Economic challenges lie ahead as climate change wreaks havoc

17 October 2018

UN bodies spotlight new ways to equip developing countries with the economic means to tackle the catastrophic effects of climate change.

The economic losses caused by disasters could be reduced if the public and private sectors cooperate better on novel finance, insurance and investment strategies, a multi-agency meeting bringing together trade and disaster risk reduction experts from the UN system and beyond heard on 15 October.

Economically devastating catastrophes are on the rise.

While disaster losses are also caused by hazards like earthquakes and tsunamis, climate change is stoking extreme weather phenomena such as hurricanes and heatwaves, affecting millions of people and repeatedly undermining development gains, panellists at the meeting said.

“We know for a fact that disasters, resulting from natural hazards and extreme events associated with climate change, can lead to significant economic losses and have major repercussions for global trade and the sustainable development prospects of the most vulnerable countries,” UNCTAD Deputy Secretary-General Isabelle Durant said.

climate change

“With the adoption of the Sendai Framework and the Paris Agreement on climate change, the international community has strengthened its commitment to address these threats seriously.”

The Sendai Framework, a 15-year, voluntary, non-binding agreement which recognizes that states have the primary role to reduce disaster risk but that responsibility should be shared with other stakeholders including local government and the private sector, was endorsed by the UN General Assembly following the Third UN World Conference on Disaster Risk Reduction, held in Sendai, Japan, in 2015. It was also the first building block of the 2030 Agenda for Sustainable Development, adopted in September 2015.

New research commissioned by the United Nations Office for Disaster Risk Reduction (UNISDR) found that in 1998-2017, disaster-hit countries experienced direct economic losses valued at $2.9 trillion, of which climate-related disasters caused $2.2 trillion or 77% of the total. This is up from 68% ($895 billion) of losses ($1.3 trillion) reported between 1978 and 1997. Overall, reported losses from extreme weather events rose by 151% between these two 20-year periods.

Trade has a key role

Ms. Durant said that disasters in small island developing states (SIDs), for example, tended to impact most of the population and the overall economy.

“For instance, the costs of the 2017 hurricane season are estimated to have exceeded the GDP for Dominica and the British Virgin Islands,” she said.

“Dominica’s total damages and losses from Hurricane Maria alone are estimated at 224% of its GDP at $1.37 billion.”

International Trade Centre (ITC) deputy executive director Dorothy Tembo said she agreed, adding that the special report by the Intergovernmental Panel on Climate Change (IPCC), released in early October, was a clarion call to action.

“Trade has a key role to play in building resilience and in reconstruction,” she said, especially for the small and medium-sized companies (SMEs) that make up 80% of the economy of developing countries.

Irina Zodrow, partnerships head at UNISDR, said that climate change dangers needed to become mainstream priorities.

“Disaster reduction has traditionally been seen as a humanitarian issue, but this will no longer do – that’s why this session brings together the trade and development communities.”

Small islands and coastal states

Stephen Fevrier of the Organisation of Eastern Caribbean States said that the increasing threat of catastrophic weather events meant that the development model pursued by Caribbean nations was no longer viable.

“The vicious cycle of disaster followed by public sector borrowing makes effective development planning near impossible,” he said, adding that rules on government borrowing presented an unsustainable trap for Caribbean countries repeatedly devastated by multiple disasters.

“A paradigm shift in global governance is needed if small island and coastal states are to survive,” he said.

UNCTAD disaster risk expert Regina Asariotis described how transport links were a cross-cutting issue upon which many efforts to reduce poverty depended.

In a "just in time" economy, shutting down an airport or port, for even just one day, can have dramatic knock-on effects well beyond the country affected, she said. Disaster impacts can therefore ripple through the globalized economy.

She laid out the ground regarding the various types of economic damage and loss, adaptation and mitigation actions, and timescales relevant to short and long-term recovery.

“This is not about saying we are all doomed, but taking preparedness seriously,” Ms. Asariotis said.

She said that SIDs were a special case, whose “lifelines” – the transport links on which their survival depended – were doubly threatened by rising sea-levels and damaging weather events, since airports were often very low-lying, and seaports easily wrecked.

She described recent UNCTAD studies on ports and airports in Jamaica and Saint Lucia that show the economic effect of catastrophic climate events and what can be done to mitigate them.

‘Winter is coming’

Paolo Garonna, secretary general of the Italian Banking, Insurance and Finance Federation (FeBAF), said that the current approach to reducing losses was now clearly unsustainable.

“We need a change in the policy approach, and we need it now,” he said. “A change is necessary and urgent, but it is also possible.”

He said that there was abundant liquidity in the world – over $100 trillion – as well as savings, pension funds, and money seeking yields in a low-interest world. Infrastructure everywhere was crying out for investment, he said.

“There needs to be a new compact between the private sector and the public sector so that public money comes in as a compliment to private capital.”

Mr. Garonna described Europe’s Juncker Plan which has mobilized private finance for the public good as a model. Finance needed to be sustainable and green, he said.

Duty of care

Mr. Garonna said that much effort was being spent on taxonomy so that instruments of green finance can be better defined.

UNCTAD, for example, is working with its partners in the Sustainable Stock Exchanges Initiative to advance the cause of green finance.

Rowan Douglas of Willis Towers Watson, a leading global risk management, insurance brokerage and advisory company, said that in 2017 “we had the worst insured-losses in history, worse than any time before”.

However, the insurance and reinsurance business had not gone bust because 25 years ago the industry had decided to “encode risk into capital, encode climate and disaster risk into credit risk. That means it has become incredibly resilient as a sector.”

He said that the private sector had not been sufficiently engaged with the physical damage that climate change will bring, and financial markets have been guilty of limiting their view to carbon emissions – which are important, but not the only part of the picture.

However, the “duties of care” that employers had to people, or, for example, mayors had to residents of cities, were becoming prominent as the predictability of climate change-caused disasters rose.

“It is fabulous that UNCTAD and UNISDR have teamed up because I can’t think of any other agencies that are going to drive this forward. But what the insurance sector can do, with these agencies, is pass on how to encode climate risks into finance and capital and duties of care.”

Mr. Douglas, who also chaired the private sector committee that fed into the development of the Sendai Framework in 2015, said that much of the discussion was about the “clear and present” vulnerability of transport and trade logistics.

The Sendai Framework, he said, mandated the setting and upholding of climate-and-disaster risk management standards by the private sector.

“Why not start with ports and airports?” he challenged the meeting. “I think it’s absolutely tractable to create a set of disclosure-based metrics in an economic sense of physical climate risks for a broad section of the world’s ports and airports. I know it’s not everything, but it’s an important start. But also, it would highlight what should be the duties of care, what should be the resilience requirements, of these assets.”

Wadid Erian, programme coordinator of the League of Arab States’ Climate Risks Nexus Initiative, said his organization was working actively on sustainable finance initiatives that took account of disaster-risk reduction, including increasing drought risks in the Middle East.

Destruction and diversion

Michael Roberts, head of Aid for Trade at the World Trade Organization, said that multinational enterprises were in effect still turning a blind eye to the long-term effects on trade and value chains, including trade diversion effects as well as trade destruction effects, of climate change and disasters.

To illustrate “trade diversion,” Mr. Roberts said that tour operators would merely replace a holiday on one Caribbean island with another somewhere else if a hurricane hit that island.

Lorenza Jachia of the United Nations Economic Commission for Europe said that, although risk management was complex, you could explain it to decision-makers by asking them what their objectives were. For example, ministries of education had the objective of educating children, but this could only take place in schools protected against disasters.

The meeting was held to mark the International Day for Disaster Reduction, which falls on 13 October each year.