Agreement Reached to Set Up a Loss and Damage Fund for Developing Countries at COP27

An Introduction to COP27
The United Nations Framework Convention on Climate Change (UNFCCC) entered into force on 21 March 1994, following its adoption during the ‘Earth Summit’ in Rio de Janeiro in 1992. The UNFCCC has a near-universal membership now, which consists of 198 countries, including all UN member states, the European Union, United Nations General Assembly observers, the State of Palestine and the Holy See, and UN non-member states Niue and the Cook Islands. The Conference of the Parties (COP) is the supreme decision-making body of the UNFCCC and is made up of representatives from all Parties. The COP creates a platform for Parties to negotiate global goals for tackling climate change, present their individual countries’ plans for contributing to the goals and report on their progress.

The 27th session of the Conference of the Parties to the UNFCCC (COP27) was held in Sharm El-Sheikh, Egypt between 6 and 20 November 2022 and aimed to bring Parties together to act towards achieving the world’s collective climate goals as agreed under the Paris Agreement and the UNFCCC. The three crucial points for discussion at COP27 were: adaptation efforts to climate change; the establishment of a Loss and Damage Fund by developed countries to compensate these countries for the harm they have suffered and to finance new adaptation efforts; and global progress on keeping within the committed global warming limit of 1.5 °C (2.7°F).

COP27 took place at a time of acute global crises, including high inflation rates, the war in Ukraine, the energy crisis and food insecurity, all of which have focused Parties’ attention inwards and away from climate action commitments. Unfortunately, this was reflected in COP27’s failure to ensure commitments on the phase-out of fossil fuels.

Despite the disappointment at COP27’s failure to achieve more, its silver lining was the historic decision to establish and operationalise a fund for responding to loss and damage associated with the adverse effects of climate change (the Loss and Damage Fund). The fund is meant to alleviate the effect of climate change on vulnerable countries which, despite contributing far fewer of the greenhouse gas emissions that cause climate change, are often the most hard hit by climate disasters.

Background to the Discussions on a Loss and Damages Fund
The impact of climate change is devastating and has already led to unquantifiable losses and damages. These losses and damages are disproportionately experienced by communities in developing nations which still depend on agriculture and livestock as major sources of income. According to the Intergovernmental Panel on Climate Change Report 3.6 billion people live in climate vulnerability hotspots.

Climate change has not only led to loss of livelihoods in these countries, but also degradation of farmland, biodiversity and the ecosystem which ultimately leads to loss of cultural heritage, indigenous knowledge, societal and cultural identity. Reduced food production from crops, livestock and fisheries increases risks to food security and therefore malnutrition in these countries. Disasters resulting from climate change, such as floods, also lead to the destruction of property, plants and infrastructure. Projected losses and damages are particularly high for island nations and other low-lying areas as the global sea level is expected to rise at unprecedented rates in the coming years.

The UNFCCC and the Paris Agreement define loss and damage as the economic and non-economic damages associated with slow onset events and extreme weather events. These frameworks provide guidance for the relevant tools and institutions to identify and mitigate such risks. Article 8 of the Paris Agreement recognises the “importance of averting, minimising and addressing loss and damage,” and calls for “enhance[d] understanding, action and support on a cooperative and facilitative basis with respect to loss and damage.’’

Various Parties to the UNFCCC have previously highlighted the urgency of enhancing understanding, action, and support necessary to meet the extreme challenges arising from climate change. Steps towards the creation of the Loss and Damage Fund began with the establishment of the Warsaw International Mechanism on Loss and Damage (WIM) that was established during COP19 in 2013. WIM plays three key functions in the context of loss and damage: enhances knowledge and understanding of comprehensive risk management approaches; strengthens dialogue, coordination, coherence, and synergies among relevant stakeholders; and enhances action and support.

Developing countries have consistently made various efforts to establish a finance facility or fund under the WIM, calling on their counterparts to scale up the mobilisation of resources to support efforts to address loss and damage.

Following a review of WIM during COP25, the Santiago Network (SN) was established to catalyse technical assistance to relevant organisations, networks and experts in implementing approaches to prevent, mitigate, and address loss and damage for developing countries particularly vulnerable to climate change. Parties agreed on the functions of SN during COP26 and set up a process to develop its institutional arrangement and means of funding. The Glasgow Dialogue, which is an annual session to discuss arrangements for funding activities to avert, minimise and address loss and damage, was also set up at COP26. First held in June this year, and set to run annually till June 2024, the Glasgow Dialogue will be a key forum for Parties to pursue the decision to set up the Loss and Damage Fund. The Funding Arrangement proposes that activities and considerations referred to therein be considered as part of the discussions in the 2nd and 3rd Glasgow Dialogue. The 2nd Glasgow Dialogue will specifically focus on the operationalisation of the Loss and Damage Fund.

A Summary of the COP27 Funding Arrangements for Responding to Loss and Damage
COP27 has acknowledged the urgent need to assist developing countries that are particularly vulnerable to the adverse effects of climate change and has finally decided to establish a funding arrangement to assist these countries in responding to such loss and damage (the Funding Arrangement). It includes a focus on addressing loss and damage by providing and assisting in mobilising additional resources to complement initiatives under and outside of UNFCCC and the Paris Agreement.

The Funding Arrangement also establishes a transitional committee on its operationalisation (the Committee). The Committee will be tasked with making recommendations for operationalisation of the Funding Arrangement for consideration and adoption by the COP in the 28th COP session (COP28). One of the interesting things to look out for in the coming days will be the constitution of the Transitional Committee which should be no later than 15 December 2022. The Committee is to have 24 members divided into 10 members from developed countries and 14 from developing nations spread through Africa (3), Asia-Pacific (3), Latin America and the Caribbean (3), small island developing states (2), the least developed countries (2) and the developing countries not in any of the preceding categories (1). The Committee will be co-chaired by one chair from a developing Party and another from a developed Party.

While coming up with the recommendations, the Transitional Committee will consider:
1. Establishing institutional arrangements, modalities, structure, governance and terms of reference for the fund;
2. Defining the elements of the new Funding Arrangement;
3. Identifying and expanding sources of funding; and
4. Ensuring coordination and complementarity with existing funding arrangements

The Committee will have the colossal task of coordinating the existing landscape of global, regional and national institutions that are funding activities related to addressing loss and damage and finding ways of enhancing collaboration between them. Therefore, one of the key challenges that the Committee will face is mapping out and creating synergy between different organisations, international bodies and institutions that are already undertaking activities to avert and minimise loss and damage. One such example is the implementation of early warning systems, which is already a key function of the United Nations Office for Disaster Risk Reduction (UNDRR), the World Meteorological Organisation (WMO), and the Climate Risk and Early Warning System (CREWS) set up by the World Bank. Many such overlaps within and outside the UNFCCC framework exist and will need to be coordinated, hopefully, to create a seamless and effective collaboration. Another issue the committee will grapple with while setting up and operationalising the fund is the uncertainties regarding methodologies for monitoring and assessing progress on, as well as the linkage and synergies between loss and damage and adaptation, finance, and equity.

This role of the Committee is crucial as it will create coherence in the system, prevent overlaps and ensure resources are utilised effectively. The Committee will also have to identify gaps within the current system, explore and come up with the most effective solutions to address them.

The Funding Arrangement also requires that the UNFCCC Secretariat conduct two workshops in 2023. The workshops are to draw participation from diverse institutions. Parties and relevant organisations have also been invited to submit views on the proposed workshops through the UNFCCC Submission Portal. This will be a good opportunity for stakeholders to give their views on the implementation of the funding arrangement on loss and damage going forward.

Also important to note is that UN agencies, intergovernmental organisations, and bilateral, multilateral and international financial institutions have been invited to submit inputs on how they might enhance access to and scale the availability of finance for activities relevant to addressing loss and damage. These organisations have been invited to submit potential limitations and barriers as well as options for addressing them. The arrangement also calls for the UN Secretary-General to convene a meeting with the principles of international financial institutions and other relevant entities to identify the most effective ways to provide funding for loss and damage. It will be important to pay close attention to these discussions as they will impact access to funding and the operationalisation of the fund.

International climate-related talks have historically been a preserve of state parties through various delegates. The private sector, has however, in the recent years joined the discussions and positioned itself as a key pillar in the implementation of environmental policies. African institutions took lead at the COP27 with 18 financial institutions in the African Business Leaders Coalition releasing a joint statement with Paris-aligned commitments and resilience plans. In the statement, the institutions committed to set company targets to drastically increase the share of renewables in their energy use that will contribute to the continental ambition of 27 percent of renewable power generation by 2030. The Funding Arrangement urges private parties, together with developed countries, UN entities and other inter-governmental organisations and institutions, to support activities addressing loss and damage.

Other COP Outcomes and Way Forward
Other COP27 outcomes include the decision by Parties to establish a framework for achieving the Global Goal on Adaptation (GGA). A workshop on the Glasgow Sharm El-Sheikh Work Programme on GGA will be conducted in 2023. During this workshop, Parties will plan on coming up with the GGA framework for consideration and possible adoption at the COP28. Whereas Parties agreed on a process to track the doubling of adaptation finance, one criticism already pointed out is that there is lack of clarity on how developed countries will double adaptation finance by 2025.

On reduction of emissions, EU, which has played an important role in maintaining the 1.5°C limit, announced at the COP its willingness to increase its Nationally Determined Contributions (NDCs) from 55 percent to 57 percent. This is still not enough to limit global temperature rise to 1.5°C by 2030 and scientists have already raised concern that the target may not be met on time. Emissions are still expected to rise 11 percent by 2030 despite incremental pledges made at COP27 and are required to fall by 45 percent for a chance to limit warming to 1.5°C. To make tangible headway, it will be important that countries to update their NDCs in line with the 1.5°C limit.

On climate financing, COP27 also saw calls made by Parties to the shareholders of the multilateral development banks to implement reforms to scale and improve development and climate finance. Industrialised countries have previously failed to meet their financial commitments of providing 100 billion dollars annually for climate mitigation and adaptation, causing mistrust and lack of credibility from developing countries.

The Climate Mitigation Work Programme was also adopted at the COP27. This programme essentially calls for Parties to voluntarily do more in their own capacity to mitigate effects of climate change. Parties were sensitised on the importance of data, planning, finance and private sector participation in establishment of adaptation and mitigation measures. It came out clearly at COP27 that governments and businesses need to develop robust adaptation plans as the world is already experiencing some irreversible effects of climate change.

Going forward, corporates need to integrate climate risk and adaptation planning in their core business strategy. Governments will also need to work more closely with the private sector and civil societies to plan, fund and implement climate mitigation and adaptation measures as the cost of inaction in form lack of preparedness during climate disasters becomes more apparent.

To the disappointment of many, other discussions did not yield much fruit as many agenda items were deferred to COP28. Commitments towards transition of energy to renewable sources for example is still far below the need. The Glasgow Climate Pact during COP26 to reduce the use of coal as an energy source was not extended to other fossil fuels. From the onset, the Glasgow Pact was criticised for using the word ‘phase-down’ which watered down the need to phase out the use of coal and other fossil fuels in tow. While there was collective agreement to invest more in renewable energy, failure to phase-out fossil fuels will continue to be a threat to the 1.5°C limit.

While the establishment of the Loss and Damage Fund is a big step towards helping developing countries to deal with the adverse effects of Climate change, its success will only be realised if the various stakeholders collaborate to pull together financial recourses. It will also be important that the Transitional Committee come up with a clear recommendation on sources of funding, recipients of funding and extent of funding for consideration at the COP28.

Meanwhile, all efforts to mitigate and adapt to the inevitable impacts of climate change, and to boost technological innovation and capacity building needed by developing countries as well as to limit global temperature rise, continue to remain relevant even with the set-up of the Loss and Damage Fund.

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Should you have any questions regarding applying ESG standards to business, please do not hesitate to contact Luisa Cetina and Wangui Kaniaru.

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Contributor
Bettina Okinyi, Trainee Lawyer