Tackling Climate-Related Financial Risk Across the Caribbean
published on 21 April 2022
Officials across the Caribbean are studying matters of financial risk resulting from climate change, as part of an effort to mitigate the far-reaching impacts climatic events likely to affect the entire region. Representatives of central banks and development banks followed a series of online training workshops on “integrating climate-related financial risks” offered by AFD, the United Nations Environment Programme, the Eastern Caribbean Central Bank and the Organisation of Eastern Caribbean States, as part of the AdaptAction Facility. Having taken the courses in February, they’re now putting the lessons into action at a time when the stakes are high – and rising.
A highly vulnerable region
Climate change is an existential threat to Small Island Developing States, not least in the Caribbean. Increasing frequency and intensity of coastal storms threatens infrastructure and livelihoods, as do increased risks of coastal flooding and drought. Since 1950, hundreds of natural disasters have struck the Caribbean, “killing 250,000 people and affecting more than 24 million through injury and loss of homes and livelihoods,” according to the IMF. The cumulative cost of climate-related disasters for the relatively small region exceeded a staggering $22 billion.
For some countries, the damage is so great as to incur costs that wipe out years of economic growth. The World Trade Organization found that Hurricane Maria in 2017 cost Dominica 226 percent of its GDP, leaving damage that it will take years to repair. More frequent and severe floods, droughts and rising sea levels pose a threat to sectors such as tourism and agriculture, and to water and food insecurity.
Climate change creates enduring financial and economic consequences that range from lost livelihoods to the destruction of physical and human capital and infrastructure. Debts then extend well into the future as governments borrow to finance recovery, even as growth slows.
Managing climate risks
These risks matter for central banks and their efforts to maintain monetary and financial stability. Yet current prudential regulations and supervisory review processes in Eastern Caribbean countries often do not take into account environmental, social and climate-related risks.
To address the need for more awareness of the ramifications of climate risk, AFD, Expertise France and the UNEP produced five seminars for the Eastern Caribbean Central Bank, national regulators and development banks to build climate risk indicators and include climate-related issues in their strategic plans.
At the core of the sessions was the development of comprehensive climate-related regulation across the Eastern Caribbean. “There is a need to continuously improve our understanding of the scope and nature [of climate-related financial risk], through improved data collection,” said Eric Usher, Head of the United Nations Environment Programme Finance Initiative, a global partnership between the UN and the financial sector. “Equally important, there is a need for the implementation of consistent and harmonized standards regarding the treatment of climate-related financial risk.”
Governments need support and financing to streamline climate regulations and improve the quality of environmental data, which is often patchy or insufficient.
This is why AdaptAction is also stepping in to help Caribbean central banks working to incorporate climate risk management in their finance regulations.
For its part, AFD provided €100k in grants for technical assistance to the Eastern Caribbean Central Bank last October for capacity building, and provided another €100k in technical assistance to the Bank of Jamaica to address data shortages and conduct climate-related risk assessments and stress tests. The backing also serves to develop early warning tools, which will be essential to minimize the fallout from severe climate events.
