Global Parametrics links climate risk transfer to microfinance funding

Global Parametrics has collaborated on a new climate risk transfer product that integrates parametric risk transfer with the provision of debt financing to microfinance organisations and initiatives.

CRED, or the Climate Resilience Enhanced Debt (CRED) product, has been jointly developed by Global Parametrics and Enabling Qapital, an impact investor and advisor of the Enabling Microfinance Fund (EMF).

The product, through its parametric triggers linked to climate, weather, or catastrophe risks, enables microfinance institutions to access emergency risk capital after a climate event occurs, helping them to provide continuity.

That means not only business continuity for the microfinance lender, but also for its clients, the microfinance institutions themselves, which importantly helps to increase resilience within the communities they actually serve.

Global Parametrics explained that when disasters strike, lenders often pull back liquidity, making recovery more challenging for the communities they serve.

The CRED product provides a quick paying, countercyclical source of financing to businesses to speed up recovery, through the use of parametric triggers.

Using Global Parametrics parametric index platform, an efficient risk transfer structure can be tailored to the climate risks of Enabling Qapital’s clients.

That means the Enabling Microfinance Fund can provide contingent financing on pre-agreed terms, triggered based on Global Parametric’s climate indices and triggers.

As a result, this contingent financing can provide Chamrouen with fresh cash post-disaster, enabling the microfinance lender to help its borrowers continue operating after weather or climate events, driving more resilient communities in Cambodia.

At the same time, the Enabling Microfinance Fund has also purchased matching parametric risk transfer protection from the Natural Disaster Fund (NDF), the risk capital pool which is managed by the Global Parametric team.

As a result, when a contingent loan is triggered for a more extreme climate event, the Enabling Microfinance Fund gets a payout from the Natural Disaster Fund (NDF) and transfers the majority to Chamroeun in the form of interest rate reduction or principal forgiveness.

It means tiered protection, for the microfinance funder and the institutions it lends to, making for a more resilient system to protect the end-customers financing needs and ensure continuity throughout that system.

Vice President of Global Parametrics, Dan Bierenbaum stated, “We’re thrilled to partner with Enabling Qapital on this innovative solution. With growing vulnerability to climate risks in emerging economies, we see the CRED product as an ideal way to get targeted financing into these communities post-disaster. Leveraging credit instruments provides a particular cost efficient means to deliver the emergency funding, which helps to make this protection more affordable for the communities that need it most.”

Chuck Olson, Managing Partner at Enabling Qapital also commented, “We have closely followed the pioneering work at Global Parametrics in mitigating climate risk, and are extremely proud to be working with them on the launch of our climate initiative. We believe we have found the ideal partner in Chamroeun, as their experienced team is already pushing boundaries in access to finance in Cambodia.”

Yannick Milev, CEO of Chamroeun added, “Having a strategic partner to help us respond proactively with adapted services to our agri-business clients’ challenges, while at the same time protecting our assets, is an important development for Chamroeun. Chamroeun’s ambition is to further expand its services to vulnerable families in rural areas, and this has been made all the more necessary by the current global Covid-19 pandemic. Indeed, building resilient and competitive economies in the agricultural sector is an important strategy for all stakeholders in Cambodia, but brings with it important risks associated to increasingly uncertain weather patterns. Chamroeun’s partners (clients) are the ones most vulnerable to these, and it is important we come together as a global community in initiatives such as this one, for us to all share the burden of that risk more equally.”

Linking parametric risk transfer to debt, lending and financing in emerging economies, or regions of the world affected by climate related risks, is a key way to enhance community resilience, by ensuring the capital flows in and out of regions of the world are protected.

This solution achieves that for microfinance, but perhaps more importantly it’s another demonstration of a model that can help global capital flows become better protected, if the onus was put on those commanding capital to protect it and its users against climate related risks.

Parametrics have a significant role to play in this type of protection, to support global capital flows against locking up, or impacts from climate risk, and it is relevant to much more of the global economy than just the development community, as global institutions should really be integrating climate risk transfer into their deployment of capital worldwide.

That’s one way communities can be buffered, by ensuring capital providers have a level of contingent protection to enable liquidity to be sustained and capital flows to continue as normal, even after climate disasters strike.