One of the biggest wins from the conference of parties number 27 (COP 27) at Sharm el sheikh in Egypt late last year was the move to establish the loss and damage fund. This is a monumental achievement for vulnerable communities and entities in developing countries who happened to be on the frontlines of the climate crisis. The main objective of the fund is to help developing countries with particular emphasis on those vulnerable to the adverse effects of the climate crisis supported for losses arising from climate change such as those caused by droughts, floods, rising seas, and other disasters attributed to climate change.
The outcome of COP 27 to establish a loss and damage fund represents one of the most significant breakthroughs in the climate change negotiations of the recent past and presents great opportunities for the first movers in climate matters. Insurance companies, financial providers and other private sector entities subject to their strategies and actions will emerge as winners when it comes to leveraging the loss and damage fund. This however will require technical knowledge and blue ocean strategies to unlock the value presented by this fund under formation. This hard-won deal is a turning point in acknowledging the vast inequities the climate crisis has caused and COP 27 will be greatly honoured by both present and future generations for successful negotiations that gave birth to the historic fund. The fund, when implemented will seek to offer financial support to the most vulnerable countries while the severely impacted middle-income countries may also apply for the support too. The vision of the fund is to make a provision for developed countries to provide finance for the recovery and rebuilding of poorer countries stricken by climate and environment-related disasters.
Public funding will not be sufficient to achieve the objective of the fund and hence the need for the leveraging of the fund by the private sector as we have seen on other funds such as the green climate fund. However, the establishment of the fund being a political goodwill, the fund’s sustainability will need to address some political and technical questions revolving around the structure, purpose, and operation of the fund in the future. One major question that will need to be answered is what constitutes “Loss & Damage’. While reflecting on Article 8 of the Paris agreement, there’s no official or precise definition of what constitutes climate-induced loss and damage. The focus should be on addressing impacts that are beyond adaptation and which cannot be avoided.
There is a need to devise a standard framework for tracking climate-related loss and damage. Similarly. there’s a need to make an analysis of available financial and non-financial resource requirements and the instruments needed for such funding. A common agreement on whether the allocated funds will go through existing government systems, the private sector, or a mix of both will need to be established. The success of the loss and damage fund will be determined by its ability to effectively deliver finance to support countries that are severely affected by the adverse effects of climate change but at the same time its ability to leverage private sector financing. Technical assistance to countries and the private sector on loss and damage should be a critical component of the fund when it comes to delivery of the loss and damage funding. Some of the challenges that I foresee include a convergence on which specific countries should contribute and pay the affected nations and to what quantum as well as the question of the affected nations. Could this be an opportunity for the financial sector?
If these institutions can be creative and look at climate change as an opportunity, they are bound to develop products and services that will speak to the objective of the loss and damages fund. This will call for the development of financial products that provide solutions to the private sector as a result of loss and damage caused by climate change and resource mobilizing for such product implementation. The introduction of a loss and damage fund needs not divert attention from focusing on the more urgent priority of fast-tracking low-carbon and climate-resilient transitions. However, the introduction of the fund is an important step toward justice, for the poor countries that’ve done little to cause the climate crisis but are suffering its worst impact. Nations and the private sector alike need to be challenged on the attention that they need to give to the recovery from climate-related risks. Loss and damage fund is a good initiative, but we should also not forget that mitigation and adaptation to climate change are still other priority areas that need accelerated action. The private sector holds the key to climate action, but governments must provide the enabling environment required for the private sector to engage.
Article by Dr. Edward Mungai