The Loss and Damage Fund at COP28 – a step in the right direction

Following the conclusion of the United Nations Climate Change Conference (COP28) at the end of last year, businesses and States have been considering the outcomes of the conference, and what comes next. (For a more detailed overview of the most significant outcomes of COP28, see here.)

One of the more encouraging developments following COP28 has been the highly publicised “Loss and Damage Fund”, which was finally brought to life via an agreement approved on the first day of the conference (see here). In broad terms, the agreement establishes a new international organisation with the ability to provide multilateral funding to vulnerable developing countries in order to help them respond to the adverse impacts of climate change. Those countries will be able to apply to the fund to obtain grants or highly concessional (non-debt creating) loans to fund repairs, adaptation and mitigation of climate risks. 

With commitments to the fund in excess of US$700 million, the beginnings of the Loss and Damage Fund look promising but, as ever, the devil will be in the detail, and implementation of funding programmes will be scrutinised carefully. 

The governing instrument of the fund also incorporates recent (and novel) practices in the creation of international organisations, making it a potentially important case study on how to establish an international organisation under time pressure with input from a large number of stakeholders.

What is “loss and damage”? 

The nebulous phrase “loss and damage” encompasses a variety of meanings depending on its context in multilateral negotiations.  

Taken to its lowest common denominator, loss and damage can be understood to refer to the impacts of climate change that cannot be avoided by mitigation and adaptation. At its outer limits, the phrase also encompasses more radical policy proposals to ascribe liability for climate change losses to developed States. 

Predictably, the key issue when loss and damage is discussed in multilateral negotiations is who should shoulder the burden for loss and damage caused by climate change. Even if a legal basis for liability could be identified under public international law (for example, based on a State’s duty to prevent transboundary harm), the evidence required to establish liability and causation may be challenging to obtain. And although States could work to develop a novel basis for liability – whether by treaty, or via the formation of a new rule of customary international law – the political will to do so does not yet exist.

For this reason, States have tended to steer away from liability-based models to address loss and damage and have instead favoured a multilateral finance model which enables developed States to provide funding to respond to loss and damage caused by climate change – effectively creating a global insurance policy for loss and damage. 

What is the Loss and Damage Fund?

As a concept, the Loss and Damage Fund has been much discussed – and prized by developing States – since the start of the UN Framework Convention on Climate Change (UNFCCC) discussions in the early 1990s. 

At COP28, the creation of an independent fund was agreed which will, for practical reasons, be hosted by the World Bank for a period of four years (assuming the World Bank can satisfy certain requirements to ensure the independence of the Fund). If, for whatever reason, the World Bank cannot provide the necessary support and guarantee the Fund’s independence, then a new host will need to be found. 

As a subject of international law, the Fund will be an international organisation in its own right, with separate legal personality from its host State. In particular, the Fund will have the capacity to enter into contracts, to acquire and dispose of property, and to institute legal proceedings in defence of its interests.

Provisionally, it appears that the Fund will be governed by a 26-member board, with broadly equal representation from the parties to the UNFCCC, and its own specialist secretariat. The Fund’s board will be required to make decisions by consensus or, where consensus cannot be reached after all efforts to achieve consensus have been exhausted, by a four-fifths majority of the board.

Non-State stakeholders, such as NGOs, will also be invited to participate in the meetings and related proceedings of the Fund’s board as “active observers”. 

What will the Loss and Damage Fund do?

At this stage, the precise functions of the Loss and Damage Fund remain to be defined in detail. However, the instrument announced at COP28 makes clear that:

• The Fund will be entrusted with the operation of the financial mechanism of the UN Framework Convention on Climate Change, which also serves the Paris Agreement. 
• Funding for affected States will be provided via grants and highly concessional loans – not via the creation of debt. The intent is to avoid the Fund operating in a way that is similar to the World Bank, given this was a sensitive point for developing States during negotiations for the Fund.
• The board of the Fund will develop a system for the allocation of funding. There will be a “country-led” approach to determine how funds are deployed, allowing States affected by climate change the ability to steer how funds to address loss and damage are used. This allocation system will take into account a number of factors, such as the priorities and needs of developing States, the need to safeguard against the overconcentration of Fund-support in any given region, and the response capacities of the impacted countries. 
• The funds will then be administered by the World Bank, as trustee, only for the purpose of and in accordance with the decisions of the board.

More broadly, it is envisaged that the new loss and damage funding arrangements will promote the coherence of and coordination across the existing global funding mechanisms and institutions for addressing loss and damage. The Fund is encouraged to play a key role in this coordination exercise. For example, the COP28 agreement specifies that the Fund should create an approach to develop partnerships, create standard procedures and make recommendations. 

As a bottom-line, there is scope for the Loss and Damage Fund to play a major role in addressing the adverse impacts of climate change. Whether it will live up to this potential will depend on the level of contributions made by States, the programmes to which funds are allocated, and the way in which the Fund itself is run (given it may, in due course, become a forum for the discussion of loss and damage). In this regard, governments and businesses will be watching to see if the request submitted to the International Court of Justice for an advisory opinion on the obligations of States in respect of climate change (see here) will have any bearing on the Loss and Damage Fund, given the potential for overlap.