The Need for Innovation in Financing Loss and Damage Efforts

The creation of a new Loss and Damage Fund (LDF) agreed upon at COP27 in November 2022, represents a long and hard-fought win, especially for small and vulnerable states, and is an essential step towards climate justice. Yet, it is important to note that this fund is years away from becoming operational, let alone being financed. 

A team of transitional committee members, representing 24 countries, have been tasked with the work of making recommendations for how to operationalize the fund in time for the COP28 summit in November 2023. Given the need for consensus among all countries involved in the UNFCCC process, it can be expected that a formal agreement on the operational framework for LDF can take a longer time to be finalized.

Loss and damage, in its broadest definition, encompasses all the negative impacts of climate change including extreme weather events like hurricanes and flooding, and slow onset events like rising temperatures and ocean acidification. As the magnitude of loss and damage is expected to increase, the loss and damage fund is intended to broaden the donor base and introduce innovative finance tools to tackle the cost incurred by developing countries. 

Given the fact that the majority of the greenhouse gas emissions causing the changing climate, are being emitted by developed countries, they are intended to bare the brunt of meeting this increased financial need for funds to cover both the cost of immediate response efforts, as well as the rebuilding efforts. Financing proactive loss and damage efforts, for example, the provision of crop insurance for farmers, is also included in the overall remit around the LDF.

For me, it is quite interesting to see how the emphasis on the creation of an LDF has now reached the central stage of climate discussions among countries. For over a decade, I have discussed various aspects of such a fund with my good friend, Robbie Lyle at the Commonwealth Disaster Management Agency, one of the initial thinkers around regional catastrophic insurance programs. 

Proactive Efforts

The concept of proactive disaster efforts is nothing new. Since 1968, a national flood insurance scheme has been in place in the United States to help people affected by floods. In 1975, following the 1973 eruption in Vestmann Islands and the 1974 destructive avalanche in Neskaupstadur, the small island country of Iceland established a national disaster protection insurance scheme that all house owners were required to pay for. While partially funded through premiums, most national disaster insurance schemes require some form of guarantee or initial funding from the associated government.

Regional catastrophic insurance schemes have also been established, distributing the risk across several countries, many building on the model initially proposed by CDMA. An innovative combination of catastrophic bonds, linked with trigger-based insurance and guarantees from governments or international financial institutions have been used to establish these schemes. Yet, even with these innovative proactive insurance schemes, the core finance guarantees and backing has often been hard to establish.

Some of the most vulnerable groups of people, when it comes to climate change, are smallholder farmers. Over the past decade, climate-related crop insurance offerings for smallholder farmers have been introduced, either as a stand-alone offering or combined with other efforts. 

One of the largest social enterprises working with smallholder farmers in Africa, One Acre Fund, has included the cost of crop insurance in its program that provides smallholder farmers with climate-resilient and higher-yield seeds and appropriate fertilizers. Their program uses a sustainable microfinance model that provides micro-loans to smallholder farmers to buy seeds and fertilizers. The growth of their services to additional smallholder farmers, beyond the 3.2 million families they currently serve, is mainly limited by the base microfinance funding they can obtain.

This part of the LDF effort must not only be sufficiently funded it is also important that innovative new approaches leveraging the sovereign funding allocated to this effort are created. In recent years, combinations of trigger-based insurance products with the issuance of social impact bonds have created new and exciting solutions.

Immediate Response

The number of climate-driven and climate-related disasters continues to rise and they are increasingly intersecting with, and compounding, existing vulnerabilities in countries that are experiencing other types of crises. No clear financing mechanism is in place to address the immediate response costs, especially those born by local actors. 

An exception to this is the Disaster Response Emergency Fund (DREF) set up by the IFRC, which enables a quick turnaround decision on financing for both small and large-scale disasters for national Red Cross/Red Crescent societies. The DREF includes both a loan facility that provides start-up funding for the IFRC and National Societies to respond to large-scale disasters, which will later be reimbursed by donor contributions to an Emergency Appeal and a grant facility that provides funding for National Society responses to small- and medium-sized disasters, where no formal Emergency Appeal is expected to be issued. These

UN agencies have the ability to request rapid funding through the Rapid Response mechanism of the Central Emergency Response Fund (CERF), but it predominantly is used by UN agencies and not INGOs or local organizations. In some countries, the INGOs have joined forces when it comes to fundraising for emergencies and created collaborative funding vehicles such as the Disaster Emergency Committee in the UK.

For most developing and small island countries, funding for local emergency services and response organizations in times of crisis requires governments to either appropriate additional funding (leading to increased foreign debt) or by cutting other critical government services. Local civil society organizations are also very limited in their abilities to seek funding for their work and often they need to depend upon becoming local implementation partners for INGOs and UN agencies.

At the same time, the humanitarian system is aiming for more localization, and the system financing response efforts must also go through localization. New and innovative ways to finance local response efforts must be put in place and it must be considered if local response capacity-building efforts should fall under this funding structure.

Recovery and Rebuilding

Often, when the media limelight of the initial disaster and response efforts disappears, so does the funding for the recovery and rebuilding efforts.  Response organizations leverage the remainder of their initial funding to launch early recovery efforts, but given the fact the focus of donors has already moved to the next emergency, these efforts often fail to achieve impact as the funds run out.

The mantra of “building back better”, became a favorite term to use when it came to disaster risk reduction and rebuilding efforts and was even reused by the Biden administration for recovery efforts after the pandemic. While the term was heavily promoted by all sides of the humanitarian and development sector, the funding for recovery and rebuilding efforts did not increase dramatically, while at the same time, the damage costs for climate-related disaster has grown each year. It is estimated that in the US alone, $165 billion of damages can be attributed to weather and climate-related disasters in 2022.

The lack of funding for recovery and rebuilding must be addressed through new means. It is not possible to simply expect that these funds will come from overseas development assistance or government funds, especially in developing countries affected by weather and climate-related disasters. We must think outside of the box and come up with innovative new models of financing these efforts. 

We must engage the private sector, the philanthropic sector, and the governments of the world to work on new and innovative financial mechanisms that address this. Otherwise, we will see rapid growth of food insecurity and mass migration at a much bigger scale than today, both of which will become much costlier to deal with. 

The Need for Broad Collaboration

None of this will happen unless we are willing to rethink our approach to dealing with this crisis. We must break down the barriers between the different sectors that need to be involved. We must initiate talks across those boundaries. It is not enough that governments talk with other governments, we must have the private sector, the financial sector, and the philanthropic sector sitting down with each other and building the new and innovative solutions we need to address the great challenge.

This is not solved by inviting a few corporates to the next COP meeting held by governments, nor by inviting a few governments to the next Davos meeting. We must create new global, regional, and local forums where all of these sectors come together on an equal footing and start working on solutions to deal with the ever-growing loss and damage from climate change. We can’t wait for slow intergovernmental processes to be completed, the need for action is now!