Leveraging on the World Bank Development Toolkits for Climate Resilient Actions by Developing Countries
*Arigor Ghenzini
Developing economies are particularly vulnerable to the effects of climate change. This is due to several factors, including the strong reliance on climate-sensitive sectors such as agriculture and tourism. Limited financial resources for adaptation and weak development infrastructure are additional factors that have magnified the effect of climate change on developing countries in recent years. This has exacerbated the economic crises facing these countries, leaving them with little or no option for crisis recovery. This has led to an increasing need for urgent actions and interventions from development agencies, including international governments, private investment firms, consultancies, and research institutions.
While developed countries tend to confront climate change in terms of mitigating carbon emissions, developing countries speak more of climate change in terms of adaptation. This refers to the actions taken to manage and adjust to the negative impact of climate change on the environment and development outcomes. Climate adaptation actions aim to minimize the damage caused by climate change and to maximize the potential opportunities that may arise. This involves implementing strategies, policies, and actions to build resilience and cope with the changes in temperature, precipitation patterns, sea level rise, extreme weather events, and other climate-related issues.
There are several financial instruments and options which developing countries can deploy in the fight against climate change and resilience building. These financial options include the following.
Concessional Development Finance
Concessional development finance involves providing loans or grants at below-market interest rates to developing countries. This financial instrument/option can be used to finance climate resilience and adaptation solutions in developing countries by providing funds for infrastructure projects such as building seawalls infrastructure, upgrading water management systems, or implementing early warning systems. By offering favorable terms on this instrument, it would reduce the financial burden on developing countries already grappling with economic challenges, enabling them to allocate resources towards climate adaptation measures.
Pension Funds
Pension funds can play a significant role in financing climate resilience and adaptation through investments in sustainable infrastructure projects and environmentally friendly technologies. Although their low risk nature serves as a limitation, pension funds are long term investment vehicles that can be leveraged through government backed securities such as treasuring bills and Exchange Traded Funds (ETF) that are focused on climate change solutions. By allocating a portion of their portfolios to climate-resilient assets, pension funds not only contribute to addressing climate change but also potentially earn long-term returns. These investments can include renewable energy projects, green infrastructure development, or climate-resilient agriculture initiatives, thereby supporting sustainable development objectives while securing future retirement benefits.
Philanthropic Funds:
Philanthropic funds are instrumental in financing climate resilience and adaptation initiatives in developing countries. Foundations, charitable organisations, and high-net-worth individuals can provide risk capital that can be leveraged to take on initial high risk climate smart investment in developing countries to show that such innovations are profitable and beneficial thereby setting the stage for commercial investment. Philanthropic funds should channel their resources towards projects aimed at strengthening communities’ resilience to climate impacts. This could involve funding research and development for innovative adaptation technologies, supporting community-based adaptation projects, or investing in climate education and early warning innovations.
Results-Based Finance:
Result based finance ensures that development funding is linked to pre-agreed and verified results, and that funding is provided when the results are achieved. The application of this mechanism incentivizes the achievement of specific outcomes related to climate resilience and adaptation. For instance, development finance institutions should make payments for the scaling of successive ecosystem services projects to reward developing countries for the execution of projects that provide critical resilience benefits such as flood protection or carbon sequestration. By linking financial rewards to measurable results, this approach encourages effective implementation of adaptation measures and promotes accountability in resource utilization.
Debt-for-Climate Swaps
Debt-for-climate swaps involve restructuring or forgiving a developing country’s debt in exchange for commitments to invest in climate resilience and adaptation projects. This mechanism reduces the debt burden on countries while mobilizing resources for climate action. By repurposing debt repayments towards climate finance initiatives, developing countries can accelerate their transition towards climate-resilient pathways, fostering sustainable development and poverty reduction objectives.
Risk Insurance
Risk insurance mechanisms can help developing countries mitigate the financial impacts of climate-related disasters. Insurance products tailored for climate risks can provide timely payouts to cover climate related damages, facilitating a quicker recovery process. Climate Risk Insurance would transfer the financial risk to insurance providers, governments and businesses in developing countries to better manage their exposure to climate-related risks, ensuring continuity in economic activities and safeguarding livelihoods.
For developing economies to build climate resilience and adapt to the effect of climate change on their economic development outcomes, these countries have to deploy different strategies and policies while taking advantage of international financial options in investing in climate-resilient infrastructure.
In June 2023, the World Bank launched a suite of new and expanded actions to help countries respond quickly and effectively to an ever-growing onslaught of crises. While the World Bank’s Crisis toolkits focused on crisis preparedness, response, and recovery in general, developing countries can leverage several aspects of these toolkits to promote climate change resilience and adaptation. These can be achieve in the following ways:
The Climate Resilient Debt Clauses
The World Bank’s Climate Resilience Debt Clause(CRDC) offers temporary pauses in debt repayments during climate-related crises, allowing countries to reallocate resources towards immediate adaptation needs rather than focusing on debt repayment. The Climate Resilience Debt Clause thereby offers developing economies an important opportunity to take advantage of this instrument to channel funds in strengthening investment in climate-resilient infrastructure, early warning systems, and improve water resource management and disaster preparedness measures that will withstand the negative impact of climate change on the economic development outcome.
Rapid Response Option
The world bank rapid response option would offer developing countries fast access to cash in the face of climate related emergencies. This would allow developing countries to channel existing loan amounts with the World Bank to finance crisis needs, thereby serving as an important climate response investment tool for developing economies enabling quick redirection of funds for emergencies. Given that developing countries have poor climate response infrastructure, the rapid response option would provide immediate financial resources for adaptation investments in response to extreme weather events and environmental conditions.
Linking Preparedness and Financing
By linking infrastructural investments aimed at enhancing preventive measures like the building of climate-resilient infrastructure and natural resource management with financing for post-disaster response, developing countries will both mobilise finance and develop a more sustainable approach to managing climate risks. This implies that developing countries can leverage finances for preparedness to improve infrastructural development, capacity building, environmental sustainability and strengthen the agricultural sector through the development of drought-resilient crop varieties and improved water management practices.
Private Sector Engagement in New Insurance Products
Innovative insurance solutions such as parametric insurance, micro-insurance, and ecosystem-based insurance would help developing countries manage climate risks by spreading financial losses across a wider pool. This would reduce the risk faced by private investors when investing in climate-resilient projects within developing countries, thereby strengthening investors’ confidence.
Debt-Free Catastrophe Insurance
Leveraging the World Bank option of embedding catastrophe insurance into lending products will provide crucial financial resources for post-climate disaster recovery without adding to debt burdens. Most developing countries and private sector players are unable to invest in climate change innovation to increase post-crisis recovery from climate change disasters. This is as a result of the risk associated with investing in climate change innovation and actions. Leveraging catastrophic insurance options would be particularly beneficial for developing countries facing limited fiscal space. This approach will mobilize private capital and pass the risks of high-intensity but low-frequency disasters to international reinsurance and capital markets
In conclusion, the World Bank’s new development toolkits provide various financial options for developing economies in the fight for climate adaptation and resilience building, it also provides alternatives for climate-crisis recovery to developing economies. By strategically utilizing this toolkit as mentioned above, developing countries will gain valuable financial buffers, technical expertise, and planning frameworks to enhance their resilience and adaptation efforts in the face of climate change.
Arigor Ghenzini is Circular Economy Lead at Clean Technology Hub.
