TWN Info Service on Climate Change (May26/02)
15 May 2026
Third World Network

Loss & Damage Fund Board achieves milestone on operationalizing direct budget support through national governments

Kathmandu, 15 May (Prerna Bomzan): The eight meeting of the Board (B.8) of the Fund for responding to Loss and Damage (FRLD), which met on 22-24 April in Livingstone, Zambia, successfully adopted the “modalities” and “risk management framework” (RMF) for operationalizing direct access via direct budget support through national governments under the Barbados Implementation Modalities (BIM), the current start-up phase of the Fund.

Direct budget support (DBS) through national governments, considered an unique feature of the Fund by developing countries, is provided by paragraph 49(a) of the Fund’s Governing Instrument and in accordance with it, decision B.5/D.4 that established the BIM provides that the BIM will include the transfer of funds to national governments for the purpose of financing activities within the scope of the Fund.

The adopted modalities define DBS through national governments as “projects/programmes financed by the Fund and implemented by national ministries”. The modalities will apply for national ministries that are not accredited to the Adaptation Fund (AF), the Global Environment Facility (GEF) and the Green Climate Fund (GCF).

[At the preceding B.7 in October last year, the Board adopted only the “process” of DBS through national governments as contained in “Annex V” of decision B.7/D.5, with the Board further requesting the Secretariat to develop the modalities and RMF needed to operationalize it, for consideration and adoption at B.8. In this regard, the Board decided to establish an ad hoc risk committee to guide the Secretariat. Furthermore, the Board decided that funding requests under DBS through national governments can only be approved subject to the adoption of its modalities and the risk management framework.]

The B.8 decision which adopted the modalities and RMF is therefore highly significant towards encouraging and building confidence of all developing country governments who may want to submit funding requests using the DBS through national governments access modality, especially in light of the approaching deadline of the 6-month submission period under the BIM by 15 June 2026. [Only one country, Jamaica, has submitted funding request under DBS through national governments, as per secretariat’s report on the status of the pipeline for the BIM.]

It is to be noted that negotiations on the modalities and RMF started prior to B.8 in February, led by the established ad hoc risk committee who continued with their mode of work during B.8 as well. The draft negotiating document, learnt to have evolved into multiple iterations, was not made public and it was only on the last day of the meeting that the final scrubbing of the document along with the draft decision – only those parts of the document and the draft decision that required agreement – was considered and adopted at plenary settings by projecting them on the screen. [The adopted document on the modalities and RMF including the adopted decision are not yet published online.]

It is learnt that negotiations were fraught with challenges right from the outset, devoid of good faith and political will, with developed countries pushing to make DBS through national governments highly restrictive and burdensome for developing countries, demonstrating that they were actually not in favour of it. Developing countries saw the requirement of an RMF in itself as a “condition” to start with in that the undue focus on risks, was deemed unnecessary and a distraction away from the priorities of developing countries, especially given the current scenario of miniscule financial resources which are far from commensurate with their needs and which ought to be the central focus of attention.

A key bone of contention was the imposition by developed countries on assessing “institutional” risks as well, rather than simply “project/programme” risks at the funded activities level. The former being a redline for developing countries as it entailed identification and assessment of both “gaps” and “risks” in “national governments’ policies, systems and capacities” which was unwarranted. In addition, associated issues were requirement of a “risk appetite” statement, and assessment of “residual risk” (defined as risk remaining after risk mitigation measures have been applied) for which developed countries accepted low tolerance.

The report of the ad hoc Risk Committee by the Co-Chairs Richard Sherman (South Africa) and Jan Dusik (European Union) also outlined the following key areas of divergence and sought the Board’s guidance on how to proceed in finalizing the modalities and RMF:

“1. Noting the scope of the BIM, should risk identification and management apply at both the institutional level and funded activities level or only at the funded activities level?

2. Should there be a risk appetite statement for this modality or are the zero-tolerance framework and risk mitigation measures sufficient for the BIM?

3. How will residual risks be assessed proportionally to the scope of the BIM?”

Sources said that following difficult negotiations, agreement was eventually reached on solely “project/programme-related risks identified by national ministries” in alignment with the mandate and scope of the Fund and the BIM; removal of risk appetite statement and applying only the “zero-tolerance for prohibited practices” and “risk mitigation measures” in the RMF; and “residual risk to be assessed by national ministries”.

The last stretch of negotiations at a plenary setting saw discussions to resolve the pending issue of “functional equivalency” assessment of the standards and safeguards of national ministries in order to allow them to directly access the Fund – a key requirement of the agreed process of DBS through national governments as contained in “Annex V” of decision B.7/D.5 . (See details below).

The issue was eventually resolved with the adopted decision confirming that “…that the modalities and risk management framework in annexes I and II of this decision document entails the approach for functional equivalency assessment as well as for determining functional equivalency of national ministries, for the purpose of the funding request scope, referred to in Annex V of decision B.7/D.5”. The qualifier “for the purpose of the funding request scope” was added, after a suggestion by Antoine Bergerot (France), to address the concern raised by Mohamed Nasr (Egypt), who pointed out that the absence of the qualifier would read as determining the functional equivalency of national ministries and not at project/programme level. Dusik (EU), when introducing the paragraph, had explained that it is a rather “complicated language” but it is basically conveying that by applying both the modalities and RMF, the Board is conducting “de facto” assessment of functional equivalency.

In a bid to mobilise consensus, the Fund’s Co-Chair Camila Tavarez (Dominican Republic), said that this was the “landing zone” provided by the ad hoc Risk Committee to be able to operationalize DBS through national governments and that if the Board agrees, then the Co-Chairs can confirm with the World Bank. Sherman (South Africa) also provided assurance that the language was an “agreed” one and that the document covers only “project” risks.

Related to the issue, another paragraph which was added to the decision read, “Further confirms that step H of annex VI of decision B.7/D.5, where it refers to “a limited screening of the entity, including anti-money laundering and countering of financing of terrorism”, also applies for direct access via direct budget support through national governments”. Dusik (EU) explained that after confirmation of assessment and management of risks by the Board, this paragraph entails the final check by the trustee [World Bank]. He said that the Board is required to do the two steps [referring to the two paragraphs] so that the RMF can be connected to the obligations in Annex V of decision B.7/D.5.

Following a huddle, urged by Co-Chair Tavarez, the decision was finally successfully adopted, and was seen as “historic” in operationalising the DBS through national governments, notwithstanding difficult and prolonged negotiations.

The following sections highlight the agreed modalities and RMF based on information derived from reliable sources, given that the draft negotiating document on the modalities and RMF and its multiple iterations were not made public.

Modalities for operationalizing DBS through national governments

The key issue was for the Board to decide on the “functional equivalency” assessment of the standards and safeguards of national ministries, in accordance with the process adopted in “Annex V” of decision B.7/D.5 in order to allow national governments to directly access the Fund.

[Step D of Annex V: The experts undertake the functional equivalency assessment of the standards and safeguards of the recipient for the funding request with the standards and safeguards of multilateral development banks (Footnote: In accordance with paras. 50, 67 and 68 of the Governing Instrument and para. 2.04 of the Trustee Agreement) for the purpose of funding request’s scope and for the Barbados Implementation Modalities, applying the modalities decided by the Board as well as the risk management framework (step A). Subject to the modalities decided by the Board, assessment will be carried out based on:

1. Relevant existing data and assessments for the assessed national Government from the World Bank, other multilateral development banks (MDBs) and the International Monetary Fund;

2. In the absence of, or in addition to, 1 if needed, existing relevant data and assessments for the assessed national government from other multilateral and bilateral entities, as well as other relevant development financial institutions;

3. In the absence of, or in addition to, 1 and 2, the experts will undertake an ad hoc assessment.]

The proposed language to resolve the issue was: “For the purposes of this modality, “functional equivalency” refers to the condition in which the policies, systems and procedures of countries and entities achieve outcomes comparable to MDBs’ standards and safeguards, while taking into account the institutional, legal and operational contexts in which countries and entities function. Thus, this modality focuses on whether the policies, systems and procedures perform the same function and deliver equivalent results in their specific context, rather than requiring identical structures, processes or terminology. Functional equivalency is a concept that supports outcome-based and context-sensitive assessment methodologies, ensuring that countries and entities in diverse contexts can meet standards and safeguards through systems that are different in form but equivalent in function”.

The modalities were to set out the requirements for “identifying gaps and risks in national governments’ policies, systems and capacities required to implement funded activities. These requirements determine the conditions under which the national ministry is eligible to access FRLD’s resources under the BIM. The modalities are guided by: (a) efficiency, speed and streamlined access; (b) high-integrity fiduciary principles and standards, and best practice environmental and social safeguards when implementing activities financed by the Fund (Governing Instrument, para. 22(f)”.

The requirements presented were for cases “where external assessments exist” and “where external assessments do not exist”.

It is learnt that developing countries were not in favour of a long process of functional equivalence as well as a burdensome, intrusive assessment and evaluation of national governments.

The final agreed language was that the modalities for DBS through national governments “set out the steps for reviewing project/programme-related risks and identifying risk mitigation measures. This process builds on risks and risk mitigation identified by national ministries. These steps determine the conditions under which the national ministry may access FRLD’s resources under the BIM. The modalities are guided by (a) efficiency, speed and streamlined access; (b) high-integrity fiduciary principles and standards, and best practice environmental and social safeguards when implementing activities financed by the Fund (Governing Instrument, para. 22(f); (c) proportionality and context-specific approach in managing risks”.

Where external assessments exist, “Modality 1: Reviewing project/programme-related risks and mitigation measures identified by national ministries, using the outcomes of existing external assessments”. In the proposed modality, “the national ministries identify the project/programme-related risks and propose risks mitigation measures in the funding request submitted to the Secretariat. Taking into account the above, in the review of the project/programme-related risks and risk mitigation measures identified by the national ministry, the objective of the review by external experts is to use the outcomes of the existing assessments to propose any additional mitigation measures related to the institutional policies, systems and capacities of national ministries that might be required for implementing the activities proposed in the funding request as per the scope and nature of the activities proposed in the funding requests. Any additional mitigation measures proposed should be proportionate and tailored to the scope and nature of these activities. Annex I presents the detailed steps under this modality”. The detailed steps to be applied under Step D [functional equivalency assessment] of the process set out in Annex V to decision B.7/D.5. In this case, the national ministry has already received funding from an international financial organization in the past five years.

Where external assessments do not exist, “Modality 2: Reviewing project/programme-related risks and mitigation measures identified by national ministries, in the absence of existing external assessments”. In the proposed modality, “external experts, under the supervision of the Secretariat, will conduct an ad hoc assessment that is conducted in proportion to the scope and nature of the activities proposed in the funding requests, focusing on what is required for implementing these activities, using guiding elements presented in annex III. This entails: (a) A desk review of the information regarding the national standards and safeguards needed to implement the activities proposed in the funding requests (provided through a questionnaire annexed to the funding request and any other publicly information available); (b) A desk review of the national ministry’s track record in implementing similar activities. If necessary, and on a case-by-case basis, an on-site audit may be commissioned by the Secretariat (Footnote: An on-site audit may be required when the desk review does not allow for the collection of sufficient necessary data, or when critical information is missing. Any on-site activities would be agreed with countries in advance). In the proposed modality, “the national ministries identify the project/programmerelated risks and propose risks mitigation measures in the funding request submitted to the Secretariat. The external experts will use the outcomes of above-described assessment in reviewing the risk and risk mitigation measures identified by the national ministry and may propose any additional risk mitigation measures that may be required for implementing the activities proposed in the funding request as per the scope and nature of the activities proposed in the funding requests. Any additional mitigation measures proposed should be proportionate and tailored to the scope and nature of these activities. Annex I presents the detailed steps under this modality”. The detailed steps of an ad-hoc assessment to be applied under Step D [functional equivalency assessment] of the process set out in Annex V to decision B.7/D.5. In this case, the national ministry hasn’t received funding from an international financial organization in the past five years.

Hence, the issue of “functional equivalency” was resolved by by reviewing the project/programme-related risks and mitigation measures identified by the national ministries, instead of a full gap identification and assessment or evaluation of national ministries.

RMF for operationalising DBS through national governments

The key issue was whether there be a consideration of institutitional risks as well, which was pushed by developed countries, rather than simply project/programme-related risks at the funded activities level preferred by developing countries.

The proposed language on “institutional level risks” was:

“(a) The nature of the entity and its ability to operate: as part of the risk identification process, the policies, systems, capacities and applicable legal framework of the national ministry and entities involved in the implementation of funded activities that enable them to receive, manage and implement the FRLD funds as proposed in their funding request; (b) Fiduciary and ESS [environmental and social safeguards] standards and safeguards: including the policies, systems, capacities and applicable legal framework of the national ministry that ensure the application of high-integrity fiduciary principles and standards, as well as best practice ESS policies; (c) Implementation modalities: including the policies, systems, capacities and applicable legal framework of the national ministry that support internationally recognized standards of integrity, effectiveness and efficiency in implementation; (d) Monitoring and control: including whether financial and operational controls are effective, conducted regularly and capable of generating alerts in the event of incidents; and, where needed, remediation mechanisms are put in place in a timely and effective manner”.

While the proposed language on “funded activities level risks” was:

“(a) The due diligence conducted by the national ministries on executing entities and beneficiaries receiving FRLD funds, including in relation to anti-money-laundering and countering the financing of terrorism (AML/CFT), as well as screening against applicable sanctions lists; (b) The application of fiduciary and ESS standards and safeguards by the national ministry to the funded activities; (c) The impact of the funded activities on the ground, as well as regular monitoring and reporting of results; (d) Appropriate and proportionate monitoring and control of the risks and associated risk mitigation measures, including mechanisms for implementing remedial actions”.

The final agreed language was: “For the purpose of the direct access via direct budget support through national governments, the identification of risks will be project/programme-related and done by the national ministry in alignment with the mandate and scope of the FRLD and the BIM” – this language is also included in the adopted decision which was urged by Nasr (Egypt).

Further, it is defined that “Project/programme-related risks relate to the risks entailed in the implementation of funded activities and are identified by the national ministry”.

The RMF establishes “structures and mechanisms for identifying, assessing, mitigating and monitoring project/programme-related risks in proportion to the scope and nature of the activities proposed in the funding requests. It safeguards the following while enabling access to the Fund: the financial integrity and transparency, environmental and social outcomes, and institutional credibility of the FRLD”.

The framework is built on the following guiding principles: “(a) Streamlined processes (Footnote: In accordance with paras. 41 and 50 of the Governing Instrument): risk identification and mitigation are integrated into the funding cycle (conformity review) without creating additional approval stages; (b) Risk-informed decision-making: risk mitigation measures are embedded in the implementation of activities rather than the national ministry needing to address them prior to Board approval (Footnote: Subject to the Board’s adoption of the country support system (CSS), countries may submit requests to the CSS for supporting the institutional strengthening of national ministries in setting up systems and capacities to enable access to the FRLD); (c) Country ownership: national ministries assess and manage project/programme-related risks at the funded activities level; (d) Proportionality and adaptability: risk mitigation measures reflect nature and scope of the activities proposed in the funding request as well as risk levels, funding size, modality and capacity of the national ministry; (e) Ensuring high-integrity fiduciary principles and standards and best practice environmental and social safeguards (Governing Instrument paras. 67 and 68) (f) Transparency and accountability: national ministries are responsible for monitoring and reporting on project/programme-related risks to the Secretariat as part of the reporting process; (g) Learning and continuous improvement: as the risk management framework for direct access via direct budget support through national governments is tested under the BIM, the Secretariat will gather lessons learned and propose improvements, where necessary, which will also contribute to the development of the long-term operational model”.

The agreed components/elements of the framework, in sequence, are as follows, with the adopted “zero tolerance for prohibited practices” included therein:

1. Project/programme-based risk identification (National ministry, based on its own risk management policies)

2. Risk classification: Low/Medium/High (Secretariat; in case of high project/programme-related risks, the Secretariat may recommend the Board to consider approving the funding request with the requirement to implement the associated risk mitigation measures as a condition precedent to the first or second disbursement in order that the risk category is reduced prior to the disbursement of funds to the national ministry, and the need for the selected disbursement timing to proportionately reflect the capacity of the national ministry concerned.)

3. Review of risk mitigation measures (External experts – supervised by Secretariat – as part of the conformity review): Modality 1 (External assessments exist) and Modality 2 (No external assessments exist)

4. Review of all risk mitigation measures; Secretariat recommendation to the Board (Secretariat)

5. Consideration for approval (Board taking into account risk mitigatioon measures)

6. Funding agreement (FRLD & National ministry, taking into account risk mitigation measures)

7. Implementation, including monitoring and reporting of risks (National ministry and secretariat)

The Board also decided that the above components/elements of the RMF apply to other access modalities under the BIM, as part of the framework for those access modalities, namely, direct access via DBS in partnership with MDBs accredited to the AF, GEF and the GCF, and access in partnership with entities accredited to the AF, the GEF and the GCF.

Issue of ensuring access via DBS through national governments by all developing countries

As a preambular paragraph to the draft decision, Abdulrahman Rowished (Saudi Arabia) had proposed to include the following text: “Recalling 1/CP.28 paragraph 20(e), and 5/CMA.5 paragraph 20(e), allowing all developing countries to directly access resources from the fund, and 4/CP.30 paragraph 8, 8/CMA.7 paragraph 8 on the modalities of direct access via direct budget support through national governments under the Barbados Implementation modalities”.

He had also raised the issue on the report of the ad hoc Risk Committee in relation to the RMF that when it comes to access, paragraph 20(e) of the COP/CMA decision ensures that all developing countries can directly access resources from the Fund, and hence this language needs to be reflected where access is mentioned in the RMF. However, the proposal saw direct objection by Kajsa Natby (Sweden) and the proposed text was dropped from the final decision.

Following adoption of the decision, Rowished delivered a statement for the record, highlighting that he would like to “address a matter of principle that goes to the core of this Fund’s mandate—ensuring predictable access for all developing countries. This seat notes current discussion relates to provisions that reaffirm access modalities, including the role of the RMF in facilitating access. In this context, we find it difficult to understand the rationale for blocking language that simply seeks to safeguard future access for all developing countries, consistent with the COP/CMA paragraph 20(e) and Board decisions. Allow me to recall a recent precedent, where a funding proposal from a developing country was effectively blocked. This is precisely the concern we seemed to address. The language we have introduced is not exceptional—it is preventative. It is a safeguard to ensure that all developing countries retain access to the FRLD”.

(The precedent that Rowished was referring to relates to a decision by the GCF Board last year to not approve a funding proposal from Oman, due to objections from some developed country Board members.)