Climate and Disaster Risk Financing Instruments: An Overview

Cissé, Jennifer D. (2021). Climate and Disaster Risk Financing Instruments: An Overview. United Nations University Institute for Environment and Human Security.

As climate change increases the frequency and impacts of large scale natural hazards, it is critical that governments put in place or update actionable, comprehensive, transparent and inter-ministerial disaster risk management (DRM) plans. For these plans to be implementable and cost-effective, governments should include a climate and disaster risk financing (CDRF) strategy as an integral component of their DRM plan. This document provides a brief overview of the instruments that are available and may be considered as part of the CDRF strategy. While finance is necessary to effectively manage disaster risks, it is not sufficient. DRM plans must also integrate (and resource) risk assessment, institutional capacity building, risk reduction and mitigation, and emergency preparedness. DRM plans should also take into account long-term climate risk, and provide adequate resources for adaptation. This CDRF overview will be used as a tool to strengthen the capacity of government officials and other stakeholders on available financial instruments, their strengths and weaknesses, and their appropriateness for different levels of risk. The document begins by overviewing ex-ante and ex-post climate and disaster risk financing needs before discussing available risk transfer, risk retention and external risk finance instruments. The document then outlines critical CDRF considerations and six axes of an enabling environment for CDRF. The overview has been developed as part of the Pacific Insurance and Climate Adaptation Programme, a joint initiative of the United Nations Capital Development Fund (UNCDF), United Nations Development Programme (UNDP) and United Nations University Institute for Environment and Human Security (UNU-EHS). The CDRF overview falls within the Policy and Regulations work stream of the programme. This programme aims to improve the financial preparedness and resilience of Pacific Islanders towards climate change and natural hazards through the development and implementation of market-based meso and microinsurance schemes. The programme will also work together with governments and relevant stakeholders to develop customized climate and disaster risk financing strategies.

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