22 September 2014: In order to leverage available capital for climate change adaptation, African States are set to announce the African Risk Capacity (ARC) Extreme Climate Facility (XCF), a multi-year funding mechanism that will issue climate change catastrophe bonds. The bonds, to be issued in 2016, will provide additional financing to participating countries to enhance adaptation investments, in case extreme heat, droughts, floods or cyclones increase in frequency and intensity in Africa.

Estimated investments in Africa to prepare for a 2°C warmer world compared to pre-industrial levels range between US$10-20 billion annually through 2050.

Speaking ahead of the UN Climate Summit, Ngozi Okonjo-Iweala, Nigeria’s Minister of Finance and Chair of ARC’s Governing Board, said the XCF will offer an innovative financing mechanism to manage climate risks by offering direct access to private capital and by leveraging development partner contributions. He added that ARC will work with African States and partners to ensure that an “effective and fair XCF design” is in place by the 21st session of the Conference of the Parties (COP 21) to the UNFCCC in Paris, France, in 2015.

The XCF will be objective and data-driven, using Africa’s 30-year climatology as a baseline, with meteorological information used to calculate a multi-hazard extreme climate index for each African region. The XCF will track increases in frequency and magnitude of extreme events and if the index exceeds the pre-defined threshold, bond maturity payments will automatically be made to those countries in affected regions and used to increase adaptation efforts or scale up disaster risk management (DRM) mechanisms.

Designed to access private capital and diversify available funding sources, the XCF will be structured as a catastrophe bond programme, with scrutinization of financial obligations to countries over a three- to five-year financing period. Initial bonds will total several hundred million dollars, with more than US$1 billion of African climate change bonds to be issued over a 30-year period. At maturity, if the index does not trigger payments then the capital provided would be returned to investors in addition to the yield collected through the annual coupon payments.

Richard Wilcox, founding Director General of ARC, said the XCF will enable the leverage of private capital against the risk of increased frequency of severe climate events, while using public money to fund urgent adaptation requirements. Participating countries will be chosen based on, inter alia, whether they have robust and investment-ready climate change adaptation plans in place.

ARC was established as a specialized agency of the African Union (AU) to help member States improve their capacities to better plan, prepare and respond to extreme weather events and natural disasters, as well as to reduce the risk of loss and damage caused by such events.

African finance ministers agreed to the creation of the XCF at the Seventh AU-ECA Joint Annual Meetings in Abuja, Nigeria, in March, 2014. [ARC Press Release] [ARC Website] [IISD RS Coverage of the UN Climate Summit]