Loss and damage and climate finance

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Finance is the cornerstone for implementing climate actions and scaling up ambition, which is why much of the COP27 negotiations focused on this area. Three types of climate finance were under discussion:
 
1. Finance for cutting emissions
2. Finance to help nations adapt to the climate crisis
3. Finance for loss and damage already caused

 

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Finance for cutting emissions and helping nations to adapt to the climate crisis

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Nations needed to consider what a ‘just-transition’ to a net-zero future looks like, with a particular focus on how wealthier economies could help poorer nations – which have had less time to benefit from carbon-fuelled industrialisation – to leap to green energy and adapt to the climate crisis. 

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An interesting debate around the use of gas demonstrated some of the potential issues.  Some African nations, perhaps understandably, want to use fossil fuels to power development and bring electricity to their  citizens currently without access.  Most nations oppose this though, citing it as an unsustainable solution at a time when the climate cannot afford any new fossil fuel emissions. 

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A solution, proposed at COP15 (2009), was that richer nations would deliver $100 billion a year by 2020 to help poorer countries with cutting emissions and adaption to the climate crisis.  This target has yet to be reached, a fact ministers and heads of states from poorer nations pointed out in the build up to COP27.  

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There has also been further debate around whether $100 billion a year is indeed sufficient anyway.  In a report, jointly commissioned by the UK and Egypt (the former and current hosts of COP), published during COP27, the highly regarded climate economist Lord Stern calculated that £2 trillion a year would be needed by 2030 for the entire developing world (except China). 

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In the end, the COP27 agreement only goes as far as expressing “serious concern” that the $100 billion a year target continues to be missed and “urges developed county parties to meet the goal”. 

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Discussions did take place at COP27 adding “high income” countries to the list of nations already signed up to $100 billion target, including Saudi Arabia, Qatar and Israel among others but this didn’t make it into the agreement. 

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The agreement did highlight that $4 trillion is needed per year to be invested in renewable energy up to 2030 to reach net-zero by 2050.  The agreement also states that $4-$6 trillion per year is needed to ensure a global transformation to a low-carbon economy. 

 

Whilst COP27 didn’t provide the answers and firm agreements that nations wanted, some promising announcements were made including from UK Export Finance who became the first export credit agency to offer ‘climate resistant debt clauses’ (CRDC) in loan agreements.  CRDC’s will allow low-income countries to defer debt payments if they suffer a climate disaster and other nations committed to ‘loss and damage funds’. 

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In-focus:  The Bridgetown Initiative

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There have been calls, not only for contributions from wealthier nations, but also systematic overhauls of the current climate finance system.  One suggestion, named the ‘Bridgetown Initiative’ has received a lot of support and praise at COP27, not least from nations like France.  The Bridgetown Initiative was developed by Barbados, and it is expected to receive wide consideration and support beyond COP27.  Here are the key recommendations of the report

 

• Developed countries can exercise influence to push the World Bank and other multilateral development banks (MDBs) to better leverage their balance sheets. Recommendations from a G20 expert group could leverage an additional $1 trillion for climate and development finance. COP should build acceptance that these recommendations must be implemented.

• US and European leaders can deliver promises of emergency liquidity using $100 billion of Special Drawing Rights, through the IMF and MDBs creating fiscal space in developing countries, quickly, and without harmful conditions.

• Creating a Loss and Damage funding mechanism will support climate equity at COP. Political support for the UNSG proposal to tax windfall profits from oil and gas exports could be an important first step. At COP a group of countries could lead a feasibility study on this proposal.

•  Innovative funding mechanisms could unlock additional political capital for a paradigm shift in resource mobilisation. A Global Climate Mitigation Trust, borrowing on capital markets, backed by $500bn of Special Drawing Rights, donor guarantees, or similar instruments is another proposal. Hosted by the IMF or private sector arms of regional development banks, it would invest borrowed funds based on the size and pace of climate change mitigated, with potential to leverage private finance.

• Heightened recognition of the nexus of climate and development stimulates new ways to engage the private sector. Innovative instruments (debt for equity swaps, state contingent debt instruments, regional guarantee platforms) provide financing options for recipient countries, including the use of instruments that incentivize private finance, and could stimulate increased South-South investments.

 

 

In focus:  Climate finance and the private sector

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Finance-flows at the supra-national level are lacking the speed needed to deliver climate goals, and support developing nations with migration and adaption.  Discussions at COP27 have mainly focussed on national and government-led solutions but the private sector also has a critical role to play in increasing that speed, quality and quantity of climate finance.

 

The biggest hope for this is from the banking and finance sectors, with key institutions attending COP27 and signing up to the Net-Zero Banking Alliance (now at 120 members).  According to the Glasgow Financial Alliance to Net Zero (“GFANZ”) an additional $1 trillion will be needed for clean energy investment in emerging markets and developing economies by 2030 if the world has any chance of achieving net zero by 2050. 

 

Investment into emerging markets and developing economies is slow at the moment in part due to insecurity around Government support in the form of policies that support and promote climate finance and sustainable investment. Additionally, even though the UN published a list of 30 projects awaiting investment on Finance Day at COP27 to build confidence amongst financial institutions that there are worthy projects to invest in, opportunities still need to be unlocked.  Loan structures, such as green loans, also need tighter definition and regulation to ensure money is going to worthy causes.

 

One thing is clear:  Climate finance will need to be provided by nations, international institutions and private finance if we are to have any chance of being successful in the battle against climate change.

 

 

Finance for loss and damage already caused

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One of the key debates to be had at COP27 was the issue of ‘loss and damage’.  Nations who have been impacted the most by the effects of climate change, widely accepted to be the Global South, are seeking compensation by those nations historically responsible for its amplification, namely the Global North. 

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This debate is not new, it has been raging on for decades, but two new developments put this argument right at the very centre of negotiations.  First, there have been a number of severe weather events since COP26, including record flooding in Pakistan and a drought in Africa that is threating extreme hunger for over 150million people.  Second, and most significantly, scientists have attributed a causal link between global heating and more severe and frequent climate disasters. 

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Such negotiations are highly complicated but an agreement was the only option, with the legal route being too challenging as Jonathan Warner-Reed (Partner – Property Litigation) explains: “Proving individual causation will be difficult. There may well be an established causal link between global warming and climate disasters, but how are those nations involved to be held accountable, and by how much? At the very hint of compensation, the countries traditionally held responsible will seek to minimise their share of responsibility, and the first question they will ask is whether it is possible to match the level of carbon emissions from a particular quarter directly against a weather disaster in another? Indeed, how can it be proved that any one disaster would not have happened anyway, or how much worse it was than it might have been, had the responsible country not produced as many emissions? The questions of who caused what and how, and how one starts to calculate quantum are certainly fraught with difficulty and not easy to unravel.”

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Ultimately, a loss and damage fund was agreed by almost 200 countries at COP27.  This is an historic agreement which has been the subject of intense negotiations, not just at COP27 but for the last two decades. 

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The fund, which must be set up by the next COP in 2023, will finally see nations who have been impacted most by the effects of climate change, receive finance from those nations historically responsible for its amplification.  Contributors and recipients are still to be determined by a committee of 24 countries, although liability will not be ascribed to nation asked to make payments.  A key point of contention will be whether China, the world’s largest emitter, and India will either contribute to the fund or benefit from it.  All recommendations, including how the fund will work, will be presented at COP 28 in Dubai.  Responsibility for the funding mechanism is with the UNFCCC under the Paris Agreement. 

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Christopher Kerr, Head of DJB’s ESG Special Interest Group said: “The tagline for COP27 was ‘together for implementation’ which was a nod to all nations being united in the battle against climate change.  To achieve that all 196 nations had to have a difficult conversation around ‘loss and damage’, which has created much distrust between developing nations and wealthier states.  An agreement simply had to be made re loss and damage, or a united front would have been impossible.  So this outcome is, prima facie, a positive outcome.  Much still needs to be done, and I suspect the structure of the fund, and the finance made available to developing nations will be an equally important step in building unity.”