Uneasy bedfellows? The role of Disaster Risk Finance in tackling climate-induced losses and damages
A new evidence review from the Centre for Disaster Protection and ODI introduces the key issues around climate change-induced losses and damages and the role that DRF mechanisms could play in tackling them. But it’s a subject fraught with sensitivities. Jon Gascoigne and Chris Kiggell step into the definitional minefield to unpack some of the opportunities, limitations, and bones of contention.
A boy walks beside a water-stained wall of a house, following rains and floods during the monsoon season in Nowshera, Pakistan September 4, 2022. Photo: Reuters/Fayaz Aziz
From devastating floods in Pakistan and Nigeria to a historic drought and the looming threat of famine in the Horn of Africa, the sequence of disasters in 2022 provides a stark illustration of the cost of human-induced climate change. But increasingly, the discussion is not only about how to mitigate or adapt to the impact of these extreme weather events and shocks – but what to do about the losses and damages they incur.
Losses and damages happen when mitigation efforts are insufficient to limit global temperature increases, when the impacts of that warming go beyond the ability of affected societies to adapt, or when governments and communities lack the resources needed to access options that may exist.
Those who have caused the least greenhouse gas emissions – mainly low-income countries and Small Island Developing States – are often the hardest hit. There's another way of saying that – through no fault of their own, the poorest and most vulnerable countries and communities are on the front line of climate change. But these voices are also becoming increasingly loud, calling for a different approach. And momentum is building, with separate high-level discussions on Loss and Damage organised by the Governments of Ireland, Scotland and Denmark (alongside the Danish Red Cross) last week alone.
A brief history of Loss and Damage
The issue of losses and damages goes back to the initial drafting of the UN Framework Convention on Climate Change (UNFCCC) in 1991. However, a call for financial resources with an initial focus on sea level rise didn’t make the final cut. The political process was then largely quiet on the issue until the introduction of the Warsaw International Mechanism on Loss and Damage (WIM) in the 2013 UN Climate negotiations. And it was only in the 2015 Paris Agreement that Parties to the UNFCCC recognised the importance of “averting, minimising and addressing loss and damage," essentially making the issue the third pillar of the UNFCCC process (alongside mitigation and adaptation). In practical terms, this reflects the full range of climate action, with 'averting' losses and damages aligning with mitigation, 'minimising' matching up with adaptation efforts, and finally 'addressing' whatever cannot be resolved through these approaches.
But progress has been slow. The push for a new Finance Facility for Loss and Damage was a central point of contention at COP26. It was ultimately blocked, with an agreement for a 'Glasgow Dialogue' process to further discuss the next steps. The issue will undoubtedly remain front and center at this year's COP27 in Egypt. Questions around the process and the provision of the financing needed to address these losses and damages are – understandably – highly sensitive and politically charged. Non-climate specialists looking to navigate this complex landscape and understand where they may have a role to play can be forgiven a sense of trepidation.
A boneyard of contentions
Issue 1: A rose by any other name
What are the sensitivities and controversies at play, and how can we make our way through them? Let's start with the most straightforward bone of contention to resolve, that of terminology. For our purposes, we are taking 'Loss and Damage' (capitalised) as referring to the political process under the UNFCCC and the wider policy agenda. In contrast, lowercase 'losses and damages' (sometimes ‘loss and damage’) are about specific instances of harm.
Issue 2: The language of loss
Next, and trickier – what is meant by ‘losses and damages’? What do these look like in the real world? While there’s no formally agreed definition, there is a degree of consensus. Firstly, there is recognition of the negative impacts on people and communities resulting from fast-moving weather disasters or rapid-onset event-based shocks - floods, hurricanes, wildfires, and heatwaves - which are becoming more severe and frequent due to climate change. Secondly, there is recognition of the impacts of slow-onset processes that unfold over decades with no clear start or end point, for example, temperature increase, desertification, glacial retreat, sea-level rise and ocean acidification. While some shocks, most notably drought, are slower to unfold, they would still fall into the former group from a climate-science perspective.
While a large proportion of these impacts are felt and can be measured in financial terms (the loss of buildings, infrastructure, assets, services, etc.), non-economic losses and damages are harder to quantify. These include loss of life but also less tangible but vitally important political, cultural and social assets, including indigenous knowledge and cultural identity, which may be lost when entire communities are displaced and livelihoods are no longer viable.
The IPCC recognises that as the magnitude of climate change increases, so too does the likelihood of exceeding the limits of adaptation, which is where losses and damages occur. These limits can be 'soft,' i.e., where adaptation options exist but are too expensive, impractical, or otherwise not accessible, and 'hard,' where there are considered to be no reasonable prospects for adaptation regardless of resource or other constraints. Accordingly, losses and damages can be classified as avoided, unavoided or unavoidable – i.e., where adaptation or mitigation has prevented damage; where external constraints mean measures have not been taken or not been successful; or where damages are already locked in.
Issue 3: Money makes the world go round
Unsurprisingly, money is the greatest area of contention. By most counts, funding needs for losses and damages look set to run into the hundreds of billions of dollars per year by 2030 and only increase from there. But the lack of a clearly-agreed definition for Loss and Damage means it's hard to track how much funding is needed and how much might be available, exacerbated by the lack of clear tags or identifiers in donor or institutional budgets. While mitigation and adaptation might help to avert and minimise losses and damages, there is no clear mechanism for addressing impacts. While humanitarian assistance may go some way towards addressing immediate and acute impacts, there are clear and important differences – and critically, existing humanitarian funding is already severely overstretched while humanitarian needs continue to grow.
The issue is further complicated by the grounds on which funding is provided, particularly regarding issues of equity, justice and historical responsibility. Concern from developed, or ‘Annex I’ party, countries that any such framing of new funding could imply an admission of legal liability for polluters saw a concerted push to include language in the Paris Agreement intended to avoid any suggestion of legal obligation to provide compensation. With the support of civil society, low-income countries are adamant that any funding must be new and additional to existing commitments. These demands reflect calls for commitments that climate finance more broadly should be new and additional to existing Official Development Assistance (ODA) commitments, underpinned by the concern that already committed funding must not be triple counted. Loss and Damage doesn’t currently make up part of the pledged $100 billion a year climate-finance-funding countries have committed to providing for adaptation and mitigation. Concerns are that any new commitments toward Loss and Damage financing may divert or reduce the flow of already-insufficient adaptation finance.
While very little donor funding has been explicitly committed to tackle Loss and Damage, that which has come is symbolically significant. At COP26, Scotland committed £2 million and the Belgian region of Wallonia a further €1m. In September, Denmark became the first central or federal government of a developed economy or ‘Annex I’ party country to provide dedicated funding, with a commitment of DKK 100M (around £12m).
What’s Disaster Risk Finance got to do with it?
So, where does Disaster Risk Finance (DRF) fit in all of this? That first reference to Loss and Damage more than 30 years ago was a proposal for an insurance scheme for countries impacted by sea level rise. But while such mechanisms have remained in the mix as the discussion (and DRF) has evolved, they can be polarising. Developing countries and negotiators have argued that they have been oversold in terms of their scope to address losses and damages or perceived as putting climatevulnerable countries rather than historical polluters on the hook for the costs of disasters. As with the wider issue, the question of who pays and on what grounds is critical.
Insurance may dominate the Disaster Risk Finance discourse, but in practice, the toolkit includes a broader range of budgetary and financial instruments. All aim to enable a more proactive approach to risk by ensuring the finance needed to respond to crises is in place before shocks hit. These run from budgetary reallocation mechanisms and contingency funds to contingent loans, risk pools and catastrophe bonds. Good quality DRF should also extend beyond the design of the instruments to establish clear conditions for pre-agreed release and distribution through operational response plans.
In considering both where such mechanisms can have a useful role to play and the limitations of their applicability, there are clear parameters:
Disaster Risk Finance can only be one part of a more comprehensive set of responses to growing climate impacts. Risk finance, which often only covers immediate emergency response costs, needs to work alongside and be better integrated with climate finance to ensure the latter is risk-sensitive. And it needs to be complementary to comprehensive Disaster Risk Management and Adaptation planning, not operating in isolation.
With a bill that could run to $trillion+ a year by 2050, DRF will only ever be able to cover part of the climate impact costs. So it's critical that a focus on the role that Disaster Risk Finance can contribute isn’t used as a defence against, or to divert attention from, broader discussions on the critical importance of additional funding and financing mechanisms - particularly to address the losses and damages caused by unavoidable climate impacts.
Finally, in the spectrum of losses and damages, DRF is squarely event-based and focussed on rapid onset (in climate-science terms) shocks. However, it’s not inconceivable that DRF-type instruments could help alleviate some aspects of slow onset or non-economic losses and damages. Some initial forays have been made, but these are not within the current repertoire of DRF options on a meaningful scale.
Prime Minister of Barbados Mia Mottley speaking during the opening ceremony for the COP26 summit at the Scottish Event Campus (SEC) in Glasgow. Photo: PA Images / Alamy
The Centre for Disaster Protection sees a distinct and important role for Disaster Risk Finance. This role involves catalysing a more intentional, proactive approach to addressing climate-related losses and damages and impacts that go beyond the limits of ‘adaptation’ efforts (i.e., impacts that have already occurred are unavoided or highly likely to be unavoidable). As with so much in this area, exactly where that role fits is harder to answer. Most readings separate 'averting and minimising' losses and damages from 'addressing' them. DRF has some read-across to the former in that the risk profiling and analytics that inform DRF can also support Disaster Risk Reduction and adaptation efforts, for example, while both draw on shared early warning systems, hazard tracking, etc. Arguably, DRF systems that enable faster funding flows around shocks can also help to reduce (or minimise) the scale of their impact through earlier intervention.
Equally, there is a case that DRF systems can 'address' shocks in that they respond to something that has already happened. Some reports position DRF mechanisms as providing finance to address losses and damages – but not necessarily the political track of Loss and Damage. Again, the lack of clear and agreed definitions, and the blurry and overlapping boundaries between different activities, make categorisation challenging and perhaps unnecessary. Regardless, considerations of ‘who pays?’ and ‘on what grounds’ remain critical and highly contentious.
We have already made clear that DRF mechanisms are only appropriate and suitable to respond to some aspects of Loss and Damage, and the funds required will far outstrip what such mechanisms can cover. But the principles that underpin DRF - and hard-earned operational knowledge won from its application - can perhaps also offer a guiding light on the path of wider efforts to tackle Loss and Damage. The practice of identifying and tracking risks to address them proactively; the process of determining how to plan and pay for disasters before they strike; the development and identification of clear action plans and actors ahead of shocks; and the agreement of objective and quantifiable triggers to ensure funding flows rapidly, predictably and where it is needed most surely all have valuable lessons for wider climate negotiations and evolving plans in the years ahead.
The challenges a changing climate brings will only increase. Climate-related shocks are becoming more frequent and intense, and vulnerable countries and communities are on the front line. At its core, DRF is about properly thinking about such risks, planning for them, and ensuring the automaticity of funds. That discipline writ large could have significant implications for a more intentional approach to the ongoing loss and damage debate and the impact of climate change on future generations. One thing is clear: the decisions we make today will directly affect how ready we are for the disasters of tomorrow.