Tailored Financial Instruments Can Make a Difference to Small Island Developing States

Photo: Randy Son of Robert/Flickr

By Ricarda Dahlheimer, Climate and Society ’13

Few countries have saved enough pennies for “a rainy day” and even less of those have considered saving for “extreme precipitation” and other impacts associated with climate change. Oftentimes, the bottleneck of building climate resilient communities is financing.

Having worked on microfinance in Ghana and accounting in Malawi after earning a degree from a business school, for me finance is no longer associated with wearing suits and reading the Wall Street Journal. Instead, I learned that no sector will thrive unless there is a financial vehicle that allows channelling money towards a certain cause (e.g. climate change adaptation). As a summer intern in the Climate Finance team at The Nature Conservancy (TNC) I am working on an innovative mechanism that generates financial streams aimed at funding ecosystem-based adaptation in Small Island Developing States (SIDS).

Instinctively, we know that islands are among the most vulnerable countries to climate change impacts (pdf). Sea level rise, an increase in extreme weather events as well as increased sea surface temperatures and acidification of the oceans all threaten coastal infrastructure, coral reefs and mangroves.

However we often neglect thinking about some of the barriers they face to adapt. Due to repeated economic setbacks by natural forces such as hurricanes, the majority of SIDS are characterized by high debt levels. Projections to the end of 2013 show that there are 13 SIDS with public debt-to-GDP ratios above the 60 percent threshold, seven of which have ratios of above 100 percent. While the United Nations offers comprehensive debt relief initiatives (pdf), only seven out of the total 52 SIDS are eligible for these programs. In sum, these factors oftentimes result in a debt spiral with a number of SIDS defaulting on existing obligations.

Photo: Tax Credits/Flickr

Moreover, unfavorable financial records and the small scale of needs frequently hamper investments in adaptation in SIDS. TNC identified that the need for additional adaptation funds as well as the urgency to reduce debt levels were mutually reinforcing factors. Both aspects also shackled the conservation efforts. This summer I am assisting TNC to further develop a debt swap instrument tailored to fund adaptation projects in SIDS. This financial tool addresses both adaptation finance and debt restructuring while aiming to include a policy agenda which ensures the long-term results of both the debt relief and cash flows directed at adaptation activities. For this purposes I have been predominantly concerned with formulating a “business case” in order to promote this financing tool to potential donors and investors. Furthermore, I had the chance to interview stakeholders such as for example the Ambassador to the UN for the Seychelles.

Photo: Fred Hsu

To understand the mechanism, imagine the “ownership” of the debt is swapped. While previously debt was owed to a bank, it is now owed to TNC. TNC grants partial debt relief and adjusts the conditions (typically lower interest rates and a longer pay-back period). The proceeds paid are collected by TNC and then invested exclusively into the country’s local adaptation infrastructure. This allows for ecosystem-based adaptation projects to be financed which otherwise would not have received funding due to the countries’ priority to pay back debt. Instead of just granting the country debt relief, TNC ensures that funds are spent on adaptation.

If adaptation to climate change is considered a goal of the global community, appropriate finance tools will play a key role in achieving it. Having observed the inertia of international organizations’ funds earmarked to close the adaptation financing gap, it is exciting to see NGOs creating new ways to fund adaptation beyond the usual “rainy day” budget. Taking on climate finance as part of the general conservation mission promises to produce innovative, sustainable adaptation solutions.