefit of currently popular risk transfer instruments.
different policyholders as possible. According to a re-
cent World Bank Study (2017), the formation of a broad
risk pool that includes around 90 low- to middle-in- The main challenges to avoiding stranded
come countries from Asia, Europe, Latin America and assets as a result of climate extremes
the Pacific could reduce costs by up to 50 percent com-
pared to regional risk pooling. The only way to prevent public and private infrastructure
• Premium support provided by international donors ‒ in zones with high risk exposure, such as low-lying coast-
or, better yet, by the main GHG polluters ‒ is a prere- lines, becoming stranded assets due to the physical risks
quisite to massively scaling up insurance in the most of sudden and slow onset events (e.g. sea level rise) are
vulnerable countries, as the experience gained from the massive investments in risk prevention and reduction
first regional risk pools (e.g. ARC) shows. The Insu- (e.g. flood barriers) combined with fast and deep GHG Climate-induced droughts endager the livelihood of people and animals especially in Sub-Saharan Africa.
Resilience Global Partnership, amongst others, should emission cuts as demanded by the IPCC (2018). SIDS, Consequently, conflicts and migration are rising.
take steps to fund insurance premiums for the poor to as well as coastal communities and cities in other
16 17New Options to close the Climate Protection Gap
Concluding Policy Recommendations
New Options to Close the Concluding Policy
Climate Protection Gap Recommendations
In order for any disaster risk financing strategy to be suc- accessing these credit lines in order to recover from cli- Adequate climate risk financing is an integral part of damage, a new fund to compensate for loss and dama-
cessful, it is key that it mitigates the risk of a state’s credit mate-induced losses and damages. Higher indebted- developing climate risk management strategies for vul- ge needs to be established. This fund is required to sup-
rating being downgraded due to its level of exposure to ness, in turn, will negatively affect the country’s credit nerable developing countries. It is vital that they be port disaster risk financing and offset climate-induced
climate change risks. The Warsaw International Me- rating and with it its access to finance, thus limiting its operationalized effectively and efficiently. Finally, it is loss and damage, and should be mobilized based on the
chanism, multilateral climate funds and other relevant long-term ability to invest in a climate-resilient, low car- key to address, minimize and offset climate-induced polluter pays principle. As mandated at COP22 in 2016 in
stakeholders, in cooperation with V20, should there- bon future. The negative effects of contingent debt facili- economic loss and damage. Marrakesh (4/CP.22 paragraphs 2(f ) and (g)), a technical
fore design new hedging instruments for developing ties could be alleviated if the sovereign debt guarantee Risk financing has to be provided under fair terms paper detailing possible sources of financial support ai-
countries to mitigate climate risks when issuing component were to be reduced or suspended. and with a view to avoiding any discrimination or penali- med at addressing loss and damage shall be prepared by
bonds. At national level, such approaches should be A new and innovative instrument based on this ap- zation of a state and its ability to access funds that would the UNFCCC Secretariat. It shall serve as an input to the
backed by the design and implementation of climate proach of resilient debt management could be a contin- offer it protection against climate risks for the sole reason review of the WIM in 2019. The WIM’s Executive Com-
risk management strategies that are responsive to gent multilateral debt facility providing convertible that the state is climate vulnerable due to reasons beyond mittee is to assist the Secretariat in determining the
identified climate change impacts and that enhance concessional finance (CCF). The provision of CCF its control. This relates to the protection of climate vul- scope of the technical paper that shall be available to
resilience. In order for them to be operational, they need would require the alignment of incentives in the design nerable countries, communities and people against: Parties by June 2019. At the eighth meeting of the WIM’s
to be well capitalized and managed sustainably. Further- phase and the implementation phase, i.e. it would be • climate-induced loss and damage leading to reduced Executive Committee, its members agreed on the terms
more, mainstreaming and incorporating climate change contingent on using the finance provided for ex-ante ag- economic development and lowered adaptive capacity; of reference for the technical paper as well as on an out-
risk into development planning and budgeting processes reed disaster risk management measures that effectively • increasing risks of stranded assets caused by climate line. Observers criticized that industrialized countries
is key to achieving resilience and attaining a sound reduce risks and address damages. Risk financing in the extremes in vulnerable countries; blocked a decision to include an assessment of how much
credit rating (Jackson 2018). form of CCF would consist of highly concessional con- • and worsening capital market access caused by climate finance is needed as well as to establish new and addi-
What options are available to offer climate vulnerable vertible debt instruments and grant-to-concessional risks leading to higher indebtedness and lower in- tional sources for such a fund ‒ though the so-called
countries access to the necessary financial means to im- debt, working with the following incentive: To build resi- vestment. Suva Expert Dialogue in 2018 made clear that finance is
plement their disaster risk financing strategies? It is clear lience against high climate risks, this step should first be a crucial issue. The assessment that has now been agreed
that dynamic access to innovative financing for a socio- supported by grants. If successful, the support could be So far there has been no commitment by industria- upon will thus only entail an assessment of already
economic transformation towards climate-resilient, low converted into pre-approved concessional debt terms. lized countries and other major polluters to provide any existing funds.
carbon development is required while avoiding further Should a project financed by concessional debt fail (sub- finance to compensate for loss and damage occurring in As this paper shows, the existing instruments are
indebtedness. Innovative financing implies accessibili- ject to ex ante agreed indicators for success and failure), poor and vulnerable countries as is already the case for insufficient to close the protection gap as required. Effec-
ty, predictability and that financing conditions are fair the debt should be converted into a grant. Such an ap- mitigation and adaptation. tive and efficient risk financing and the offsetting of
in the sense that they do not bear the risk of further in- proach would help overcome the dangerous spiral of Despite efforts made to provide climate risk finan- climate-induced loss and damage requires new funds
debtedness caused by the impacts of climate change. worsening credit ratings, rising indebtedness and more cing on a voluntary basis, such as the InsuResilience that are provided to the climate vulnerable in a way that
Furthermore, innovative financing options should incen- stranded assets caused by climate change. It would enab- Global Partnership and initiatives undertaken by the delivers climate justice and that is sourced in line with
tivize transparency of action as well as support strong le climate vulnerable countries to mobilize risk capital for V20, the protection gap remains significant and is likely the polluter pays principle. It is therefore of the utmost
ownership and intense collaboration between vulner- investment into resilience building and higher climate to widen even further in future due to ongoing global urgency that the community of states, and especially
able countries and the financing partner institutions. ambition. It would benefit climate vulnerable communi- warming. the Parties to the Paris Agreement and the Executive
Contingent debt facilities are contingent financing ties and people, and it would factor solidarity and justice Committee of the Warsaw International Mechanism,
programs that are usually offered by multilateral de- into climate risk financing by offsetting economic loss Thus, Bread for the World puts forward the following develop options to mobilize these funds in 2019 with
velopment banks. They allow for concessional debt based and damage caused by climate extremes. It would pro- policy recommendations: a clear outcome adopted by COP25.
on loans that are extended on terms substantially more mote socio-economic and financial inclusion as well as 1. The mobilization and provision of climate risk finan-
generous than market loans and, as previously menti- climate resilience. Finally, it would be a new hedging cing in the context of comprehensive climate risk 3. Climate vulnerable countries should establish
oned, are already a typical disaster risk financing instru- strategy of global common interest that helps to stabilize management approaches is a crucial prerequisite to climate risk financing strategies, being informed by the
ment. However, it is important to further improve such the international financial and economic systems against closing the climate protection gap for vulnerable peop- OECD Recommendation on Disaster Risk Financing
facilities by better aligning incentives on the design climate-induced disasters, which will occur more fre- le and countries. Thus, it should be given significantly Strategies (2017):
and implementation side: If disaster strikes, contingent quently and on a larger scale in future. higher priority in international policy forums, becoming • that effectively manage the financial impacts of climate
credit lines are usually provided by multilateral banks, However, new finance is required to capitalize a a permanent agenda item, for instance at COPs, G20 disasters,
such as the World Bank, to vulnerable countries as a contingent multilateral debt facility that provides conver- summits and regular meetings held by multilateral • that form an integral part of climate risk management
main financial source to recover from the shock. These tible concessional finance for climate disaster risk finan- development banks. strategies,
loans are concessional, i.e. provided below market rates, cing and resilience building, and that offsets climate 2. In light of insufficient global mitigation efforts, the • that are effectively aligned with national adaptation plan-
but linked to a sovereign debt guarantee provided by the induced loss and damage. Thus, how the facility could inadequate provision of climate finance to help coun- ning, sustainable development planning and budgeting,
borrowing country, meaning that the repayment is gua- be provided with adequate funding is a key issue that tries adapt to the effects of climate change, and the • that build on a sound multi-hazard risk assessment
ranteed. Countries will thus be further indebted when needs to be addressed with urgency. complete lack of funding to compensate for loss and (for hazard and risk assessment, see glossary),
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