Addressing Loss and Damage conference - practical action: summary report

4. Innovative Finance to Address Loss and Damage

Given the current lack of public finance available to support action to address loss and damage, there is an urgent need to develop and deploy innovative sources and flows of finance to fill this funding gap in ways that are appropriate, effective and just. In this session participants were presented with case studies of novel and innovative sources of funding, and asked to consider how far these addressed the limitations identified among the existing mechanisms considered in the ‘Mobilising Finance: lessons learned’ session. They discussed how far current options address the urgency and scale required for loss and damage action, and what role the innovative approaches might play in shifting the financial burden away from the most vulnerable and most impacted. Finally, which actors are ‘agents of change’ in this area was considered.

It was suggested that private sector finance could be mobilised by making the case that, if unaddressed, loss and damage will erode productivity, market access and long-term profit rates. Some participants noted that private enterprises, from transnationals to small businesses, are already experiencing the negative impacts of climate change. They can act now to make their supply chains and business models climate resilient, supporting producers, processors, manufacturers and traders at all levels of the value chain to cope with and recover from climate shocks. It was suggested that addressing loss and damage can be integrated into businesses’ climate risk management plans and corporate social responsibility strategies. Loss and damage should also be included in Environmental, Social and Governance (ESG) targets of multinational companies and financial service providers.

Companies with philanthropic arms can follow the example of the Climate Justice Resilience Fund (CJRF) and the Climate Emergency Collaboration Group (CECG) by investing in actions to address loss and damage. Philanthropies, including CIFF and Oak Foundation, have also allocated finance for addressing loss and damage.

The V20 – a grouping of finance ministers from climate vulnerable countries – is establishing a small grants funding window for addressing losses and damages. This will include a crowd- funding component.^[18] In Bangladesh the German development bank KfW has provided an interest-bearing endowment fund to BRAC (one of the world’s biggest NGOs) to support the Climate Bridge Fund to strengthen the resilience of people displaced, or at risk of being displaced, by climate impacts. This finance is channelled to registered NGOs working with slum dwellers in four cities of the country.

The G20 Capital Adequacy Frameworks Review has identified key reforms of the multi-lateral funding agencies – the World Bank and other MDBs – to improve access to funds for climate resilience in climate vulnerable countries. Existing funds tied up in banks’ systems should be released, overly cautious lending approaches should be revised, and new guarantees should be afforded to climate vulnerable countries by richer countries.

There was significant interest in the potential of Special Drawing Rights (SDRs) to act as an innovative public finance option for addressing loss and damage in developing countries.^[19] A large share of the International Monetary Fund (IMF) SDRs remain uncommitted and could be allocated to developing countries to address loss and damage. While SDRs come as loans with conditionalities, the IMF has recently established the Resilience and Sustainability Trust (RST)^[20] that seeks to help low-income and vulnerable middle- income countries build resilience to climate shocks by providing longer-term, affordable financing to address climate change. This fund could be a mechanism for countries with excess SDRs to channel them to countries in need of resources. It is early days for the RST and it is hoped that the IMF will listen to the governments of climate vulnerable countries in deciding how to roll it out. The Bridgetown Initiative calls for the re-channelling “of at least US$100 billion of unused Special Drawing Rights (SDRs) to those [countries] who need it.”

Taxes (e.g., on fossil fuel companies, large polluters, shipping companies, airlines) could be used to raise finance for addressing loss and damage in ways that are consistent with the polluter pays principle.^[21] An air travel levy, as recently introduced in France, can be placed on domestic and international flights or on frequent flyers (individuals and companies). While raising finance for addressing loss and damage through taxation is considered technically feasible, achieving the necessary political will is a challenge.

Many participants expressed interest in the potential of strategic litigation as a means to unlock finance and to maintain climate ambition by holding major polluters legally accountable. It was suggested that recent legal actions by Vanuatu^[22] and the Climate Change Litigation Initiative^[23] indicate what litigation might achieve. Preferred routes for litigation vary depending on domestic legal frameworks. Ways to strengthen and use litigation aligned to delivering loss and damage finance include examining and learning from unsuccessful litigation cases, building capacity for litigation in climate vulnerable countries and CSOs, improving public access and understanding of relevant legal information, and climate-proofing new legislation.

A number of participants argued that debt relief offers a just mechanism to release finance, by opening up fiscal space in an affected country and by reducing the debt burden of highly vulnerable developing countries. It was noted however that this will not be a straightforward option. Debt cancellation does not automatically mobilise additional resources. While it could in theory allow countries to dedicate more resources to address loss and damage, governments would be free to decide what to spend the released finance on, and may prioritise other budgetary demands.

It was noted that the cancellation of harmful public investments such as the provision of government subsidies for fossil fuel extraction and production, air travel and industrial agriculture, have the potential to release significant amounts of finance that could be used to address loss and damage. As with debt relief, this would be a highly political process, and there is no guarantee that if a government agreed to cancel such subsidies that they would choose instead to invest in loss and damage action.