Climate Risk Financing: A Brief Analysis of Financial Coping Instruments and Approaches to Close the Protection Gap


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This paper presents and discusses new and established climate risk financing instruments and approaches and how they could better contribute to closing the protection gap in vulnerable countries. It provides information and new ideas to civil society organizations and policy- makers who are engaged in the broader debate on finding financing solutions to compensate climate-induced
loss and damage following the principles of equity and climate justice. A further aim is to address knowledge gaps and misconceptions about what can be expected and what cannot be expected from risk financing instruments. It is an analytical paper, presenting fact-findings and some recommendations derived from research, but
it is not a policy paper.

In terms of recommendations, Bread for the World (Brot für die Welt) supports the development of a fund
or a new mechanism designed to compensate for cli- mate-induced loss and damage that recognizes and
follows the principles of equity and climate justice, as well as the “polluter pays” principle. Respective proposals will be presented in a policy paper to be released at the end of 2019.

Climate-induced loss and damage are accelerating against the backdrop of unhindered global warming. The cumulated economic losses as a result of extreme
weather events amounted to US$ 3.47 trillion between 1998 and 2017 alone, with the Caribbean, Central
America, South and Southeast Asia, Sub-Saharan Africa and the South Pacific facing the highest macro-eco- nomic risks.

As a consequence, sustainable development in climate vulnerable countries, particularly small island developing states (SIDS) and least developed countries (LDCs), is being hampered by recurrent damages, thus increasing the risk of lower investments, stranded infrastructure investments, worsening credit ratings, higher indebtedness and, ultimately, lowered adaptive capacity.

It is the role of comprehensive climate risk management strategies, with risk financing its core pillar, to
reduce these risks and to protect vulnerable countries and people from losses that go beyond their risk absorption capacity.

Risk financing instruments are, in the narrow sense, categorized according to their sources (i.e. regional/ national/international/risk transfer to third parties) and whether they are ex-ante disaster or ex-post disaster instruments. Ex-ante disaster financing instruments, like
calamity funds, catastrophe bonds or other climate risk coping instruments, require proactive advance planning and upfront investments. Post-disaster financing instruments, such as donor assistance, budget reallocation,
tax increase or credits, are sources that do not require
advance planning. However, the mobilization of post- disaster resources contains an element of uncertainty and takes more time. Countries usually combine a mix of different instruments for their risk financing strategies. However, analysis shows that the protection gap remains considerable.

This paper identifies key challenges to closing the protection gap and increasing the resilience of poor and vulnerable people against climate risks. Affordability of climate risk insurance and the introduction of innovative climate risk financing instruments, for instance a contingent multilateral debt facility providing convertible concessional finance (CCF) that does not lead to the further indebtedness of vulnerable countries, are considered
important approaches given that sufficient finance is mobilized to operationalize these instruments in a way that at least partially compensates for loss and damage, with the priority being on letting polluters pay.

This paper concludes with eight recommendations on how to move risk financing forward:

• The mobilization and provision of climate risk financ- ing in the context of comprehensive climate risk mana- gement approaches is a crucial prerequisite to closing the climate protection gap faced by vulnerable people and countries. Thus, it should be given significantly higher priority in international policy forums and
listed as a permanent agenda item, for instance at international climate conferences (COPs ‒ Conferences
of the Parties to the United Nations Framework
Convention on Climate Change, UNFCCC), G20 summits and regular meetings held by multilateral development banks.

• Options on how to mobilize new finance should be
developed, especially with regard to sourcing financing from the main polluters, industrialized countries and multilateral development banks for the offsetting of climate-induced loss and damage, by no later than COP25.

• Climate vulnerable countries should establish climate risk financing strategies.

  • Publisher: Bread for the World
  • Author(s): Thomas Hirsch (Climate and Development Advice ‒ Lead Author)
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