Gap 1
The first gap highlights that CCA and DRR aspects are not fully encompassed in the current version of the EU Green Deal. Climate change adaptation and disaster risk reduction communities at an international level are regulated by two different agreements – the Paris Agreement (PA) and Sendai Framework on Disaster Risk Reduction (SFDRR). These documents have common targets, priorities and areas of action. We recommend synchronisation of the components from PA and SFDRR within the EU Green deal in order to increase the effectiveness of related measures – improving resilience of the economy and society to climate change.
The EU Green Taxonomy and EU Green Bond Standard should be enriched by CCA and DRR metrics, targets and measures, allowing redirection of financial flows to green and climate-related projects, but also facilitating dynamic resilience within the EU.
A range of intangible benefits from including CCA and DRR measures, for example, saved lives, health of cultural heritage, could be created. However, there is not a unified guideline or standard on how to account for intangible benefits and assets of such projects. We argue for creation of unified standards and methodologies at the EU-level for monetising and accounting for intangible benefits and assets created as a result of CCA and DRR projects.
Recommendation
- Incorporation of the CCA and DRR aspects from PA and SFDRR into the strategic documents within the EU Green Deal.
Recommendation
- EU-wide or international standard or guidance on how to monetise and account intangible values from CCA and DRR measures.
How: EU-wide or international standard or guidance on evaluation and accounting of the social, economic and governance assets from CCA and DDR projects.
Who: European Commission, International Accounting Standards Board.
Gap 2
The second group of gaps highlights that the current approach in management of climate-related risks doesn’t completely encompass CCA and DDR components. As a result, a comprehensive unified approach to climate risk management on the EU level is needed. As part of the EU Green Deal, a new framework for disclosure of climate-related risks will be established by the end of 2020. Such an initiative could improve climate change risk assessment and risk management, and reduce associated transaction costs while mobilising climate finance. This would allow existing principles and standards for reporting on non-financial risks (for example, Standard 103 by Global Reporting Initiative) to be taken into account to improve risk management and related legal acts within the EU, and achieve synchronisation of CCA and DRR components.
With respect to the role of supply chains in transferring non-financial risks along the value chain, we recommend including reporting requirements on climate risk management for large companies within supply chains. Such provisions should be incorporated into the new version of the Directive (EU) 2014/95/EU on non-financial reporting, which will be the subject of updates within the EU Green Deal road map.
Recommendation
- Disclosure on Climate Risk Management (short, CRM) at the intersection of DRR and CCA (e.g. multi-hazard risk with cascading effects).
How: Improvement of the EU Green Deal (update of the Directive 2014/95/EU) through requirement for large companies to disclose on information about the climate risk management the within their supply chains.
Who: Commission, national legislative authorities.
Gap 3
There is insufficient data and climate finance information to conduct appropriate disaster risk reduction and adaptive measures (UNEP, 2018), in particular, the lack of reliable, frequently updated loss data, and details of vulnerability to climate-related risks. This lack of data leads increased transaction costs and limits access to climate finance, particularly for small and medium economic agents (for example, small-scale farmers). This is a complex challenge and requires implementation of the 3D Nexus – de-risking, digitalisation and decentralisation – which grants collection, processing and storage of reliable and frequently updated climate-related data.
Recommendation
- Innovative financial instruments and IT-solutions to reduce transaction costs for climate-finance and insurance products.
How: Climate Finance Accelerators in the EU-countries should be established in collaboration between private sector, financial institutions, national and EU authorities.
Who: Ministries of Finance, Ministries of Environmental Protection, European Investment Bank, European Bank for Reconstruction and Development.
Gap 4
As a result, we have additionally identified the fourth gap – lack of CCA and DRR finance. In fact, there is a need in innovative financial instruments, which could facilitate climate finance flows towards small economic agents and grant for them an access to the insurance services.
Recommendation
- EU Green Bond Standard and EU Taxonomy on green projects with CCA and DRR components
How: Incorporation of CCA and DRR indicators and metrics into the EU Green Taxonomy and EU Green Bond Standard for labelling of the green debt financial instruments.
Who: Commission and High-Level Expert Group on Sustainable Finance.
Recommendation
- Self-financing and crisis financing mechanisms with application of Distributed Ledger Technologies (short, DLT).
How: National DLT-based platforms for accumulation of the savings and facilitation of climate-related crisis financing.
Who: Ministries of Finance, Ministries of Environmental Protection, International Organisations.
Recommendation
- Sovereign Climate Insurance Funds (CIF) with application of IBI and DLT
How: Sovereign Climate Insurance Funds (polls) could provide protection against climate-related risks through the state guarantees and public financial resources, contributions from the local level. Additionally, such SIFs allow an access to resources of the market financial by implementing innovative financial instruments (e.g., derivatives). The CIF should be able to issue sustainability, environmental impact, catastrophe, water and/or pandemic bonds (as additional source to public funds). Application of the catastrophe swaps could give an opportunity to transfer climate-related risks to the financial market via facilities of the European Financial Stability Facility or European Investment Bank (see Recommendation 2.2).
Who: Ministries of Finance, Ministries for Environmental Protection, UNFCCC, national authorities responsible for auctioning of the emission allowances, local/regional authorities.
Recommendation
- Risk Transfer and data collection through European Risk Transfer Mechanism.
How: A DLT-platform on the EU-level for national and sub-national authorities/institutions in order to transfer climate-related risks to the financial market, collect and process related data (e.g. loss data, level of risks). Such data could contribute to reduction of transaction costs and improve management of climate-related risks on the EU-level.
Who: Ministries of Finance, Ministries of Environmental Protection, European Financial Stability Facility, European Investment Bank.
