Commentary

The Current State of Play on Financing Loss and Damage

Funding “nowhere close” to addressing scale and scope of problem, writes Preety Bhandari, Senior Advisor, Global Climate Programme and the Finance Centre at the World Resources Institute.  

Since 2000, over four billion lives have been impacted and US$2.9 trillion lost to disasters, the bulk of which are attributable to extreme weather events. This is the reality known as loss and damage, and its impact is set to increase drastically over the next two decades. The Intergovernmental Panel on Climate Change (IPCC) indicates that even if the world rapidly decarbonises, greenhouse gases already in the atmosphere and current emissions trends will make some significant climate impacts unavoidable through 2040. While this shouldn’t discourage action or hope, it makes clear that any climate action package is incomplete without serious action and financing to address the loss and damage that has already been set in motion.   

Across 2019-20, the average annual global financing for climate action came to US$632 billion. Of this total, about 90.3% went to mitigation and 7.2% went to adaptation; the remaining 2.4% went to activities that covered both. While some of this likely addressed loss and damage, there is no clear estimate for how much it was, nor is there a clear or comprehensive understanding of mechanisms to directly address loss and damage once a climate catastrophe hits. According to new preliminary research from World Resources Institute (WRI) to understand the existing landscape of financing for loss and damage, while there are some very limited activities underway that could potentially be classified as addressing loss and damage, these are often coded as adaptation or disaster risk management, and current funding is nowhere close to addressing the full scale and scope of the problem. 

Challenges for assessing loss and damage financing 

The Paris Agreement discusses loss and damage using the phrase “averting, minimising and addressing loss and damage”. Loss and damage can be averted by curbing greenhouse gas emissions (mitigation) and minimised by taking pre-emptive action to protect communities from the consequences of climate change (adaptation). Addressing loss and damage is the crucial third pillar of climate action: helping people after they have experienced climate-related loss and damage. All three pillars are interrelated. For example, if there is more mitigation and adaptation action, there will be less need for loss and damage support, but the opposite is also true.  

For our analysis, we focused on activities and finance that could be understood as addressing loss and damage, given that averting and minimising overlap a lot with mitigation and adaptation. Action on loss and damage must also be understood to go beyond relief, rehabilitation and recovery from disasters to include safe migration and resettlement and long-term security to re-establish lives and livelihoods. This is especially true as non-economic losses and slow onset events make it harder to define what qualifies as loss and damage. 

Because there is no official definition for loss and damage, there is no clear line between financing to address loss and damage and providing humanitarian assistance. While these two can overlap, they are not the same: humanitarian assistance is primarily in reaction to an event, while addressing loss and damage can involve that immediate response but also include proactive anticipatory measures such as contingency funds and insurance. To make a clear distinction between the two, a definition for addressing loss and damage is required, but discussions attempting to agree on a definition or scope can quickly become politically charged. Negotiators and policymakers must remain focused on the goal of supporting impacted communities by mobilising resources. In the case of humanitarian assistance, the conversation must focus on the funding gap and ensure that existing humanitarian funds are not diverted or relabelled. 

Moreover, recent Oxfam research shows that even when humanitarian aid is appropriate, the global community has not adequately responded to the scale of the need. Recent Oxfam research also found that funding appeals linked to extreme weather events are eight times higher than they were 20 years ago, and over the past five years, nearly half of all appeals have gone unmet. This has led to a funding shortfall of up to US$3 billion over the period. 

A further effect of this lack of a definition is that the current financial information available to the public does not provide clear tagging in government or institutional budgets to clearly indicate funds earmarked for loss and damage from climate related events. What’s more, while some organisations are collecting case studies to share lessons learned and best practices that can inform loss and damage finance discussions, this lack of tagging makes these case studies harder to learn from. 

What we know about the current state of finance

With neither an agreed definition nor a systematic way to classify loss and damage activities, it is extremely difficult to identify existing loss and damage finance. This preliminary research analyses multilateral, bilateral, domestic, philanthropy and private channels to estimate existing finance by identifying streams that may already include some resources for addressing loss and damage. 

While at COP27 in Egypt in November 2022, countries agreed to establish funding arrangements, including a new dedicated fund under UN Framework Convention on Climate Change (UNFCCC) for addressing loss and damage, the only existing multilateral source within the UNFCCC that seems to provide any funding for addressing loss and damage is the Green Climate Fund (GCF). 

study cited by the IPCC in its March 2022 report showed that about 24% of all approved GCF projects refer to loss and damage, while a subset representing 16% of all projects explicitly mention loss and damage linked to their main activities. The GCF has been mandated by countries to provide loss and damage support to the extent it is compatible with its investment and results framework (which does not explicitly mention loss and damage), existing windows and structures and responsive to the workstreams of the Warsaw International Mechanism on Loss and Damage. In its 2020 Annual Report, the GCF highlighted its support for activities to combat slow onset events such as sea level rise; comprehensive risk management such as investing in early warning systems and weather index-based agriculture insurance; and addressing non-economic losses, such as restoring wetlands for the ecosystem services that they deliver. 

However, the GCF will soon be complemented by a dedicated fund for addressing loss and damage. In March 2023, the Transitional Committee will be formed to provide recommendations for the operationalisation of the funding arrangements, including the new fund, with a view to taking decisions at COP28 in late 2023. 

The remaining sources under the UNFCCC — the Least Developed Countries Fund (LDCF), the Special Climate Change Fund (SCCF) and the Adaptation Fund (AF) — only seemed to provide funding for adaptation. The Santiago Network on Loss and Damage, whose functions were agreed upon at COP26 in Glasgow, is gearing to provide only technical assistance on loss and damage. 

Outside of the UNFCCC, the main sources of multilateral financing to address loss and damage are the Global Facility for Disaster Reduction and Recovery (GFDRR), the Global Risk Financing Facility (GRiF), and multilateral development banks. However, without a clear definition of loss and damage, it is hard to say with certainty how much of the financing from each of these entities actually supports addressing loss and damage. The GFDRR reported on three areas that show potential overlap with addressing loss and damage: Deepening Financial Protection (US$55.8 million in total funding as of June 2021), Building Resilience at the Community Level (US$94.3 million), and Enabling Resilient Recovery (US$10.2 million). Supported by the GFDRR, the GRiF seems to provide finance through insurance mechanisms. 

Separate from these sources, the Climate Vulnerable Forum (CVF), a coalition of climate vulnerable countries, and the Vulnerable Twenty Group (V20), a group of the finance ministers of CVF countries, along with G7 launched the Global Shield against Climate Risk at COP27. The CVF’s proposed initiative earlier in the year on a window to address loss and damage under their existing multi-donor trust fund, is now an integral part of the financing structure of the Global Shield. 

Looking at official development assistance (ODA), using OECD data on disaster-related ODA as a proxy, US$133 billion or 11% of international aid was disaster-related from 2010-2019 (with the caveat that this amount also includes disasters triggered by geophysical hazards such as earthquakes). Of this total, 90.1% was earmarked for emergency response, 5.8% was earmarked for reconstruction relief and rehabilitation, and 4.1% was earmarked for disaster prevention and preparedness.  While additional research is needed to further dissect the US$133 billion, these amounts make clear that ODA is an important source of finance that might address loss and damage.  

Meanwhile, many countries have established national funds to address loss and damage from disasters. These could play an important role in the eventual finance architecture for addressing loss and damage. The key question is to what extent these national funds can be geared to receive international funding and aligned with the UNFCCC agenda. 

Private sector actors including households, businesses and investors – through their coping, risk management and transfer mechanisms for disasters – are another source of potential finance for which no comprehensive dataset exists. 

Lastly, philanthropies and bilateral commitments also play an important role. At COP26, philanthropies including Children’s Investment Fund Foundation, European Climate Foundation, Global Green Grants Fund, Hewlett Foundation and Open Society Foundation pledged US$3 million to address loss and damage. COP26 also saw pledges from the governments of Scotland and Wallonia which committed £2 million (approximately US$2.5 million) and €1 million (approximately US$1 million) respectively. Since COP26, Denmark also pledged 100 million Danish krone (US$13 million) for loss and damage in September 2022. And at COP27, Scotland and Wallonia increased their pledges and commitments were also made by Belgium, Germany, Austria, New Zealand, Canada, Ireland, Spain, France, US, UK, and the EU – although some were not new, but rather specifications on existing pledges. 

All the forementioned sources demonstrate some scope for addressing instances where unavoidable losses and damages are incurred. However, despite this wide array of potential sources for financing for addressing loss and damage, it is not enough, and the Maldives Minister has wisely alluded to the need for a “mosaic of solutions.” A concerted effort is needed to make more high-quality, accessible and fit-for-purpose financing available, and the new fund established at COP27 should be designed with these features. 

Key considerations for international finance

In the leadup to COP28 where it will present its recommendations, the Transitional Committee will tackle questions including the current landscape of solutions, the gaps in the current landscape, ways to address those gaps, and potential sources of funding. There are important considerations to evaluate when designing a mechanism for financing to address loss and damage, according to our preliminary research. 

The first is ensuring that financing for addressing loss and damage is fit for purpose. Addressing loss and damage covers a wide range of circumstances, from extreme weather events to slow onset events and economic to non-economic loss and damage. Each of these may require a different approach to financing, further confounding the ability to come up with one concise form, definition or understanding of “financing for addressing loss and damage.” Any financing mechanism must be flexible so it can provide tailored support. 

The preliminary analysis conducted also showed that a large proportion of the finance that may address loss and damage seems to be geared toward rapid onset disasters, with limited availability and access for finance for slow onset disasters and non-economic loss and damage. Further research is needed. 

And critically, financing to address loss and damage should go to local decision makers where possible and appropriate. 

Not all financing is created equal 

In 2020, losses from disasters caused by climate-exacerbated natural hazards totalled US$210 billion and that amount is only estimated to increase. One study predicted that total residual damages for non-Annex-1 regions ranges from US$290-580 billion by 2030, US$551 billion-1.016 trillion by 2040, and US$1.132–1.741 trillion by 2050. 

However, while financing for loss and damage is classified as climate justice — and indeed it is — the story of loss and damage itself has its own inequities. One dollar of loss and damage for a family in poverty has a very different effect compared to US$1 of loss and damage for a wealthy family. Socioeconomic status determines the impact of an economic burden imposed by climate-induced losses and damages and also can determine who has access to social assistance following an extreme weather event. One report showed that after floods and landslides in Nepal in 2011, 90% of well-off people sought government support, while only 6% of the very poor did. 

Looking ahead 

While COP27 has delivered a historical outcome on funding arrangements for loss and damage including a dedicated fund, the real work will commence in earnest now to build a coherent framework and institutional arrangements, while ensuring there is new, adequate, predictable and accessible funding flowing to the vulnerable countries and communities. The Transitional Committee and the UNFCCC secretariat will be the fulcrum of action in this regard, and hopefully they will draw on existing work and expertise of various actors including think tanks, networks and consortia that are already looking at loss and damage finance and trying to answer critical questions on the who, what and how. 

The best available science shows that climate-induced losses and damage are here to stay and will keep increasing, so it will be essential to ensure that the world’s most vulnerable have the necessary resources in times of crisis. While more research and analysis are needed on this topic, policymakers should not use that as an excuse to slow the distribution of funds to vulnerable countries. At COP28, leaders should fully set the Loss and Damage fund in motion, while providing latitude for it to evolve to maximise its impact. 

This article was originally published here on WRI Insights and was co-authored by Nate Warszawski and Chikondi Thangata.   

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