Building financial resilience in small island states

Mauritius is tackling climate change head on

Small islands are most vulnerable to the impacts of climate change. In Mauritius, rising sea levels are potentially catastrophic to the island, with 26.2% of land area and 29.3% of the population living at less than five metres above sea level. Building financial resilience and integrating disaster risk management into governance strategy are crucial buffers against this threat.

The International Monetary Fund has conducted work into the risks small islands face and potential resilience-building strategies through the IMF/World Bank Climate Change Policy Assessments programme. The results have shown that small island states need to integrate disaster risk management and policy into their budgets, debt management processes and fiscal frameworks.

The CCPA pilots ran in Seychelles, St Lucia, Belize, Grenada, Micronesia and Tonga between 2017-20. Other key recommendations included improving transparency between international markets and potential financing partners, accessing support grants to build adaptation capability, adapting public financial management and ensuring quick access to available funds during recovery periods.

In a report published in 2019, ‘Building Resilience in Developing Countries Vulnerable to Large Natural Disasters’, the IMF laid out a three-pillar approach to building resilience. The first pillar is financial, which includes inserting buffers, self-insuring, improving financial management, building risk-transfer instruments and incorporating risk into macro-fiscal and financial frameworks. The second pillar focuses on building structural resilience by developing robust infrastructure, risk maps and zoning rules. And the third involves establishing post-disaster social resilience through contingency plans and quick access to capital.

The three pillars have been based on the Paris agreement’s Nationally Determined Contributions. Alongside working with international partners, the NDCs have been instrumental in driving efforts to tackle climate change in Mauritius.

Additional efforts include the Bank of Mauritius joining the Central Banks and Supervisors Network for Greening the Financial System in July 2020. The central bank is refocusing its investment strategy to include environmental, social and governance criteria, including conducting a survey to assess how banks are integrating climate change into their decision-making processes. This will form a key element of the central bank’s strategy over the next few years.

Other key initiatives for building capital and investment include issuing green, blue and social bonds and developing disclosure requirements to strengthen supervisory processes. This involves expanding central and commercial banks’ toolkits through collecting and expediting data on sustainable investments, increasing training and improving staff capabilities.

In a recent OMFIF discussion, Bank of Mauritius International and Institutional Relations Adviser, Pauline Charazac, highlighted the need to conduct more research and the crucial role of the bank in driving the conversation and setting the tone for sustainable practice.

With the World Bank and the IMF, the Bank of Mauritius is working to incorporate ESG indicators into supervisory approaches and running stress-testing workshops alongside the European Central Bank. The IMF is starting to include the stress-testing of physical and financial assets in each small island state to gain a stronger understanding of the impact of climate change and natural disasters on balance sheets. Work is also being done to set common standards for the disclosure of investments and increase the capacity for evaluating which assets and funds are brown or green.

Questions remain around the mechanisms available to small island states when countries face consecutive large-scale disasters in a short space of time. In the recent OMFIF discussion, the IMF’s Senior Economist, Aleksandra Zdzienicka, recommended insurances and contingency plans where high-frequency but not intensive disasters take place. In the case of high-intensity natural disasters, she recommended regular issuances and the use of credit lines. And for colossal disasters, noting the quick reaction of the international community when events do occur, Zdzienicka suggested catastrophe finance mechanisms with no conditionality from international financers.

Work still needs to be done to build financial capacity, data resources and tools for assessing green and brown investments and portfolios. Blue and social bonds need to be integrated and sustainability needs to be examined in a way that considers biodiversity needs, inclusivity and good governance.

Nevertheless, as Zdzienicka noted, small island states have been dealing with the threat of climate disaster for years. They have adapted, installed buffers and involved local communities to tackle the impact of climate change with positive results. The rest of the world should pay attention.

Emma McGarthy is Programmes Manager, Sustainable Policy, OMFIF.

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