Tony La Viña, Gab Mesina, and Jayvy R. Gamboa
COP 28 witnessed a historic agreement on the operationalization of the Fund for responding to Loss and Damage, or more commonly known as Loss and Damage Fund (“LDF”), the hosting of which as a Financial Intermediary Fund (“FIF”) was referred to the World Bank (“Bank”).[1] The Bank officially expressed its acceptance in June 2024. A month later, the third day of the LDF board meeting in Korea saw a lengthy discussion between the LDF Board and the Bank representatives on the hosting of the fund.
The Proposal
Should the Board and the Bank come to an agreement, the LDF will join 27 other FIFs under the World Bank. The World Bank proposal consists of two parts: the Bank as a trustee and as a host.
As a trustee, the Bank will be responsible for receiving, investing, transferring, and accounting fund resources. In essence, under the trustee agreement, the Bank will handle all monetary management concerns of the LDF. The Bank will leverage multiple departments, such as the treasury and accounting departments, to fulfill its responsibilities as trustee.[2] Of course, the trustee responsibility is limited only to management and the Bank shall not provide additional resources to the Fund. Investment and releasing of the resources remain under the discretion of the LDF Board. Organizations, world bank client nations, and non-client nations are among the possible recipients of the LDF’s resources.
On the other hand, under the host agreement, the Bank would become part of the secretariat of the LDF. The host facilitates the day-to-day operations of the LDF from providing office space to legal services, human resources, IT, security, and other necessities. For their hosting and trustee services, the Bank is set to receive compensation equal to a pre-negotiated percentage of the LDF’s pool of resources. [3]
For the sake of transparency, the Bank has emphasized that the trustee and host obligations are handled by two independent entities that do not commingle.[4] Additionally, independent auditors will be employed by the Bank to ensure proper management of the LDF. Transparency is not the only concern regarding the hosting of the LDF and so these issues have materialized in the dialogue with the Bank representatives.
The Concerns
Civil society has since been critical of the World Bank’s hosting of the LDF, stating that the business model of the bank may compromise the ability of the Fund to operate as a tool for responding to climate change-induced events.
This, of course, is a legitimate concern. The Bank is made up of 189 member countries acting as shareholders.[5] Some have demanded that the Bank recover its costs for hosting the LDF. A set percentile of the secretariat budget and a fee for keeping money in World Bank accounts constitute the cost-recovery demands of the bank. In total, around 17% of ‘total costs’ will be paid by the LDF to the Bank as cost recovery for services. The Women and Gender CSO representative shared their apprehension with the World Bank fees. They state the experience of the Global Partnership for Education[6]– another World Bank FIF which has had its fees nearly doubled by the World Bank within a few years.
In response, the World Bank has stated that it has, in fact, demanded a lower compensation than their usual rate of 22%. The Bank’s board had given its approval to subsidize the Fund to maintain their cost-recovery package at 17% of total costs. According to Bank representatives, an independent audit had found the reduced rate of 17% to be adequate. It is also worth noting that the Bank has stated they are open to negotiate their fees in confidence with the LDF Board and interested parties.
Regardless, the global community and advocates of Loss and Damage should not lose sight that these fees, while estimates are still nowhere to be seen, shall be sourced from the country contributions to the LDF—further reducing the already insufficient 661 USD million pledged by developed countries.[7] The costs of services still stands at 17%, which could have been otherwise redirected to projects in the Pacific Islands, South Asia, or Africa, instead of the demands of Bank’s shareholders, the majority of which are held by developed nations.[8]
The Bank’s involvement in the disbursement of funds was also discussed during the dialogue. It has been reiterated that it is the LDF Board that has the discretion and responsibility to commit the Fund’s resources. Whereas, the World Bank, as trustee, simply carries out the LDF Board’s order, which includes delivering the necessary resources to the decided recipient entity.
However, this does not hold true in all cases. The Bank may withhold the funding if the decided recipient entity is on any “list”, where disbursement to those listed therein is prohibited by the World Bank. As to what these specific lists are, they have yet to be revealed by the Bank representatives.[9] However, this statement from the Bank is alarming, because it implies that while the LDF Board controls the funds on paper and with the mandate of a COP decision, the Bank has power over operationalizing access to these. It begs the question whether the LDF Board does have full discretion on what to do with the Fund.
The World Bank has had a history of refusing developmental aid to countries for various, often Western-conforming, political reasons. It had withheld development funding from Iran in response to sanctions imposed on the country for their nuclear program back in 2010.[10] Following the 2022 invasion of Ukraine, the Bank had cut off all programs in Russia and Belarus.[11] Most recently, future funding for Uganda has been indefinitely postponed after their adoption of the abhorrent ‘Anti-homosexuality act’.[12]
It is rather difficult, but, in these contexts, it must be emphasized that the state is distinct from its people. In the case of the LDF, it is not hard to imagine the World Bank withholding the release of LDF resources from any nation for similar reasons above, even if the LDF Board decides to do so. This would only disproportionately punish the grassroots communities of these countries; again, shifting the brunt of climate impacts on the most vulnerable.
If the Bank does indeed insist on the prohibition of disbursement at the state level for various political reasons, then an alternative must be seriously considered by the LDF Board. The COP decision opens the possibility for direct access by communities: “Access to small grants that support communities, Indigenous Peoples and vulnerable groups and their livelihoods, including with respect to recovery after climate-related events”.[13]
The Future
Fortunately, the proposal is not yet final. There is still room for much optimism as the World Bank seems open to a more flexible arrangement with the Loss and Damage Fund.
The Bank has committed to submitting their proposal on the 12th of August this year. A decision from the LDF Board will then determine whether to accept the Bank’s proposal. While there is no set deadline for the Board’s decision, the urgency of the decision is expected from the Board given the worsening climate situation.
The Board then must come together and set safeguards to prevent unreasonable increases in cost-recovery fees demanded by the Bank. It is also imperative that the LDF Board upholds its exclusive authority as the sole decision maker on the releasing of Fund resources, and not to be reined in by the Bank’s policies. Hopefully, the concerns raised above are adequately addressed in the upcoming LDF Board meeting in Baku from September 18-20, 2024. Until then, the world, especially the developing world, eagerly and anxiously awaits the Loss and Damage Fund to fully operationalize.
[1] UNFCCC, 1/CP.28; 5/CMA.5.
[2] Proceedings of the Second meeting of the Board of the Fund for responding to Loss and Damage on July 9-12, 2024 at Songdo – Incheon, South Korea
[3] Id.
[4] Id.
[5] See the list of world bank member countries here: https://www.worldbank.org/en/about/leadership/members
[6] See https://fiftrustee.worldbank.org/en/about/unit/dfi/fiftrustee/fund-detail/gpef#3
[7] Danish Contribution to the Fund for responding to loss and damage, https://um.dk/en/-/media/websites/umen/danida/about-danida/danida-transparency/public-consultations/pk-04-06-24/draft-fund-for-responding-to-loss-and-damage.ashx
[8] Voting power is also proportional to the amount of shares held by a country. See voting power of world bank member nations here: https://www.worldbank.org/en/about/leadership/votingpowers
[9] The list being referred to may be the ‘Debarred Firms and Individuals’ list
[10] See https://www.reuters.com/article/world/iran-blasts-world-bank-for-refusing-loans-idUSTRE6975KS/
[11] World Bank Statement of Russia and Belarus 2 March 2022
[12] World Bank Group Statement on Uganda 8 August 2023
[13] 1/CP.28, para. 49 (d).