Climate loss and damage: practical action

2 Mobilising finance for loss and damage

According to a recent report by E3G,^[24] addressing loss and damage is necessary for sustainable economic development, and rapid disbursement of funds to the people enduring climate shocks can aid recovery of local economies in cost-effective ways. Climate impacts that breach adaptation measures result in chronic economic problems and increased climate vulnerabilities. Climate vulnerable countries need the means to strengthen their economic resilience to shocks, and mobilising finance for addressing loss and damage will be a central part of the solution.

The lessons discussed here consider conventional forms as well as innovative new sources of finance. Case studies are provided to illustrate key points. The relevance of recent proposals for reform of the international finance system including the multilateral development banks (MDBs) to the mobilisation of finance for loss and damage and the fiscal flexibility of climate vulnerable countries is also discussed.

2.1 Mobilising public sector finance for addressing loss and damage

In this sub-section the focus is on issues related to public sector finance, sovereign debt and mobilising finance through the global financial system. Solidarity with climate vulnerable countries can foster trust between countries leading to opportunities for collective climate action. Mobilising loss and damage finance can help to demonstrate the merit of multilateral institutions at a moment when the global geopolitical order is coming under attack.

The case studies included in this sub-section include: Reform of the MDBs and the Bridgetown Initiative from Eurodad, Climate justice must include debt justice from Jubilee Scotland, Clarifying loss and damage legal pathways through an International Court of Justice advisory opinion, and Loss and Damage in Nationally Determined Contributions to the Paris Agreement from the Government of the Republic of Vanuatu, and Roadmap for progressing on loss and damage from E3G.

2.1.1 Bilateral funding pledges

Global North countries should be providing new and additional finance for loss and damage while also increasing the overall envelope of international financing to guarantee that all countries have the means to address climate change and pursue sustainable development.^[25] Several pledges of finance for addressing loss and damage were made during 2021 and 2022. The Scottish Government was the first industrialised country to pledge funding of £2m for Loss and Damage at COP26 in Glasgow (increased to £7m at COP27 in Sharm el Sheikh). They were soon

followed by the regional government of Wallonia and several philanthropies (see case study 4). Denmark committed DKK 100 million in September 2022, with a focus on the Sahel region.

At COP27 in Sharm el Sheikh, a number of other developed nations followed suit. The modest tally of over USD 300m so far is nowhere near the scale of finance required. However, the moves have broken an impasse by rich nations to offer such support or to discuss historical responsibility for climate change for fear of liabilities. The pledges made to date are summarised in Table 1.

Table 1 Loss and damage funding pledges

Funder	Pledge (USD)	Managed by	Allocated for
Austria	52m (over 4 years)	7m to Adaptation Fund	Climate vulnerable countries and SNLD
Belgium	2.5m	Belgium government	Storm warning systems Mozambique
Denmark	17.7m	Government of Denmark	Insurance and civil society across Sahel
Germany, Canada, Ireland and France	211m	Global Shield Against Climate Risks	Disaster risk financing (social protection, government bonds, etc.) to vulnerable countries
New Zealand	12m over 3 years (from existing climate budget)	New Zealand Government	EWS, disaster risk insurance in Pacific countries
Philanthropies	3m	CIFF, ECF, Hewlett Foundation, Global Green Grants Fund, OSF	Climate vulnerable countries and communities.
Scotland	8.5m	Climate Justice Fund, Scottish Government	Climate vulnerable countries, research and communities
Wallonia	2.15m	CVF and V20	Climate vulnerable countries

2.1.2 Multilateral development banks

Currently MDBs, often through UN agency intermediaries, provide finance through loans, and in some cases through grants, for projects aimed directly or indirectly at reducing losses and damages caused by climate impacts. These projects include measures such as early warning systems, cyclone shelters, flood defences, and social safety-nets. Relative to need, these actions are few in number, small in scale and often not categorised as finance for climate loss and damage.^[26]

MDBs also provide significant finance for post‑disaster reconstruction projects, but this is largely in the form of loans. For instance, in the wake of the 2022 floods across Pakistan the Government signed a USD 475m loan agreement for flood relief with the Asian Development Bank.^[27]

Given that the countries most vulnerable to climate change are often highly indebted, in order to reduce national debt burdens, and to contribute to fiscal flexibility, finance would be better disbursed in the form of grants or debt relief, rather than loans.^[28] Urgent action to predictable, equitable, and fair, new and additional climate finance that does not exacerbate debt vulnerabilities in the Global South is necessary to avert the social, economic, environmental, gender and intersectional impacts of both debt and climate crises.^[29] One solution which is garnering increased attention is for MDBs to develop new instruments to deliver that finance.

Box 2 Reform of the MDBs and the Bridgetown Initiative

The Bridgetown Initiative launched by the Government of Barbados in July 2022 states that achieving the SDGs requires rapid increases in low-carbon transition investments in the energy, transport and agriculture sectors. Substantial investment is also needed to build climate-resilience and sustainability, particularly in public health and education.

The World Bank intends to increase its climate finance from USD 10.9bn in 2016 to USD 31.7bn in 2022, making it the biggest multilateral funder of climate action in developing countries. Meanwhile, it invested USD 15bn in fossil fuel-related projects between 2016 and 2021.^[30] This inconsistency/discord in policy is something new senior management could consider in future investments.

To deal with the climate impacts on vulnerable countries the 2022 Bridgetown Initiative calls for emergency liquidity, expanded multilateral lending, and activation of private sector funds. The International Monetary Fund is asked to return access to its unconditional rapid credit and financing facilities to previous crisis levels, temporarily suspend interest surcharges, re-channel at least USD 100bn of unused Special Drawing Rights (SDRs) to those countries who need it, and, to promptly operationalise the Resilience and Sustainability Trust (RST) which was designed to help low-income and vulnerable middle-income countries build resilience to external shocks and ensure sustainable growth, contributing to their longer-term balance of payments stability.^[31] The IMF Board could indicate how the RST will support losses and damages, e.g. through shock-responsive social protection systems, establishing contingency funds, or underwriting affordable insurance products.

The G20 is requested to establish a Debt Service Suspension Initiative that includes all MDB loans to the poorest countries, and COVID-related loans to middle-income countries. Natural Disaster and Pandemic Clauses in all debt instruments should be normalised to absorb shocks better. Although some of these proposals are steps in a positive direction, many of them imply an increase in debt levels.

Further, the Initiative calls for implementation of the recommendations of the independent G20 Capital Adequacy Frameworks Review.^[32] The World Bank and other MDBs are asked to expand lending to governments by USD 1tn so that new concessional lending can prioritise attaining the SDGs everywhere and building climate resilience in climate vulnerable countries.

Finally, the Initiative identifies the need for a global mechanism for climate disaster reconstruction grants. This is particularly important for countries facing both severe restrictions to fiscal space and escalating climate impacts and risks.

2.1.3 Debt relief

Current climate impacts and future risks are focusing policy discussions on the management of existing debt stocks. Extreme climatic events are increasing the cost of servicing debts for developing countries, thereby squeezing the fiscal flexibility needed for climate adaptation and mitigation, and recovery from loss and damage. Reduced government revenues due to the cumulative effects of the 2008 financial crisis and the economic recession associated with the pandemic as external debt payment levels rise, have led some countries to increase their reliance on non-concessional loans. This worsens debt vulnerability and makes debt distress more likely.^[33]

Many Global South countries on the front line of the climate crisis are facing concurrent debt crises. Insufficient grant-based climate finance is forcing countries deeper into debt. Countries repaying vast sums to creditors are unable to invest in adapting to the climate crisis or addressing the associated losses and damages. As discussed in case study 1, there is a growing call from civil society and others for debt relief, adequate grant-based climate finance, and the suspension of debt payments when a climate-related disaster takes place.

Case study 1: Climate Justice must include debt justice – Jubilee Scotland

The links between debt and the climate crisis have been highlighted by governments from lower income countries, civil society, the World Bank and IMF. While the G20 and IMF are responsible for addressing debt issues, there has been a lack of action due to a lack of agreement and concerted response by creditors.

A comprehensive monitoring and reporting framework around debt and climate finance would be helpful. It could cover bilateral, multilateral, intermediary and private finance flows. Regular reviews are needed to ensure that the evolving climate finance including loss and damage requirements of countries are addressed and do not add to debt levels.

Two initiatives to address the urgent debt crisis exacerbated by the COVID pandemic are the Debt Service Suspension Initiative (DSSI) and the Common Framework for Debt Treatments. DSSI aimed to suspend debt payments temporarily so 73 of the world's poorest countries could use their resources to respond to the COVID pandemic. However, the scheme only suspended 23% of debt payments because private creditors largely did not take part. The Common Framework, launched in November 2020, aims to provide wider debt relief to countries that request it. Chad, Ethiopia and Zambia have applied – but so far, no agreements for debt relief have been made.

In November 2020, Zambia defaulted on interest payments to private lenders and in February 2021 the government applied for a debt restructuring through the Common Framework. No progress has been made in the negotiations as large private creditors refused to enter into an agreement for debt relief. Zambia is currently experiencing devastating climate impacts including flooding, extreme temperatures and drought which is creating severe food insecurity. Zambia does not have the resources to address these challenges, in part due to unsustainable debt levels. During this decade Zambia is due to spend over four times more on debt payments than on addressing the impacts of the climate crisis, including addressing losses and damages.

Securing adequate grant-based climate finance is challenging because many climate finance solutions come in the form of additional loans. It is necessary that polluters make new, additional and better quality climate finance available, so countries are not forced into further debt because of the climate crisis.

An increasing proportion of lower income country debt is owed to private creditors (now around one third). A necessary condition for success is that the Common Framework is strengthened to force private sector participation in debt restructuring.

A challenge when working to implement suspension of debt payments when a climate-related disaster takes place is that such clauses exist but are not included in contracts systematically, they do not cover all forms of disaster, and can result in higher interest rates for the borrowing country. Resolving these impediments would help achieve the no additional indebtedness objective in addressing loss and damage highlighted in Section 6.2.

2.1.4 Nationally Determined Contributions and National Adaptation Plans

Nationally Determined Contributions (NDCs) sit at the heart of the Paris Agreement. They outline the ambitions of each Party state to reduce greenhouse gas (GHG) emissions and adapt to the impacts of climate change. Parties are required to update their NDCs every five years. However, given the large gap between the emissions cuts required to limit global warming to 1.5°C and the reductions currently forecast, the Glasgow Climate Pact in November 2021 called on all countries to strengthen the targets in their NDCs prior to COP27 in Egypt.

At the time of writing, 31 nations have submitted revised and enhanced NDCs since 2022.^[34] As NDCs are crucial to the implementation of the Paris Agreement, and science confirms that these NDCs must be dramatically strengthened if temperature, adaptation and finance goals of the Paris Agreement and the UNFCCC are to be met. Case study 2 from the Government of Vanuatu demonstrates how loss and damage can be incorporated into National Adaptation Plans as well as Nationally Determined Contributions to inform the mobilisation and allocation of funding through the UNFCCC.

Case study 2: Loss & Damage in Nationally Determined Contributions (NDCs) to the Paris Agreement – Government of the Republic of Vanuatu

Despite making a negligible contribution to global GHG emissions (0.0016%) Vanuatu is highly vulnerable to a number of climate risks, ranging from tropical cyclones to prolonged droughts, ocean acidification, sea-level rise and extreme rainfall events. Climate loss and damage is now experienced by all island communities and households.

The Parliament of Vanuatu declared a Climate Emergency in May 2022 and committed to meeting Glasgow Pact obligations to revise and enhance its NDC before COP27. Vanuatu has submitted one of the most ambitious NDCs in the world, including dedicated sections on Loss & Damage and Adaptation, while also committing to achieving 100% renewable energy in the electricity generation sector by 2030.

It is Vanuatu's view that Loss and Damage is an equally important pillar of the Paris Agreement, and thus that Loss and Damage commitments must be fully included in NDCs. It is hoped that by demonstrating how Loss and Damage could be incorporated into the NDC formulation process, other nations, including donor countries can begin to mainstream this important issue into their main climate international policy documents.

Figure 1 is taken from the Vanuatu Revised and Enhanced 1st Nationally Determined Contribution 2021–2030.^[35] The pie charts show the high costs associated with the limits to adaptation, as exemplified by the devastating financial, social and environmental losses and damages experienced already and expected to increase exponentially as climate change accelerates. As Vanuatu is already a net negative emitter, most funding will be required for adaptation and addressing loss and damage.

An essential aspect of this process has been the costing of Vanuatu's NDC commitments and disaggregating loss and damage. By costing these loss and damage interventions, the Vanuatu Government has provided a much clearer and more comprehensive perspective of how the new and additional finance will be utilised to address loss and damage at the domestic level.

2.1.5 Collective action for mobilising loss and damage finance

Mobilising finance for addressing loss and damage is urgent but in the context of recovery from the pandemic and the economic perturbations precipitated by the war in Ukraine it is very difficult. Countries needing loss and damage finance face significant indebtedness increasingly to private creditors and to China.^[36]

The climate threat multiplier is creating urgent finance gaps that are not being filled. This is a moral issue, but it is also creating global financial instability and security risks. Addressing loss and damage is in everyone's interests. COP26 in Glasgow was a turning point, with political commitment to tackle loss and damage, but disappointment from many that what was agreed only amounted to more talks. Despite universal recognition of the importance of the issue, there was little concrete progress until the breakthrough decisions at COP27 which may help foster collective action.

Case study 3: Roadmap for progressing on loss and damage – E3G

This case study looks at who needs to act to enable the agreement of a credible package of measures, including an agreed way forward on raising and delivering the finance required for loss and damage (estimated to be between USD 290 and USD 580 billion per year by 2030). It also considers how to strengthen the risk management ecosystem to avert, minimise and address loss and damage.

Growth in political support for loss and damage was evident at COP27. Climate vulnerable countries such as the V20^[37] are already acting. The G7 must commit to scaling up support for vulnerable countries and communities with public finance and to support an enabling environment for private sector investments. The UN Secretary- General is being encouraged to appoint a special envoy on loss and damage to drive finance ambition and champion the voices of vulnerable countries and communities who are most impacted.

An IPCC Special Report on Loss and Damage would ensure that political action is informed by the latest available science. The V20, which now represents 58 countries, together with the G7 launched the Global Shield against Climate Risks at COP27 in November 2022.^[38] In April 2022, the V20 agreed to design and test a small grants funding facility to address loss and damage using resources from a joint V20-Climate Vulnerable Forum fund, with initial contributions from the Children's Investment Fund Foundation (USD 1m) and the Open Society Foundation (USD 500,000). The G7 could commit to using it as a potential vehicle for addressing loss and damage.

The Global Shield against Climate Risks^[39] could provide practical and complementary responses to loss and damage. The initiative could incorporate both financing and insurance options for climate risk preparedness and response, prioritising financial instruments to close the climate protection gap.^[40]

An observatory to monitor and assess climate risks globally would be helpful to better coordinate how loss and damage is addressed. An observatory could complement work under the SNLD and generate evidence for future global stocktakes by the UNFCCC.

2.1.6 Discussion

Ways to finance loss and damage have moved away from contentious conversations about compensation and liability. There is a growing recognition that it is a question of not just solidarity among nations but also that addressing loss and damage comprehensively is in the interest of all countries.

E3G quote Oxfam's estimates of what developing countries will need each year to address losses and damages at between USD 290 and USD 580 bn by 2030.^[41] Vanuatu's enhanced NDC estimates USD 720m for its own loss and damage. The gulf between what has been pledged so far (see Section 5) and what is needed is shockingly apparent.

SEI put forward the proposition that mobilising loss and damage finance should be on the basis of solidarity and account for local needs. Further, loss and damage finance can recognise historical responsibility, operationalise the polluter pays principle, and adhere to the "common but differentiated responsibilities and respective capabilities" principle within the UNFCCC.^[42]

The climate crisis and the unsustainable rise of new debt are major obstacles to achieving the Sustainable Development Goals (SDGs). This will be a major issue in the review and consultations for the SDG Summit at the 78^th session of the UN General Assembly (UNGA) scheduled for September 2023 and ahead of COP28 in Dubai UAE.

The MDBs can ensure concessional finance is available for vulnerable countries by expanding the eligibility criteria for concessional finance to include vulnerability to climate impacts. They could also provide grants for loss and damage to cover insurance risks in the most vulnerable cases, in recognition of the limits of insurance and the unaffordable premiums for many countries. Concessional finance may be appropriate and selected by some countries for such investments in sustainable development and resilience building. However, for addressing loss and damage in climate vulnerable countries grant finance is considered most appropriate.

2.2 Innovative finance for addressing loss and damage

With the COP27 decision to establish a Loss and Damage fund, there is a greater need to show how innovative finance could be deployed. Evidence presented in Section 2.1 shows that while a minimum floor for public sector finance to address loss and damage is necessary, it is also likely to be insufficient. The exploration of innovative mechanisms for mobilising finance from non-conventional sources is required alongside public sources.

The private sector innovates and mobilises finance in part to limit the ways that loss and damage is, and could further, erode productivity, decrease market access and squeeze returns on the bottom line. Addressing loss and damage can be integrated into businesses' climate risk management plans and corporate social responsibility strategies. Loss and damage could also be included in Environmental, Social and Governance (ESG) targets of multinational companies and financial service providers.

Risk pooling (e.g. risk insurance facilities, sovereign risk pools and other insurance solutions) are another set of measures that have been proposed as a way of warding off the consequences of losses and damages.

Regional mechanisms have been put in place to address climate impacts through risk pooling and transfer by countries. The African Risk Capacity (ARC) Group is a Specialised Agency^[43] of the African Union established to help African governments improve their capacities to better plan, prepare, and respond to extreme weather events and natural disasters. The ARC mission is to use finance mechanisms including risk pooling and transfer to enable a continent-wide response to climate related losses and damages. Collaboration and innovative financing are being used to enable countries to strengthen their disaster risk management systems and access rapid and predictable financing when disaster strikes. Founded in 2007 and now with 23 members, the Caribbean Catastrophe Risk Insurance Facility (CCRIF) seeks to limit financial impacts of climate and other hazards to Caribbean and Central American governments. It provides short-term liquidity when an insurance policy is triggered by events including tropical cyclones, earthquakes, and excess rainfall. It covers mainly the fisheries sector and public utilities.^[44]

The private sector can also be regulated and taxed to generate finance for loss and damage. According to Oxfam, new, innovative sources of finance have a vital role to play in generating finance in ways that are fair and equitable^[45]. A number of potential innovative sources have been suggested by different actors that could provide stable and significant finance for loss and damage. Many embody the polluter pays principle by deriving finance from taxes on high-carbon activity. They include:

• A tax on international shipping emissions, or a 'bunkers tax': A major contributor of global emissions, yet barely regulated. A 'bunkers' tax would levy a carbon price per tonne of emissions produced.
• A Climate Damages Tax: a charge on the extraction of each tonne of coal, oil and gas based on how much CO2 equivalent is embedded.^[46] The revenues would be split between addressing loss and damage, and an allocation back to the country where the oil, coal or gas was extracted to support a just transition.
• Carbon markets: between 2013–2019, the EU ETS raised €49bn, a portion of which could be allocated to loss and damage.^[47]
• A Wealth tax: a tax based on a person's assets targeted at those with the highest net wealth. Oxfam recently estimated that a one-off wind-fall tax of 99% on the new, pandemic-era billionaire wealth of the top 10 richest men would raise $812bn.^[48]
• Redirecting fossil fuel subsidies: The Climate Action Network says a 4% annual cut in fossil fuel subsidies by G20 countries could raise an estimated $245 billion for loss and damage between now and 2030.^[49]
• International Air Passenger Levy: A fee on airline passengers was proposed to the UNFCCC by the Maldives, on behalf of the Least Developed Countries (LDC), in 2008, when it was estimated to have the potential to raise USD 8-10 billion a year.^[50]
• Financial Transactions Tax: A small fee or levy applied on transactions or trades of financial instruments, such as derivatives.^[51] Could be progressive as it would fall on financial firms doing large quantities of transactions and on wealthier individuals, though there is perhaps a weaker direct link to levels of emissions.

The case studies included in this sub-section include: Early lessons from philanthropic funding for loss and damage from Climate Justice Resilience Fund, Solidarity funds for loss and damage: the Climate Bridge Fund, from BRAC, Bangladesh; Providing access to livestock insurance for pastoralists in the Somali Region of Ethiopia, from WFP; Testing insurance in high poverty high risk communities in Nepal, from Practical Action; and, Participatory & evidence-driven loss & damage finance processes, Sri Lanka from SLYCAN Trust.

2.2.1 Philanthropic funding for loss and damage

Another form of finance which has already been mobilised for loss and damage is that from philanthropies. Case study 4 details how a group of philanthropies are both independently and collaboratively providing funding for loss and damage.

Case study 4: Early lessons from philanthropic funding for loss and damage – Climate Justice Resilience Fund

Following the Scottish Government's announcement of £2m to address loss and damage at COP26, a group of philanthropies, galvanised by the Children's Climate Investment Fund (CIFF), stepped forward with an additional commitment of £3m in funding to keep momentum going at and beyond COP26. Others in this group include Open Society Foundations (OSF), the William and Flora Hewlett Foundation, the European Climate Foundation (ECF), and Global Greengrants Fund (GGF).

Each philanthropy has its own loss and damage portfolio at varying levels of development, while also pooling a subset of funds. Activities include technical and diplomacy work, and advocacy. For example, OSF has supported the V20, Climate Emergency Collaboration Group (CECG), capacity-building efforts for COP negotiators, and piloted an initiative on cultural heritage with support for media. GGF has been consulting with their advisors to better understand their and grantee partners' needs around loss and damage; two re-granters of loss and damage funding are the Climate Justice Resilience Fund (CJRF) and CECG.

With additional funding from the Scottish Government, CJRF has made four large grants for addressing loss and damage to partners in Bangladesh, the Pacific Islands, Malawi, and has devolved grant-making to the Loss and Damage Youth Coalition (LDYC) to make grants to youth.^[52] CECG strongly supported advocacy on loss and damage at COP27, funding both specific deep-dive initiatives and providing broad-based funding support.

Some of the key lessons that have emerged are as follows:

• The philanthropic organisations are showing that it is possible to deliver measures to address loss and damage and to catalyse additional investments from other sources.
• Each organisation is monitoring the impact of its efforts independently, but are moving towards more shared learning and efforts to collectively monitor impact.
• It is important to develop framing narratives for loss and damage. This should include whether and how to separate loss and damage from other spending areas including humanitarian assistance, adaptation, mitigation, and resilience-building. Distinguishing loss and damage from other efforts allows additionality and attribution to be captured.
• It is possible to learn from existing mechanisms and to channel finance for loss and damage through these e.g., social protection schemes.
• A key question remains as to how best to spend on loss and damage to catalyse other (larger) commitments, while not undermining the need for more loss and damage finance at scale from governments?

Being thoughtful and consultative when funding loss and damage has resulted in a slower-paced process, but there has still been good progress in the first year of operation for many philanthropies in this area. The funding committed at COP26 has been invested in on-the-ground action, research, and advocacy. Philanthropy is able to engage across this spectrum and can play an important role in linking these actions. Collaboration is undertaken with an awareness that new players risk alienating those who have been working the Loss and Damage policy space for a long time. However, better coordination is needed among the widening set of groups and organisations working on loss and damage, though this is not the preserve of any one organisation. Philanthropies see the sense in efforts to link loss and damage and climate justice issues, and to tie this into broader climate and development movements and goals.

2.2.2 Solidarity funds for loss and damage

Providing support in solidarity with those people and communities unable to adapt to the impacts of climate change is one step towards climate justice. The CBF is a significant innovation related to solidarity funding for addressing loss and damage. The German development bank KfW has provided an interest-bearing endowment fund to BRAC (one of the world's biggest NGOs), Bangladesh, to support the CBF. This Fund strengthens the resilience of people displaced, or at risk of being displaced, by climate impacts. This finance is channelled to registered NGOs working with slum dwellers in four cities of the country.

Case study 5: Solidarity funds for loss and damage: the Climate Bridge Fund, BRAC, Bangladesh – BRAC

The Climate Bridge Fund (CBF) is a trust fund established by BRAC with support from the Government of Germany through KfW bank. It supports projects implemented by NGOs in Bangladesh to strengthen the resilience of people displaced, or at risk of being displaced, by climate impacts. CBF has two funding windows that support action on climate adaptation, mitigation and disaster risk reduction. Climate-induced migrants are supported in slum areas of Barishal, Khulna, Rajshahi, Satkhira and Sirajganj city corporations/municipality areas. These people have been displaced by the impacts of climate losses and damages and also face climate risks in the destinations they have moved to.

People displaced by climate impacts, losses and damages, often end up living in informal settlements with inadequate access to basic services. CBF works as a solidarity fund managed by BRAC, it is designed to channel finance from large donors to people in climate vulnerable situations. A USD 10m endowment generates interest that can be invested in projects, and KfW has allocated a further USD 10m for emergency responses.

The CBF works bottom-up fostering locally designed interventions by people, organised groups and local authorities. It supports innovation in the face of climate vulnerability. The Emergency Response Window supports climate-induced migrants and other people living in climate vulnerable hotspots of the country to address their needs due to losses and damages from climate and non-climatic disasters e.g. pandemic.

CBF is at an early stage. 18 projects totalling € 12m are underway. Improvements are anticipated in social development, economic opportunities, and reduced ecological risks. Projects include improving WATSAN, better housing, skills training, support for assets building, and cash to start-up small enterprises. Household solar systems and improved cookstoves are provided. Bridges and raised walkways are being built for access to work and schools during floods. Drainage systems, and solid waste collection

and management are being installed. CBF's monitoring indicates that incomes and savings of affected households have increased, with one recipient stating that, 'After losing my husband, life became difficult and COVID made it miserable. BRAC came as saviour with the cash support that helped me to start a small business. I will be able to run my family for at least 3-4 months without any worry if there is any disaster should hit us again'; testimony by Zanu Begum, Greenland Abason Slum, Khulna City Corporation.

The CBF is learning how to target and engage with the most climate vulnerable and how to address needs due to losses and damages. It has learned the scale of the task – of the 98 concept notes received in the first call only four could be supported due to the limits of the funding available. There are hundreds of climate-migrant communities across Bangladesh – CBF works in five.

The CBF model of mobilising finance from international sources to address losses and damages at local levels is one that could be adapted and tried elsewhere. While the solidarity fund approach using interest-bearing endowments is uncommon, the precedent is set now and could convince others to follow suit.

The regulatory and fiduciary lessons for establishing a solidarity fund are being considered in how best to take the CBF model into the African countries where BRAC also works with climate vulnerable communities. Each country will have its own regulations vis-à-vis the inward placement of funds into interest-bearing accounts. While BRAC has long experience of efficient channelling of funds to locally based organisations, fiduciary risks management is dependent upon the ways of working and the technical capacity available in the location where the implementing organisations work.

2.2.3 Index-based insurance

Risk transfer through various types of insurance is becoming an essential component of the global approach to addressing loss and damage. Risk transfer products need to be tailored for specific contexts. Index-based insurance programmes are used to manage risks related to weather and catastrophic events. They trigger payouts based on publicly observable indices that can include rainfall as measured by a nearby gauge, a commodity price, crop yields, or satellite data.

The speed at which payments can be issued under index-based insurance programmes makes it particularly suited to covering risks of loss and damage because there is no need to undertake loss assessment and adjustment for covered individuals.

Case study 6: Providing Access to Livestock Insurance for Pastoralists in the Somali Region of Ethiopia – WFP

To address loss and damage and help communities cope with climate shocks, WFP developed the Satellite Index Insurance for Pastoralists in Ethiopia (SIIPE) project. This is focused on delivering an index-based livestock insurance product. The objective is that payouts reach households quickly enough so that pastoralists can take the necessary steps to protect their herds and avoid distress sales, such as purchasing or producing fodder, paying for veterinary services, or purchasing water or fuel for pumping irrigation water.

SIIPE provides access to insurance to pastoralists and agro-pastoralists in exchange for their contribution to the construction and rehabilitation of community assets. These assets, such as terracing and other soil and water conservation activities, are designed with local authorities and decrease communities' vulnerability to climate shocks over time. In addition, they receive training on financial literacy, income diversification, access to veterinary services and seed and fodder provision to build their longer-term resilience to drought-related shocks.

SIIPE was designed based on a thorough feasibility study, building on existing examples (such as the Kenya Livestock Insurance Programme).^[53] Over the years, many community consultations took place to ensure that the insurance product and the integrated risk management approach fit with the needs and demand of the targeted pastoral households.

Vegetation levels are monitored in the Somali region of Ethiopia to identify when vegetation is below the average growth thresholds, signalling that pasture and fodder availability may be reduced for livestock. SIIPE then triggers insurance payouts that are distributed to pastoralist households through a combination of mobile money and cash distributions. The record-breaking drought due to three consecutive failed rainy seasons between 2019 and 21 triggered an initial SIIPE payout of USD 900,000 between 25,000 families to help them protect their herds.

Although few women lead pastoral activities in this region, a specific focus on gender is placed so that women are targeted and considered in the programme, as shown in recent monitoring conducted after the latest payout. Additionally, by design, SIIPE targets vulnerable pastoralist households who are under the productive safety programme of the government (PSNP), confirming the level of food insecurity. As such, a social protection entry point is undertaken, while the programme targets graduating participants.

The sustainability of the index-based insurance in Ethiopia requires a comprehensive capacity development and policy advocacy strategy targeting beneficiaries, key implementing partners and policy actors. This strategy aims to create informed demand to encourage participation in the insurance scheme; enhance technical know-how among the implementing partners; and, strengthen advocacy for policy frameworks to mainstream insurance at regional and federal government levels.

To expand the number of beneficiaries and their access to financial services beyond insurance, WFP will enrol people into shock-responsive savings products that can release finance to cope with moderate droughts or other shocks not covered by insurance. Digital financial services and savings accounts to enhance financial inclusion literacy will also be promoted.

As evidenced in the WFP Ethiopia case study (and the Practical Action Nepal case study that follows here) insurance is essentially a private sector market mechanism that can design and deliver appropriate schemes suited to the circumstances of people affected by loss and damage. Innovations in the design and delivery of weather-indexed insurance need to take account of accessibility to women as key asset owners for many poorer households, the complementarity and synergies possible with other social and asset protection interventions, and the need for local definition of the threshold triggers in the indexes driving payouts.

Linnerooth-Bayer and colleagues^[54] reviewed insurance as a response to loss and damage. They found that micro-insurance programmes and regional insurance pools generate benefits but at significant costs. Such interventions need to be made affordable to poor. Public-private arrangements e.g. the African R4 micro-insurance programme and the African Risk Capacity (ARC) regional insurance pool, can bring risk transfer within reach of people facing loss and damage but require solidarity funding to do so.

Case study 7: Testing insurance in high poverty high risk communities in Nepal – Practical Action

The overall objective of this pilot was to develop an index-based flood insurance product as a risk transfer mechanism targeting climate vulnerable smallholder farmers and marginalised people in Western Nepal. The aim is to increase the resilience of farmers exposed to flood risk in five local governments areas of Sudurpaschim and Karnali provinces.

An assessment of the risks faced by the communities was made and the major hazards and levels of exposure were identified. It was necessary to identify historic hazard data for product design as well as accurate data on current productivity and market prices.

Effective delivery mechanisms, using trusted intermediaries (local cooperatives), were essential to ensure the outreach, communication and support with local farmers and to enhance trust in the product. Different partners had different priorities and reaching consensus took time. One area that slowed down the design of the product was discussion over the premium costs and pay-out levels linked to different thresholds. It took a lot of work across all partners to make these realistic for the farmers.

It was necessary to test farmers' willingness to pay for insurance across different agricultural commodities and different hazards to identify where IBFI might work best. This was assessed using simple games. Based on these findings about risk and economic potential a research design phase to develop the insurance product itself was begun. Most importantly, a delivery mechanism was tested that made the product accessible to those who needed it while keeping administrative costs and processes to a minimum.

This pilot initiative and product was not covered by government subsidies. Proof of concept evidence will be needed for it to be rolled out to other insurance companies. This will make the product eligible for subsidy of the premiums paid making it more accessible, especially to the poorest farmers.

An enabling environment has been created for piloting and scaling up the index-based flood insurance product that caters to the needs of climate vulnerable farmers. Vulnerable households have access to index-based flood insurance as an innovative risk transfer mechanism to secure their assets and build resilience to climate shocks and stresses to which they are exposed. In the first monsoon season since testing the scheme floods occurred and pay-outs have been triggered.

Index Based Flood Insurance (IBFI) is new in Nepal. Guidance for IBFI is lacking and although national policy promoting insurance exists, this fails to guide what a suitable insurance product should look like. The design of the product was based on the realities of the climate impacted farmers and not the economic profitability of the product.

Fostering cooperation amongst multi-actor partnerships, including private sector, can support access to finance for loss and damage action at local levels. Building capacity, generating evidence and sharing knowledge and lessons learned are needed to support evidence-based planning at local levels with the involvement of vulnerable groups.

Case study 8: Participatory & Evidence-driven Loss & Damage Finance Processes – Sri Lanka, SLYCAN Trust

The research aimed to identify the effectiveness of existing loss and damage mechanisms for climate and disaster risk management in Sri Lanka, i.e. agricultural crop insurance and other resilience insurances which are led by domestic public funding. The assessment encompassed: capacity needs; the role of key stakeholders and the inclusion of multiple actors in the governance and decision-making processes; impact and ability to address the needs of vulnerable communities; and avenues for scaling up the scope and its impact through enhanced partnerships and access to additional finance.

An initial study was conducted on crop insurance in Sri Lanka through a policy, gaps and needs assessment. The findings were integrated into a broader planning process and the key findings focused both on national and local levels. Local level data was gathered for 500 farming households and people in divisional and district level government structures were interviewed to understand the ground realities of implementing the finance mechanism. Parallel activities focused on national level structures for loss and damage finance and consultation with stakeholders including representatives from government, private-sector, civil society, youth groups, academia, and the media.

The initiative sought to enhance trust among the government entities involved in the Climate and Disaster Risk Finance and Insurance mechanism to engage with other stakeholders such as civil society, think-tanks and the private sector. This is important for scaling up loss and damage finance to reach vulnerable communities. Creating avenues for concrete partnerships among different stakeholders can help access additional funding.

The provision of evidence and lessons learned from developing countries for UNFCCC negotiations on loss and damage and the global goal on adaptation has been undertaken. This helps provide research-based evidence of the existing mechanisms which could be promoted as an example of how Sri Lanka has been burdening the costs of loss and damage for over 50 years, and the need to provide loss and damage finance to vulnerable developing countries building on existing mechanisms.

As the SLYCAN case study shows, the trust developed through inclusive and participatory processes is necessary to work with vulnerable communities. Innovations that include the private sector and marginalised communities need the enabling environment of a coherent national policy framework. Policy coherence – national to international and national to local – as this can help facilitate better finance accessibility to address loss and damage climate finance needs. Inclusive and participatory processes provide avenues for better implementation of such action with the inclusion of vulnerable communities through gender-responsive approaches.

2.2.5 Discussion

Innovations in terms of the mechanisms to distribute loss and damage finance need to be found and quickly. The private sector has a strong self-interest in addressing loss and damage in its own value chains, but it could also recognise its share in supporting vulnerable people. The polluter pays principle is particularly relevant here.

Experience from these case studies and a variety of other examples in different contexts show that, to be effective for poor communities, insurance premiums for climate risks should be subsidised or met from state coffers, and they should be designed to deliver support rapidly following shocks or triggered by early warning information. Valuable lessons have been learned in Ethiopia,^[55] Rwanda,^[56] and the Caribbean.^[57] These examples show that to invest wisely in insurance schemes, community members need to understand what they are paying for, what is insured and who will benefit. It is unclear how insurance could work in covering losses and damages caused by slow onset events, or non-economic losses and damages. Furthermore, with loss and damage risks projected to escalate with continued global heating, there is concern that even more places will soon become uninsurable.^[58]

Insurance provides a valuable mechanism for transferring risks through commercial markets (see the insurance related case studies above). However, it is not a silver bullet and is better deployed as one tool within a suite of measures.