COP27: Global Shield launched with role for parametric triggers & cat bonds

At the COP27 climate change conference in Egypt yesterday the Vulnerable 20 Group of Finance Ministers (V20) of 58 climate vulnerable economies and the Group of Seven (G7) officially launched the Global Shield against Climate Risks, while the World Bank officially launched its Global Shield Financing Facility.

The former is an initiative to deliver pre-arranged financial support that has been designed to be quickly deployed in times of climate disasters.

The latter is the World Bank facilitated financing structure to channel capital to protect vulnerable nations against climate and disaster risks that we reported on last week.

Together these initiatives further embed disaster risk financing techniques, in particular responsive risk transfer and anticipatory financing, at the heart of global efforts to build resilience to climate change and climate driven natural disaster events.

With contributions of around EUR 170 million, the Global Shield is first being rolled out to a group of so-called Pathfinder countries, Bangladesh, Costa Rica, Fiji, Ghana, Pakistan, the Philippines and Senegal.

This isn’t a full package of measures to address loss and damage in the way vulnerable and climate impacted countries have really wanted, but it is a mechanism that can deliver climate risk financing and risk transfer to aid resilience to and recovery from climate disasters when they strike.

So it’s a starting point announced at COP27, but an important one, especially the financing angle and the fact that these twin Shield initiatives, the Global Shield against Climate Risks and Global Shield Financing Facility, appear to have an agnostic approach to delivering climate risk financing and risk transfer, with instruments including parametric triggers and catastrophe bonds cited among the range of possible solutions that can be utilised.

The Global Shield aims to address what are seen as current weaknesses in the financial protection structure in climate vulnerable economies using pre-arranged finance that can be disbursed rapidly and reliably before or just after disasters happen.

Hence, parametric triggers, anticipatory and forcecast based financing, appear key risk transfer and financing techniques that could be put to work within the Global Shield.

In addition, the Global Shield is designed to expand the range of instruments of financial protection for governments, communities, businesses, and households, as well, to reduce the impact of disasters, make vulnerable economies more resilient to climate risks, all while safeguarding sustainable development, and protecting lives and livelihoods.

Different instruments are appropriate for the different layers of protection, with crop insurance, parametric risk transfer, business interruption insurance, property insurance, risk pooling and sharing all seen as key at the household and business level of the Global Shield.

At the national and subnational levels of governments, humanitarian agencies and NGOs, the Global Shield will look to develop and roll out integrated financial instruments that can ensure that money is available when needed (money in), as well as processes to ensure the money is spent effectively (money out).

This, money in specifically, is where catastrophe bonds and risk transfer to the capital markets are cited, particularly at the sovereign level, alongside risk pooling and development insurance.

Reinsurance capital and third-party capital could have a significant role to play in supporting the role out of Global Shield initiatives, through and alongside the World Bank facilitated Global Shield Financing Facility, as capacity requirements are going to be particularly significant if this is to become a meaningful initiative.

In fact, on the financing side, there are three sources of funding, via the Global Shield Solutions Platform, which builds on the existing InsuResilience Solutions Fund, the Global Shield Financing Facility at the World Bank, and also the Climate Vulnerable Forum (CVF) & V20 Joint Multi-Donor Fund.

Donor funding is going to be key to build activity in the Global Shield, with premium payments one part of the equation, but the initiative should be looking at how economies of scale and risk pooling efficiencies can lower the costs and ultimately help to reduce the reliance on donor funding over time as well.

With developed economies requiring climate disaster risk transfer and financing as well, in the future these initiatives could broaden their scope, once proven for the vulnerable nations, in order to generate even greater economies of scale and benefit the most vulnerable economies by supporting their financing needs through the participation of a greater number of climate affected nations.

The World Bank’s Global Shield Financing Facility will be focused on pre-arranging more financing before disasters strike.

“We estimate that by 2040, over 130 million people could be pushed into extreme poverty by climate change,” explained Axel van Trotsenburg, World Bank Managing Director of Operations. “Access to disaster risk finance and insurance solutions for low-income countries is part of the World Bank’s strategy for helping them adapt to the growing risks of natural disasters. We will contribute to the Global Shield initiative through our analytical and advisory work, policy dialogue and country lending operations.”

Integrated financial protection packages will be developed to complement investments in climate adaptation and disaster risk reduction.

The World Bank aims to mobilise private capital within this, to improve financial resilience, through the offering of private financial solutions, including insurance and other risk transfer instruments such as catastrophe bonds, it explained.

Given the World Bank’s role as a catastrophe bond facilitator and its use of the Capital-At-Risk notes program to bring catastrophe bonds to countries more efficiently and at lower-cost, the cat bond industry and its investors could become a key source of private capital that can help to underpin the Global Shield initiatives as it reaches greater scale.

Financing solutions that can support climate adaptation, resilience and risk transfer are going to be key, if loss and damage is to be addressed, as the mechanisms and structures need to be designed and arranged to work together to deliver anticipatory and rapid post-climate disaster financing in sufficient volume to really make a difference.

The ultimate goal it to develop mechanisms that can deliver flexible and robust integrated financial packages, including items such as contingent credit, market-based insurance risk transfer, catastrophe bonds and other financing solutions, all to help vulnerable countries as they battle the effects of climate change and climate or weather disasters.

Rolling it out to developed nations that are vulnerable too will grow the pool of risk being addressed and help to generate economies of scale in time.

It’s a starting point on a loss and damage solution that could be an important part of the mechanism to deliver financing to climate exposed countries going forwards.

It doesn’t answer all of the questions on loss and damage and reparations for those nations most impacted by climate change, by a long way.

Putting in place the mechanisms and structures to support building resilience against disaster level climate events is a vital step and an important piece of the loss and damage puzzle.