Damage caused by climate change: Can the new climate fund deliver what it promises?

When last year’s COP28 climate summit in Dubai adopted the charter for a new Fund for responding to Loss and Damage (FRLD) and invited the World Bank to host the secretariat of the new Fund, this was hailed as a major achievement. The most climate-vulnerable developing countries had pushed for decades for this funding mechanism as a matter of climate justice and global solidarity, while carefully avoiding the language of reparations to overcome developed countries’ history of objection, diversion, and delay tactics. Ultimately, developing countries’ unified push – supported by coordinated global civil society advocacy – willed the Fund into being. One year later, important deadlines at COP29 in Baku for the new Fund’s institutional set-up have been met against the backdrop of new global temperature records and devastating extreme weather events of unprecedented severity in 2024, highlighting both the need for the Fund and the urgency for action. However, the core work of agreeing on the scope, scale, and core operational policies of the Fund, including simplified and diverse access modalities to ensure it supports the most vulnerable communities in developing countries quickly and unbureaucratically, will only be tackled after COP29. Consensus on these is necessary for money to flow at the earliest by mid 2025.

Fuzzy on funding commitments and scale

How much money will the Fund be able to provide? This is still the key unanswered question, with who will pay into the FRLD and who should be prioritized for receiving the Fund’s support close behind. Pledges for the new Fund by 18 countries plus the European Union made at last year’s climate summit, amounting to 674 million US dollars, were quickly praised by developed countries as a paradigm for a new cooperative climate finance model. COP28 host the United Arab Emirates kicked in 100 million US dollars, outperforming commitments by rich developed countries like the United States (17.5 million US dollars) and Japan (10 million US dollars). Rich countries had pushed for language in the COP28 decision indicating that all contributions would be voluntary – thus distancing any support for addressing loss and damage from their existing financial obligations under the UNFCCC climate regime and the Paris Agreement for mitigation and adaptation as a matter of their historical and continued responsibility for the majority of carbon emissions. It further stated only that developed countries would “take the lead” in providing resourcing for “commencing the operationalization of the Fund.” This is not the same as rich countries’ clear commitment to securing the Fund’s financial future, let alone at a scale commensurate with growing needs for escalating loss and damages, which some recent estimates put at up to 671 billion US dollars per year by 2030.  Some new research has calculated what a fair share contribution of developed countries for an FRLD at scale addressing those needs would look like, with contributions in the billions required. Since the Dubai summit, only three additional countries and one region have come forward with new pledges, pushing the Fund's total to 702 million US dollars, with only 10 million US dollars delivered so far. And while COP29 is touted as the ‘climate finance COP’, additional, and especially large, new pledges for the Fund are unlikely, since rich countries are fighting the inclusion of loss and damage as a thematic focus of funding support in the new collective quantified goal on climate finance (NCQG) to be decided in Baku. If developed countries succeed with their priorities for a new NCQG, the new goal could replicate the Fund’s approach according to which all contributions would be voluntary. The NCQG is scheduled to replace the existing annual goal of 100 billion US dollars by 2020 set in 2009 in 2025. This original goal had developed countries providing public support for developing countries’ climate actions, but only for adaptation and mitigation. The future scale of the Fund is thus inextricably linked to the scale of the NCQG and its public support core and how loss and damage will be reflected in the structure of the goal.

Source: https://unfccc.int/process-and-meetings/bodies/funds-and-financial-entities/pledges-to-the-fund-for-responding-to-loss-and-damage 

Priority focus on meeting COP28 deadlines

The Fund, which is governed by a 26-member Board with a majority of 14 developing country representatives, including two each from least developed countries and (LDCs) and small island developing states (SIDS), initially was not off to a speedy start. Mandated by the COP28 decision to convene its first meeting by the end of January, the Board only came together after a three-month delay, as developed countries took their time to nominate their representatives. The Board, chaired by two climate finance veterans from South Africa and France with backgrounds and governance experience in the Green Climate Fund (GCF), faced an uphill battle and tight timetable to fulfill the mandates set at COP28 in just seven months over three meetings held in early May, July and September before COP29. The most prominent and important deadlines revolved around negotiating and finalizing the arrangements with the World Bank, which was invited by the decision in Dubai to set up the FRLD as a financial intermediary fund (FIF) with trustee services and administrative and technical support for its new dedicated Secretariat from the  World Bank. This was hugely controversial in the design phase of the Fund in 2023. Developing countries as well as civil society observers pushed for an entirely independent set-up of the new Fund to ensure it can operate differently from existing mechanisms. Developed countries were ultimately successful, securing a hard won compromise with their argument that the Fund would receive more support and start running quicker with structural support from the World Bank.

This arrangement will be interim initially for four years, but could become permanent dependent on an evaluation at COP33 in 2028  that the World Bank, which accepted the invitation to host the Fund in June of this year, will by then have met a set of 11 conditions to ensure the independence of the Fund and its Board for all funding decisions and operational policies. The FRLD is not part of the World Bank, but of the funding mechanism of the UNFCCC and the Paris Agreement and accountable to all its parties, which receive the Fund’s annual report and give guidance to its Board at the annual climate summit – not to the World Bank’s Board of Directors. Most importantly, Fund policies will have to be developed to allow developing countries to directly access resources from the Fund their own subnational, national, and regional agencies and entities in addition to using direct budget support and for small grant funding for affected communities – even though standard World Bank FIF-procedures limit implementing agencies to multilateral development banks (MDBs) and UN agencies.

In order for the Board to enter into the necessary contractual agreement with the World Bank – which it approved at its third Board meeting in September in closed session following weeks of negotiations, but which are not yet publicly disclosed – it needed to secure legal capacity and legal personality first. For this, the Board required a host country to confer that legal capacity. The Philippines, selected from among seven country candidates at the Board’s second meeting in July, did so promptly with an act of parliament signed by its President in late August 2024.  As the host country of the Board, the Philippines is also set to convene the majority of future Board meetings, including for the first time after COP29 in early December in Manila.

Inaugural Executive Director will set the Fund’s tone

The prompt selection of the Fund’s Executive Director through a merit-based and transparent competitive process was another COP28 mandate the Board was working to complete by COP29. This, too, was tied to the hosting arrangements with the World Bank, as the Executive Director – as well as the future staff of the dedicated independent Fund Secretariat – will be technically World Bank employees subject to the Bank’s human resources policies. The contractual language of the World Bank hosting arrangements is meant to reaffirm the full autonomy of the Fund’s Board to select the Executive Director and clarify their responsibilities, such as reporting requirements. The Executive Director will also have to navigate the dual loyalties of the arrangement with accountability to the Fund Board for development and implementation of Fund policies, procedures, and the execution of the Fund’s administrative budget, but also reporting to a World Bank Vice President for compliance with World Bank human resources policies for the staff of the Fund’s independent Secretariat, which the Executive Director will select. Already at its first meeting in early May, the Fund Board kicked off the selection process, which ultimately used a head hunting firm working with the World Bank to recruit and then establish a shortlist from a wide field of candidates. A final group of six candidates were interviewed by a Fund Board subcommittee, which narrowed the applicant pool further to the final three candidates who then made their case before the full Board at its third meeting in September.

The Board’s selection of Ibrahima Cheikh Diong as the FRLD’s inaugural Executive Director was publicly announced after he signed his World Bank contract for an initial four-year term starting November 1, 2024. A Senegalese and American national, he previously held several senior positions with the government of Senegal, as well as with the World Bank and its private sector arm, and with private sector banks. More recently, he was the head of the African Union’s African Risk Capacity (ARC), which delivers sovereign risk transfer and risk pooling insurance to African member countries following extreme weather events as well as outbreaks and epidemics. This background has some observers concerned that the new Executive Director could have a bias in favor of insurance approaches, long a developed country priority for loss and damage funding support, despite the fact that with escalating losses and damages insurability is reduced with premiums rising for lower payouts.

Mr. Cheikh Diong is expected to attend COP29 to introduce himself and his vision for the operation of the Fund and its Secretariat to a wider audience. As the inaugural Executive Director, he is in charge of setting up and staffing the new independent Secretariat as soon as possible – and thus managing the transition from the current interim secretariat with staff from the UNFCCC, the Green Climate Fund, and UNDP. His staff selection will set the tone for the new Fund. It will be an early indication of his willingness to bring in a diverse set of experts with a variety of backgrounds, lived experiences from frontline communities, and the ability to think outside of the box in climate funding – instead of drawing mainly from the expert pool of World Bank employees out of expediency. Undoubtedly, his choices and his own background will set the tone for and influence the development of operational policies for the Fund, which will accelerate after COP29, and thus determine if the new Fund can be truly innovative and conduct its funding in a way that is ‘business unusual.’ Several civil society constituencies have expressed their hope and expectation in a letter that the new Executive Director brings a strong commitment to a human-rights-based and gender-responsive funding approach to the FRLD by championing access to funding for affected communities, women and diverse gender groups, workers, Indigenous Peoples, and marginalized groups through devolving decision-making to locally-led approaches.

Will the Fund do ‘business unusual’?

In its three meetings throughout the year, the Board repeated the need for the Fund to be bold, different, and innovative responding to loss and damage, including by targeting funding in support of vulnerable communities. However, the Board has yet to develop a unified vision for the Fund and its ‘business model’ or define its place in the broader landscape of actors already funding some aspects of loss and damage response like humanitarian responders, insurance providers, or MDBs offering pre-arranged finance or reconstruction loans. Efforts for complementarity or coherence could see the new FRLD in the lead – as the COP28 seemed to intend by given it an important coordination role – or as following behind other already established actors in filling some funding gaps. Significant differences between developed and developing countries in the Board regarding the Fund’s intended scope, scale, and funding approach continue to linger unresolved from the 2023 design process and will need to be bridged for the Board to agree on core operational policies for the Fund, such as its access modalities or allocation framework.

A number of tough questions have to be answered, which will also determine if the Fund moves ahead with a country-owned, bottom-up process that would start addressing the financial support needs of developing countries’ existing systems and financial mechanisms, including by delivering funding quickly through those systems, or goes the procedural route of putting in place a set of sequenced operational policies first before any funding can be released.  Regarding the Fund’s scope, will it focus on providing funding for a purposefully narrow set of underserved loss and damage responses such as those focused on non-economic loss of culture or heritage or planning for slow-onset events, as some developed countries propose? Or will it fund a comprehensive response to loss and damage as developing countries demand?

The scope is invariably tied to the scale, especially if no new and improved developed country pledges are forthcoming. If the scale of the Fund stays in the hundreds of millions instead of in the needed hundreds of billions, will only a subset of needed activities and select developing countries and those communities deemed the most vulnerable receive funding? And if the Fund’s vision maintains the broad scope with guaranteed access for all developing countries, what should be the minimum floor for funding in support of SIDS, LDCS, and to local communities to acknowledge their special circumstances and vulnerability? How will scarce funding be allocated between rapid disbursements as urgent responses to extreme weather events versus programmatic approaches with planned investments to prepare for slow-onset events such as sea level rise forcing the relocation of communities? Will the Fund just primarily give grants to support public sector actors, since many developing are already trapped in the vicious cycle of spiraling debt burden due to loss and damage and having to rebuild over and over again after extreme weather events? Or will the Fund focus on private sector leveraging and de-risking and finance commercial approaches? And how should funding be best channeled: as direct budget support to governments and through direct access for national and subnational agencies, looking for unusual partners and funding approaches; or through MDBs and UN agencies as the ‘business-as-usual’ implementers?

How the Board will answer these questions is far from clear. It will decide not just the vision for the Fund but also the heart and soul of what the Fund can do for those that need the support the most. Both the discourse about the ‘business model’ for the Fund and its access modalities are on the agenda of the fourth Board meeting in December in the Philippines, as are policies related to the meaningful participation of observers, including from Indigenous Peoples, women and diverse gender groups, children and youth, workers, farmers and civil society and grass-roots community-based organizations who have an important role to play to ensure the success of the Fund. Several decades ago, the call for support to address loss and damage originated in the quest for climate justice and the acknowledgement that those that have contributed least to the climate crisis are suffering its worst impacts and are owed a climate debt by rich countries.  The Fund must respond accordingly.