Workstream 1: Strategic Guidance & Convergence
Guide the integration of Climate and Disaster Risk Finance and Insurance solutions in global climate change and resilience frameworks
Integrating Risk Finance in National Adaptation Planning
Enhancing decision-making and risk-informed investments
Climate resilience building and emissions reduction are critical to avoid the worst-case scenarios projected by the Intergovernmental Panel on Climate Change (IPCC).
National adaptation planning and corresponding investments are vital to make societies resilient to the impacts of climate change. A Policy Note was developed by the CVF-V20¹ Secretariat, the InsuResilience Secretariat, the Munich Climate Insurance Initiative (MCII), the NDC Partnership Support Unit and the United Nations Framework Convention on Climate Change (UNFCCC) Secretariat in order to examine how risk-financing considerations can enhance national adaptation and investment processes in vulnerable countries.
This Policy Note makes references to three instruments under the UNFCCC: Nationally Determined Contributions (NDCs), National Adaptation Plans (NAPs) and adaptation communications (adcoms).
Based on an MCII background brief and drawing from an analysis of vulnerable countries’ needs by the NDC Partnership Support Unit, the Policy Note suggests that integrating risk-financing considerations in adaptation planning can enhance investment decision-making in the context of climate change. Countries that integrate risk-financing considerations in adaptation planning may therefore reap extensive resilience benefits.
Risk analytics and pricing techniques help finance ministries and other decision-makers to set resilience baselines, understand investment risks and gaps, and assess the cost-effectiveness of different resilience-building options, which ultimately help capture the true value of investment activities. This is in addition to strengthening countries’ financial resilience and closing the protection gap for vulnerable people to climate shocks and disasters.
¹ The Vulnerable Group of Twenty (V20) Ministers of Finance from 48 countries of the Climate Vulnerable Forum (CVF) is a dedicated dialogue and action platform that works on financial responses to maintain and strengthen fiscal stability and economic resilience in the face of climate change. This includes addressing investments to enable climate-proof growth, reduce exposure to transition and climate risk, carbon pricing, and tackling increasing cost of investment capital due to climate vulnerability.
De-risking investments through the integration of risk-financing into national adaptation strategies!
However, countries still face many challenges when it comes to integrating risk finance into their national adaptation planning. The lack of access to recognized and standardized methodologies and decision-making tools, as well as limited country capacities for their application, represent a persistent barrier. Effective adaptation planning requires a prior understanding of the losses associated with the materialization of climate risk and the gains from avoiding or reducing climate-risk exposure and the magnitude of impacts.
Currently, the risks, the associated financial losses, the measures for addressing these losses and the cost-effectiveness of such measures are mostly unknown to vulnerable countries and development partners. To address these challenges, the Policy Note suggests concrete Action Areas for the InsuResilience Global Partnership to be taken forward in cooperation with other partners and initiatives. These Action Areas were endorsed by the InsuResilience Global Partnership’s High-Level Consultative Group on 15 September 2020.
Action Areas for the InsuResilience Global Partnership
This is a shortened version of the Action Areas. A full version can be accessed in the Policy Note.
- 1. Raise awareness and support advocacy for the benefits of integrating risk-finance instruments and strategies into national resilience and adaptation efforts: The InsuResilience Global Partnership intends to expand the information on these benefits and corresponding opportunities for vulnerable countries, highlighting the importance of raising international support for developing countries to implement adaptation and risk reduction measures. Together with the NDC Partnership, the NAP Technical Working Group and other initiatives, the InsuResilience Global Partnership should increase countries’ awareness around considering CDRFI in their national adaptation. These initiatives may promote exchange between Ministries of Finance, planning departments, and other ministries, and provide information about methodologies and tools that have been successfully implemented.
- 2. Enhance capacity building across in-country institutions: The InsuResilience Global Partnership intends to work with other initiatives to scale up capacity-building efforts that support countries in integrating risk-finance considerations early on in adaptation planning and strategies.
- 3. Strengthen availability and access to data, information and knowledge to model resilience baselines, deal with uncertainty and set investment targets based on outcomes: Leveraging the operational resources of implementing partners, the InsuResilience Global Partnership intends to strengthen efforts to develop and make accessible recognized and robust methodologies and tools for vulnerable countries to establish a resilience baseline against which to set investment targets and plan adaptation, risk reduction and risk-financing measures cost-effectively. Such efforts should also support South-South exchange work with the South-South Centre on Climate Information Services of the Climate Vulnerable Forum (CVF).
- 4. Promote country-driven access to private sector expertise and capital: The InsuResilience Global Partnership intends to explore and concretize avenues through which countries can systematically and freely access and independently utilize the expertise of the risk industry early on in planning and pricing adaptation, including through building local insurance capacities in vulnerable countries. Building on that, it may also promote an engagement of the industry’s risk capital to help fill gaps in financing for adaptation investments, if and where cost-effective.
- 5. Disseminate good practices: The InsuResilience Global Partnership intends to identify and disseminate good practices for countries with a focus on South-South exchange of expertise and innovative solutions in finance, technology and policy, e.g. in cooperation with the CVF’s South-South Centre. Practices can be shared on how better to integrate risk finance strategies and instruments in their NAPs and on how to communicate information on those strategies and instruments in their revised NDCs or adcoms.
UNFCCC instruments discussed in the Policy Note:
NDCs are at the heart of the Paris Agreement adopted at the UNFCCC conference in 2015. The goal of the Paris Agreement is to transform countries’ development trajectories towards limiting global warming to 1.5°C above pre-industrial levels and to increase their long-term ability to adapt to the adverse impacts of climate change. As such, NDCs can provide a blueprint for countries’ development and complementary investment strategies.
NAPs are action plans that guide national adaptation actions across sectors and inform the preparation of adaptation communications, including when communicated as components of NDCs. The process to formulate and implement NAPs (NAP process) serves to help developing countries to identify medium and long-term adaptation needs and to develop and implement strategies and programmes to address those needs.
Adcoms are country-driven communication instruments in which countries may provide an overview of adaptation priorities, implementation and support needs, plans and action, and progress and results achieved.