04. Innovative Financing

“41 billion dollars worth of flood losses that happen worldwide each year are unprotected by insurance.”

This story has been taken from the multimedia report Top 10 Frontier Technologies for Climate Action. Find it here.

It is easy to talk about climate change in terms of abstractions — global targets, rates of emission.

But for each extreme weather event, there is a devastating human fallout. Every year, people around the world lose their homes to flooding, or their livelihoods to drought. Farms are destroyed; lives are blighted. As the physical risks of climate change increase, people in countries in development are more exposed. Often, they have very little financial protection to rebuild their lives, should the worst occur. The cliché is that money is power — it is certainly true that people with no or little access to money and its movement around the world are at a sharp disadvantage.

In remote areas where people have little access to banks, credit or credit history data, the problem of obtaining financial protection via insurance is particularly acute. But there are options now. New insurance products are opening up entirely new markets, while fintech innovation is helping people who do not have access to banking. Mobile phone ownership allows for the creation of new banking and insurance products, giving more people access to money. Better geospatial data can help to assess risks more accurately, meaning that extreme weather events can be predicted and resilience measures put in place.

Increasing the use of these innovative finance techniques isn’t simple. There can be a lack of awareness of these new products in emerging markets, and early stage capital investment can be lacking too. The development sector could support this work with guarantee loans, facilitating partnerships with banks, and helping to connect new tech to the appropriate markets.

Parametric Insurance

Extreme weather poses a huge risk to houses, crops and barns. In a developing context, these physical structures might be more fragile and less able to withstand harsh rain or wind. One new development to mitigate against extensive loss is insurance which works within pre-agreed physical parameters. If a certain level of rainfall is reached, for instance, the insurance company pays out immediately, without waiting to assess losses. This fast response means that farms could have money when they need it, rather than getting mired in a long claims process.

FloodFlash provides parametric insurance for businesses and homes in the UK. It installs sensors and agrees a flood height for an instant payout. This model could bring insurance to many uninsured people around the world. It is a challenge — financial products are often strictly regulated. But given the greater availability of good forecasting data, it could go beyond flood mitigation, for example insuring farmers against low rainfall.

Green Bonds

To limit global warming to 1.5 degrees, carbon emissions must be cut drastically, and fast. This change, though desirable, could have an unpredictable financial impact, including stranded assets — fossil fuel resources no longer able to make money. Green bonds are a way for issuers to raise money specifically for environmentally friendly projects, such as renewable energy or clean transport. This is a fast-growing area of financial innovation. In 2017, it was estimated to surpass $160 billion, and is expected to reach $200 billion by the end of 2019, essentially making money available to fund green projects. This could be a significant tool to mitigate physical climate change and manage the transitional risks. In countries in development, there needs to be more training and capacity building around this. And across the board, oversight is important, as there is a risk of green-washing — funds going to projects that appear to be more environmentally friendly than they are.

Soil Sequestration Incentives

Soil is the largest land-based reservoir of carbon on Earth, absorbing it from trees and vegetation as they die and decay. Tweaks to farming practices can increase the carbon content in soil and reduce overall emissions. At the moment, there isn’t much reason for farmers to make these changes. So why not pay farmers and other land-users to increase the carbon content of soil? This would not only reduce emissions, but would also give income to smallholders. It would improve soil quality which in turn improves crop quality. Specific schemes to encourage soil-based sequestration through crops and adapted farming practices have just come to market this year — with incentives packaged with farm management software systems. Other, more physical tech is needed too — before you start paying people to store more carbon, you need to be able to accurately measure the amount of carbon in soil.

Want to explore the other nine Frontier Technologies for Climate Action? Click here.

Is there a technology here that captures your attention? Put your thoughts in the comments section below or get in touch at ftlenquiries@imcworldwide.com