Why climate investors need to prioritise those who are most affected
Maria Teresa Zappia, who’s currently at COP27, explains why the “just transition” to a green economy must put people at its centre.
The fight against climate change is a story half-written, and so far, big, powerful economies have mostly been the ones to tell it. That needs to change.
The shift, or transition, to a low-carbon world is gaining momentum. The number of countries and companies that have made commitments to transition their activities to net zero emissions has increased dramatically. Indeed, 90% of global gross domestic product (GDP) is now covered by these commitments.
But it isn’t enough. Real world policies and action are currently projected to result in a 2.7 degrees Celsius global warming level. Yet the goal of the 2015 Paris Agreement is to limit long-term temperature increases to well below 2 degrees – preferably 1.5 degrees – Celsius. Moreover, the people in emerging and frontier economies, who are set to feel the most pain, are ill-equipped to protect themselves. In many cases, their ability to anticipate, prepare for, and respond to disturbances related to climate change is already at the limit.
The level of climate preparedness within emerging and frontier economies varies widely but overall is very low. Many of these economies are currently more dependent on fossil fuel use than developed ones, which means that in the race to reach net zero emissions, the playing field isn’t level.
If we are to achieve a just transition to a lower carbon, more resource-efficient, and more socially inclusive economy, governments and businesses need to take more action to realise their commitments. And not only build a green economy, but also put people and human rights at the centre. They must help ensure that the people who are most impacted by climate change are equipped to protect themselves.
The same holds true for private investors. Many recognise this and are asking: how can we combine economic initiatives that move away from carbon creation while generating opportunity for employees, workers, and local communities?
The answer is (at least) three-fold. Investors must commit to climate adaptation strategies, or what the Glasgow Climate Pact defines as “helping those already impacted by climate change,” not just reducing emissions. They must also work to improve financial and insurance products designed for people at risk, and measure their impact through community feedback.
Investing in climate adaptation strategies
First, we won’t achieve net zero by the middle of the century without trillions of dollars in private finance – trillions that aren’t yet flowing.
Developed countries are bound to mobilise $100 billion every year in climate finance to support developing countries, but to effectively deploy those funds, investors need more real world examples of investments that drive both a just transition and climate justice more broadly.
The Impact Investing Institute’s new Just Transition Finance Challenge, whose founding participants are development and mainstream asset owners and managers representing a total of $4.4 trillion, aims to generate these needed examples and thereby help shift financial flows that address climate change. To date, investors have mostly focused on climate mitigation through reduced emissions, but the 2021 United Nations Climate Change Conference (COP26) took a step toward adaptation. Participants determined that 50% of total climate finance allocations for emerging markets should strategically target climate adaptation, with the majority going to vulnerable countries.
The costs of annual climate adaptation could reach $300 billion in emerging economies in 2030, and on the surface, the COP26 allocation seems like a very actionable and simple investment. However, the latest available data suggests that financial support across all countries remains far lower for adaptation finance than for mitigation. A step-up in adaptation activities – including increasing the preparedness of the groups most impacted by climate change – is essential, and innovation is an important component of success.
Innovative climate adaptation strategies can manifest in many ways, including through the development of more resilient crops and new irrigation systems. One very effective strategy we have focused on is the creation of a new climate insurance market. Impact investing specialising in emerging markets provides access to tailored climate insurance for micro, small, and medium enterprises, as well as low-income households, that covers extreme weather events. Insurance is key to the livelihood and resilience of many smallholder farmers, as the crop or cattle they insure is their only source of household income. Climate adaptation strategies are now a pillar of most of many climate finance offerings.
How low-income communities can be protected through climate insurance
BlueOrchard has focused on the protection of low-income communities through climate insurance for eight years. During that time, we’ve supported the distribution of climate insurance via local financial institutions that have an end-client base of entrepreneurs. We’ve also invested along the value chain of insurance companies and brokers, as well as insuretech companies, which create new technologies for the insurance sector, including weather data forecasting tools that better assess climate-related risks.
One example is Skymet Weather Services Private Ltd, which provides weather and crop-yield related information services to the insurance sector in India via more than 4,000 automatic weather stations across the country. Our investment helped the company expand its network of stations, and secure new contracts in both weather data and crop yield measurement. It now reaches more than 20,000,000 farmers, allowing them to better manage the impact of climate and weather events on harvests through smartphone-available, index-based, livestock and crop insurance.
Another example is Royal Exchange General Insurance Company Ltd, an insurance company in Nigeria with more than 100 years of experience in the national insurance market and a significant portfolio in the agricultural sector. The company offers a full range of general and specialist risk-insurance products, and our investment will extend their reach to low-income farmers particularly vulnerable to climate change.
We have also partnered with Kashf Foundation, a non-banking, microfinance organisation in South Asia that has become the largest distributor of micro-insurance solutions in Pakistan. It also provides micro insurance policies to more than three million customers, primarily for health and life. Kashf used our financing to launch its first rural product in 2017, a livestock loan called Kashf Mahweshi Karza. The product includes insurance for dairy cattle in Pakistan to cover the cost of repayments should the cow fall sick or die. The pay-outs enable farmers who lose animals to purchase new ones, and prevents them from default and accruing a poor credit rating. This type of safety net is especially important in the face of climate change, as increases in impacts such as drought, flooding, and disease affect livestock mortality rates.
Measuring impact through community feedback
Integrating the views of all stakeholders into product design, monitoring, and evaluation is important to achieving a just transition.
Overall, feedback to surveys we developed at BlueOrchard to ensure we deliver on our intentions showed that communities benefited from climate insurance. Of all those surveyed (some insured, some not) two-thirds had suffered a climate shock. Of those covered by insurance, 45% were able to rely on savings after the climate event. Meanwhile, only 18% of people not covered by insurance were able to rely on savings. Similarly, insured respondents were 10% more likely to recover from the shock without selling an asset.
As a result, claimants were more than twice as likely to recover from shocks compared with people who didn’t make a claim; 50% of the insured people recovered versus 19% of people without insurance. In addition, beneficiaries largely invested the insurance pay-outs back into their businesses.
Collectively, emerging markets are poised to become the most influential on Earth. In some ways, they already are. They encompass most of the world’s population, produce the bulk of global GDP, and are growing faster than developed economies. Ensuring the long-term resilience of vulnerable communities to a changing climate puts people at the centre of the transition to a green economy. And at this point, even as action on climate change still lags our global ambition, equipping the most susceptible to better cope with climate uncertainty is essential.
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