Loss & Damage Fund must be independent to deliver climate justice

Brandon Wu is the director of policy and campaigns at ActionAid USA

This week, the UN Transitional Committee (TC) mandated with designing the new fund to support developing countries in addressing loss & damage from climate impacts meets for the fourth and final time. The TC must deliver a concrete recommendation for approval at the COP28 climate negotiations later this year in Dubai - ideally, a full framework or “governing instrument” for how the new fund will be governed, what it will fund, and how it will fund it.

Over the course of the three previous meetings this year, the TC has solicited input, and country groups have submitted proposals for what they think the new Loss & Damage Fund (LDF) should look like. Under a proposal from the United States, followed by a largely similar one from the European Union, the LDF and its secretariat would be housed under the World Bank.

This has become one of the major points of contention in the TC negotiations. Developing countries prefer that the LDF be established as a brand-new independent entity, a call that is echoed by a submission made by a broad range of civil society organizations.

Why is this so important? The LDF was established at COP27, under the principles of the UN Framework Convention on Climate Change (UNFCCC). These principles, and the design of many related UNFCCC institutions such as the Green Climate Fund (GCF), are in direct conflict with many of the World Bank’s policies and practices. If the World Bank hosts the LDF – that is, provides its secretariat services, rather than only serving as its trustee, as is the arrangement with the GCF – a number of these conflicts will come to the fore.

For example, the World Bank’s Financial Intermediary Fund (FIF) framework, under which the LDF would fall, explicitly states that hosted FIFs, and thus the LDF, may only use multilateral development banks and UN agencies as implementing entities. This would preclude direct access to funds by national government institutions, much less any other national or subnational entities, including civil society groups.

Direct access has long been a priority for developing countries. Removing the “middle man” – an international intermediary – means that significantly more money flows to the country itself (since intermediaries invariably take a cut of the funds), significantly more capacity is built in-country (since intermediaries invariably use their own staff or consultants), and significantly more control over how funds are used lies with the country (since intermediaries may have their own policy prescriptions and constraints).

The fact that establishing the LDF under the World Bank would make direct access impossible should immediately disqualify the World Bank from consideration as host.

Responsive to the needs of the vulnerable

But the concerns do not end with direct access. As a UNFCCC institution, the LDF must be equitably governed, and unless something goes terribly wrong at TC4, it will have a Board of Directors (or similar governing body) that reflects this principle. The GCF, for example, is governed by a board that has an equal number of members from developed and developing countries.

The World Bank, on the other hand, is governed on a shareholder basis – countries’ voting shares are determined by their contributions into the Bank, with the US holding by far the largest single share. While it’s reasonable to assume that the LDF’s Board will have decision-making authority over most of the Fund’s affairs, rather than the World Bank’s governance structure having a say, there are many gray areas.

For example, the FIF framework includes a blanket statement that “World Bank policies and procedures also apply to hosted FIF secretariats.” What happens when these policies and procedures are directly at odds with decisions by the LDF Board? Given that the secretariat staff will be subject to World Bank HR policies and procedures, will the World Bank feel that it has some ability to influence, for example, the selection and appointment of the LDF Secretariat’s Executive Director or other senior management?

The World Bank may reassess the alignment between itself and a Financial Intermediary Fund whenever major changes are made, including during routine replenishments. Does this mean the World Bank will effectively have influence, or even veto power, at any time the LDF Board makes decisions to evolve the Fund with changing circumstances? If so, this could have a serious chilling effect on the Fund being a learning institution, as most countries have indicated it must be.

While expediency matters, it is very clear that we need to get the design of this fund right. An LDF that is operational within a year but is unable to be responsive to and meet the needs of vulnerable people in developing countries will be a failure. For the reasons outlined above and more, an arrangement in which the World Bank hosts the LDF would immediately be in danger of failing to support developing countries under basic principles of climate justice.

Rather than listening primarily to the countries that have caused the climate crisis and are still failing to meet their obligations to solve it, we should be listening to what developing countries and their communities want and need. TC4 has a golden opportunity to put this basic principle of justice into practice, and it needs to get it right.