In a bid to curb global warming and climate change, African leaders have launched the African Risk Capacity Extreme Climate Facility for climate change catastrophe bonds. The bonds — planned to be issued in 2016 — will provide additional financing to participating countries to enhance their climate adaptation investments. 

The facility (XCF) will be entirely objective and data-driven, using Africa’s 30-year climatology as a baseline.

The index will track increases in the frequency and magnitude of extreme weather events over and above an established baseline in each climate region of the continent. Should the index exceed a pre-defined threshold, bond maturity payments will be automatically made to countries in the affected regions and used to boost adaptation efforts.

Consistent meteorological information covering the entire continent is available since the start of the satellite era in the early 1980s and will be used to calculate a multi-hazard extreme climate index for each region in Africa.

Experts estimate that Africa needs to invest between $10 billion — $20 billion annually through 2050 to prepare for a 2°C-warmer world. 

“The XCF will offer African nations a new financing mechanism to manage climate risks by providing direct access to new private capital and by leveraging development partner contributions. We are leading the way in innovative climate finance,” said Ngozi Okonjo-Iweala, the chair of African Risk Capacity governing board.

Following the announcement, ARC will work with African states and their partners towards an effective and fair XCF design when nations convene in Paris next year for the UN Climate Change Conference.

Designed to access private capital and diversify the available funding sources, the XCF will be structured as a catastrophe bond programme, whereby its financial obligations to countries over a three- to five-year financing window will be securitised, issued as cat bonds and financed by capital provided from private investors.

Initial catastrophe bonds will total several hundreds of million dollars in value therefore setting the foundation for the issuance of more than $1 billion of African climate change bonds over a period of 30 years.

At bond maturity, if the XCF index does not trigger payments during a financing window then the capital provided would be returned to investors in addition to the yield collected through the annual coupon payments.

“XCF will ensure that African countries and the international community appropriately monitor climate shocks and will be financially prepared to implement specific adaptation measures in an effective and accountable manner, leveraging ARC’s existing public-private infrastructure,” said Richard Wilcox, founding director general of ARC.

“The XCF allows us to leverage private capital against the risk of increased frequency of severe climate events, while using public money to fund immediate and certain adaptation requirements,” said Dr Wilcox.