In a recent article by the Financial Times (FT), a recent Asia Development Bank (ADB) report warned of a coming climate change crisis.
Here are five (5) major takeaways:
– Asia will be particularly affected due to its large population, dependence on certain crops highly impacted by climate change (e.g., rice yields are forecasted to drop precipitously), as well as having a notable population on or near coastal areas.
– Asia also accounts for almost two-thirds of the 20 cities it is estimated will suffer the greatest increase in financial losses to flooding over the next decades.
– Rising mean temperatures risk killing tens of thousands more older people (certain Asian states have rapidly aging populations), while deadly or debilitating mosquito-borne diseases such as malaria and dengue fever are likely to flourish.
– Mean summertime temperatures in north-west China, Pakistan, Afghanistan and Tajikistan are projected to rise as much as 8C by 2100. Rainfall is forecast to climb by half in many land areas of the Asia-Pacific region, creating new flooding risks.
– The ADB says it has screened its investments for climate change implications, asking questions such as whether new cities, bridges and roads will be able to cope with more severe flooding and other threats. It says other action that could help would be to shift agricultural practices away from evaporation-prone surface irrigation to more water-conscious drip irrigation methods.
Apart from IGO and public sector funding, one innovative way of financing such climate change remediation measures could be the use of pay-for-performance (PFP) environmental impact bonds (EIBs, a specialized form of social impact bond, SIB).
The first EIB/SIB used in the US occurred last year involving DC Water, Calvert Foundation and Goldman Sachs Group, among others.
Social Finance defines a SIB as “a public-private partnership which funds effective social services through a performance-based contract. Social Impact Bonds enable federal, state, and local governments to partner with high-performing service providers by using private investment to develop, coordinate, or expand effective programs. If, following measurement and evaluation, the program achieves predetermined outcomes and performance metrics, then the outcomes payor repays the original investment. However, if the program does not achieve its expected results, the payor does not pay for unmet metrics and outcomes.”
The EIB/SIB structure utilizes market mechanisms and incentives with social and economic returns, which could potentially fund Asia’s environmental remediation programs. As part of such EIB/SIB structure, IGOs such as the ADB could provide first-loss guarantees on equity/mezzanine tranches of such EIBs/SIBs as well as help with collateral and/or credit ratings.
Such advancements to the traditional EIB/SIB structure would help mitigate risk and thus incentivize other market players–both private and public–to help in this coming climate change crisis.