As vulnerable communities are exposed to a wide range of climate-related risks, a Comprehensive Climate Risk Management and financing strategy should combine approaches to reduce, absorb and transfer impacts occurring at different risk levels and time frames.
Climate change is not a threat in the distant future but a present-day emergency that is already threatening lives, livelihoods and economies. The global climate crisis is driving more frequent and intense floods, heatwaves, droughts, and storms. These climate shocks affect food-insecure people disproportionately, destroying crops, livestock and vital infrastructure.
These hazards can easily prompt a marginally non-poor person or household to lapse into poverty or a poor one to fall into deeper poverty. While large-scale disasters tend to grab headlines, even small-scale, localised shocks can cumulatively constrain national development, besides causing hardship and suffering to the individuals and households concerned. The imperative to reduce the likelihood of these shocks occurring, and to minimise their consequences, is clear.
To best address the impacts of a wide range of climate hazards require that Climate Risk Management uses an approach that comprises three elements, with each having relevancy for shocks of different levels of severity:
- Risk reduction: reducing the likelihood that the hazard will cause a shock. For example, while heavy rain may be unavoidable, one can reduce the probability that it results in flooding or landslides.
- Risk absorption: having the capacity to anticipate or recover from the shock, for instance by having sufficient economic resources to cope with losses. The person or community retains the risk but can deal with it. This can be done: by strengthening the person’s overall capacity regardless of any particular shock or by acting in response to (or in advance of) specific shocks.
- Risk transfer: shifting the (financial) consequences of the shock to another party, for instance through insurance.
Investments in disaster risk reduction are useful for all shocks. However, it is likely to be more feasible to reduce the risk arising from small-scale, low-impact events – even if they are relatively frequent – than to eliminate the risk of major catastrophes. Any risk that cannot be removed must be dealt with by other means (risk absorption and risk transfer). Households may be able to absorb any remaining risk from low impact events such as a short dry spell that results in a minor loss of agricultural productivity. However, as shocks become severe, it becomes harder for households to bear the consequences. At this point risk transfer measures may become appropriate. Risk transfer usually applies to shocks that do not occur frequently but are catastrophic and affect communities at large. One would not expect an insurance programme to provide payouts every year to cover households during a lean season. However, insurance can cover some of the consequences of extreme weather events that happen, say, every ten years.
A Comprehensive Climate Risk Management strategy must also ensure that financing enables predictable management of risks through preventive action targeted at the moment when it is most needed. This reduces reliance on ad-hoc resource mobilization following a climate shock, which is the prevailing paradigm in many humanitarian programmes. World Food Programme (WFP) utilises three different climate risk finance tools that link to each of the three risk management categories. WFP is implementing all three of these climate risk management approaches in Zimbabwe, which will allow further evidence building on how this combination of tools and strategies complement each other and improve the resilience and food security of WFP beneficiaries:
- Forecast-based Financing (FbF) is an innovative mechanism that supports countries to reduce and absorb predictable climate-related risks, by linking extreme weather forecasts with anticipatory actions before a natural hazard materialises. In Zimbabwe, WFP is using anticipatory actions such as creation of soil and water conservation structures, provision of drought-resistant seeds and training of farmers on agroforestry and water management, to reduce the impact, recovery time and costs associated with traditional drought response. WFP leads with the Red Cross in the development of FbF mechanisms in Asia, Africa and Latin America.
- Micro or Inclusive Insurance is a means to protect low-income people, usually excluded from traditional financial services, against specific perils in exchange for regular premium payments that are calculated based on the likelihood and cost of the covered risk. When applied to rural and agricultural areas, these policies transfer the risk of drought or floods from vulnerable households, providing an effective tool for food-insecure smallholder farmers to overcome vulnerability and achieve resilient livelihoods, while also enabling risk-informed investments and growth in the agricultural sector. In 2019, through the R4 Rural Resilience Initiative, WFP promoted access to a variety of micro-insurance products for 90,000 farmers in seven African countries as one component of an Integrated Climate Risk Management approach. WFP is also providing nearly 10,000 pastoralists with an index-based livestock insurance in drought-prone areas of Ethiopia. R4 provides insurance to low-income households in exchange for participation in asset creation programmes or adopting sustainable agriculture practices that reduce risk related to the insurance coverage. WFP will be scaling up its micro insurance-based approach in Zimbabwe to insure up to 50,000 farmers with funding received from the Green Climate Fund.
- Macro or Sovereign Insurance refers to insurance covering a nation/state (macro) to protect vulnerable communities, which combines elements of risk transfer with risk absorption through providing resources for governments and humanitarian agencies to respond earlier to shocks and support households to cope with the impacts. One example is the sovereign insurance product offered by African Risk Capacity Ltd (ARC) to vulnerable African countries prone to extreme drought risks. ARC allows countries to manage climate risk as a group, in a financially efficient manner, by pooling together many country-level policies covering various climate risks across the continent. Under a WFP and Start Network initiative, humanitarian organisations can complement the insurance coverage of ARC Member States by purchasing an additional ‘Replica Policy’, which could double the number of beneficiaries receiving assistance when an extreme drought event occurs. This year, the ARC and ARC Replica insurance policies have triggered a payout in Zimbabwe which will support both, the government and WFP, in ensuring households are still able to feed themselves even during the COVID-19 pandemic.
These tools all share a common characteristic, all or most decisions are taken before the event. Funds are available, the information and processes to trigger the funds are pre-defined and the mechanisms to deliver funds and other services to affected populations are already in place, thus enabling resources to reach affected households 6 to 10 months before traditional response in case of drought.
As vulnerable communities are exposed to a wide range of climate-related risks, a Comprehensive Climate Risk Management and financing strategy should combine approaches to reduce, absorb and transfer impacts occurring at different risk levels and timeframes.