A Victory for Loss and Damage, and a Litmus Test for the World Bank

More heavy flooding from monsoon rains forced some to carry their flood relief aid through high waters in the Qambar Shahdadkot district of Sindh Province, Pakistan, Sept. 9, 2022. (AP Photo/Fareed Khan, File)

After five meetings around the world (Luxor, Santo Domingo, Bonn, Aswan, and Abu Dhabi) and 20 or so days of working together, a United Nations Transitional Committee (TC) has finally agreed[1] on a set of recommendations to operationalize a new loss and damage fund (the Fund) and its funding arrangements. The package will be sent as “agreed text” to the United Nations (UN) annual climate conference (COP28) later this month, and hopefully will be adopted—a critical step in creating assistance for developing countries that are particularly vulnerable to climate change. The Fund would allow these countries to respond to economic and non-economic loss and damage associated with the adverse effects of climate change, including extreme weather events and slow onset events.

One of the most important decisions the Transitional Committee negotiators faced was whether or not the new fund would be built from scratch—what was referred to as a “stand-alone” fund—or if it would be located in an existing institution, such as the World Bank, United Nations Development Programme (UNDP), or Green Climate Fund (GCF). The UNDP and GCF options were discarded, and two possible paths emerged: a stand-alone Fund, with its own legal structure and host, or a new financial intermediary fund (FIF) hosted (i.e., inheriting legal privileges and operating procedures) by the World Bank.

Developing countries favored the stand-alone option. Broadly speaking, they were skeptical of the World Bank’s commitment to hosting the Fund, given its business-as-usual model and board composition. However, some developing countries were willing to consider the World Bank as an option, due to the Bank’s expertise on leveraging, accessing capital markets, and overall capacity. The Maldives, for example, argued that the Fund needed scale, something that could be more easily and rapidly achieved through an existing institution. Egypt and Barbados also expressed openness to the World Bank option on the basis of its financial tools and capacity to deliver. Most importantly, the Bank would also confer “legal personality” to the Secretariat of the Fund, allowing it to start working in countries soon after the Fund’s establishment as a financial intermediary fund. This was a perceived advantage over the stand-alone option, which would require obtaining new privileges and immunities to work in countries, new human resources procedures and staff (among other things), which could delay the Fund’s operationalization.

Yet, from some developing countries’ perspective, the World Bank option carried significant risks. During the TC meetings, the representative of Antigua and Barbuda expressed that the Bank did not have the interests of small island countries in mind, whose size and income limits the amount of aid they can receive, despite rising climate costs. Other developing countries, such as Colombia and Timor-Leste, cited the Bank’s overall institutional culture (“condescending”), financial model (mostly loans), and board model (generally favorable to donors) as reasons for their support for a stand-alone fund.

To ensure that their concerns would be addressed, the developing countries in the Transitional Committee outlined a set of conditions and safeguards that the World Bank would have to meet in order to host the Fund. Critical measures included access to the Fund by non-World Bank members (i.e., Cuba), direct access to funding from national and subnational entities, and a commitment to use the Fund’s investments in capital markets.

The presence of World Bank representatives throughout the process helped the Bank option survive the test of fire. Juergen Voegele, Vice President for Sustainable Development Practice Group, and Stephen Hammer, advisor to the Transitional Committee, assured delegations of the Bank’s willingness to host the Fund under the conditions developing countries were asking for. Signaling  that it is willing to forge a new path, the Bank vice president told delegations that the Fund would provide direct access (a modality rarely used by the Bank) along with an ability to invest in capital markets, a feature no longer employed in other FIFs.

The Fund safeguards broke a longstanding mold at the Bank, which provided an opening for those countries most opposed to this option to consider it. Yet there was still hesitancy for such a big leap of trust. The deal was only completed after the Bank agreed to an interim period to meet the conditions outlined in the text. After this period, both the Loss and Damage Transitional Committee and the board at the World Bank will have a chance to review the Fund’s performance and consider whether to stick with it or not.

The Fund is an unprecedented opportunity for the Bank’s new leadership to demonstrate its commitment on climate change and its new “evolution” process. It shows that the Bank is willing to focus on the most vulnerable over the long term, and work in completely new ways with a Fund grounded in global solidarity. That is the promise.

The final gavel on this text will occur at COP28, which is less than a month away. During the global climate conference, a whole package of potential outcomes will need to be carefully balanced by its incoming presidency, the United Arab Emirates (UAE), to end with a consensus text. Loss and damage will be part of a larger deal that contains the first global stock-take, along with agreements on mitigation and the global goal on adaptation (GGA). Moreover, COP28 is happening amid a very difficult moment in the Middle East which is creating strong geopolitical waves. It remains to be seen how, for example, the United States will address this challenge, and how the UAE will mediate the larger forces beyond climate.

Jimena Leiva Roesch is Director of Global Initiatives and Head of Peace, Climate, and Sustainable Development at the International Peace Institute (IPI). Michael Franczak is a Research Fellow in the division of Peace, Climate, and Sustainable Development at IPI and a Visiting Fellow in the Department of Philosophy at the University of Pennsylvania.

[1] The United States objected to the text, but the co-chairs conveyed that consensus does not mean that one party can veto the decision and sentiment of the whole group.