COP27: World Bank to launch Global Shield Financing Facility (GS-FF)

At the COP27 climate change conference in the coming days, the World Bank is set to announce the launch of the Global Shield Financing Facility (GS-FF), which will be an important new financing structure to channel capital to protect vulnerable nations against climate and disaster risks.

Details are limited right now, but from what we understand the Global Shield Financing Facility (GS-FF) will become a key financing and implementation vehicle the World Bank’s deliver of financing solutions designed to support climate adaptation, resilience and also disaster risk transfer.

The Global Shield Financing Facility (GS-FF) is seen as a version 2.0 of the World Bank’s Global Risk Financing Facility (GRiF), through which it has already delivered some $2 billion in project financing so far.

The goal will be to have a more flexible and robust financing structure to deliver integrated financial packages, including items such as contingent credit or market-based insurance risk transfer, all to help vulnerable countries as they battle the effects of climate change and climate or weather disasters.

The Global Shield Financing Facility (GS-FF) could be one of a number of finance solutions announced at the COP27 conference, as the subject of loss and damage becomes increasingly critical to gaining consensus on a way forward on climate adaptation.

For more than a decade now we’ve been writing about the role of risk transfer and private markets in delivering loss and damage protection, highlighting the appetite of capital markets to support such initiatives using insurance-like financing structures, such as insurance-linked securities (ILS) or catastrophe bonds.

As the world looks to develop frameworks for delivering loss and damage financing, it seems important that risk transfer plays a role, with donor funding paying premium commitments, enabling just-in-time capital to be delivered to support recovery from climate and weather related disasters, while adaptation and resilience building are ongoing.

Countries need rapid capital inflows when disasters strike, both to help in the recovery and rebuilding, but also to support their ability to continue making debt payments and the like. It’s all about providing continuity through capital support, with risk transfer just one potential element of broader financing structures that can channel sovereign and donor capital efficiently, while leveraging private capital appetite alongside this to make the response even more effective.

Given how little information is available on the World Bank’s new Global Shield Financing Facility (GS-FF) we can’t muse on how it might work, but we do understand that private market insurance solutions and disaster risk financing are seen as critical components of the World Bank’s work on climate adaptation.

Increasingly, the topic of risk transfer and instruments like catastrophe bonds are being and set to be discussed at talks prior to and at COP27, as loss and damage rises up the agenda.

Fitting private risk and capital markets into the loss and damage agenda is not easy though, given there is a clear need for transfer of funds from polluting nations to those suffering the brunt of climate change, which is why premium funding is likely to be one subject of discussion at the very highest levels at COP27, as the Parties look at how disaster risk financing and transfer can, or should, be integrated into part of the loss and damage solution.

Back in June, at the G7 meetings in Germany, a Global Shield against Climate Risks was announced, as a new facility to build on the InsuResilience Global Partnership and other initiatives.

The new World Bank Global Shield Financing Facility (GS-FF) is set to be a key financing and implementing vehicle of the G7 Global Shield against Climate Risks, to further support the scaling up of climate and disaster risk finance and insurance.

The World Bank also intends to continue working to crowd in private capital to support its climate related initiatives, with insurance set to be integrated into green energy solutions as well as disaster risk financing.

All of which is expected to receive further focus at COP27 in Egypt over the coming days, with valuable feedback from the other Parties present.

The Global Shield initiatives are designed to ensure pre-arranged protection plays a significant role for those countries most exposed to climate and disaster related risks and to deliver more of this protection, in increasingly sophisticated and efficient forms, while also considering how private capital can support these goals as well.

The initiatives will focus on all tiers of risk transfer, for households and businesses, as well as sovereign actors, to ensure pre-arranged financing is there to support recovery from climate and disaster events.

The private sector, so here this is insurance, reinsurance, insurance-linked securities (ILS) and related service sectors, are all expected to be mobilised to support delivery of risk analytics, design risk transfer products and triggers, underwrite these products and ensure private capital can have the confidence to support them as well.

Which is all quite promising for the role of risk transfer markets in helping to deliver greater climate resilience around the world.

As a reminder, we’ve reported recently that World Bank senior leadership are becoming increasingly positive on the role of catastrophe bonds in their work, after a period where the instruments barely got a mention.

Catastrophe bonds are also a topic of conversation around the COP27 event, with many Parties seeing them as a financing source for pre-arranged disaster financing that has a role to play.

As ever though, the question is how to deliver that as efficiently as possible, using platforms like the World Bank’s Capital-At-Risk Notes Program, to make any use of cat bonds for climate disaster financing as cost-effective as possible.

It feels like a solution that features premium financing layers, as well as risk transfer layers, is needed, for a loss and damage financing solution that fully-engages the private capital markets.

By tranching climate and disaster risk into a range of layers, to meet the risk and return appetite of different kinds of capital, with donor funding running across the structure and helping to fund premium payments, all while ensuring the focus is on delivery of financial support to those most affected by climate change and most in need of disaster risk financing, risk transfer and capital market technologies can deliver funding in as efficient, anticipatory or responsive a manner as possible.

We’d love to see COP27 presented with a loss and damage financing solution that features different types of capital, from donor and multi-lateral sources, alongside private capital markets, insurance and reinsurance, coming together to help reduce and transfer risk, through liquid capital market instruments so as to benefit from the appetite of investors for these kinds of risk assets.

Of course, much more is required on loss and damage and reparations for those nations most impacted by climate change also need dealing with and arranging.

But it feels like there are risk-bearing solutions, that integrate the World Bank’s work on disaster risk finance, catastrophe bonds, with global insurance and reinsurance markets, to enable risk to be reduced and just-in-time capital to be delivered to protect countries and their populations, while delivering capacity to enable them to recover, rebuild and maintain continuity of capital flows at the same time.