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Why a loss and damage fund is essential

Author: ICAEW Insights

Published: 31 Oct 2023

Marion Osieyo, ICAEW’s Sustainability Manager, Society, explains why loss and damage fund negotiations matter to us all.

The concept of the loss and damage fund is 32 years old. It was first proposed by Vanuatu and small island nations at the 1991 United Nations Framework Convention on Climate Change in Geneva, Switzerland. The idea was that developing nations that were at greater risk from the impact of climate change – and less likely to be the cause of that change – should be given financial support to help them rebuild. This, the argument went, would help to redress the balance between the causes of global warming and its effects. 

While the loss and damage fund has been on the agenda since then, the world’s nations have yet to reach an agreement on what it might look like. Last weekend (21 and 22 October), a committee set up to agree recommendations on how to operationalise the loss and damage fund failed to reach consensus. Like so many other climate change-related issues, we have come so far, only for talks to falter at the last hurdle. 

An agreement on how to operationalise the loss and damage fund is one of the key indicators of success for the upcoming COP28 summit, but it’s more than that – it’s an essential element of transition planning and something that will become increasingly important for all of us as the impact of climate change worsens.

Key points of contention between developed nations and the most affected countries at the most recent committee session include the governance structure of the fund, its recipients and its contributors. Crucially, the US and other developed nations wanted the fund to be held by the World Bank, while developing nations argued for the formation of an independent institution. 

Developed nations are concerned that they will be exposed to unlimited financial liabilities, while developing countries see the World Bank as ill-equipped to facilitate the fund in an efficient and effective way.

This may seem like a distant and irrelevant issue for you and your business, but it is, in fact, a critical consideration for all transition planning. On top of the moral and ethical arguments that we have a duty to support countries and communities most affected by climate change, the loss and damage fund is also of strategic importance. 

These negotiations are critical because they are setting the terms and conditions going forward on how affected communities and states can access loss and damage financing in a timely, responsive and inclusive way. This has clear benefits for the rest of the world as climate change impacts become more frequent and intense. Today, it is countries like Vanuatu and Fiji who need the financing the most. Tomorrow, it might be cities and towns like Leeds and Dudley who need access to this finance. The impacts of Storm Babet – a drop in the ocean compared to what might come – demonstrates the relevance and importance of financial investment in climate resilience for the UK.

Further delay to agree on an operational mechanism for this fund delays a response to climate impacts that can no longer be avoided, increasing the risk and impact of economic and non-economic losses. More explicitly, an effective loss and damage fund would help to mitigate the supply chain risks that many businesses will increasingly face over the coming years. 

A loss and damage fund could also help mitigate financial instability. Many of the territories most vulnerable to climate change are also among the world’s poorest. Under future climate and nature loss scenarios, higher rates of debt default are already expected.

The economic costs of migration are also a consideration. Without loss and damage finance in place, many more people will be displaced, adding to the burden on public finances in nations that are more sheltered from the worst impacts of climate change.

Effective governance structures for the fund would ensure transparency and the participation of most affected communities and states. It helps ensure that financing is effective in supporting people who need it the most by allowing for feedback and decision-making by most affected countries.

Finally, it is a resilience issue: due to the hyperconnected nature of global markets and supply chains, loss and damage financing to most affected communities strengthens value chain resilience and global macroeconomic resilience, which is key for business continuity. 

The agreement of a loss and damage fund is not off the table. The committee will meet again before COP28 in the hope that an agreement can be reached. There are several options being considered, including a fund hosted by the World Bank both with and without conditions, the formation of a new independent institution and an open process to select the fund’s host. Others have proposed a loss and damage tax or levy on high-carbon industries as an alternative to the world’s governments footing the bill. 

When the committee meets again in Abu Dhabi in November, it is vital that it is able to succeed and that countries put their full support behind it. Denmark, Scotland and Belgium, among others, are big advocates of the establishment of the fund, and others should follow their lead. 

Whatever is decided, we need to see action now. We can no longer delay our mitigation and adaptation efforts. We must come together and put aside self interest for the sustainability of our global economy, society and the planet.

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