Building financial resilience in small island states
Small islands are the most vulnerable to the impacts of climate change. In Mauritius, sea level rise is potentially catastrophic for the island, with 26.2% of the land area and 29.3% of the population living less than five meters above sea level Building financial resilience and integrating disaster risk management into governance strategy are critical buffers against this threat.
The International Monetary Fund has conducted work on the risks small islands face and potential strategies for building resilience through the IMF / World Bank Climate Change Policy Assessment Program. The results showed that small island states need to integrate disaster risk management and policy into their budgets, debt management processes and fiscal frameworks.
The CCAC pilot projects took place in Seychelles, Saint Lucia, Belize, Grenada, Micronesia and Tonga between 2017 and 20. Other key recommendations included improving transparency between international markets and potential financial partners, access to support grants to build adaptive capacity, adaptation of public financial management and ensuring rapid access to available funds during periods of recovery.
In a report published in 2019, ‘Building resilience in developing countries vulnerable to major natural disastersThe IMF presented a three-pillar approach to building resilience. The first pillar is financial, which includes the insertion of cushions, self-insurance, the improvement of financial management, the creation of risk transfer instruments and the incorporation of risk into macrofiscal and financial frameworks. The second pillar focuses on building structural resilience by developing robust infrastructure, risk maps and zoning rules. And the third is building social resilience after a disaster through contingency plans and quick access to capital.
The three pillars are based on the nationally determined contributions of the Paris Agreement. Along with their collaboration with international partners, the CDNs have played a key role in efforts to combat climate change in Mauritius.
Additional efforts include the Bank of Mauritius joining the Network of Central Banks and Supervisors for the Greening of the Financial System in July 2020. The central bank is refocusing its investment strategy to include environmental, social and governance, in particular by conducting a survey to assess the integration of banks. climate change in their decision-making processes. This will be a key part of the central bank’s strategy over the next few years.
The issuance of green, blue and social bonds and the development of disclosure bonds to strengthen supervisory processes are other key initiatives to strengthen capital and investment. This involves expanding the toolkits of central and commercial banks by collecting and accelerating data on sustainable investments, increasing training and improving staff capacities.
In a recent OMFIF discussion, Bank of Mauritius International and Institutional Relations Advisor Pauline Charazac highlighted the need for more research and the bank’s crucial role in driving the conversation and the establishment of a sustainable practice.
With the World Bank and the IMF, the Bank of Mauritius is working to integrate ESG indicators into supervision approaches and is organizing crisis simulation workshops alongside the European Central Bank. The IMF is starting to include stress tests on the physical and financial assets of each small island state to better understand the impact of climate change and natural disasters on balance sheets. Work is also underway to establish common standards for investment disclosure and to increase the ability to assess which assets and funds are brown or green.
Questions remain around the mechanisms available to small island states when countries face consecutive large-scale disasters in a short period of time. In the recent OMFIF discussion, IMF Senior Economist Aleksandra Zdzienicka recommended high frequency, but not intensive, disaster insurance and contingency plans. In the case of high intensity natural disasters, she recommended regular issuance and the use of lines of credit. And for colossal disasters, noting the rapid response of the international community when events occur, Zdzienicka suggested mechanisms for disaster financing without conditionality from international funders.
There is still work to be done to strengthen the financial capacity, data resources and tools to assess green and brown investments and portfolios. Blue and social ties need to be integrated and sustainability needs to be considered in ways that take into account biodiversity needs, inclusiveness and good governance.
Nonetheless, as Zdzienicka noted, small island states have faced the threat of climate catastrophe for years. They adapted, installed buffers and involved local communities to tackle the impact of climate change with positive results. The rest of the world should pay attention to it.
Emma McGarthy is Program Manager, Sustainable Policy, OMFIF.