Speech by Ingrid van Wees, ADB Vice-President for Finance and Risk Management, at ADB Institute’s side event at the 54th Annual Meeting, 5 May 2021
Good day and warm greetings to you all from Manila.
I am encouraged by the strong interest for this session and will start with an upbeat message: The rebounding of the global economy despite the pandemic.
The outlook for Asia and the Pacific for 2021 and 2022 is good, following its most severe crisis in the past 6 decades, which put most severe and considerable strain on most countries across the region, resulting in numerous sovereign credit rating downgrades.
ADB forecasts growth in the region to rebound to 7.3% in 2021 and 5.3% in 2022, a strong rebound, but one which remains vulnerable to evolvement of the current COVID-19 pandemic. Considerable amounts of financial resources are being deployed to counter its health and economic effects: Around $1.8 trillion of fiscal stimulus packages are being mobilized by governments in the region to avert the worst.
However when it concerns the environment and our climate, I am downbeat.
While this spending did mitigate the economic fallout, the benefits did not extend to a green and inclusive recovery yet. The United Nations in its 2021 SDG Progress Report for Asia and the Pacific concluded that the region is regressing on SDG 13 “Climate Action” and SDG 14 “Life under Water” as compared to 2000.
As illustrated by the current pandemic, natural disasters generally cause large human suffering and economic losses in the immediate aftermath. They result in economic scarring by reversing hard-won development gains, weighing on productivity growth, and cementing inequalities.
This panel and this publication by the Asian Development Bank Institute, in collaboration with the Center for Sustainable Finance, WWF, 4-27, and Inspire, could therefore not be more pertinent than this time.
The topic of Climate Change and Sovereign Risks in Asia and the Pacific will only grow in relevance, as the time to address climate risks is rapidly running out.
In my remarks today, I want to highlight three points:
- First, how the Asia and Pacific region is severely impacted by climate related disasters and, at the same time, missing an important key to addressing it.
- Second, how ADB is assisting its developing member countries, or DMCs, in addressing both the impact of climate change and the strenghtening of disaster resilience.
- Third, I will discuss some of the challenges posed by incorporating climate risks in sovereign credit ratings.
To start, let me emphasize that the Asia and Pacific region is no stranger to natural disasters. Many DMCs, particularly the low-lying coastal communities and small island developing states in the Pacific, are highly exposed and vulnerable to natural hazards.
With the current trajectory of climate transition heading towards the 2-degree scenario, this is going to worsen. The region is expected to face the brunt of climate disasters.
Economic losses caused by natural catastrophes are trending upward. Over the past 3 decades between 1990 and 2019, immediate damage to property, crops, and livestock from natural disasters in the region amounted to almost $1.5 trillion and over 5.2 billion people were affected.
In 2020 alone, Asia’s overall losses related to natural disasters amounted to a whopping $67 billion of which only $3 billion, less than 5%, were insured. To illustrate this – I have two examples from 2020:
- The world’s costliest natural disaster was the severe flooding during the summer monsoon rains in the People’s Republic of China. Losses amounted to approximately $17 billion, of which only around 2% was insured.
- Losses of the worst tropical cyclone in terms of damage, Cyclone Amphan, which made landfall in May in the northern Indian Ocean, amounted to $14 billion, again with marginal insurance or Cat-risk cover.
The very low insurance penetration intensifies the fiscal impact of disasters on developing and emerging economies in the region.
In the absence of a third party for risk sharing, the sovereign effectively becomes the “insurer of last resort” funding the immediate recovery and rehabilitation.
With this, I turn to my second point, ADB’s assistance with reducing climate change impact.
The COVID-19 pandemic, triggering the European Commission’s stimulus plan of multiple trillion US dollars, has shown that a proactive approach in form of pre-crisis preparedness, early warning systems, good governance, and scientific adaptation measures are good economic investments.
If we fail to invest the millions and billions required for Paris Alignment today, we will be facing a check exceeding multiple trillions.
While proactive policies and investments determine the extent to which economic shocks caused by a natural disaster can either be mitigated or amplified, economic diversification can lower and/or shorten spikes in unemployment and disruption to economic activities.
Quality social infrastructure fosters better health outcomes, while reducing loss of lives and disruption to schooling.
Finally, countries with low government debt experience faster recovery, avoiding setbacks in human capital, as fiscal space allows for swift disaster relief without the expense of cutting social expenditures.
To conclude this point – the capacity and extend of health and social protection systems, quality of infrastructure, indebtedness, and economic diversification are important factors fostering the capacity of countries to withstand, adapt, and recover from adverse shocks.
Consequently, poor communities and countries are generally more exposed to hazards and at higher risk of loss of human life.
Although the impact of climate risk is mitigated by strengthened resilience, the strongest and most urgent lever remains emission reduction. Asia currently accounts for about 47% of global carbon emissions. It is uniquely placed to lead global mitigation efforts since one half of the envisaged global expansion of electric power capacity in the next decade will be in Asia. We therefore often hear: “The battle of climate change can be won or lost in the Asia and Pacific region.”
Addressing climate change and strenghtening disaster risk resilience are ADB’s operational priorities. As part of its “Strategy 2030”, ADB is commiting:
- 75% of its operations on a 3-year rolling average to address climate change
- $80 billion of its own resources from 2019-2030 (21-year period) which could, with a mobilization factor of 4, easily be multiplied to hunderds of billion of dollars.
To decrease emissions, ADB is
- Scaling up investments in clean energy, energy efficiency, and low carbon transport and agriculture;
- Catalyzing private sector investments; and
- Accelerating deployment of high-level technologies that effectively and efficiently curb emissions.
Reduction of the fiscal and economic exposure and enhanced infrastructure resilience require a comprehensive risk diagnosis and multi-stakeholder involvement.
For enhanced infrastructure resilience:
- ADB is promoting risk-sensitive land-use planning, integrating climate and disaster-resilient measures into infrastructure projects, and including Operation and Maintenance of these assets.
- ADB is supporting disaster risk assessments of existing and planned infrastructure and ecosystem services.
To enhance financial resilience:
- ADB has innovated and expanded its products for sovereign financial disaster risk management;
- A country-based approach is being enhanced with regional initiatives to pilot and promote regional disaster insurance schemes, to pool funds and share risks.
Let me now turn to my third point, the evolving journey of inclusion of climate risks in sovereign credit ratings.
As highlighted by the report presented today, there is a strong correlation between climate risks and sovereign creditworthiness. When assessing credit risks of its DMCs, ADB is incorporating climate and other environmental, social, and governance, or ESG, related risks into their sovereign ratings.
The different ESG components are accounted for in varying degrees: Current practice at ADB, other Multilateral Development Banks, and rating agencies places considerable weight on governance factors when assessing sovereign creditworthiness.
Social and environmental factors presently carry less weight, giving the perception that their impact on creditworthiness is longer term and therefore less relevant for a short-to-medium-term rating horizon. This perception, however, is shifting and more attention is now being paid to these factors.
Although ADB’s approach is aligned with peers and rating agencies, we recognize that we must enhance and evolve our methodology.
A key finding of the report discussed today is that, in general, climate change is expected to be credit negative for sovereign ratings and can result in an increase of borrowing cost for affected sovereigns.
To conclude, I’d like to invite all of you to use the ingenuity, creativity, and insights of all stakeholders, male and female, to work constructively on addressing one of the greatest challenges of our generation.