Pakistan is one of the countries most affected by climate change (floods, droughts, erratic rains, melting glaciers, heat waves, and weather-related extreme events) due to its low adaptive capacity and poor infrastructure. It is ranked the 8th most affected country in the world as per German watch’s Long-Term Climate Risk Index (2000-2019) report. Climate change is expected to increase the frequency and intensity of these events as well as exacerbate the vulnerability of local populations. Estimates show that more than 21 million people could fall into poverty by 2050 if Pakistan does not take measures to adapt to climate change. At the same time, the technical and financial capacity to adapt to the adverse effects of climate change is very low.
Financial instruments can be a key tool in adapting to climate change: they provide the rapid financial means to support communities and infrastructure to recover from disasters. Without financial protection, individual citizens, governments, or aid organizations bear the losses themselves, with a significant impact upon already straining government budgets, and economic and social hardship for those affected. Financial instruments for adaptation can help countries and individuals recover faster from disasters. In addition, they contribute to a better understanding of climate-related risks and help promote measures that individuals and communities can use to improve their protection from climate-related disasters. By engaging the private sector, these tools can effectively leverage private investment and thereby contribute to an increase in funding available for adaptation.
A Resilience Bond is a new insurance instrument designed to help cash-strapped Governments increase both physical protection and financial insurance against disasters. These bonds link insurance coverage that public sector entities can already purchase (including parametric insurance policies and catastrophe bonds) with capital investments in resilience projects (such as flood barriers and building retrofits) that reduce expected losses from disasters. These bonds are more like insurance policies than traditional municipal bonds and are designed to reduce the financial risks associated with very low-probability, high-consequence natural disasters. For example, if a hurricane strikes, the aim of a catastrophe bond is not to limit the damages on the ground, but instead to reduce the resulting economic disruption.
The risks to people and ecosystems from natural hazards are growing with climate change, while their exposure due to urbanization, economic development in risk-prone areas, and natural degradation increase the risk even further. There is substantial interest in finding solutions that help to reduce these risks and help both people and ecosystems adapt to these changes. Separately both Ecosystem-based Adaptation (EbA) and Climate Risk Finance & Insurance (CRFI) have been used to aid adaptation, reduce, and transfer risk, and build resilience to the growing impacts of natural and human-made hazards. There is a nascent and growing interest in where these strategies may intersect and be mutually beneficial for adaptation.
Example: R4 Rural Resilience Initiative: R4 is underpinned by the concept of Insurance-For-Assets (IFA) and built on existing social safety nets. Here, farmers are encouraged and supported to “pay” for insurance with labor, building up assets through risk reduction (e. g. flood diversion channels are built by farmers, trees are planted, and roof rainwater systems are being installed). Herewith encouraging more environmentally friendly farming activities, which then enable the farmer to access parametric weather index insurance. With the protection of insurance, when weather-related events adversely impact crops, farmers receive a payout as financial indemnification, not forcing them to sell their assets or sacrifice family well-being (e. g. stop paying school fees) to get the farm back up and running. This then results in more resilience to weather shocks and household asset ownership, not putting farmers in the poverty trap.
The Author is a Director, Institute of Agricultural & Resource Economics, University of Agriculture Faisalabad.