Undoubtedly, compensation for climate loss and damage is a just and genuine claim made by some of the poorest nations in the world against the wealthiest. It has been part of the debate at COP summits since they began in 1995, and under discussion before that. I was working as an adviser to the Alliance of Small Island States in 1991 when they first tabled a proposal for an insurance mechanism to help pay for the impact that climate change was having. It was rejected at the time, but if it had been accepted, we would have built up a substantial pool of insurance capital for the most vulnerable countries by now.
However, international agreement was diplomatically impossible to achieve thirty years ago. It is a sign of the progress that has been made in climate talks that the issue of setting up a global loss and damage fund has led the debate at COP27 in Egypt over the past two weeks. Yet the diplomatic hurdles that stand in the way of making the fund a reality are still huge, and they are stopping money getting to the most climate-vulnerable countries, who need it today.
The EU, for example, has made it clear this week that it is ready to support a loss and damage facility – but only if China pays in to it. China is very unlikely to agree to this, particularly if it is put under an obligation to make payments. Even if an agreement can be reached, the chances of one fund being large enough to be effective, while being internationally regarded as fair, are vanishingly remote. The loss and damage pledges we have seen during the COP27 summit in Sharm el-Sheikh from countries including Germany and the US, for example, are at least one order of magnitude out.
So rather than waste negotiating time on trying to reach agreement – and risk damaging the goodwill that is present by pitting developing countries against developed states – it’s time to put our energy into pragmatic solutions. Our starting point should be the acceptance that we need several different, smaller mechanisms to move money where it needs to go, at the speed required.
Time to make a start
Before going further into the detail of how this could work, it is important to be clear that the loss and damage fund currently being debated by negotiators is not a form of reparations. It is not a compensation fund for the totality of loss and damage caused by man-made climate change. Instead, what countries are engaged in is trying to use the relatively small amounts of public money available to meaningfully support poorer countries already feeling the harm of climate change.
One important step forward that could be achieved at this conference, as put forward by Professor Benito Müller, managing director of Oxford Climate Policy, is to give a mandate to one of the funds already available, such as the Adaptation Fund (recently replenished with US, UK and EU money) to create a pilot project and start getting the money flowing to where it is needed. Under Professor Müller’s proposal, the time-limited pilot fund would be operational by 2024 at the latest. At the same time, work on a longer-term loss and damage facility would carry on, with the intention of getting it up an running in the years after 2024, while still piloting innovative new sources of funding and loss and damage response tools.
We then need to optimize the public funds available by leveraging philanthropic and private sector participation. A particularly promising group of partners is insurers, which not only oversee a large pool of investment capital, but also quantify for financial markets the size of the risk of climate loss in different regions.
We are already beginning to see examples of public, philanthropic and insurer partnerships to support climate adaptation in vulnerable communities and ecosystems. Founded in 2007, the Caribbean Catastrophe Risk Insurance Facility (CCRIF) became the world’s first multi-country risk pool. Through contributions from numerous international governments alongside the World Bank – coupled with insurance and asset management partners – CCRIF has been able to provide low-cost insurance policies to member countries against various natural disasters.
This ultimately provides financial liquidity in the face of catastrophic events while encouraging climate adaptation. In all, CRIFF has made approximately $244.8 million in payouts since its inception.
Another example is the insurance broker Howden, which launched seven projects for charities this year, with 15 more planned for next year. The projects demonstrate the potential for parametric insurance – when certain thresholds are reached, money is automatically released – to meet some of the cost of loss and damage, and to respond to the need for increased resilience in climate-vulnerable countries. One such project is the catastrophe bond Howden, through its foundation, and other insurance groups, have developed with the Danish Red Cross. When levels of volcanic ash and prevailing winds reach a pre-agreed level that indicates highly populated areas are at risk from a volcanic eruption, funds are immediately paid out to the Red Cross so they can get aid to where it is needed at once.
No single solution
Insurance is of course only one important tool among the range of capital solutions that we as advisors should be looking at. Opportunities with particular promise are projects that provide short-term resiliency and long-term adaptation benefits to both public and private sector beneficiaries. An example of this is the Delta Blue Carbon Project in Pakistan. This project will restore 350,000 hectares of mangrove forests and tidal wetlands, sequester approximately 142 million tonnes of CO2e in its 60-year lifetime, and shield 49,000 local inhabitants from the immediate and future implications of climate change. With the first tranche of carbon credits purchased this year, the project is already demonstrating its value to the market.
Using a number of smaller mechanisms will also be more effective if they are geographically distributed in the regions where loss and damage funding is needed, rather overseen from one location. This is the aim of the G7 and the V20 group (the 20 most climate-vulnerable countries) for example, in setting up the Global Shield , composed of local and regional risk markets, with the aim of making financial protection affordable for countries where climate risks have driven up the cost of capital to unsustainable levels.
As projects of this scale become an increasing reality, it would be wise to leverage the entire suite of tools and partnerships at our disposal to tackle loss and damage now. While the private sector, governments and philanthropic organisations will push each other to drive innovation, the most climate vulnerable countries don’t have 10 years to wait while large wealthy countries argue between themselves, and with smaller developing nations, about who is liable for what in a potential loss and damage fund.
The work of the COP negotiators is difficult and laborious – it is a truly multilateral process between governments, investor groups and civil society, and their success in securing international climate commitments in Glasgow last year and at previous summits deserves our respect. Making the decision to address loss and damage using readily available financing tools, and delivered via a series of smaller funds at country or city rather than international level, would not be watering down our idealism or failing to face up to the problem. Rather, it would show pragmatism and innovation, as well as determination to harness the commitment on show in Egypt, and turn it into action.