On day one of the COP28, on the 30th of November, the climate summit marked a significant milestone: representatives from 198 countries reached a consensus. They ratified a framework to establish a fund dedicated to financing loss and damage. The agreement was met with a resounding standing ovation from the assembled delegates.
Let’s scrutinize the various aspects and potential outcomes of this development
For decades, developing countries and small island states have been persistently advocating for dedicated funding since the early 1990s. Finally, as of the first day of COP28, this long-standing demand materialized into a historic agreement, signaling a significant and hopeful shift on a global scale. Besides, the early establishment of this fund at the summit is not only a remarkable achievement for climate-vulnerable nations but also sets the tone for more impactful discussions and decisions, particularly regarding fossil fuel policies, as COP28 unfolds.
The loss and damage fund launched with an initial commitment of USD 475 million, contributed by various nations: the United Arab Emirates with a generous pledge of USD 100 million, the European Union contributing USD 275 million, the United States offering USD 17.5 million, and Japan adding USD 10 million. This fund is a testament to global solidarity and a crucial step towards mitigating the impact of climate change on the most affected and vulnerable communities.
Although the establishment of the loss and damage fund signals an impactful contribution to tackling the effects stemming from climate change on vulnerable communities, several critical aspects of this fund remain shrouded in uncertainty, raising questions and concerns among the global community. As such, non-economic loss and damage encompass intangible and adverse impacts such as psychological trauma from experiencing extreme weather events like tropical cyclones, the disintegration of communities due to forced displacement, and the irreplaceable loss of biodiversity. However, it remains unclear whether the fund will cover non-economic losses and damages.
Currently, the financial magnitude and the scope of the loss and damage fund remain uncertain. The “Climate Vulnerable Economies Loss Report” by the Vulnerable 20 Group indicates that the financial needs are immense, possibly corresponding to several trillion dollars. The V20, representing 68 climate-vulnerable countries, reported a staggering loss of USD 525 billion between 2000 and 2019 due to climate change impacts, amounting to a fifth of their collective GDP[1]. Additionally, another study[2] estimated annual damages of USD 143 billion attributable to extreme weather exacerbated by climate change.
There was initial disagreement over the choice of the World Bank being as the fund’s administrator. Various countries voiced their opposition, citing the institution’s strong ties with the United States as a potential conflict of interest. Eventually, a temporary compromise was reached, allowing the World Bank to manage the fund temporarily while addressing other concerns. Furthermore, there are apprehensions that the fund might serve as an instrument for wealthier nations to increase their influence over less affluent countries, altering the dynamics of international relations under the guise of climate assistance.
The contributions from some of the world’s largest economies have also been a point of contention. The United States and Japan’s contributions of USD 17.5 million and USD 10 million, respectively, were perceived as disappointingly low by some jurisdictions, especially in light of the enormous financial requirements estimated for effective loss and damage measures and compared to their contribution to climate injustice.
While the establishment of the loss and damage brings to the fore a host of challenges and debates, it is envisioned as a crucial support system for those affected by climate change and represents a significant step forward in global climate policy. It aims to provide essential aid to vulnerable communities, such as families needing to rebuild homes after disasters, assist farmers whose crops are destroyed, and help relocate people permanently displaced by rising sea levels, etc. This fund is more than just financial assistance; it’s a lifeline for those facing the immediate, tangible, and intangible effects of climate change.
What financial institutions can do to advocate the loss and damage fund?
In alignment with the directives of ‘Decision 2/CP.27’, international financial institutions (FIs) are encouraged to contribute to funding mechanisms, adopting new and innovative approaches. Recognizing their capacity to improve access and enhance the speed, scope, and scale of financial resources for activities related to addressing loss and damage, these institutions have a crucial role to play. This includes overcoming potential limitations and barriers, as well as identifying solutions to these challenges.
Financial institutions are well-positioned to establish and offer innovative financial products such as climate bonds, catastrophe bonds, or resilience bonds. These instruments can raise capital specifically for projects that are tailored to climate-related loss and damage, and resilience-building efforts. Furthermore, the provision of insurance products and risk management services focusing on climate-related events is another vital area where FIs can contribute significantly. By doing so, they can assist communities and nations in managing the financial impacts of natural disasters, thereby offering a safety net for those most vulnerable to climate change. Additionally, financial institutions can strengthen the impact and reach of the loss and damage fund through strategic partnerships with governments and international organizations to pool resources and expertise. Thereby, they can create synergies in the global fight against climate change, reinforcing the effectiveness of the fund and ensuring a broader, more inclusive approach to addressing the multifaceted challenges posed by climate change.
[1] Available at: https://www.v-20.org/wp-content/uploads/2022/06/Climate-Vulnerable-Economies-Loss-Report_June-14_comp
ressed-1.pdf
[2] Available at: https://www.nature.com/articles/s41467-023-41888-1
