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 within five meters above sea level. Wed Strengthening financial resilience and integrating disaster risk management into governance strategy are essential buffers against this threat.

The International Monetary Fund has conducted work on the risks facing small islands and potential strategies for building resilience as part of the IMF and 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 CCPA pilots took place in Seychelles, Saint Lucia, Belize, Grenada, Micronesia and Tonga between 2017 and 2020. Other key recommendations included improving transparency between international markets and markets. potential financial partners, access to support grants to build adaptive capacities, adaptation of public financial management and ensuring rapid access to available funds during periods of recovery.

In a 2019 report, “Building Resilience in Developing Countries Vulnerable to Major Natural Disasters,” the IMF presented a three-pillar approach to building resilience. The first pillar is financial, which includes the insertion of cushions, self-insurance, improvement of financial management, creation of risk transfer instruments and integration of risk into macro-budgetary frameworks and financial. The second pillar focuses on building structural resilience by developing robust infrastructure, risk maps and zoning rules. And the third is building post-disaster social resilience through contingency plans and early access to capital.

The three pillars were based on the nationally determined contributions of the Paris Agreement. In addition to working with international partners, the NDCs have been instrumental in leading efforts to tackle climate change in Mauritius.

Additional efforts include the accession of the Bank of Mauritius to 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 how banks integrate climate change into their decision-making processes. This will be a key part of the central bank’s strategy over the next few years.

Other key initiatives for building capital and investments include issuing green, blue and social bonds and developing disclosure requirements to strengthen supervisory processes. 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 tone of a sustainable practice.

With the World Bank and the IMF, the Bank of Mauritius is working on the integration of ESG indicators into prudential approaches and is organizing crisis simulation workshops alongside the European Central Bank. The IMF is starting to include stress tests of physical and financial assets in 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 are faced with 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 event of high-intensity natural disasters, she recommended regular issuance and the use of lines of credit. And for colossal disasters, noting the rapid reaction of the international community when events occur, Zdzienicka suggested mechanisms for disaster financing without any strings attached from international funders.

There is still work to be done to strengthen financial capacity, data resources, and tools to assess green and brown investments and portfolios. Blue and social bonds need to be integrated and sustainability needs to be considered in a way that takes 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 have adapted, installed buffer zones and involved local communities to tackle the impact of climate change with positive results. The rest of the world should be careful.

Emma McGarthy is Program Manager, Sustainable Policy, OMFIF.