Prioritising climate change mitigation in the OIC

Oussama A Kaissi, CEO of The Islamic Corporation for the Insurance of Investment and Export Credit (ICIEC) the export credit, political risk insurance and credit enhancement arm of the Islamic Development Bank Group, discusses climate risks and the insurance industry and how the Organisation of Islamic Cooperation (OIC) will prioritise climate change issues

Climate risks and the insurance industry

Climate change is one of the defining challenges of our times and represents one of the most complex issues that the international community has ever faced. The physical impacts of climate change already have profound and often devastating effects on societies worldwide, adding significant stress to food production, water supplies, health services, and economic growth. Stronger and more frequent natural disasters, for example, are destroying homes and businesses at record-breaking rates and putting entire food systems at risk.

The risks caused by climate change are multiple and systemic, and they will likely stress local economies and may even cause market failures that affect both consumers and insurers. Insurers face the dual challenge of addressing escalating climate change risks and shifting industry regulations; more frequent natural disasters combined with the evolving regulatory requirements can make insuring the risks caused by climate change both unaffordable for customers and unfeasible for insurers. The projected escalation of climate risks, such as the occurrence of more floods and wildfires, may even lead to underinsurance or no insurance at all.

Insurers need to understand these climate risks to help their organisations mitigate and adapt to them. The actions required include stress-testing their exposure to climate risk, rebalancing their portfolios away from carbon-intensive investment strategies, and developing products explicitly covering climate-related risk. Many insurers have begun incorporating climate-risk considerations into their new product launches and underwriting processes. Some have even publicly committed to reducing their exposure to carbon-intensive industries by specific deadlines. Insurers can no longer avoid or postpone addressing the risks of climate change on their underwriting, pricing, and investment decisions.

Responding to climate risks in ICIEC’s member countries

ICIEC’s 47 member countries are spread throughout the globe, spanning from South America to Asia and from Eurasia to Sub-Saharan Africa and many are located in some of the world’s most climate-vulnerable regions. Several member countries are classified as low-income and developing, and face challenges to attract the required capital to mitigate or adapt to climate change, despite being among the most vulnerable to its effects. The risks caused by climate change threaten to erase years of significant development gains made in these countries.

However, there is great potential to be realised in the way ICIEC member countries respond to climate change. If harnessed properly, an effective response can lead to economic and social prosperity for all ICIEC member countries and their citizens. As such, ICIEC understands it has a vital role to play in helping to drive investment for climate-resilient infrastructure in its member countries and is working consistently to address climate risks and improve its capacity as a climate finance facilitator.

ICIEC has increasingly provided support for projects that strengthen its member countries against the threat of global warming, helping them both prepare for and adapt to the many challenges of a warming planet and reduce vulnerability and the costs resulting from the impacts of climate change. ICIEC is committed to assisting each member country in reducing greenhouse gas emissions and achieving its sustainable development goals. An essential part of this assistance is to help mitigate and adapt to the threats of climate change.

Notable ICIEC climate projects, investments, and products

Recognising the critical balance to strike between a fast transition to a lower-carbon economy and continued economic health, ICIEC continues to provide insurance for fossil fuel transactions due to the centrality of fossil fuels to its member countries’ economies. However, ICIEC also plays a catalytic role in facilitating strategic projects that support climate action and has been instrumental in introducing renewable energy technologies in its member countries since its inception.

ICIEC provides support for investments, assisting with importing technologies and their use in national infrastructure projects, including creating solar energy systems and wind farms, developing solar-powered and ‘green’ buildings, and the support of environmentally friendly waste management solutions.

In Egypt, ICIEC provided $68 million in coverage toward the Benban Solar Complex, a 1.8 gigawatt project consisting of 30 different solar plants developed by different companies at a total cost of $4 billion. Upon completion, this solar complex is envisaged to become the biggest solar photovoltaic park in the world. It will provide power to hundreds of thousands of homes and businesses in line with the Egyptian government’s energy plan of producing at least 20% of its energy from renewables by 2022 and 40% by 2035. This landmark project also created 640 permanent and 18,000 temporary jobs.

ICIEC also provided cover for the construction financing of the Sharjah waste-to-energy (WtE) project. In partnership with SMBC, Siemens Bank, Abu Dhabi Commercial Bank, Abu Dhabi Fund for Development and Standard Chartered, this project is the first WtE project to be financed in the Gulf region as the Gulf states move away from landfills to more environmentally-friendly disposal solutions. The project, led by the UAE’s clean energy firms Masdar and Bee’ah, will help Sharjah reach its zero waste to landfill target and contribute to the UAE’s 2021 goal of diverting 75% of solid waste from landfills. In 2018, ICIEC was awarded the Project Finance International Award for Middle East Clean Energy Deal of the Year for its Sharjah Waste to Energy Project insurance.

ICIEC strives to ensure all projects meet their beneficiary member country’s environmental requirements. ICIEC uses the risk management framework, the Equator Principles, to benchmark the environmental impact of the projects it supports. A bespoke ecological impact assessment report is required with all applications for political risk insurance or non-honouring of sovereign financial obligations policy.

In addition to its covering of climate-resilient projects, ICIEC has begun building partnerships that allow it to leverage its products more effectively, crowding in private sector capital for climate-related projects. It has also started developing products tailored specifically for catalysing investment towards climate-resilient projects.

Specifically, ICIEC introduced its Green Sukuk Insurance Policy to allow Sukuk issuers to attract capital for ‘Green’ projects. The product is crucial for issuers in ICIEC’s higher risk developing countries. The product is at an advanced stage of development and is expected to be launched early next year.

ICIEC’s ongoing commitment to address climate risks

As we advance, ICIEC will continue to offer strong leadership in climate finance and remain a reliable partner by turning uncertainties into manageable risks. In this complex and challenging environment, each country forges a path towards sustainable development specific to its context. Still, building climate resilience must be a part of every country’s path forward.

As we look ahead, especially in light of the current global pandemic, we must focus on how we can build back better to create climate-resilient sustainable development for our member countries. ICIEC will continue to work towards being a leader in support of climate finance to help avert and mitigate the threats that climate change poses for its member countries and the world.