Richard Blewitt, Executive Director of International, British Red Cross;
Maarten van Aalst, Director of Red Cross Red Crescent Climate Centre;
Carina Bachofen, Associate Director, Red Cross Red Crescent Climate Centre; Edward Cameron, Independent Consultant, British Red Cross
Addressing the human impact of climate change together
Alongside public financing and private funding, exciting new approaches are being developed, although most of these tools remain small-scale or nascent. Innovative finance, blended finance, insurance, ESG, socially responsible investment, and impact investing as well as traditional official development assistance and development finance are all tools to be harnessed to address the humanitarian impact of the climate crisis.
Introduction
At first glance the private sector and the humanitarian community may seem like unlikely partners, but a closer look reveals that both are heavily impacted by the climate crisis and both are essential to finding innovative ways to manage climate risk and build resilience. As the Red Cross Red Crescent Climate Centre has previously observed “the private sector is an essential partner in reducing the impacts of climate change and extreme-weather events on vulnerable people. The innovations, products, services, political influence, capacity to shape behaviour, and investments… are essential for enhancing the resilience of marginalized and vulnerable communities.”¹⁵
The human toll of climate change is enormous and growing. Between 2010 and 2019, 1.7 billion people have been affected by climate- and weather-related disasters.¹⁶ The World Economic Forum (WEF) has consistently ranked
climate-related events as the highest risks to global business in both likelihood and impact,¹⁷ while the global economic cost could be as high as US$24 trillion by 2030,¹⁸ which is before considering the social, environmental, or human costs..
Private companies representing half of the value of the world economy (US$36.5 trillion in revenue), have committed to climate action¹⁹ whereas funding flows to humanitarian actors are falling behind growing needs (see graph). Getting global funding to prepare for and adapt to existing climate impacts to vulnerable frontline communities is especially challenging. Between 2003–2016, less than 10% of global climate finance was dedicated to local action.²⁰
Increased investment will be critical to help the poorest and most vulnerable better prepare for and manage increasing climate-related risks. It is estimated that adaptation finance must grow between six and 13 times by 2030 from the levels provided by international public finance today.²¹ In addition, countries need support dealing with the increasing impacts already happening today. Insurance is one instrument that can help address some of these needs.
There are promising new developments to enabling greater collaboration between the private and public sectors in area of climate risk management. For example, the Red Cross Movement, the Centre for Disaster Protection and around 30 other organisations and individuals have recently launched the Crisis Lookout Coalition²² advocating for new ways for public and private sector actors to help deliver more effective humanitarian response through better understanding and use of disaster risk information and pre-arranged finance mechanisms, including through partnerships with the insurance sector. Another initiative supported by the Red Cross Movement is the Risk-informed Early Action Partnership (REAP)²³ which brings together stakeholders across the climate, humanitarian, and development communities with the aim of making 1 billion people safer from disaster by 2025 through scaling-up early and anticipatory approaches.
A collaborative approach involving all stakeholders including at-risk communities, the private sector, humanitarian organisations, and governments enabled by international bodies, is vital to ensure that greater capital and resources are mobilised appropriately, effectively and at scale to help the most vulnerable. While public funding is often allocated to countries facing the highest levels of vulnerability to disaster risk and climate change, the funding is not consistent or proportional with needs. International Federation of Red Cross and Red Crescent Societies (IFRC) analysis shows that none of the 20 countries most vulnerable to climate change or weather-related disasters were among the 20 highest per person recipients of climate change adaptation funding.²⁴ An additional challenge is ensuring that funding reaches the most at-risk people within these countries.
Cross-sector dialogue is particularly important when identifying and assessing risk. When thinking about mobilising resources for tackling climate change, there is a huge opportunity to strengthen resilience of communities and countries by adapting business models and practices. Most businesses are approaching climate-related risk as a two-dimensional challenge of “hazards” and the “exposure” of their resources and operations to these events. However, research suggests many companies are blind to the third dimensions of “vulnerability” – the specific underlying weaknesses that increases susceptibility to harm.²⁵
Opportunities for partnership
Taking innovative finance tools to scale
Aon estimated US$2.98 trillion of damage occurred from natural catastrophes between 2010 and 2019, with only US$845 billion of that being covered by insurance.²⁶ This gap in disaster protection is a clear opportunity for action by
the insurance industry. Insurance approaches have been suggested as a potential instrument to help absorb losses and damages in the context of climate change, through networks and organisations like Insurance Development Forum and InsuResilience, and at regional scale through for instance Africa Risk Capacity, CCRIF and SEADRIF. Some initiatives such as Start Network/African Risk Capacity Replica and the Danish Red Cross Volcano Catastrophe Bond have even experimented with insurance approaches to fund humanitarian emergency response.
While market-based approaches offer scale, using insurance for crisis financing is not without issues. The World Bank’s Pandemic Emergency Financing Facility (PEF) highlights some of the limitations.
PEF was created “to fill the financing gap after the initial outbreak and before large-scale humanitarian relief could be mobilized” however, the complex trigger mechanism meant funding was not timely, and the US$196 million pay-out across 64 low-income countries was ultimately deemed insufficient.²⁷ The PEF illustrates the limitations, complexity and lack of flexibility in such tools, showing they are
not suitable for all contexts. Whilst insurance is a viable solution in many situations, its limitations and the learnings must be recognised, understood and addressed. However, “in a world where aid budgets are being slashed as the global economy is on a downward trajectory projects like the PEF should be expanded with implementational learnings taken on board.”²⁸
Finally, an even more important interface between the insurance sector and the humanitarian world may be in terms of complementarity skills in understanding risk. Insurance companies and governments have expertise in assessing, modelling, and managing exposure to hazards. This should be married with the humanitarian sector’s knowledge of community resilience and vulnerability – with that of local responders – to form a more holistic and effective humanitarian response.
Such improved risk analysis can inform better prediction, preparedness, and response. For example, our Forecast-based Action (FbA)²⁹ programmes support early action by predicting likelihood of disaster and its effects on local communities, enabling pre-arranged actions to be implemented. Early Action Protocols can be enhanced by expertise from outside the sector such as academics, government agencies (such as the UK government’s Actuary Department)³⁰along with the insurance industry. In turn, risk information generated for such forecast-based action programmes – with a particular focus on the most vulnerable– can then also feed into more risk-informed development planning and adaptation.
A spotlight on insurance
The vast majority of spending on climate- related disasters is focused on recovery and reconstruction, which is more expensive than investing in risk reduction and resilience. Early investments should be prioritised to yield this “resilience dividend” which is the cost/benefit of investing in resilience before a hazard event occurs. A collaborative approach to climate risk assessment and defining risk management plans can help ensure early investments benefit those who are most at risk. Greater use of insurance and risk management has a role to play in building more resilient communities.
The UK with its leadership in humanitarian policy and action, expertise with crisis financing, climate finance, and the expertise on insurance from the City of London, offers a great environment for more cross-sector partnerships around innovative humanitarian finance. With the right focus, larger, and more appropriate insurance tools could be developed to support humanitarian response to the climate crisis.
Conclusion
15 Climate Centre (2019), Companies and Climate Resilience: Mobilizing the power of the private sector to address climate risks
16 IFRC (2020), World Disasters Report: Come Heat or High Water, p.4
17 World Economic Forum (2020), The Global Risks Report 2020
18 Dietz, S., Bowen, A., Dixon, C., and Gradwell, P. (2016), Climate value at risk of global financial assets, Nature Climate Change 6: 676–679
19 Cameron, A., Arrighi, J., Monasso, F., Suarez, P., Jjemba, E., Bachofen, C. (2019), Companies and Climate Resilience: Mobilizing the power of the private sector to address climate risks, p.12
20 IIED Briefing (2020), Calling for business unusual: mechanisms for delivering change
21 UNEP (2016), Adaptation finance gap report, cited April 7, 2021
22 Crisis Lookout is a coalition committed to the creation of a smarter system for funding disasters that protects more people caught up in crisis, especially in the poorest countries calling for a new approach to disasters.
23 REAP aspires to drive a systemic shift towards pre-crisis action and investment to reduce the impact of disasters in a cost and time efficient manner, safeguarding lives and livelihoods while promoting and protecting development.
24 International Federation of Red Cross (2020), World Disasters Report
(2016), Adaptation finance gap report, cited April 7, 2021
25 Cameron, E. (2019), Business Adaptation to Climate Change and Global Supply Chains. The Hague: The Global Commission on Adaptation
26 Aon (2020), Weather, Climate & Catastrophe Insight 2019 Annual Report, p.12
27 Norwegian Refugee Council (2020), Make or Break: The Implications of Covid-19 for Crisis Financing, p.22
28 Clarke, D. (2020), Now is not the time for the World Bank to step back on pandemic financing
29 International Federation of Red Cross and Red Crescent Societies (2018), Forecast-based Action
30 Bedenham, G., Wilson, C. (2020), International Federation of Red Cross and Red Crescent Societies’ Forecast Based Action by the DREF
Clarke, D. (2020), Now is not the time for the World Bank to step back on pandemic financing