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Delivering a financial system that reduces disaster risk

Posted on 7th November 2018 at 12:33pm

Ahead of the 2018 2018 Forum on Disaster Risk Reduction, Erling Kvernevik, Teresa Rubino and Rosalind Cook say that delivering a financial system that reduces disaster risk is a critical contribution to a more sustainable and safer Europe

By bringing together the financial and disaster risk reduction communities, the European Forum for Disaster Risk Reduction in Romw is an opportunity to harness the growing innovative vision and approach to disaster resilience by in the private sector and join up action in partnership with the public sector (image: Bakhtiar Zein / 123rf)

Direct and indirect losses and damages related to extreme weather events, which are exacerbated by climate change, are on the increase, and so is the share of those losses that are insured. The total reported economic losses caused by weather and climate related extremes in the European member countries over the 1980–2015 period amounted to over €433 billion. If the full picture of cascading and indirect losses were included in these figures, they would be even more staggering. These figures show that there are increasing, unsustainable losses on the European economy.

Not paying attention to disaster risk reduction can lead to a serious deterioration of the economy and ecosystems and a loss of trust amid both the population and investors. Frequent small and medium impact disasters and single intense events can severely disrupt community lifelines – the systems that provide food distribution, water supply, health care, transportation, waste disposal and communications.

Business and private investors may shy away from cities that are perceived to be indifferent in acting towards reduce disaster risk. In urban developments, disaster risk is produced through a large number of individual public and private investment decisions and non- decisions taken over a long time – making it difficult to attribute responsibility.

In Europe, and around the world, countries, governments, institutional investors, businesses and households are now sitting on another mountain of hidden debt – the contingent liabilities represented by unrealised disaster risk. This disaster prone capital stock, whether privately or publicly owned, represents another category of toxic assets, which do not appear on any balance sheets. Europe is therefore not only vulnerable from direct disaster risk within its borders, but it also has a great financial risk because it ‘imports’ risks through the insurance sector, overseas investments and international supply chains. With accelerating impacts of climate change, the potential for future losses is enormous. On our current trajectory in Europe, we are continuing to mix a destructive ‘cocktail mix of disaster risk’.

To respond to this challenge, a sound financial system that integrates disaster risk is needed. This would support resilience to these impacts, speed up recovery and reconstruction, and harness knowledge and incentives for reducing risk. A comprehensive financial strategy can deliver informed risk management and governance.

A number of initiatives are underway to reform the global and European financial system to make it more sustainable. The implementation of the Task Force on Climate-related Financial Disclosures (TCFD) is a good example, where disclosing climate-related financial information can make a substantial contribution to risk informed investments. The TCFD offers a foundation to improve investors’ and others’ ability to appropriately assess and price climate-related risk and opportunities. 

The EU developments on sustainable finance also offer a major opportunity for a comprehensive shift, by reorienting private capital flows towards sustainable investments, including resilient critical infrastructure, as well as managing financial risks stemming from climate change.

Other sectors, including the insurance sector can play an important role as absorber of risk and provider of risk expertise within an integrated approach. In Norway, for example, there is a good example of a public-private partnership between the national civil protection authority and the insurance industry on disaster damage data. This is supporting targeted disaster resilience reassures and strengthening the work of local municipalities in preventing disasters.

On November 21-23, 2018, hundreds of multi-stakeholder delegates from 55 countries in Europe will convene at the European Forum for Disaster Risk Reduction in Rome to discuss this opportunity for change within the financial community, including on climate-related financial risk disclosures, to increase disaster resilience. The Forum, organised by the Government of Italy and the UN Office for Disaster Risk Reduction, takes place every two years, to showcase inspiring action and identify regional challenges.

By bringing together the financial and disaster risk reduction communities, there is an opportunity to harness the growing innovative vision and approach to disaster resilience by in the private sector and join up action in partnership with the public sector. The Sendai Framework for Disaster Risk Reduction, the international agreement on reducing disaster risk, sets a clear target to substantially reduce the economic losses from disasters by 2030. Delivering a financial system that reduces disaster risk is a critical contribution to a more sustainable and safer Europe.

Erling Kvernevik is Senior Adviser, Directorate for Civil Protection, Norway; Teresa Rubino is European Affairs Senior Advisor, Italian Banking, Insurance and Finance Federation; and Rosalind Cook is External Relations Officer, UN Office for Disaster Risk Reduction 

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