Low-income countries, facing risks from climate change, confront hurdles in obtaining crucial financial safeguards such as insurance, catastrophe bonds, and other risk-mitigating mechanisms, industry sources revealed to Reuters. This challenge underscores a significant focus of the ongoing COP28 climate summit in Dubai.
Efforts aimed at aiding these vulnerable nations in accessing financial protection against climate-induced perils constitute a primary objective during COP28 climate summit. Multilateral lenders and wealthier nations are endeavoring to support a dedicated climate disaster fund while offering “disaster clauses” in new loans and facilitating alternate lending structures to shield these countries from the economic repercussions of floods, wildfires, droughts, and other extreme weather events.
Despite the imperative nature of expanding protection, these initiatives face sluggish progress, political complexities, and fragmented implementation. However, bolstering financial resilience emerges as an increasingly critical focus for governments, especially in dozens of emerging economies where damages from climate-related disasters can surpass 100 percent of economic output.
“COP28 is an opportunity to spread the message that it is better to spend money on prevention measures ahead of time, instead of waiting for the catastrophe to happen and scrambling to react,” emphasized Ekhosuehi Iyahen, Secretary General of the Insurance Development Forum (IDF), advocating proactive financial measures.
Various financial instruments such as catastrophe bonds, parametric insurance, and risk pools exist to address different scales and frequencies of risk. However, access to these mechanisms remains arduous for many countries, exacerbated by escalating debt burdens compounded by recent global interest rate hikes.
The Centre for Disaster Protection’s report revealed that low-income countries received only $200.8 million out of around $5 billion in pre-arranged finance (PAF) between 2017 and 2021, equivalent to a mere 3.7 percent of international development financing for PAF.
Addressing this access gap necessitates international cooperation and coordination, suggested IDF’s Iyahen, proposing grants or financial support to assist countries in meeting required premiums.
Initiatives to Bolster Resilience and Aid Vulnerable Nations
About 60 percent of low-income countries are either in or at high risk of debt distress, prompting challenging prioritization decisions that could impede demand for PAF directly financed by governments, according to the CDP report authored by Michèle Plichta and Lydia Poole.
To enhance resilience and encourage private sector involvement, the European Bank for Reconstruction and Development (EBRD) plans to introduce clauses in sovereign loans enabling automatic debt reprofiling post-disaster, focusing on countries prone to natural catastrophes like floods, earthquakes, and droughts.
Multilateral institutions are poised to announce similar initiatives during COP28, aiming to alleviate the escalating costs of natural disasters that accounted for $50 billion in insured losses and $194 billion in total losses in the first half of 2023, according to Swiss Re and Aon.
As part of concerted efforts to provide greater coverage, the approved UN-led loss and damage fund at COP28 could emerge as a pivotal funding source. A report by the University of Cambridge’s Institute for Sustainability Leadership indicates the fund could cushion vulnerable countries from disasters for as little as $10 million each per year.
Call for Strengthened Engagement
“We are ready to scale up climate protection through early warning systems, anticipatory cash, climate insurance, and community-based resilience projects,” remarked Gernot Laganda, Director of Climate and Disaster Risk Reduction at the United Nations World Food Programme. Laganda emphasized the need for enhanced involvement by climate and development funders to fortify this vital protection.