At COP27, Exchequer Secretary James Cartlidge will set out how the UK is introducing innovative new loan agreements to support countries most vulnerable to the effects of climate change.
- UK Export Finance to pause debt repayments for disaster-hit countries, allowing them to focus on disaster relief.
- The UK is also publishing design principles to underpin Climate Resilient Debt Clauses (CRDCs) for the private sector.
- A closer alignment between the public and private sectors on finance for vulnerable countries will play an important role in managing disasters.
UK Export Finance will become the world’s first export credit agency to pause debt service payments for low-income countries and small island developing states when they are hit by climate catastrophes, such as hurricanes and floods. This will allow vulnerable countries to be able to free up resources to fund disaster relief.
Focusing on recovery not debt repayment is critical for resilience
Climate shocks are increasing in frequency and severity and, in the wake of a disaster, vulnerable countries can face painful trade-offs between rebuilding their communities and making debt repayments.
Exchequer Secretary to the Treasury, James Cartlidge, said: “Today is a significant milestone in our work to find innovative solutions to these global challenges, and I am proud that UK Export Finance is the first export credit agency in the world to offer loans which suspend debt service payments for countries hit by climate catastrophes and natural disasters.”
Avinash Persaud, Special Envoy to Barbados Prime Minister Mottley on Climate Finance, said: “Adopting Natural Disaster and Pandemic clauses in debt instruments is the single most impactful way of making the international financial system fitter for the new world of shocks and for international development. And they don’t cost borrowers or creditors a penny. We have them in our bonds. They can free up fiscal space for borrowers just when they need it most without hurting creditors on a net present value basis. I cannot welcome and commend this initiative by the UK Government enough.”
Multilateral Development Banks (MDBs) have also agreed to collaborate through an informal working group to further explore CRDCs and other approaches, building on the Inter-American Development Bank’s leadership in this area. The UK is calling on all other lenders to explore adopting these flexibilities in loan contracts.
The UK and climate finance
The announcement is part of the UK’s wider commitment, made at COP26, to support developing countries to adapt to the impacts of climate change and for the UK to be the world’s first net zero-aligned financial centre.
Cartlidge said that the UK “continues deliver on our key funding commitments, spending £11.6 billion on international climate finance”. At COP27, the Prime Minister announced that the Government will commit to triple funding for climate adaptation as part of that budget, from £500 million in 2019 to £1.5 billion in 2025.
Public sector debt relief can serve as a model for the private sector
Cartlidge also announced the publication of key design principles which will underpin CRDCs for use in private-sector lending, and called for all creditors – including private banks, other bilateral lenders and international financial institutions – to explore adopting these clauses.
A ‘model term sheet’ for private lending including CRDCs has been developed and is to be published on the International Capital Markets Association website.