Equitable Scaling of Finance for the Loss and Damage Fund

There can be little progress on scaling up support for loss and damage (L&D) finance without a serious thought on who should pay and how much. The annual economic cost of L&D in developing (Non Annex I) countries is projected to be anywhere between $290–580 billion by 2030 and $1–1.8 trillion by 2050 (Reinhard et al. 2019, 349). However, the history of climate finance contributions has been marred by inaction, and the same is seemingly true for L&D finance. Currently, L&D finance is limited, inaccessible and unpredictable.

The Fund for responding to Loss and Damage (FRLD) was established at the 27th Conference of the Parties (COP27), to ensure adequate, timely, and predictable financing for the growing climate related L&D needs of vulnerable communities in developing countries. The FRLD aims to disburse finance in early 2026, though much of the groundwork remains to be done. A review of existing literature points to key challenges that persist.

• Definitions are not universally accepted, accounting standards have not been established, and resulting accounting ambiguities render an overlap between adaptation and L&D.
• Mitigation investments deliver tangible, long term economic returns, whereas L&D finance pays for irreversible losses. The return on investment for L&D measures is, therefore, unattractive for investments.
• Institutional frameworks are weak, enforcement of contracts inadequate, creditworthiness low, and data on climate related losses limited; therefore, the risk perception of L&D finance is high.
• The perception of high risk and low returns results in an extremely high cost of capital and a vicious cycle of debt distress.

As climate impacts intensify and vulnerabilities compound, determining pathways for securing sustainable funding is essential. And in this identifying a fair and feasible approach to garnering developed country contributions to L&D finance that can be sustained in the long term is central. This issue brief argues that vulnerability is an imperative framing for rethinking responsibility and capability, as the impacts are universal but differentiated.

It sets forth two instrumental and interlinked outcomes:An overarching burden sharing framework for countries to scale up finance, with vulnerability at its core, and a ‘baseline’ or minimum floor for developed country contributions to the FRLD.

This paper can be accessed here.

This paper is authored by Jhalak Aggarwal, Mohana Bharathi Manimaran, CEEW, New Delhi.