Addressing Loss and Damage conference - practical action: summary report

3. Mobilising Finance: Lessons Learned so Far

In this session participants were asked to consider what lessons can be learned from existing sources of finance for mobilising funds to address loss and damage. Following presentations on existing finance sources, participants were asked to consider the limits of those sources and how they might be overcome, and which actors are in a position to put the lessons learned into practice.

Developed countries (Annex I Parties to the UNFCCC) have pledged USD 100bn annually from 2020 for mitigation and adaptation. In total so far, they have only delivered about USD 20 bn for adaptation in vulnerable developing countries and USD 80bn for mitigation.^[7]

During the conference, participants recognised that whilst Multilateral Development Banks (MDBs) and UN agencies do provide finance for some projects that aim to minimise losses and damages through adaptation measures – early warning systems, cyclone shelters, flood defenses, social protection – these are few in number, small in scale and are not tagged as finance for climate loss and damage. MDBs provide significant finance for post-disaster reconstruction projects, but this is mainly in the form of loans. MDBs could mobilise new and additional finance for addressing loss and damage, and could develop new instruments to deliver that finance. Given the countries most vulnerable to climate change are often highly indebted, finance should be in the form of grants or debt relief, rather than loans which add to their debt burden. The Bridgetown Initiative issued by the Government of Barbados in July 2022 calls for “a global mechanism for raising reconstruction grants for any country just imperilled by a climate disaster”.^[8]

It was acknowledged that a fraction of Official Development Assistance (ODA) is currently used for disaster risk reduction, post-disaster recovery, anticipatory action and social protection related to climate shocks. Much of this ODA is also provided in the form of loans which imposes repayment costs upon recipients. Participants reflected that ODA targets are too low and too often left unmet. Moreover, some participants warned that allocating a larger share of already allocated ODA to address loss and damage would only shift the emphasis of climate finance that has already been committed, rather than create additional funding. Similarly, some participants argued that while humanitarian finance is often used to deliver response operations before and after climate shocks, it is far from sufficient to fill the loss and damage ‘response gap’ (see "A global climate policy framework on Loss and Damage").^[9]

There was significant discussion on the role of global climate funds, such as the Green Climate Fund (GCF). It was recognised that these funds do provide finance for measures related to avoiding and minimising losses and damages, but such finance is limited and often not appropriate for addressing the unavoidable impacts of loss and damage. Most GCF projects related to loss and damage finance measures are aimed at ‘averting’ and ‘minimising’, with funds flowing mainly to mitigation and adaptation projects under existing finance windows.^[10] Some participants stated that they do not consider GCF finance suitable for addressing loss and damage because it is difficult to access for the most vulnerable developing countries, slow to arrive, and challenging to report on.^[11] Thus, even though the GCF is the only financial institution mandated by the UNFCCC to provide Loss and Damage finance, the countries which are most in need are among those who are least able to access GCF finance.^[12] Concerns were also raised about the governance of global climate funds, considered favourable to the interests of developed countries over highly vulnerable developing countries. A government representative from the Global South noted that, “when there is a funder from the North and a politician from the South, the power is always in the hands of the North.”

Participants recognised that while loans can deliver large sums of finance to countries in need, especially for recovery and reconstruction programmes, they can impose an unjust burden upon recipients when they come with high interest rates, as is often the case for the most climate-vulnerable developing countries.^[13] This imposes a burden upon recipients that compounds the climate injustice. Loan repayments reduce the fiscal space available to countries to address loss and damage when shocks occur, and restrict their ability to invest in development. As climate hazards mount, affected countries will be forced to amass unserviceable debts, undermining their financial resilience and their ability to access other forms of finance. On this basis, participants recommended that Loss and Damage finance should be provided in the form of unconditional grants. The transaction costs of access should also be minimised, and local stakeholders should be able to play a meaningful role in ensuring financing arrangements ‘do-no-harm’.

Participants discussed the role of insurance and agreed that it provides a valuable mechanism for transferring risks through commercial markets (see case study summary in Box I below). However, participants also noted that insurance is not a silver bullet and should only be deployed as one tool within a suite of measures.

Insurance is a market mechanism rather than a fund, and needs to be designed and delivered in ways that are appropriate to the circumstances of affected people. Experience from a variety of contexts shows that, to be effective for poor communities, insurance premiums should be subsidised or covered by the state and they should be designed to deliver support rapidly following shocks, or triggered by early warning information. Valuable lessons have been learned in Ethiopia,^[14] Rwanda,^[15] and the Caribbean.^[16] These examples show that to invest wisely in insurance schemes, community members need to understand what they are paying for, what is insured and who will benefit. It is unclear how insurance could work in covering losses and damages caused by slow-onset events, or non-economic losses and damages. Furthermore, with loss and damage risks projected to escalate with continued global heating, there is concern that even more places will soon become uninsurable.^[17]

Participants concluded that while some funding is being provided to directly address loss and damage through existing financial mechanisms, the sums are insufficient to address the escalating needs of affected developing countries and accessibility is a challenge for most LDCs. New, additional finance is needed which is adequate for, and earmarked to, addressing loss and damage. It must also be delivered in ways that are appropriate to the needs of the people and places that need it the most.