Background facts What is climate risk financing?

Extreme weather events vary in terms of their intensity and frequency. In order to effectively address the resulting climate risks, mutually harmonised risk financing instruments are needed that cover different kinds of financial needs: direct and indirect climate risk insurance, guarantees, bonds, (reserve) funds, and loans and grants help survivors to recover quickly from disasters and to protect themselves better in the future.

Climate risk financing is most effective if it is part of a country's broader risk management strategy and if provision is made for it in the government's budget and credit lines. Each financing model should be identified on a case-by-case basis, taking into account local conditions and risk factors, so as to ensure the highest possible benefit for the people affected. The choice of the most efficient instrument is based on the risk in question. For example, reserve funds in the national budget are best suited for dealing with smaller, recurrent events, whereas extreme events are most effectively covered by insurance.

Reliance on holistic climate risk financing enables governments, humanitarian players and other organisations to quickly access funding after a disaster, reducing the strain on the budget and providing financial security and predictability. At the level of the government, it is vital to define in advance how the funding will be paid out after a disaster so that the poorest and most vulnerable groups will benefit quickly and secondary consequences will be minimised.