African governments will use track record of public climate funds access to attract private finance

African governments will use track record of public climate funds access to attract private finance

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Date: 13th May 2016
Type: News
Countries: Africa, Ethiopia
Tags: climate funds, insurance, risk management

Experts who gathered to discuss climate finance in Addis Ababa last month found that many of the standards and procedures developed to channel public funds to African countries may provide the foundation for new forms of private finance to flow for climate resilience. CDKN Africa's Senior Project Manager Suzanne Carter reports.

A meeting of African Risk Capacity (ARC) – a sovereign weather insurance fund governed by African member states – heard that national, African institutions which have honed their management and fiduciary standards to obtain money from the Adaptation Fund, Green Climate Fund and similar global, publicly-funded bodies, will be ideally positioned to apply for new forms of long-term climate risk insurance.

The experts gathered to discuss plans for an Extreme Climate Facility being developed by ARC. They included finance specialists from Chad, The Gambia, Kenya, Madagascar, Mali, Malawi, Mauritania, Niger, Senegal, and Zimbabwe, as well as as well as representatives from CDKN, the Rockefeller Foundation, DFID, KfW, SIDA and Global Affairs Canada.

The Extreme Climate Facility aims to provide adaptation and disaster risk reduction funding to ARC Members States where a noticeable shift in climate has occurred, in windows of 5-year periods. The Extreme Climate Facility is novel in that it will leverage funds from both the private sector and donors. ARC hopes to launch this product in 2017.

The Facility will complement ARC’s current insurance for drought (with upcoming flood and tropical cyclone cover).

Africa’s adaptation challenge is huge: it will take an estimated USD100 billion to adapt to a 2°C temperature rise according to Thomas Yanga of the World Food Programme. It’s against this context that CDKN commissioned the Frankfurt School-UNEP Collaborating Centre for Climate & Sustainable Energy Finance and Kulima Integrated Development Solutions to develop the investment framework for ARC’s new Extreme Climate Facility.

The framework proposes a three-step process for countries to first confirm eligibility, then review whether they would be able to meet all criteria for a final investment case (possibly getting some assistance to meet the gaps), and finally submitting an investment case for review by the ARC Agency’s Peer Review Mechanism. The aim was to design these criteria to have a relatively “light touch” approach in the early stage as there may not be a payout in the 5-year period. This will allow for the final investment case to be flexible and only submitted when a payout is triggered.

Build on existing international standards

The criteria draw on international best practice, but the proposed framework has limited the complexity by using a subset of international climate funds’ standards. The benefits of this approach are that those accredited to other funds like the Adaptation Fund or Green Climate Fund (GCF) would not need to resubmit evidence of fiduciary compliance. For those that will need to work towards compliance, there is time to improve their systems.

Workshop participants confirmed that for many of their countries, it will be possible to use ongoing in-country work for direct access under the GCF or Adaptation Fund; some of them already have nationally accredited entities (which will reduce their compliance requirements). There could also be a role for regional entities too, where there is still a great deal of improvement needed to meet international fiduciary standards.

Build on the Paris outcomes

CDKN’s Chief Executive Sam Bickersteth flagged the synergies of this work with two major outcomes of Paris: the (Intended) Nationally Determined Contributions (which set forward what countries will be doing to address climate change on a national level) and the ramp up of private sector investment to address climate change.

Several financial mechanisms are still being considered for the Facility and all could involve private actors: as proposed by ARC Legal Counsel these could include re-insurance, derivatives, catastrophe bonds or a combination of these.

Another aspect that will be required is political leadership to take the idea forward and COP22 presents a good opportunity for showcasing ARC as an example of African leadership.

Build on existing national adaptation priorities

In terms of adaptation projects that might be funded, the National Adaptation Plans that are being prepared will highlight each country’s priorities; many are intended to be ready in late 2017. INDCs that have adaptation components could also be used as a starting point. The adaptation criteria of the investment plan will largely involve elaborating the details of a particular intervention that addresses the country’s already-stated adaptation priorities. There is a further criteria to ensure the plan is robust to future climate change projections, to avoid possible maladaptation.

Delegates recommended using existing structures and institutions as much as possible, including the considerable institutional infrastructure developed in several Member States during the roll-out of the ARC drought insurance product.

Design of the Extreme Climate Index

Aside from the financing mix, other key elements of the Extreme Climate Facility must be designed before its anticipated 2017 launch. They include an Extreme Climate Index, which would provide an objective trigger for determining if countries are to be given a payout. Amigo Climate presented preliminary research on such an Index that was supported by the Rockefeller Foundation. The Index is underpinned by a Standardised Precipitation Index and a Standardised Heatwave Index. It allows for the comparison across countries with different climates for multiple hazards in a simple, easy to use tool. The next step will be a review of the Extreme Climate Index by African research institutions (currently out for tender), including a stress test to check how frequently it will trigger using future climate projections.

Next steps

ARC will be refining the Extreme Climate Index, legal structure and the adaptation standards over the course of 2016. In addition, a cost benefit analysis for the Extreme Climate Facility still needs to be completed to demonstrate the value proposition for members and donors. CDKN will be supporting the ARC to finalise the adaptation standards.

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