After 30 years of climate change negotiations, COP27 will be remembered as significant because it agreed on the establishment of the Loss and Damage Fund (LDF). The LDF is a milestone for developing countries that contribute least to greenhouse gas emissions but severely suffer the brunt of the impacts of climate change. The rationale for establishing the fund was to support the most vulnerable countries from climatic shocks. Establishing the LDF is one thing, operationalising it is another. The mammoth task of coming up with recommendations on how to operationalise the LDF —for consideration and adoption by COP 28 and CMA 5 (Decisions 2/CP.27 and 2/CMA.4)— was delegated to a 24-member representative committee, known as the Transitional Committee (TC).
On the 3rd and 4th of November 2023, the United Nations Framework Convention on Climate Change convened the 5th and final meeting (TC5) of the TC to conclude and adopt its work on the operationalisation of the new funding arrangements and the fund to address loss and damage. At TC5, the committee adopted the Co-chairs’ proposal comprising (i) the cover decision to operationalise the Fund and the funding arrangements (ii) the Governing Instrument for the Fund (Annex I) and (iii) the draft recommendations of the TC in relation to the funding arrangements (Annex II). While the adoption of the document concluded a year’s work ahead of COP28, three contentious issues emerged that have a direct impact on Africa, as one of the regions that experience the adverse impacts of climate change.
The hosting of the LDF by the World Bank
According to the recommendations, the World Bank will host the LDF as a Financial Intermediary Fund (FIF) for an interim period of 4 years. Since the LDF will have legal personality, through the Board of the Fund, it will negotiate, conclude and enter into a hosting arrangement with the World Bank, as interim trustee and host of the Fund’s independent secretariat. This raises a number of challenges for countries in the Global South. Firstly, the proximity of the World Bank with the United States of America (USA), given that the President of the Bank is appointed by the country, brings into question the independence of the LDF. Being hosted by the World Bank also means that the LDF will have to adhere to strict policies and guidelines from the Bank. These might in effect have a bias of furthering the interests of the Global North, particularly those of the USA, at the expense of those of African countries. Secondly, the administrative costs associated with the Bank being host to a FIF are very high. The World Bank charges an administrative fee of 24% on top of high costs to host the secretariat, meaning that large amounts of money will be paid towards administration rather than being channelled to countries which would have suffered losses due to climatic events.
Who is eligible to access funds from the LDF?
According to the recommendations, eligibility for access to funds for developing countries will be assessed on the basis of vulnerability. This is problematic as there is no clear definition of vulnerability and it has been argued that such a criteria potentially impedes the LDF’s ability to respond to climate-related floods in middle-income countries like Pakistan and Libya. Providing more clarity in relation to eligibility to the LDF will be beneficial in the long run, especially for African countries which are not defined as least-developed countries (LDCs) but still experience severe climatic shocks.
Type of funding from the LDF?
The Fund will provide financing in the form of grants and highly concessional lending, based on the Board’s policy on the provision of grants, concessional resources and other financial instruments, modalities, and facilities using, inter alia, triggers, climate impact relevant indicators, debt sustainability, and other criteria developed by the Board. Providing loss and damage finance as loans —even concessional ones —is problematic because Africa’s debt is at its highest level in over a decade. Due to COVID-19, the Russian invasion of Ukraine, and soaring inflation, African countries have had to take on even more debt, and it is estimated that 21 low-income African countries are either bankrupt or at high risk of debt distress. In essence, what this means is that the LDF becomes another form of debt financing for countries that would have suffered from the devastation of climate change impacts. Instead of providing financial assistance to these countries, this type of proposed funding means that countries will be left with additional debt that will need to be repaid to the LDF, further exacerbating the debt distress that many African countries already face.
While the establishment of the LDF was a victory worth celebrating in COP27, the operationalisation of the fund is not without contestation. As it stands, it increasingly seems as though the independence of the LDF is in question with the recommendation of the World Bank to host it. Furthermore, the type of funding that will be provided by the LDF will seemingly be more burdensome to most African countries that are already debt-distressed. As countries prepare for COP28 to be convened in Dubai from the 30th of November to the 12th of December 2023, these concerns should be highlighted so that the LDF actually achieves the aim for which it was established: to be a new channel for multilateral finance to assist those countries to respond to loss and damage associated with the adverse effects of climate change.
Chantelle G. Moyo is a registered legal practitioner, academic and researcher. Her research interests are in environmental law, specifically mining law, climate change law and energy law. She holds a Ph.D in Law and Development focusing on climate change and energy governance and is a Certified Expert in Climate Change and Renewable Energy Finance.