TWN Info Service on Climate Change (Nov23/05)
10 November 2023
Third World Network

Loss and Damage Fund – interim arrangement with World Bank with conditions

10 Nov, Kathmandu (Prerna Bomzan): The fifth meeting of the UNFCCC’s Transitional Committee (TC5) which met on 3-4 Nov in Abu Dhabi, UAE, has recommended the new Loss and Damage Fund (LDF) as a World Bank Financial Intermediary Fund (FIF), on an interim basis of four years, based on a list of conditions. The TC also recommended the LDF to be designated as an operating entity of the UNFCCC’s Financial Mechanism.

The TC5 package outcome which got adopted after intense negotiations (see preceding TWN Update), managed to resolve the difficult issue of the location of the Fund/Secretariat, primarily due to the massive compromise demonstrated by developing countries in agreeing to a World Bank FIF, as an interim arrangement subject to conditions. The developed country TC members had aggressively pushed for the LDF to be a World Bank FIF, instead of it being a standalone fund as demanded by developing countries.   

Further, developing countries had consistently demanded that the LDF be designated as an operating entity of the Convention’s Financial Mechanism in accordance with Article 11. Hence, getting agreement on this at the TC was an important win to balance the outcome.

(Article 11 of the Convention constitutes the Financial Mechanism, defined as “a mechanism for the provision of financial resources on a grant or concessional basis….” and “That it shall function under the guidance of and accountable to the Conference of the Parties, which shall decide on its policies, programme priorities and eligibility criteria related to the Convention”).

The scenario note by the TC Co-Chairs Richard Sherman (South Africa) and Outi Honkatukia (Finland) released before the meeting had listed both, (i) location of the secretariat of the Fund (also dependent on location of the Fund) and (ii) sources of funding and financial inputs, as the two outstanding issues, calling TC members to “come prepared to put forward compromises and creative proposals that can bridge the remaining divides within the TC”.

Accordingly, the Co-Chairs’ proposal (TC5/2023/4) which was presented as the draft negotiating text carried “options” which were seen as moderately balanced to start with on the two outstanding issues. On the location, the text carried both World Bank FIF and standalone options. On the sources or financial inputs, the options captured “differentiation” between developed and developing countries with the former’s financial obligations, including options reflecting the principles of equity, common but differentiated responsibilities (CBDR) and historical responsibility, reflecting the proposals of developing countries.

However, successive iterations of the negotiating text in the form of Co-Chairs’ proposals (namely, TC5/2023/4/Rev.1 and TC5/2023/4/Rev.2, the latter adopted in unedited version as explained in preceding TWN Update) saw the initial balance whittled down with the developing countries showing greater flexibility and concessions in the spirit of “good faith” and upholding “multilateralism” to move the process forward.

Nonetheless, the greatest strength at play was developing countries’ firm unity and one voice throughout, which definitely influenced the outcome for better than for worse, albeit its shortcomings. The TC5 outcome package was saved from a verge of collapse, thus salvaging the process to operationalise the LDFund at COP28 in Dubai.

On the mode of work, the two-day meeting mostly met in constituency consultations with the respective Co-Chairs to raise their concerns, as well as to communicate their proposed language in order for the Co-Chairs to negotiate with each other to reflect their constituencies’ demands in the evolving texts. There was a preceding iteration to the adopted unedited version of TC5/2023/4/Rev.2 .

A World Bank FIF with conditions

The cover decision proposed by the TC (in paragraph 17) invites “the World Bank” subject to conditions, “to operationalize the Fund as a World Bank-hosted Financial Intermediary Fund (FIF) for an interim period of 4 years starting from the sessions of the COP and CMA at which the Board confirms that the conditions….can be met, with the Fund to be serviced by a new, dedicated and independent secretariat hosted by the World Bank”.

 

Paragraph 19 also invites the World Bank “to take the necessary steps for the prompt operationalization of the Fund as a FIF and to submit to the Board of the Fund the relevant FIF documentation as approved by the World Bank Board of Directors, which includes a hosting arrangement between the Board of the Fund and the World Bank, no later than 8 months after the conclusion of COP 28 …”.

Among the key list of conditions (listed in paragraph 20) are as follows:

“(a) Is fully consistent with the Fund’s governing instrument;

(b) Ensures the full autonomy of the Board of the Fund to select the Executive Director of the Fund at a level of seniority set by the Board, in line with the relevant World Bank human resources policies;

(c) Enables the Fund to establish and utilize its own eligibility criteria, including based on guidance from the COP and CMA;

(d) Ensures that the Fund’s governing instrument supersedes, where appropriate, the policies of the World Bank in instances where they differ;

(e) Allows all developing countries to directly access resources from the Fund, including through subnational, national and regional entities and through small grants funding for communities, consistent with policies and procedures to be established by the Board of the Fund and applicable safeguards and fiduciary standards;

(f) Allows for the use of implementing entities beyond Multilateral Development Banks, the International Monetary Fund, and United Nations agencies, consistent with policies and procedures to be established by the Board of the Fund and applicable safeguards and fiduciary standards;

(g) Ensures that Parties to the Convention and the Paris Agreement which are not members of the World Bank are able to access the Fund without requiring decisions or waivers from the World Bank Board of Directors on individual funding decisions…:

Developing country TC members were concerned that without these conditions being fulfilled, the policies of the World Bank would impede developing countries from accessing the LDF resources.  

Paragraphs 21, 22, 23 of the decision contain three time-bound triggers for exit from the World Bank while paragraph 24 was an additional one imposed which blocks the exit strategy as it states that if the conditions are met then the “COP and CMA will take steps at the end of the interim period” to “invite the World Bank to continue operationalising the Fund as a FIF, with or without conditions, as appropriate”.  Hence, this paragraph 24 provides the hook to lock in the Loss and Damage Fund as a World Bank FIF if indeed all the robust conditions of paragraph 20 are met.

On the first day 3 Nov, Sonam Phuntsho Wangdi (Bhutan) speaking on behalf of the developing countries, had stated a “modified option 1” of the World Bank as an interim location for a pre-dertermined period, with a set of conditions that will have to be met, with a clear exit strategy of the Fund to become an institution separate from the World Bank by the end of such interim period”. After laying out the conditions to operationalise such interim arrangements, he had concluded that “the COP/CMA decision should further explicitly make it clear that following the interim period, subject to a decision of the COP/CMA, the Fund will be further operationalised as an independent legal entity to provide services to further its mission, with the COP/CMA launching an open, transparent, and competitive process to operationalize the Fund as a standalone institution in a host country”.

This initial proposal of developing countries for a pre-determined automatic exit strategy from the World Bank after the interim period, was not retained in the process of negotiations and in the final outcome.

Operating entity of the Financial Mechanism

According to sources, negotiations were tough to insert language on the LDF to be designated as an operating entity of the Financial Mechanism of the Convention, to reflect the demand of developing countries and also to maintain it in the text, although specific reference to the related Article 11 of the Convention got dropped in the last take-it-or-leave-it package.

After the outcome package was adopted, Mohamed Nasr (Egypt) who had championed this ask until the final moments, had highlighted that “our understanding” of any mention of the Fund as an operating entity of the Financial Mechanism is according to “Article 11” (of the Convention)

In the adopted text (edited vesion TC5/2023/4/Rev.2), paragraph 4 of the cover decision and paragraph 10 of the Governing Instrument confirm that the LDF is “ [a]n entity entrusted with the operation of the financial mechanism of the Convention, that also serves the Paris Agreement” and that it “will be accountable to and function under the guidance of the Conference of the Parties to the Convention (COP) and the Conference of the Parties serving as the meeting of the Parties to the Paris Agreement (CMA)”.

Board of the Fund and independent secretariat

Paragraph 7 of the cover decision which states that the “Fund will be governed and supervised by a Board”.

The decision also invites “Parties, through their regional groups and constituencies, to submit nominations of representatives for membership of the Board as soon as possible to the UNFCCC secretariat.” (Paragraph 8). According to the proposed governing instrument of the LDF, the Board of the Fund “will have an equitable and balanced representation of all Parties within a transparent system of governance” (paragraph 15) and will be comprised of 26 members (paragraph 16).

The other important ask of developing countries which got reflected in the text and survived despite the United States’ (US) redline is paragraph 15 of the decision on the Board’s legal personality and capacity which reads, “Decide that the Board of the Fund will be conferred with legal personality and legal capacity as necessary for the discharge of its roles and functions, in particular the legal capacity to negotiate, conclude and enter into a hosting arrangement with the World Bank as interim trustee and host of the Fund secretariat;”.

Similarly, the next paragraph 16 in the decision crossed the US’ redline which reads, “Request the Board to select the host country of the Board through an open, transparent and competitive process, with the host country of the Board conferring to the Board legal personality and legal capacity as necessary for the discharge of its roles and functions;”.

The demand by developing countries for a “new, dedicated and independent secretariat” is also established by paragraph 3 of the cover decision. As pointed out above, in the interim, the independent secretariat will be hosted by the World Bank.

Sources of funding or financial inputs

This most controversial outstanding issue which nearly jeopardised the TC5 package adoption was on sources of funding or financial inputs.

In the morning of Saturday, 4 Nov, when a new iteration (TC5/2023/4/Rev.1) of the text was produced by the Co-Chairs, it was completely silent on the aspect of sources/financial inputs in the governing instrument, which in the previous draft negotiating text (TC5/2023/4) had carried options on “differentiation” between developed and developing countries and also reflected the principles of equity and CBDR as well as the notion of historical responsibility.

This drew a very sharp response from developing countries. Speaking on behalf of the developing countries, Avinash Persaud (Barbados) made clear reservations on the highly diluted text saying “in the spirit of global solidarity, we have sought the minimum we can live with, and without which we cannot agree to this text”.

He then presented four asks signalling that without achieving this, the text would not acceptable. Presaud said that “The governing instrument (of the LDF) must have four things: (i) a recognition that what is agreed here is not prejudicial to what is being negotiated elsewhere in climate finance; (ii) a recognition that developing countries are today bearing the bulk of loss and damage (costs), and the purpose of this Fund is to support them; (iii) a recognition of the scale of loss and damage that this Fund and funding arrangements need to address; and (iv) a re-iteration of what was agreed at the Glasgow COP viz. that developed country Parties, the operating entities of the Financial Mechanism, United Nations entities and intergovernmental organisations and other bilateral and multilateral institutions, including non-governmental organisations and private sources, are urged to provide enhanced and additional support for activities addressing loss and damage associated with the adverse effects of climate change”.

The proposal to introduce the agreed Glasgow language (from COP 26 in 2021) (paragraph 40 of decision 1/CP.26), as a compromise text emerged when no headway was made during the small group or huddle discussions among only TC members the previous first day on 3 Nov to resolve the issue which was led by Nasr (Egypt) and Jean-Christophe Donnellier (France).

TWN was informed that developed countries especially the US took a very hardline position of refusing to accept any mention of “developed countries” in the text as financial providers, clearly rejecting the principles of equity and CBDR and implying that even developing countries should be contributing funds, which was also countered strongly by TC members from Saudi Arabia and Brazil.

According to sources, even the agreed weak Glasgow language of two years ago was flatly rejected by the developed countries.

Thus, Persaud (Barbados) had also included in his statement, “The Glasgow language was not a 'developing country text'. We felt it needed to be stronger, but we agreed to it. The idea that this language is irrelevant today because it was decided before a Fund existed beggars belief and all credibility. To say that binding, agreed, broad commitments made before a fund existed were necessarily greater than could be expected to stand after a fund is set up is illogical and questions and undermines the Glasgow agreement. We accept Glasgow. Developed countries are rejecting it”. He further concluded that the four asks were necessary to accept the text and that “without these four minimum points, we would prefer to go to COP to explain and argue our case”.

In a show of further flexibility, it was heard that developing countries were willing to go with Article 9.2 of the Paris Agreement which states, “Other Parties are encouraged to provide or continue to provide such support voluntarily”, along with the inclusion of responsibility of “developed countries” in the text.

Therefore, in the next iteration after TC5/2023/4/Rev.1 which was not published, the Co-Chairs attempted to formulate the following in the decision text:

Preambular paragraph – “Also recalling decision 1/CP.26, paragraph 40, and decision 1/CMA.3, paragraph 64, and in that context welcomes the efforts by developed country Parties, operating entities of the financial mechanism, UN entities, and intergovernmental organisations and other bilateral and multilateral institutions to provide enhanced and additional support for activities addressing loss and damage associated with the adverse effects of climate change”.

Paragraph 12: Continue to urge developed country Parties, the operating entities of the Financial Mechanism, United Nations entities and intergovernmental organisations and other bilateral and multilateral institutions, including non governmental organisations and private sources, to continue to provide enhanced and additional support, and invite and encourage other Parties to provide, or continue to provide support on a voluntary basis for activities to address loss and damage while recognising ongoing efforts, for activities to address loss and damage”.

Additionally, paragraph 13 of TC5/2023/4/Rev.1 was amended to “Invite financial contributions with including from developed country Parties continuing to take the lead to provide financial resources for commencing the operationalisation of the Fund and its capitalisation”.

Furthermore, responding to the first ask read out by Persaud (Barbados) on the “recognition that what is agreed here is not prejudicial to what is being negotiated elsewhere in climate finance”, the Co-Chairs included two footnotes “6” and “7” in paragraph 12 of the cover decision and paragraph 53 of the Governing Instrument respectively, both of which reads, “This paragraph is without prejudice to any future funding arrangements or any positions by Parties in current or future negotiations, understandings, and interpretations and/or obligations under the Convention and Paris Agreement related to finance”.

After these developments of the text on sources of funding/financial inputs, TWN was further informed that the developed countries refused to also accept the aforementioned new textual formulations including bracketing [signalling disagreement] parts of the two footnotes.

The next final iteration TC5/2023/4/Rev.2 was then released as a take-it-or-leave-it package with the preambular paragraph recalling decisions 1/CP.26 and 1/CMA.4 removed; with paragraphs 12 and 13 amended; and with the mirroring footnotes 5 and 6 in paragraphs 12 and 53 also amended.

The controversial further verbal amendment of paragraph 12 by Co-Chair Honkatukia (Finland) and ensuing drama by the US attempting to veto the TC5 package outcome consensus then unfolded. (See preceding TWN Update)

Scale of resources

One important aspect of the Fund that developing countries did not succeed in obtaining at TC5 was reference to the scale of resources needed which they had been calling for at least USD 100 billion per year by 2030. In their proposal, they had been maintaining that the Fund would have to potentially scale up because this amount is not meant as a ceiling but rather as a minimum commitment and that the LDF should be prepared to adapt to new climate change realities with the rising trajectory of losses and damages.

This USD 100 billion amount had been captured in the TC5/2023/4 first draft negotiating text presented by the Co-Chairs in paragraph 8 of the governing instrument but in brackets [not agreed] as one of the unresolved issues to deal with at TC5.

Developing countries had defended it with Nasr (Egypt) particularly voicing at every opportunity, including when adopting the TC5 package outcome mentioning the absence of scale of resources in his reservations. However, developed countries were opposed to any mention of the scale, arguing that it was out of the scope of negotiations and thus, managed to stop any mention of it, much to the disappointment of developing countries.