The World Bank is preparing to issue its first-ever drought bond within the next 12-18 months, signaling a significant expansion of its catastrophe bond (cat bond) offerings.
These instruments are designed to support countries grappling with the aftermath of natural disasters such as storms and earthquakes.
The drought bond, which will likely focus on Africa, is a new addition to the World Bank’s suite of cat bonds, which have been crucial in providing financial relief to emerging economies over the past decade.
George Richardson, the director of the capital markets and investment department at the World Bank Treasury, emphasized the importance of this initiative.
Catastrophe bonds offer financial protection to countries facing severe natural disasters like droughts and storms.“We would love to do something in the drought space; that is something we are working on,” Richardson told Reuters. He noted that this bond would address the needs of African nations, which have been particularly hard-hit by severe drought conditions.
The World Bank, through its lending arm, the International Bank for Reconstruction and Development (IBRD), has issued cat bonds for years, facilitating $568 million in insurance payouts to countries affected by natural disasters.
Most of these bonds have been concentrated in the Pacific and Caribbean regions, with Mexico being a prominent beneficiary. However, the World Bank is now in discussions with more countries to expand the geographical reach of these bonds.
Southern Africa has recently experienced its worst drought in years, driven by the El Niño phenomenon and rising global temperatures due to greenhouse gas emissions. This has resulted in record-breaking weather extremes, underscoring the urgent need for innovative financial instruments like the drought bond.
Richardson acknowledged that modeling droughts, wildfires, and floods presents unique challenges compared to earthquakes or storms, as these events require extensive historical data for accurate parametric triggers.
Nonetheless, the World Bank is committed to developing these tools to help vulnerable nations mitigate the impacts of climate-related disasters.