Platform for African climate bonds unveiled
The African Risk Capacity (ARC), an agency of the African Union formed to improve responses to climate-related emergencies in Africa, has launched a new facility that has the ability to issue climate change cat bonds.
The Extreme Climate Facility (XCF) is a multi-year funding mechanism that will issue bonds to help cover the risks of severe weather events caused by climate change.
The launch of the XCF coincided with the UN Climate Summit in New York. The platform plans to launch its first bonds by 2016.
They will target the provision of financing for countries in the event that extreme weather such as heat, droughts, floods or cyclones increase in occurrence and intensity across the continent.
Africa is widely recognized to be the region most vulnerable to weather risks. Weather-related disasters are already undermining record growth across the continent, threatening hard-won gains and vulnerable populations.
The World Bank estimates an adaptation investment cost need of $14-17 billion per year over the period 2010-50 for sub-Saharan countries to adapt to an approximately 2°C warmer climate forecast for 2050. Climate change is particularly threatening to the future of African agriculture, which impacts global food security and the economic livelihoods of hundreds of millions of Africans.
The XCF is entirely driven by climate data, using Africa's meteorological climatology as a baseline. XCF establishes a multi-hazard Extreme Climate Index (ECI) for each African climatic region.
The index will track increases in the frequency and magnitude of extreme climate events over and above the baseline. When the index exceeds pre-determined thresholds, countries will automatically receive payments from the XCF to support their pre-approved climate adaptation plans.
Should they occur, payments would start small and would increase with subsequent cat bond issuances, growing alongside increasing evidence of observed deviations from the baseline climatology.
