Moving from the Technical to the Political, the Transitional Committee Struggles to Bridge Fundamental Differences

While the meeting in Santo Domingo, Dominican Republic, at the end of August narrowed some choices, the fundamental differences, if not polar opposites between developed and developing countries respective vision for the scope, scale, eligibility and institutional home of the LDF, and its role and weight in any new and upgraded funding arrangements, persisted. This was evidenced during four days of discussions and anchored in two core submissions on draft terms of reference for the fund from the United States and the developing countries TC members discussed then -- notwithstanding the optimistic labeling of the American input as ‘bridging proposal’.  Since then, the TC members from European Union countries have likewise tabled a proposal, finding common ground with many of the American suggestions. A fourth proposal has come from civil society, echoing many of the core asks from developing countries.

Here is an overview comparing major provisions of these four distinct proposals on how the LDF should operate and be governed in table format.

With little time remaining in the TC process, which concludes with a final meeting (TC4) from October 17-20 in Aswan, Egypt, the stakes were high for a High Level Ministerial Meeting on September 22 on the sidelines of the UN General Assembly to provide the political push towards compromise, with the specter looming that the TC could conclude without agreeing on recommendations for operational modalities of the new fund; for broader new funding arrangements with actors, institutions and processes inside and outside the UNFCCC as well as the coordination, complementarity and coherence within the evolving landscape for loss and damage finance; and for expanding finance sources, including innovative ones. However, instead of showing political will for a middle-ground, a long list of ministerial statements in New York rather cemented than broke down diametrically opposed stances. Thus, the danger has grown that the TC could fall short of its core mandate in these four areas of work received by COP27 in its groundbreaking decision, leading likely to a slowing, if not postponement of getting the LDF on its way quickly to provide urgently needed support to developing countries and the most affected communities and people already suffering from catastrophic loss and damage.  A minimalist consensus document for example could set up an interim secretariat and ask for the LDF to start its work, but postpone difficult decisions to the first year of board deliberations. 

The progress and convergence achieved during the meeting as well as the remaining obstacles and divergences to overcome, were summarized by the TC Co-chairs, Outi Honkula (Finland) and Richard Sherman (South Africa), at the end of the meeting in a series of co-chairs’ summary notes, which attempt to provide a non-exhaustive, indicative list of issues resolved (relatively few) and remaining (too many). The summary notes, which the co-chairs made clear have no legal status, nevertheless provide a good overview over the myriad of issues and their interlinkages that the TC members are struggling with. They are a welcome, if belated burst of transparency following a TC3 meeting with two of its four days of deliberations in closed session, which civil society in the lead up to the meeting had criticized in an open letter, fearing that it could set a bad precedent for the fund’s future engagement with observers, and urging improvements for the remaining TC process to ensure that the voices and priorities of affected communities are heard and meaningfully included.

Governing arrangements of the fund

Which governance arrangements for the new fund the TC in the end will recommend to the COP28 will determine the nature and status of the fund, the principles by which it is guided, where it is housed, whether it has its own legal personality, who is eligible to access its funding and to whom it is accountable for the impacts and effectiveness of its operations. It will have impacts on the speed with which it can set up and begin funding and the independence which it can craft its operational policies, its ability to change flexibly over time – and thus stand the test of time – and the extent to which it can break away from existing approaches and donor orthodoxies and provide a new, fit-for-purpose approach centered around the realities and needs of the communities and peoples already suffering from loss and damage in a way that is equitable and just.

With the stakes high, members at TC3 could agree broadly that the new fund should have a board with regional balance and designated seats for small island developing states (SIDS) and Least Developed Countries (LDCs), that the World Bank should be appointed as trustee on an interim basis, that the fund needs a dedicated secretariat and that its board and secretariat should receive some guidance to direct its operation and ensure its accountability. They could not agree on much else.

Operating entity of the financial mechanism or not?

Developing countries have long maintained, and were steadfast in insisting at TC3, that the LDF should be an operating entity of the financial mechanism of the UNFCCC (its Article 11) and serving in the same function for the Paris Agreement, thus joining the Global Environment Facility (GEF) and Green Climate Fund (GCF) with this designation. From a developing country perspective, as expressed by representatives from Egypt, Columbia, China, Timor-Leste and Sudan, this provides clarity and assurance with respect to the eligibility of the new fund (accessible to all developing countries), the core principles by which it should be resourced, governed and its policies designed and operations run (based on equity and common but differentiated responsibilities and respected capabilities, CBDR-RC) and on its accountability to both the COP and CMA. In the view of TC members from Columbia and Egypt such a guarantee would be needed especially if the LDF would not be set up as a new standalone fund but placed under an existing institution. It also gives weight and status as highlighted by the TC member from Antigua and Barbuda for financing to address loss and damage as the third funding pillar in addition to mitigation and adaptation – and thus also as signal for the comprehensive coverage developing countries push for under the concurrently negotiated new collective quantified goal on climate finance (NCQG), which is to succeed the existing US$ 100 billion commitment from 2025 onward.

Developed countries, on the other hand, reject such a designation which in their view would limit contributions to and slow the operationalization of the fund. Representatives from the US, Germany and Australia, among others, made it very clear that the LDF should focus on widening its ‘contributor base’ beyond developed countries who have a funding obligation under the Convention and Paris Agreement and instead invite ‘all parties in a position to do so’ to contribute to the fund, with the TC members from the US and Germany arguing that developed countries had no funding obligation for loss and damage under either – a view they had already voiced during the mandated second workshop on loss and damage in Bangkok in July.  The TC member from France also argued that a speedy operationalization and the needed flexibility of the fund would be negatively impacted if it were established as an operating entity, citing his experience with the GCF, which he presided over as Board Co-Chair in 2021 and 2022.

Accountable to whom?

As an operating entity of the financial mechanism, developing countries want the LDF to be accountable to and receive guidance from both the COP and the CMA to ensure the compliance of its policies, programming and eligibility criteria with the UNFCCC and Paris Agreement. Developed country TC members including from Australia, Germany, the US and Norway don’t question the need for some reporting, oversight and directions, but argue that the accountability of the fund and guidance it can receive is not dependent on such a designation. They point as an example to precedent set by the Adaptation Fund. It was set up under the Kyoto Protocol and is now under the funding mechanism of the Paris Agreement and receives CMA guidance, but is not an operating entity.  The TC member from Germany suggested that similarly the LDF could receive guidance only from the CMA, which in effect would distance the fund from the Convention (and its eligibility criteria and funding obligations). However, as the developing country co-chair reminded the TC, the body derives its mandate from decisions from both the COP27 and the CMA4 and will make its recommendations to both governing bodies (COP28 and CMA5) to decide on the fund, including its accountability arrangements.

Stand-alone fund or hosted by an institution

The discussion about whether the new LDF should be set up as standalone fund (designed and operationalized from scratch such as the GCF in 2011) or housed under an existing institution (with both the GEF and the Adaptation Fund being set up under the World Bank and benefitting from it administrative policies and support) is generally presented as a potential trade-off between speed in operationalization and the long-term independence and flexibility to design modalities and structures in a way that transcends reliance on the operational policies and procedures – and mindsets – of existing institutions for a new fit-for-purpose fund. A paper prepared by the Technical Support Unit (TSU) for TC3 presented five options for the fund to be hosted (see the paper’s Annex I for a detailed comparison of implications of various hosting options), with TC members largely disregarding the possibilities for hosting the LDF under the GCF, the GEF, by the Adaptation Fund Board or as a multi-partner trust fund by an UN agency. This leaves placing the fund under the World Bank as a financial intermediary fund (FIF) as the hosting option many TC members consider most feasible, or even desirable.

Developed country TC members, including strongly voiced by Germany, Norway, Australia have long questioned the need for a standalone fund, highlighting the urgency required to provide funding to affected communities as quickly as possible. They point to the fact that it took the GCF close to four years before it funded its first projects in 2015. The US submission of the ‘bridging proposal’ wants the new fund, which it calls a ‘Resilient Future Fund’, to be set-up as a World Bank-hosted FIF, as does the EU TC members’ submission.

Developing countries prefer a standalone independent institution which would retain full authority over its policies, full authority to select the head of its fully independent secretariat and the ability to designate the full range of potential implementation partners. They point out that with lessons learned from the GCF a speedier set up in the case of the LDF is possible. Of particular concern are some of the stipulations under the existing FIF framework guidance by the World Bank. Approved in 2019, they did not yet apply to the GEF and Adaptation Fund. The new stipulations seem to suggest that a FIF with the secretariat hosted by the World Bank would need to fully comply with Bank policies and procedures, be approved by the World Bank Board initially and report to it regularly and seek its approval for ‘significant’ changes to its structure throughout the FIF’s life-cycle. Significantly, the FIF framework outlines limiting implementation partners for a World Bank-hosted FIF to multilateral development banks (MDBs), the IMF and UN agencies, thus undermining the possibility for direct access and enhanced direct access for developing countries’ regional, national and sub-national entities and communities under the LDF, such as those that could be grandfathered in through their existing accreditation with the Adaptation Fund and GCF (some 75 currently). The Pandemic Fund, cited by some developed countries as a good practice example for a World Bank-hosted FIF, currently does exclude direct access entities as implementation partners.

It is not clear if the World Bank would be willing to grant waivers on any of these provisions, as some TC members have suggested could be negotiated with the World Bank. Even in this case, as argued by the TC member from Egypt, only the designation of the LDF as an operating entity could provide the safeguard that countries that are not members of the World Bank, among them several SIDS, would receive access to LDF funding if the fund were a World Bank-hosted FIF, and for the independence of the fund’s policies from World Bank policies and procedures, including for the long-term.

Secretariat

All TC members agree that the new fund must have its own dedicated secretariat. However, its independence and the independence of its staff are tied to whether the fund is stand-alone or whether its secretariat is hosted by the World Bank under a FIF. In the latter case, the administrative and human resources policies of the World Bank would apply, which would designate staff to serve in the LDF secretariat. While developed countries argue that this would leverage the capabilities and the knowledge of World Bank staff and allow the new secretariat to start its work quickly, developing countries worry that this might transfer World Bank culture and ‘donor-driving’ thinking instead of bringing different funding approaches and diverse experiences to bear for a new funding approach. This point was also highlighted in the civil society submission for a proposed LDF governing instrument that called for the new fund’s secretariat to be gender- and geographically balanced and “committed to best practice work culture and adequately staffed with professional staff with relevant experience and expertise from diverse backgrounds (including financial, technical, social and gender, human rights, developmental, environmental and economic) and with an understanding of the lived experiences of affected communities in developing countries.”

Trustee

The question of the World Bank serving as a trustee is separate from whether the LDF is a standalone fund or a World Bank-hosted FIF, as the experience of the GCF shows for which the World Bank, after an interim status of several years, now serves as the permanent trustee. Thus, there seems to be consensus in the TC that COP28 could designate the World Bank as the interim trustee of the LDF, to be confirmed by its new board down the road. The role of the World Bank as trustee is seen as critical to collect financial inputs from a wide range of public, private and alternative sources of finance, including innovative sources such in the Adaptation Fund, which is scheduled to receive a share of proceeds from emissions reductions certificates under the Paris Agreement Article 6 market mechanism. This could potentially be to be replicated for the LDF, as suggested by Norway.

The Fund’s legal personality and its privileges and immunities

One of the strongest arguments for a World Bank-hosted FIF is the issue of the new fund’s legal personality and capacity and its ability to have privileges and immunities (Ps&Is) in the countries in which it will operate. Ps&Is are necessary to protect the effectiveness and efficiency of the fund’s operations and its ability to achieve its goals. With Ps&Is, the fund would not be subject to customs or taxation regulations affecting materials for reconstruction or local procurement and its staff in carrying out its work would be safeguarded and protected. While an independent new standalone fund could receive a status as an independent intergovernmental organization from the COP and CMA, confirming its legal personality, it would have to pursue Ps&Is through either an institutional linkage between the fund and the United Nations or through the adoption of a multilateral agreement managed through the fund’s board. Two other options, namely negotiating Ps&Is bilaterally (an approach that in the GCF after years of efforts only secured Ps&Is with some 30 developing countries) or linking disbursements or access to the granting of Ps&Is in the relevant recipient country are undesirable. In contrast, in a new fund established as a Word Bank-hosted FIF, the LDF would not have its own legal personality, but operate through the World Bank’s and the fund’s assets and its staff would benefit from the World Bank’s Ps&Is, but notably only in World Bank member states (with for example excludes Cuba which is eligible to receive funding under the UNFCCC, has received GCF funding, but is not a World Bank member).

Board

TC members from developed and developing countries continue to disagree about the exact size and composition of the new fund’s board, intrinsically linked to the fund’s institutional placement, including on a potential role for non-Parties, such as representatives from the private sector, communities, Indigenous Peoples or philanthropies. Developing country TC members stressed the need for an equitable and geographically balanced representation of all parties as enshrined in Article 11.2 of the Convention, which would ensure board members from all five United Nations regional groupings with designated seats for SIDS and LDCs, give developing countries a majority of seats (such as in the Adaptation Fund or in the TC process) and maintain a constituency set-up and structure of developed and developing countries, including via respective co-chairs selected by their constituencies. In contrast, both the US and the EU proposals foresee a representation model in which a significant number of voting member seats would be contribution-based (in additional to seats attributed to Western industrialized countries), thus essentially replicating a shareholder governance structure as in the MDBs, as the balance, that the US claimed could be achieved in this model, would only come with several developing countries becoming some of the largest contributors to the LDF.  This could also allow for the inclusion of a private philanthropic contributor as a voting member, such as the Gates Foundation in the Global Fund Board. Notably, the US proposal is currently the only one suggesting voice and vote for one representative of civil society, Indigenous Peoples, the private sector and philanthropy each.  The civil society suggested LDF governing instrument also envisions a possibility for designated voting board seats for affected communities and groups in a geographically and gender-balanced board – something developing country TC members are reluctant to consider as they see the LDF as party-driven. In their view, an LDF board, once constituted, could consider further “means to enhance engagement with observer organization”.  The other proposals indicate various numbers of designated active observers to ensure the ability of non-party stakeholders to engage in board proceedings short of a vote, following good practice precedent set by the GCF, but also the Climate Investment Funds (CIFs), something several developed country TC members from the UK, Norway, and Australia stressed in their interventions during TC3.

At issue is also whether the board will be a resident one, such as in the World Bank to allow for quick decision making after a climate disasters, as the TC members from the LDCs suggest, or whether speedy finance delivery could be achieved through board-delegation of some decision-making to the LDF secretariat, for example up to a pre-determined amount under a board-approved framework, similar to current GCF decision-making on readiness finance, or under country-specific programmatic investment plans approved by the board.

Principles

The designation of core principles to guide the LDF has clear operational implications, not only but also importantly for eligibility to access its funding and core financial inputs. During the TC3 meeting – and reiterated during the High Level Ministerial just weeks later – representatives from developing countries stressed that the principles of the UNFCCC and Paris Agreement, specifically those of equity and common but differentiated responsibilities and respective capabilities (CBDR-RC), must guide the new LDF. TC members from Brazil, Barbados, Sudan, Timor-Leste and the Maldives stressed that the fund has to be responsive to countries needs and priorities and work through and enhance national systems and policies, including through programmatic responsive and by providing direct support to national budgets. Representatives from Antigua and Barbuda, Sudan and Fiji highlighted the need to also consider Article 3.2 of the Convention and the extreme vulnerability of some countries and regions and the localized nature of loss and damage.  This also requires a recognition of possible data gaps, for example in LDCs or SIDS, and thus the need to accept and be guided by traditional and local knowledge as well as to minimize bureaucratic hurdles and transaction costs in ensuring that the fund is fit-for-purpose and dynamic in nature to evolve with the challenges over time, as highlighted by TC members from Antigua and Barbuda and Timor-Leste. Pointing out the climate-debt nexus, developing country speakers urged the deployment of new and additional, predictable grant-based finance to be provided by developed countries as a matter of equity and climate justice, with innovative financing to be considered to fill some funding gaps as long as it is progressively applied and considering equity.

A focus on funding to address priority gaps in existing funding arrangements for loss and damage and for priority developing countries and the most vulnerable population groups and ecosystems were the key principles for the LDF that developed country TC members from Germany and France stressed in their interventions. The TC member from the US, while agreeing with others that the fund should be operating in a transparent and accountable manner, and highlighting that it should be guided by efficiency and providing co-benefits through a gender-sensitive funding provision, also pushed back  on the notion of equity and CBDR-RC applying to financial inputs to the LDF. She argued that the COP27 decision establishing the fund was based on cooperation and does not involve liability and compensation and that there was no financing obligation for addressing loss and damage for developed countries that could be derived from the Convention. Instead the LDF should be sourced from a wide range of inputs, including from developing country parties with the capacity to do so, and thus a reference to historical responsibility was not warranted in the TC outcomes or as part of the LDF guiding principles.

Eligibility

Developing country TC members have maintained throughout the discussions that all developing countries under the Convention and Paris Agreement should be eligible to receive funding from the LDF, pointing out that the language of the COP27 decision with reference to “developing countries particularly vulnerable to the impacts of climate change” was accepted Convention language and did not exclude certain developing countries from access to highly concessional financing on the basis of income categorization or development status as is the praxis in MDBs. TC members from Egypt, Brazil, Antigua and Barbuda as well as Columbia urged to focus on communities in vulnerable situations and ensure nobody is left behind as a matter of fairness, with Egypt’s TC member pointing out that if some of the more restricted understanding of vulnerable countries developed countries suggest for funding eligibility would prevail developing countries that have suffered extreme climate shocks recently like Pakistan, the Philippines or now Libya would not receive support. These points were emphatically repeated also by a number of high-ranking developing country speakers including from Pakistan, Egypt and Chile during the High Level Ministerial in New York.

For the developed countries, their reading of the Sharm el-Sheikh decision language, as indicated by the TC members from Australia, France and the Netherlands, implies a prioritization of funding provision with a focus on the most vulnerable populations particularly in LDCs and SIDS. This is also highlighted in the EU TC member proposal, which equates particularly vulnerable developing countries with those two country groups explicitly.  For the US, while their proposal repeats the decision language from COP27, a proposed structuring of the fund in several sub-funds includes one for ‘small markets’ for countries with populations of five million or fewer and is thus clearly SIDS-focused. During the High Level Ministerial, a number of developed country speakers, representing among others the EU, the US, Spain and Germany, had emphasized that the LDF should have a priority focus on SIDS and LDCs.

Scope and allocation

The language in the decision from Sharm el-Sheikh establishing the LDF speaks to the comprehensiveness of is funding scope by stipulating that it should be “responding to economic and non-economic loss and damage associated with the adverse effects of climate change, including extreme weather events and slow onset events, especially in the context of ongoing and ex post (including rehabilitation, recovery and reconstruction) action.” Developing country TC members in their joint submission underscore this by stating that the “Fund’s scope and programmatic areas shall be based on the mandate established by the Sharm el-Sheikh decision.” The TC member from Egypt reiterated during the discussion that the role and scope of the LDF is clear as a ‘solidarity fund for impacted communities’ to allow them to regain lost development in accordance with this language.  TC members from Sudan, Timor-Leste and Columbia stressed in particular the need for the fund to tackle recovery, rehabilitation and reconstruction comprehensively.

Developed countries on the other hand have long argued, as did the German TC member, that the fund’s scope should be more precise and targeted on priority gaps and needs in what is currently not provided in wider funding arrangements and that the fund’s scope should complement but not duplicate activities already undertaken by other actors, such as through humanitarian assistance, as stressed by the Norwegian TC member. For several developed country TC members, including from Canada, Germany, the Netherlands and the US, establishing sub-funds under the LDF was the preferred way to indicate such funding priorities and narrow the LDF scope. While the US earlier in the TC proceedings had focused solely on funding for slow onset events (SOE) as gap to be addressed by the new fund, their proposal now suggests three sub-funds, namely a Slow Onset Events Sub-fund; a Recovery and Reconstruction Sub-Fund and a Small-Markets Sub-fund targeting countries with populations of five million or fewer. The EU TC member proposal envisions even five sub-funds in addition to the main fund, namely for LDCs and SIDS; for recovery and reconstruction, for pre-arranged finance (for example working with the Global Shield); for small grants (community-focused) response; and for human mobility (such as planned relocation).

The TC co-chairs in their summary note list as a growing consensus among their members that thematic areas that the LDF should provide funding for include recovery, reconstruction, rehabilitation, human mobility and a range of non-economic losses, including those related to ecosystem services and loss of cultural heritage, and that these should be addressed to the extent possible through programmatic approaches. However, developing country representatives from Columbia and China sharply pushed back against the establishment of sub-funds, as this would allow for ear-marking of financial inputs to specific sub-funds and could constrain eligibility as well as reflect contributor priorities or introduce access conditionalities. As pointed out by the TC member from Antigua and Barbuda, this could also result in allocation imbalance and underfunding of specific thematic areas and funding approaches. This is evidenced by the CIFs with their lopsided allocation where the mitigation-focused Clean Technology Fund with narrow eligibility only for emerging market economies attracted almost 70% of all contributor commitments, with the remaining 30% divided under eight additional sub-funds and programs, including the only one for adaptation. Developing countries, including from the Maldives and South Africa, instead argued for flexibility by giving the board the mandate to set up sub-structures such as windows later. Developing countries also disagreed on the inclusion of capacity building or preparedness funding such through pre-arranged finance in the scope of the fund, with TC members from Brazil, Columbia and Timor-Leste arguing that this falls squarely under adaptation (minimizing loss and damage) and is not focused on addressing loss and damage. Capacity-building and planning had been identified by developed country TC members from France, Germany, Australia and the Netherlands as falling under the purview of the new fund.

Country ownership

The need to reflect country ownership in the new fund, both as a guiding principle and in operational modalities, was highlighted during the discussion in Santo Domingo by both developed and developing country TC members.  Several developing country representatives, including from Bhutan, Barbados, Fiji, and Antigua and Barbuda, stressed that this required the fund to work through and enhance national systems where available, but also necessitated broad country engagement of the fund in the absence of adequate national systems to ensure country priorities and needs are reflected in all support provided. As pointed out by these speakers, under a country ownership understanding, funding should be provided to the extent possible not predetermined for distinct activities but as direct support to national budgets, also to allow for the flexibility by the recipient country to (re)allocate funding to other areas of addressing loss and damage as needs or priorities change. For their part, speakers from the UK, Canada and the US agreed that countries through programmatic engagements, including via investment plans, should set priorities and determine implementers, including on the sub-national and local levels and with a focus on stakeholder engagement of vulnerable population groups disproportionately impacted.

Access modalities and triggers

The meeting in Santo Domingo saw a spirited discussion about access modalities and triggers, with disagreement between developed country TC members from the US, Germany and Australia who saw the trigger discourse tied to allocation (and the prioritization of funding for some activities, geographies or countries based on limited resources), while developing country TC members saw it as one way of speeding up and automating funding release following a loss and damage event based on the impact of affected communities to all eligible developing countries. They point out that the allocation of resources (and prevention of a first-come, first-served disbursement) was not the least dependent on the scale of contributions to the fund.

With regard to possible triggers for consideration, the TC member from Barbados suggested that an indemnity-based trigger focused on magnitude of a loss and damage event and related impact on the economy of a country could be considered, such as 5% of its gross domestic product (GDP). Other speakers, including from Fiji, Sudan, Columbia and Antigua and Barbuda pointed out that there is no one-size-fits all trigger, that soft triggers (such as a declaration of national disasters) and country-driven specificity should play a role, and that the term itself is to narrowly focused on economic losses and damages. In their view, it has a connotation of parametric approaches and insurance, which would for example not be adequate for non-economic losses, such as loss of biodiversity or ecosystems. For those, the notion of thresholds might be better suited, as suggested by the TC member from Antigua and Barbuda. The suitability of triggers for slow onset events was also discussed, with one suggestion that this could be measured and calculated based on long-term cumulative impacts, although the issue of data availability and the need for science-based criteria was brought up in allowing for the complexity to define and set both triggers and thresholds. Members agreed that the setting of triggers at this point was premature, although some TC guidance was required. The TC member from Columbia suggested that the experts in the Warsaw International Mechanism’s Executive Committee (WIM ExCom) should be involved in the development of triggers by the LDF Board, while the Canadian TC pointed out that any agreement on triggers is linked to agreeing on the scope of LDF funding approaches. Several developing country TC members emphasized the importance of providing financial support, irrespective of the use of triggers or thresholds, in the form of direct budget support to national entities, which then would provide enhanced support and devolve smaller scale funding directly to communities. This is distinctly different from suggestions, such in the civil society proposal, but also in the EU’s suggestion for the LDF’s terms of references, to have a small-grant window or sub-fund directly accessible for affected communities and people.  

The TC members from Bhutan and Timor-Leste highlighted the LDC proposal for two distinct access modalities, which suggests a trigger-based direct support following extreme weather events and programmatic support for reconstruction to build back better and to deal with slow-onset events utilizing in particular direct budget. The LDC proposal for a trigger-based approach drew some inspiration from the EU Solidarity Fund, which helps EU member states hit by national disasters with losses exceeding 0.6% of their gross national income or € 3 billion, disburses a quarter of its support rapidly based on the soft trigger of declaring a national emergency, with the remaining portion released following comprehensive needs assessment. In 2021 alone, the EU Solidarity Fund provided over € 700 million for five EU member states affected by massive flooding, including over € 600 million to Germany.   

Sources

TC members agreed in their discussions that the LDF, supported by the trustee, should be able to receive a wide variety of sources of funding, including from non-public (NGOs, private sector, philanthropies) and innovative sources, given the scale of financing needs in the hundreds of billions annually. Their positions diverged on the importance and role of public finance, with developing countries expecting grant contributions from developed countries to form the bulk of the US$ 100 billion funding floor they envision in their joint submission, while developed countries want to widen the contributor base to call on all parties ‘in a position to do so’ to provide finances and do away with the differentiation enshrined in the UNFCCC and  reiterated in the Paris Agreement (where Article 9.1 mandates developed countries to provide financial resources to developing countries, whereas Article 9.2 encourages parties other than developed countries “to provide or continue to provide such support voluntarily”). TC members from France and the US, among others, urged to make the fund an attractive proposition to a variety of contributors such as for philanthropies or high net worth individuals or sovereign wealth funds, including by offering a board seat to major, including non-state contributors. Both the US and the EU proposals also explicitly point to innovative sources such a share of proceeds from voluntary carbon markets or international pricing mechanisms on maritime or air transport emissions. A TSU paper presented at the Santo Domingo meeting highlights a range of innovative sources, including the potential of special drawing rights (provided by countries to the fund, which the International Monetary Fund, IMF, could designate, similar to MDBs, as a prescribed holder), contributions from citizens (the Adaptation Fund experimented with such crowdsourcing) or investments in the capital markets.

Developing countries expressed some concern that the recommendations by the TC and a related COP28 decision on ‘identifying and expanding sources of financing’ for the fund as required under the TC’s mandate would not able to compel countries or international organizations such as the IMF to act. They also stressed that the principle of equity would have to apply to the consideration of international taxies and levies as sources to guarantee no-net incidence for developing countries. Thus, any such recommendations would at best ‘encourage’ bodies like the International Maritime Organization (IMO) or the IMF, without providing a clear pathway for action to be taken. However, this would not stop the application of levies or taxes to benefit the LDF either domestically or regionally in developed countries, as the experience with the French solidarity levy on airline tickets showcases.  Civil society groups have also long argued for the progressive application of polluter-pays-based tax approaches, such as a proposal for a ‘Climate Damages Tax’ for major fossil fuel companies, as a way to generate resources for the new fund. The discourse about innovative funding sources is also relevant for the mandate of the TC to define new elements of broader funding arrangements, where existing actors such as UN agencies or MDBs in various technical inputs have maintained their ability and capacity to do more, provided additional funding is forthcoming.

Funding arrangements

Throughout its proceedings, the TC and its members have struggled to get a clear and common understanding of what constitutes funding arrangements for responding to loss and damage, both in assessing gaps in existing ones as well as in recommending new ones. In the most general sense funding arrangements could be defined as the sources, existing funding instruments, processes and initiatives providing finance relevant for loss and damage under and outside the Convention and the Paris Agreement and often referred to as a ‘mosaic’ of approaches. One of the most contentious issues centers on the relationship between fund and funding arrangements. The complexity and divergence of views and interpretations continued at TC3.

Developed countries have long maintained that the range of actors and funding initiatives in the humanitarian and development finance sector already provides significant support in responding to loss and damage, although they acknowledge some gaps in speed, eligibility, adequacy and access, which they see the new fund tasked to fill in a targeted, but limited way to avoid a duplication of efforts. In this view, the new fund is but one player in the wider ‘mosaic’, which actually would ‘top-up’ with new funding what existing players are already doing and working primarily through existing actors. Developed country TC members pushed for a long list of specific and concrete recommendations on funding arrangements to be advanced to COP28 outlined in submissions by the US, Germany/Ireland and France. They were presented as an indicative list of issues with a heavy focus on reinforcing existing arrangements on pre-arranged finance and risk pools (such as the Global Shield or regional insurance facilities such as the African Risk Capacity), scaling up humanitarian assistance (by pointing to the work of UN agencies such as the UN Office for the Coordination of Humanitarian Affairs in providing more effective, timely funding, including for anticipatory approaches), human mobility (such as the Migration Multi-Partner Trust Fund), and recovery and reconstruction (suggesting for example an expanded role for debt deferment clauses under scaled up concessional loan provision by the MDBs and the integration of climate vulnerability criteria into allocation decisions).

Developed countries’ push for concrete and specific recommendations on funding arrangements to be advanced as part of the TC outcome to COP28 was met with resistance by developing country representatives, who felt that the suggestions were top-down and not country-led, as they for example do not consider how country-specific funding arrangements fit with the broader international mosaic of approaches, and were incomplete by missing for example relevant actors and approaches for non-economic losses. They also argued that broader issues related to instruments, debt or eligibility would have to be coordinated with and discussed within the LDF board.

From developing country side the starting point for the new funding arrangements for loss and damage, and the LDF’s future role within them, is the complete inadequacy of existing mechanisms in scale, scope, access, provision of liquidity, and eligibility.  TC members from Fiji and Timor-Leste stressed that even if scaled up, as suggested by the British and Dutch TC members, humanitarian assistance, because of its short-term focus, would not address recovery needs. The TC member from Barbados pushed back against the utility of pre-arranged finance citing his island’s experience that at most risk pools or risk transfers provide developing countries hit with cascading loss and damage impacts from repeated extreme weather events and parallel effects of slow onset dynamics a bit of breathing room, while suggested debt deferment clauses or debt-for-swaps were not addressing the nexus between climate and debt sustainably. The TC members from China, Timor-Leste, Bhutan, Brazil and Egypt reiterated the need for new funding arrangements to provide new and additional, non-debt creating resources in line with the principles of the Convention and Paris Agreement and with a clear loss and damage focus. This echoed a civil society intervention during the meeting which had called for the development of a set of criteria to transparently account for whether finance provided under the funding arrangements is addressing loss and damage. This is necessary to prevent, in the words of TC members from Antigua and Barbuda and Egypt, repackaging or ‘loss-and-damage washing’ of existing funding, for example for adaptation measures.

Developing country TC members stressed that they see the new LDF as the central player in the new funding arrangements and at the heart of technical and procedural coordination efforts with other actors to ensure complementarily and coherence. In order to do so, the fund needs authority provided by scale as a significant financial actor to have cloud with other actors outside of the UNFCCC. The developing country proposal on funding arrangements complements the LDF’s technical coordination role with the suggestion for a high level advisory and coordination dialogue, as well as adding existing COP and CMA structures as another layer for guidance, support and accountability. While the US proposal on complementarity and coherence had suggested a political high level ‘Resilient Futures Coordination Council’, which would bring together representatives from UN agencies, MDBs and IMF, multilateral climate funds, and experts every few years, it lacked a clear role for the LDF as a technical lead agency within the evolving funding arrangements for responding to loss and damage and reiterated the understanding by developing countries that funding arrangements responding to loss and damage were based on cooperation, and thus not subject to core principles under the UNFCCC.

Mandated Loss & Damage Events during UN General Assembly

During this year’s High Level 78th Session of the UN General Assembly, several events relevant for the work of the TC were held, including the UN Secretary General’s Climate Ambition Summit as well as two events requested by the COP27 and CMA4 decisions  establishing the fund. One was the UN Secretary General hosting the principals of international financial institutions (IFIs) and other relevant entities meant to identify additional ways that they could provide funding for addressing loss and damage. The other was a High Level Ministerial on Loss and Damage convened by the outgoing and incoming COP presidencies of Egypt (COP27) and the United Arab Emirates (COP28).

Climate Ambition Summit

While the Climate Ambition Summit featured high-level speaker after speaker decrying the need for urgent action and the compounding losses and damages devastating lives and livelihoods, the summit despite its name was largely devoid of ambition in new financial commitments to address the climate crisis, with just a few countries announcing new pledging for the ongoing second replenishment of the GCF, and even fewer (just Austria and Spain) highlighting in their speeches some (in the case of Spain miniscule) new financial commitments to address loss and damage. With the call for fossil fuel phase out and a fight against entrenched interest of the fossil fuel industry pushed strongly by many speakers (including from California, Columbia and Chile), the Prime Minister of Barbados called out excessive profiteering by the fossil fuel industry and challenged them to contribute directly to the LDF, echoing civil society’s persistent call for taxing fossil fuel companies through a climate damages tax. She and other developing country leaders from Kenya, Samoa, South Africa, Sri Lanka, Pakistan as well as the Egyptian COP27 Presidency highlighted mounting and unsustainable debt burden, urged debt relief and called for increasing the provision and accessibility of highly concessional additional finance to address loss and damage as a matter of fairness and climate justice.

Special Session with IFIs

At the session requested by the COP and CMA decisions establishing the fund and convened by the UN Secretary-General with IFIs, bilateral development institutions, insurance and risk pools, and existing multilateral climate funds on the sidelines of the Climate Ambition Summit, speakers – rather than identifying or committing to specific additional actions and commensurate new and additional financing for addressing loss and damage – highlighted largely what they are already doing related to loss and damage, although this comprised largely efforts to avert (mitigation) and particularly to minimize loss and damage (adaptation). In a way, this reinforced the opening and scene-setting comments by the Deputy Secretary General as well as an IPCC-expert that what is needed most at this point is adequate and predictable finance, and that the current financial institutions have failed to address loss and damage, especially in light of the fact that more than 50% of debt increases in the vulnerable developing country nations with 3.3 billion people are linked to disaster recoveries and reconstruction.

While several speakers from MDBs, including from the Islamic Development Bank, the Inter-American Development Bank, the European Bank for Reconstruction and Development, and the European Investment Bank extolled ongoing efforts to expand or introduce climate resilient debt or hurricane clauses on a case-by-case basis that would suspend debt payment for two years (as suggested as one approach among many by the Bridgetown Initiative) or swifter access to loans under enlarged crisis response facilities or individual debt-for-nature restructuring efforts, there was no commitment to a comprehensive and substantial debt restructuring or cancelation strategy by the MDBs. Nor does it seem to be considered under ongoing IFI reform efforts such as the World Bank’s Evolution Roadmap process. A number of principals from regional and global risk pools (African Risk Capacity, Global Shield, Pacific Catastrophe Risk Insurance Facility) , but also private sector oriented bilateral development institutions (British International Investment, US Development Finance Corporation) instead focused on their actions to engage developing countries and the private sector in early warning approaches and disaster risk response through risk insurance and risk pooling and the potential of pre-arrangement and trigger-based finance, urging more premium support as a way to provide contingent financing to actors in developing countries to deliver loss and damage ambitions. The four multilateral climate funds (GCF, Adaptation Fund, GEF, CIFs) likewise stressed loss and damage relevant activities as a significant part of their funding portfolio such as early warning services, hydromet or climate risk insurance support and their ongoing collaborative engagements to enhance coordination and complementarity in their funding,

With many of the prescribed activities, while relevant, clearly not focused primarily on addressing loss and damage, a civil society speaker urged that in order for funding provided by IFIs and other actors to be considered as finance to address loss and damage, they must fulfill a set of criteria, stipulating, inter alia,  that funding provided is non-debt creating; new, additional and predictable; equitably governed; can provide immediate response to and direct access from affected communities; and is human-centered and human-rights based taking intersectionality and intergenerational equity into account. Judged against these criteria, it is clear that many of the funding approaches described and institutions presented in this special event would not make the cut.

High Level Loss and Damage Ministerial

In advance of the High Level Ministerial on Loss and Damage convened by the COP27 and COP28 presidencies as part of the TC work plan, there was some expectation that the meeting could provide some political direction and guidance on possible landing zones for a compromise outcome document that the TC is expected to advance to COP28 for a decision on the way forward on operationalizing the fund and funding arrangements and to conclude its mandate. A summary of the discussions prepared by the co-chairs of the meeting will be shared with the TC in advance of its final meeting from October 17-20 in Aswan, Egypt.  The three-hour event with 67 statements delivered, however, failed to demonstrate the political will for bridging the fundamental divergences clearly laid out in the technical process of the TC. Instead, ministers and high-level speakers from developed and developing countries respectively reiterated core positions and opposing visions on what the mandated outcome of the TC process should be, with sharply divergent views centered on who should be eligible to access the fund and who should contribute resources to it.

Speakers from developing countries, including from Cuba for the G77 and China, Pakistan, Samoa for the Alliance of Small Island States, Argentina, Brazil, Senegal and Barbados, insisted that all developing countries should be able to access support by the LDF, reiterating that resources should be provided to the most vulnerable people and communities in developing countries, rejecting efforts of a differentiation according to income level or geography and urging that no developing country is left behind. This is different from the suggestion by developed country speakers from Germany, the EU, the US, the Netherlands, or Spain who made it clear that they see different levels of vulnerability with prioritizing access and funding allocation for SIDS and LDCs, based on set of vulnerability criteria or indicators.

Pushing for a standalone fund under the Convention and the Paris Agreement and subject to the principles of equity and CBDR-RC as overarching context to guide both eligibility as well as financial inputs into the fund, developing country representatives see developed country contributions of new, additional, predictable and adequate public grant finance as the basis providing the bulk of the new fund’s resources while allowing for flexibility in accepting innovative finance sources. For developed countries, all countries capable of contributing should provide support, with the speaker from the US explicitly rejecting that CBDR-RC would apply to the LDF and indicate an obligation for developed countries to contribute to the fund. The broadening of the contributor base beyond all countries ‘in a position to do so’, as stressed by the UK and the EU among others, would also mean involving private sector and innovative contributions to get to the scale required. Speakers from developed countries cited the necessities of efficiency, expedience and effectiveness as arguments for setting up the new fund with a dedicated secretariat under the World Bank as a financial intermediary fund (FIF).  

Both the outgoing Egyptian COP27 President and the incoming COP28 President from the UAE who chaired the meeting, in their opening and closing remarks reiterated the need to establish a dedicated fund for addressing loss and damage, urging more efforts to overcome political differences and calling on all contributing countries to deliver early pledges to the LDF. The representative of Samoa, speaking on behalf of SIDS pleaded for the early and ambitious capitalization of the fund no later than March 24, expressing the hope of developing for a scale of at least US$100 billion per year for the fund, an expectation also expressed in the submission by developing country TC members. Success at COP28, as stressed by a civil society speaker, will depend on ambitious financial contributions to the fund, primarily from developed countries, and for all developing countries to have access to the fund

Looking ahead

With only one four-day meeting of the TC left, scheduled to take place in Aswan/Egypt from October 17-20, time is running out to overcome fundamental divergences and still come to a compromise outcome document to be presented to the COP28/CMA5 for consideration and decision as required by the mandate given to the TC. To be able to find consensus on language, the TC recommendations, including on the terms of reference for the LDF, may have to be more barebones than many would like to see. For example, they may fall short of a fully fleshed out governing instrument for the fund and instead pass the authority – and some flexibility – on to the new fund board, expected to be  constituted swiftly after COP28, to flesh out further details. Likewise, recommendations on the funding arrangements might be a lot more criteria-focused and overarching, then a detailed list of actions, innovations and reforms a broad set of institutional actors inside and outside of the UNFCCC should take.  In a way, this would postpone resolution of some of the most contentious issues around the fund and new funding arrangements further, allowing for the extra time that many TC members felt they needed to further drill down on some issues, including for understanding the positions and motivations of those they disagree with better. The alternative – which essentially would signal a shortcoming of the TC to fulfill its mandate – would be for the TC to advance textual recommendations with competing options laid out in square brackets. This would subject the fate of the LDF and funding arrangements at COP28 even more so than seems already unavoidable to the vagaries of the climate negotiations, with bits and pieces being traded off and the real danger that the integrity of the funds’ vision, mission and its rapid fit-for-purpose operationalization could succumb to a COP28 negotiated package deal.