Innovate or sink in climate finance fight, say vulnerable nations
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Emerging Markets

Innovate or sink in climate finance fight, say vulnerable nations

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Capital markets and public money must combine to finance the fight against climate change. Blue, green and catastrophe bonds could be part of the solution

Finance ministers of countries vulnerable to climate change are taking matters into their own hands by working on innovative financing instruments that they say are necessary to complement aid.

Philippines finance minister Cesar Purisima said his country was working with the World Bank on become the second government to issue catastrophe bonds. 

And the Seychelles is working with various multilaterals on clinching a partial guarantee on what would be the first, what it calls, “blue” bond — similar to a green bond but concerning sea and ocean issues.

“Aid is needed, but there is a lot more to be done side by side with aid that is not as expensive as people think,” Jean-Paul Adam, finance minister of the Seychelles, told Emerging Markets. “Innovation has to enter the conversation, and unless that happens we’re heading for a precipice.

“If all the ice caps melt there is nothing we can do, but we could potentially use proceeds of a blue bond to invest in projects that make us more resilient to rising seas.”

Question marks surround how wealthy countries will raise the $100bn to tackle climate change that they pledged in 2009 in Copenhagen, leading those most in need to suggest alternative solutions.

“To raise the kinds of amounts we are looking at we will have to come up with other mechanisms,” Purisima said.

Purisima suggested mandatory catastrophe insurance across countries with a premium to be determined by the carbon footprint, “so that the countries that contribute more to global warming pay more and the countries that contribute less pay less”.

He highlighted that the Vulnerable 20 group of 20 states most exposed to climate change, inaugurated on Thursday, generated just 3% of the world’s carbon footprint.

Cat bonds, under which the occurrence of a catastrophe defined in the terms of the bond waives or reduces the issuer’s liability to repay the principal, has become an established instrument for insurance and reinsurance companies to issue, but Mexico remains the only sovereign borrower to have issued, with three deals. The Philippines wants to issue as soon as possible.

“We are talking about merging insurance and a bond,” said Purisima. “It would be even more interesting if the World Bank can package it together with a country on the other side of the world — say Peru or Costa Rica — and issue it as one.

“If you do that you can have two uncorrelated risks, which directly makes it more efficient.”

BLUE BOND

The Seychelles’ planned $10m blue bond would be the first of its kind.

Adam — who believes the lack of available financing for climate change is a symptom of the world underestimating the problem — said that he was in conversations with the World Bank and African Development Bank, among others, over the possibility of a partial guarantee for the deal.

“We’re doing something very small to show that it’s feasible,” said Adam. “There is huge interest in partnering with us and the cost to the development bank is very small.

“Channelling this through the multilaterals lowers the cost, and if we start to see more blue bonds the impact could be very big.”

Other countries — and in the future the Seychelles — may not need this guarantee, the minister hopes. The Seychelles will use the proceeds from the first blue bond to invest in sustainable fisheries.

“For me this is what development financing should be about: mitigating the risk but ensuring that the return is there,” said the minister.

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