A stronger commitment to transforming our capital markets has the potential to bring prosperity and stability to billions of people, argue Jerome Haegeli and Bryan Pascoe
War, inflation, the threat of recession, climate change, the lingering impact of the pandemic – our world continues to grapple with uncertainty and volatility.
It seems that as soon as we have a handle on one crisis, another erupts. Unexpected shocks deplete our resilience and ability to adapt, recover and equip ourselves against future perils.
Insurance may compensate for some losses incurred, but our latest findings on global resilience make for sober reading. While we've seen an overall improvement in society's ability to withstand unexpected shocks in the last 5-10 years, underinsurance has grown to a record $1.8 trillion.
A newly introduced measure on agricultural underinsurance shows that a staggering 60% of global crop production is uninsured. Our research hence signals how underprepared we are for the next crisis.
Short-term policy thinking a threat to global resilience
Short-term and siloed policy thinking jeopardises our resilience to adverse events and has often left us with a false sense of security, when in fact perils like natural catastrophes repeatedly expose the weaknesses of our infrastructure and the vulnerabilities of our food and energy supplies.
We need a new, future-focused approach. One that galvanises the combined strengths of the public and private sectors to provide the scale and efficiency needed to support long-term stability.
By charging up existing partnerships, governments and the financial and insurance sector can pool resources, expertise, and risk, mitigating vulnerabilities in an increasingly complex world.
We must upgrade our existing infrastructure to cope with severe events
With climate hazards abounding, we most urgently need to adapt our existing infrastructure, buildings and crops so they can withstand severe weather events. Reducing expected losses helps protect economic growth and fiscal space.
We estimate that emerging markets alone need about $100 billion in investment per year through 2030 in the above-mentioned sectors to bolster resilience.
However, these are not just costs. As a plethora of existing research has shown, climate adaptation investments can generate economic benefits that outweigh initial spending by as much as $10 for every $1 spent.
That said, these financial needs fall disproportionately on the countries that can least afford the upfront investments.
"The $121 trillion international, publicly traded debt market is critical in funding sustainable and resilient projects"
The $121 trillion international, publicly traded debt market is critical in funding sustainable and resilient projects.
However, given that sustainable debt stood at $5.7 trillion in the first quarter of 2023, the overall sustainable debt market still constitutes less than 5% of the total bond market.
While global green and sustainable bonds are at an all-time high at nearly $3.5 trillion and continue to rise, there's clearly still a long way to go.
The harmonisation of international standards and practices is crucial to help ensure the bond market reaches its full potential.
Resilience bonds are a step in the right direction
We need more innovative financial instruments to meet the complexity of the risks faced. Artificial intelligence applications are revolutionising our lives – but what if we applied the same level of effort and resources to reinventing financial products?
A stronger commitment to transforming our capital markets has the potential to bring prosperity and stability to billions of people.
In this regard, we must accelerate the development of bond markets in many jurisdictions and regions, particularly in emerging markets. Doing so is essential to build emerging markets' structural resilience and depth to meet the vast needs identified as the deepest possible source of financing.
Resilience bonds represent a positive first step, but they are still very niche. We need more economic, growth-enhancing debt instruments for which standardisation in market instruments to lower investment barriers is key.
"We must accelerate the development of bond markets in many jurisdictions and regions, particularly in emerging markets"
Similarly to catastrophe bonds, resilience bonds aim to channel the raised capital into climate-resilient infrastructure investments that help reduce expected losses from disasters through climate adaptation.
Where risk reduction can't prevent all losses, governments can support the transfer of risk to insurers to protect assets and income and encourage long-term financial planning.
Investing in resilience means investing in the long-term ability to absorb shocks. The climate emergency means we don't have the luxury to continue to kick the can down the road. We are in this together and we must tackle this together.
Jerome Haegeli is Group Chief Economist for Swiss Re. Bryan Pascoe is CEO of the International Capital Market Association (ICMA).