COP26: A pressing need to set up a comprehensive risk finance framework for Loss and Damage

As the global community is meeting in Glasgow for the 26th gathering of the Conference of the Parties to the United Nations Framework Convention on Climate Change (COP26), one topic stands out as particularly pressing: Loss and Damage finance.

Impacts of climate change already felt across the globe

Even if the world was able to stop climate change today, the disastrous consequences of global warming are already leaving their grim mark. Sea level rise and flooding have already cost the livelihoods of many communities, heat is becoming existential, and more and more communities are facing high wildfire and storm risks.

In many places, the impacts of climate change will only become more severe, especially as mitigation and adaptation efforts remain too little, too late. Predominantly, the impact will fall on less wealthy nations, unable to afford effective response on their own. But make no mistake – wherever disaster strikes, climate change has already unleashed its harrowing force.

Urgent need for reliable Loss and Damage finance

Advancing on Loss and Damage finance must be a priority for the global community at COP26, even more so than in the years prior. With the creation of the Warsaw International Mechanism (WIM) to address loss and damage associated with impacts of climate change in 2013, the United Nations Framework Convention on Climate Change (UNFCCC) has made a first step in that direction.

But more is needed: communities will need access to reliable streams of finance to not only make up for the increasing losses and damages they face, but to also enable resilience and transformation of livelihoods to withstand the dire effects of climate change, and if necessary relocate. A new paper by IIASA researchers lays out a framework for such climate risk finance.

Layers of risk finance options

Tying together insights from various disciplines IIASA research suggests a comprehensive framework for Loss & Damage finance that embraces all three pillars of the L&D discourse.

Using a classification from risk-analysis that distinguishes between avoided, unavoided and unavoidable risks in connection with a range in timescales from sudden sporadic extreme weather events to slow-onset hazards, the framework proposes a layered approach of finance types for increasingly severe climate risks:

• Finance for risk management means direct funding to pay for adaptation, risk management and resilience-building – turning unavoided risks into avoided risks. Here, national budgets and development funding could be boosted by more innovative financing mechanisms such as climate resilience bonds. Where incremental adaptation measures have been inadequate, extra funding and engagement for more radical, transformational adaptation is key. This may mean helping people to find new livelihoods, say switching from agriculture to service industries; or it may mean managed retreat away from the highest risk areas – transformational initiatives that so far haven’t received sufficient support under the L&D discourse.
• Risk finance means insurance in a broad sense. This may be through commercial insurance markets, or through international risk-transfer agreements – such as contingency funds, like the Caribbean Catastrophe Risk Financing Facility (CCRIF), where nations would pool resources to cover local emergencies. It could pay for rapid reconstruction and recovery after an extreme event, for example where a storm has overwhelmed flood defences. Traditionally, risk finance has been at the core of the debate on finance for L&D – yet it is merely a band aid for when averting and minimizing loss and damage has been futile, and as such but one piece of an effective finance architecture for L&D.
• Curative finance describes the finance needed for slow-onset risks, to cover the costs of managed retreat and loss of livelihoods – a last resort pillar of sorts. Where risks manifest at the hard limits of adaptation, even funding transformational adaptation cannot make a place liveable again and thus, insurance does not make sense. So new funding sources and mechanisms are needed, such as national loss distribution and compensation schemes (for example the initiative to set up a Loss and Damage reserve fund in Bangladesh or the former FONDEN reserve fund in Mexico). Ideally, however, such contingency schemes would be global in scale, both to supply enough funds and to meet the ethical climate debt owed by richer nations. In the absence of global mechanisms, ODA support for national loss distribution and compensation schemes offers a useful workaround.