South Africa’s National Treasury is exploring regulations to promote catastrophe bonds and parametric insurance as part of a strategy to combat climate change. This follows a series of climate disasters, with plans to establish a climate-change response fund and engage investors, particularly pension companies, for climate-related financial products. The government also seeks to issue more green bonds to secure private investment in resilient infrastructure.
South Africa’s National Treasury is actively considering new regulations to foster the adoption of innovative financial solutions aimed at combatting climate change, specifically catastrophe bonds and parametric insurance. At a recent meeting held by the Presidential Climate Commission, Kolisang Molukanele, a senior economist at the Treasury, emphasized the government’s commitment to engaging with investors to enhance their confidence and comfort in these financial instruments. “We are keeping abreast of any new financial mechanism that could be used,” he declared. This initiative is largely a response to a succession of climate-related disasters faced by the country, including a drought triggered by El Niño and devastating floods in 2022 that resulted in over 400 fatalities and approximately $2 billion in damages. To further this cause, South Africa plans to establish a climate-change response fund by March, seeking private investment to fuel this effort. Discussions have already taken place with pension companies regarding climate-focused financial products. Catastrophe bonds, known for their high returns, are structured to provide yields only in the aftermath of a natural disaster, while parametric insurance is designed to trigger payouts when specific pre-established conditions are met, such as insufficient annual rainfall. Mr. Molukanele noted that parametric insurance could facilitate a more rapid distribution of relief funds to affected provinces. Additionally, the government is contemplating the issuance of an increased volume of green bonds at both national and municipal levels. It is imperative for municipalities to develop more bankable projects to attract private investment for climate-resilient infrastructure, such as enhanced bridge and road constructions.
The current global climate crisis has prompted countries to seek innovative financial solutions for addressing the impacts of climate change. Catastrophe bonds and parametric insurance are considered effective means to mobilize private funds for disaster response. As South Africa grapples with the realities of climate-induced disasters, the National Treasury recognizes the necessity of establishing a framework that entices investor participation in climate adaptation and resilience projects. This approach not only aims to secure financial backing for necessary infrastructure improvements but also actively involves investors in the mitigation of climate-related risks.
In summary, South Africa’s initiative to regulate and promote catastrophe bonds and parametric insurance reflects a proactive approach to financial resiliency against climate change. With the establishment of a climate-change response fund and engaging with pension companies, the Treasury aims to diversify investment in climate-related projects. By prioritizing these financial instruments and green bonds, the government is laying the groundwork for improved climate resilience across the nation, which is crucial given the frequency and severity of climate-related events experienced in recent years.
Original Source: www.insurancejournal.com
