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Operationalizing finance for loss and damage: from principles to modalities

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Vulnerable countries and communities are already facing loss and damage resulting from climate impacts, and urgently need financial support to recover and rebuild livelihoods and infrastructure. Despite increasing demands, however, finance for addressing loss and damage has been largely absent and falls far short of the scale of needs. There are also gaps in the existing climate finance architecture that make it unsuitable for addressing loss and damage.

This report draws on literature on the effectiveness of climate finance and development and humanitarian assistance to set out key principles for loss and damage finance that are grounded in climate justice. The authors find that the following principles should underpin how loss and damage finance is operationalized:

  • historical responsibility and the “polluter pays” principle
  • equitable and targeted support (including ensuring gender equality and protecting human rights)
  • grant-based and programmatic finance
  • accessibility
  • recipient ownership
  • transparency and accountability.

Second, the authors draw on interviews with key stakeholders to present options for how those principles can be operationalized within a potential global loss and damage finance facility, including what structures and modalities need to be put in place at the global, national and sub-national level. A key finding is that modalities for loss and damage finance should be designed to place the needs and priorities of vulnerable communities at the centre. This includes giving those communities significant autonomy and decision-making power over how finance is utilized in line with their needs. Small grants and unconditional cash transfers, as opposed to loans or project-based finance, are also likely to be more accessible for recipients and more successful in reaching affected communities.

Overall, both the literature and the interviews show that successful examples of just and effective delivery of climate finance tend to be small-scale projects that offer direct access at the community level. While many such models are still at the pilot stage, the authors suggest that they could be a practical and effective way to deliver loss and damage finance, and offer an opportunity to test innovative approaches combined with inclusive learning processes. This could also catalyse the shift of climate finance altogether towards practices better aligned with climate justice.

Key findings and recommendations

  • Climate finance is currently largely inaccessible for recipient countries and communities due to stringent proposal and accreditation requirements and long lag times in delivery. Negotiations on loss and damage finance at COP27 should prioritize simplified and enhanced direct access procedures that deliver funding directly to communities and marginalized groups.
  • Loan-based and project-based finance often increases the debt burdens of recipient countries, is associated with burdensome reporting requirements, and often doesn’t reach the most vulnerable communities in need. Funders both within and outside the UNFCCC should prioritize small grants and unconditional cash transfers, which are likelier to reach disempowered and marginalized groups quickly.
  • Climate finance is often associated with conditionalities and not distributed and utilized according the needs of recipients. Negotiations on loss and damage finance should ensure that recipients – particularly representatives of the most vulnerable and discriminated communities – are involved at all stages of decision-making and have a say on how finance is allocated and utilized. This could involve sitting on the board of a potential loss and damage finance facility at the global level, or devolving decision-making to the lowest levels.
  • Requirements for transparency and accountability are currently burdensome for recipient countries, and often reflect the priorities of finance providers rather than being accountable to affected communities. Funders and policymakers should embed independent and participatory approaches to monitoring and evaluation in their structures and create accountability mechanisms that empower recipient communities.
  • A loss and damage finance facility would take time to implement and there is no guarantee of success, but it would have the advantage of offering a blank slate for modalities tailored to principles grounded in climate justice. A COP27 decision could include a phased approach of establishing a facility in the medium term, and mobilizing finance through existing mechanisms in the immediate term. Subsequent sessions of the Glasgow Dialogue could be used to discuss the arrangements of the facility. In the interim, loss and damage finance could be mobilized bilaterally and through small-scale pilot programmes, such as through small grants under the Green Climate Fund.

This report was originally published by Stockholm Environment Institute

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