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Will the World Bank make good on the loss and damage fund?

Written by Bianca Getzel, Michai Robertson

Image credit:Canals, flood controls stations and water retention basins helped reduce the risk of flooding in the city of Beira, Mozambique. Credit: World Bank / Sarah Farhat Image license:CC BY-NC-ND 2.0

A historic first-day decision at COP28 adopted a plan for the further operationalisation of the new Loss and Damage Fund.

The joint decision invites the World Bank to host the Fund and serve as its trustee for the first four years. The governance of the Fund was a divisive point between developed and developing countries, and the decision to invite the Bank a contentious one.

So, what conditions must the Bank fulfil? Based on past experiences, is it likely to do so in the spirit of the COP28 decision? And how can we learn from the Bank’s track record to ensure the loss and damage fund is a success?

1. What is the Bank's experience of managing such funds?

The Bank has been invited to operationalise the Loss and Damage Fund as a financial intermediary fund (‘FIF’ – development practitioners do love their jargon and acronyms).

The Bank already has 26 FIFs under management. As its FIF portfolio continues to grow, both by volume and number of national-level implementing entities (bodies tasked with allocating finance from a fund like the L&D fund), the influence of the Bank has declined. Consequently, the Bank now places more emphasis on strengthening its oversight role. One facet of this push for closer supervision has particular salience for the politically sensitive Loss and Damage Fund: the Bank’s Board now needs to be provided with information on new FIF proposals early in their development process when there is still an opportunity to shape them.

The majority of the Bank-hosted FIFs are not accountable, or directly linked to an international treaty regime. For example, many are born out of initiatives from the G7 or G20. But the Loss and Damage Fund has emerged from the United Nations Framework Convention on Climate Change (UNFCCC) regime, which has its own rules for governance and accountability. This leads to a push-and-pull between the Bank and the UN climate convention.

The COP28 decision has sought to address this tension by requiring the Bank to fulfil eleven conditions in its interim hosting of the Fund. These are intended to safeguard control over the Loss and Damage Fund within the climate regime, while delegating certain roles to the world’s biggest (and arguably most experienced) development financier. These conditions therefore create potential arenas for conflict between the UNFCCC regime and the Bank.

Using past experiences of Bank-hosted FIFs and our interpretation of its existing policies and procedures, we foreshadow the Bank’s potential engagement with some of these conditions.

2. How might the World Bank engage with the conditions on the Loss and Damage Fund?

a. Duty of the Executive Director (‘ED’):

The Board of the new Loss and Damage Fund can autonomously select its ED. However, the ED cannot - once hired - act autonomously. The ED will be responsible for monitoring developments and risks which may materially impact the Bank, including strategic and operational alignment and engagement with the Bank. It is difficult to imagine that the ED will not be heavily influenced by the way in which the Bank conducts its development business. This influence could also go beyond the ED and affect the Fund’s secretariat personnel who will technically be Bank staff members. Thus, the ambition of the Fund could be curtailed by the risk appetite of the Bank.

b. Cost:

The financial costs of being hosted by the World Bank are one of the most significant concerns for developing countries. Representing the small island developing States, Diann Black-Layne, described the Bank’s behaviour as “pure gangster”. This led to a condition focused on ensuring a reasonable and appropriate cost recovery methodology is used for the Loss and Damage Fund.

The Bank’s policies states that the full administrative costs of hosting the secretariat and providing Trustee services are to be recovered through the resources of the Fund. In the TC process, an administrative fee for hosted secretariat services amounting to 17% of the secretariat’s costs was mentioned. In spite of this vague condition on cost recovery, concerns remain over the unpredictability of the Bank’s administrative charges, given that the Bank reserves the right to change its overhead fees at any point in time. For example, in the Global Environment Facility’s (‘GEF’) case, the Bank has just proposed an administrative fee increase of approximately 300% compared to the current financial year. The GEF Council has proposed an alternative charge which would result in a lesser (but still significant) cost increase of 188%. Negotiations continue.

c. Contributions:

Even though the Bank does accept contributions to its trust funds from a wide range of sources, its due diligence process prohibits or renders very unlikely contributions from some potential donors.

Private corporations or other for-profit entities, especially ones closely affiliated to a for-profit entity, are subject to enhanced scrutiny. This has meant that between FY2019-2023 less than 1% (USD 44 million) of cash contributions to Bank-managed funds were from private for-profit entities. Meanwhile, high net worth individuals are prohibited from contributing to the Bank’s FIFs altogether. The Bank’s limited track record with more unconventional contributors may potentially limit the volume of resources channelled to loss and damage response.

d. Investment powers and financial instruments:

The Bank seeks to preserve and increase the value of its FIFs through investing in capital markets. The COP28 decision placed a condition on the Bank to do that, however, it is silent on how the Loss and Damage Fund would go about doing that.

One option is to replicate the approach of the Pandemic Fund, whereby the Bank issues bonds and swaps to generate resources for the fund; the resources are then issued as grants. In the past, the Bank has been very careful when issuing these financial services because they could have broader implications for the Bank’s balance sheet or its preferred creditor treatment, which directly implicate the Bank’s lending capacity and cost of funding – i.e. how cheaply it can offer loans. However, following recent reforms to the Bank’s capital adequacy framework, the main source of tension, known as the Statutory Lending Limit, has been alleviated. In turn, the Bank can more easily leverage its balance sheet to generate resources for FIFs without risking becoming lending constrained under the Statutory Lending Limit. Due to these capital adequacy reforms the Bank has and will continue to strengthen its ability to increase the value of its FIFs while also preserving its own standard business. .

e. Direct access:

The Loss and Damage Fund, like other climate funds before it, aims to reduce transaction costs and strengthen national institutions by allowing countries “direct access” to its resources. Direct access via non-traditional implementing entities goes beyond the Bank’s original concept of a FIF, where funds are disbursed through intermediaries such as MDBs and UN agencies.

In the Fund’s case, direct access has been central to the debate. Unfortunately, climate FIFs struggle to deliver on the promise of direct access because of higher perceived risks. Figures 1 and 2 show the disbursements to national and international entities by the Green Climate Fund (‘GCF’), whose secretariat is hosted externally from the Bank, and the Adaptation Fund (‘AF’), with a Bank-hosted secretariat. In both cases, funding for national entities has stagnated each year since 2020 and disbursement has been close zero since 2022.


The Fund seeks to address these issues by:


  1. Conferring legal personality and capacity: Giving the Board of the Fund its own legal personality and capacity would mean that the Bank would not need to directly enter into legal agreements with national implementing entities and could choose to delegate this responsibility (and risk) to the Fund’s Board.

  2. Recognising accreditation by existing climate funds: This would allow many national implementing entities to skip the accreditation process altogether. However, additional measures will be needed for the Fund to provide small grants directly to communities – perhaps a light-touch accreditation process or global programme like the GEF’s Small Grant Programme managed by UNDP.

  3. Recognising functional equivalency with the Bank’s standards and safeguards: The Bank has been providing budget support to many countries for decades, including immediate liquidity in the event of climate-related disasters. Where national governments are already meeting the requirements of the Bank, the Fund should be able to provide budget support without a further accreditation process.

Conclusion

Both the UNFCCC and Bank regimes could bring unique value-add to the Loss and Damage Fund, but there are potential tensions between them. Both therefore need to come to the table next year and attempt to operationalise the Fund in good faith. If they fall short, it is the people and ecosystems that they depend on that are already experiencing climate-induced loss and damage and that will once again bear the failures of the multilateral system.