What is loss and damage and will it have a breakthrough at COP27?

Loss and damage has been a talking point in the build-up to the last few COPs, with a clear divide between developed and developing nations as to how funding and discussions around the thorny topic should take place.

But what exactly is loss and damage? How long has the UN been discussing it? What is happening with loss and damage at COP27? And, what does this mean for corporate sustainability?

Here, edie outlines everything you need to know about the crucial subject of loss and damage.

What is Loss and Damage?

Loss and damage has plenty of broad definitions but hasn’t been formally defined by the UN Framework Convention on Climate Change (UNFCCC). This is in part due to the infancy of the topic and the fact that discussions have only just started to pick up, but also because loss and damage covers multiple different topics and scenarios.

It can be seen as the impacts from the climate crisis that have not been avoided – but could potentially be with increased funding and support – through adaptation and mitigation. Of course, research from the Intergovernmental Panel on Climate Change (IPCC) has since stated that even on a 1.5C trajectory there will be irreversible climate impacts, so loss and damage also refers to the unavoidable impacts of the climate crisis and how it affects certain communities most vulnerable to these risks.

In previous UNFCCC discussions and negotiations, loss and damage has been split into tangible examples, such as economic loss, goods and services outputs and impact to markets, and then less-tangible aspects under a non-economic loss and damage (NELD) banner. These include damage and loss regarding life, location, territory, biodiversity and also conceptual aspects like identity and culture.

In fact, the ECBI has produced a pocket guide on loss and damage through the lens of UN negotiations. We don’t need to get into all the intricacies here on this occasion though.

Why is Loss and Damage important?

It only takes a glance across the headlines to see how climate change impacts, and the loss and damage caused by them, are already materialising themselves into everyday lives.

At COP27, Pakistan Prime Minister Shehbaz Sharif outlined the damage caused by the record levels of flooding experienced in the country in recent months.

More than 1,700 people have died in the floods, two million homes destroyed and millions of children are now out of school as a result of the devastation. The Pakistani Government places the damage at a total of more than $30bn.

Research suggests that Pakistan’s contribution to the global carbon footprint is less than 1%, but the country is within the top 10 nations for “climate-stressed” countries.

Wildfires, flash floods and even immigration and displacement caused by climate-related conflicts all create loss, all create damage, predominantly for developing nations. The loss and damage caused by the climate crisis will only increase because developed nations have shown a historic unwillingness to support mitigation and adaptation initiatives.

More broadly, a report by more than 50 vulnerable countries found that climate-related losses over the last 20 years had accounted to a bill of $525bn – which is equitable to 20% of their collective GDP. By 2030, research suggests this could reach almost $600bn.

While many nations have contributed to international climate finance, including the $100bn climate finance goals as part of the Paris Agreement – although developed nations are falling well short of funding goals here as well – it usually comes in the form of carbon-cutting technologies and restoration. Vulnerable nations want dedicated funding the damage that they can’t avoid or respond to.

Has it been addressed at previous COPs?

In comparison to the conversations around climate change, loss and damage has only just started to gain traction in UNFCCC discussions.

Referring back to the ECBI’s handbook, it appears that discussions started to pick up in 1992, when Vanuatu, on behalf of the Alliance of Small Island States (AOSIS), issued a proposal for an internal fund to cover and insure the damage of climate change for the most vulnerable nations. It was proposed that the funding would come from developed countries that are the primary contributor to the climate crisis. Discussions fell through during negotiations.

Then, at the COP13 summit in Bali in 2007, loss and damage appeared in the texts for the first time, in reference to the need for enhanced action on the issue, but no concrete commitments were made.

Loss and damage resurfaced at the failed climate discussions in Copenhagen in COP16, again though, any proposals fell through.

Even in the landmark Paris Agreement, loss and damage was again brought to the table by a cohort of developing nations. However, the issue was treated as a separate, standalone article from the overall Agreement (Article 8) and featured an exclusion clause that essentially acted as a loophole for inaction.

There’s a running theme here, the African and Small Island States most vulnerable to climate impacts have been the ones trying to bring loss and damage to the table, only for it to be swatted away by developed economies.

The primary driver for rich countries to resist agreeing to loss and damage finance is a fear of being hit with large claims and issues around liability as to what nation is contributing to the climate crisis, in what way, and how that payment should therefore be issued.

What happened at COP26?

Loss and Damage was far more prominent at COP26, and even got its own thematic day of negotiations.

At COP26, nations including China and the G77 – which represents 134 developing and emerging economies – expressed anger that their proposals for a Loss and Damage finance facility had been watered down, following reported interventions from the US and EU.

Such a facility would see developed nations offer reparations for vulnerable nations to respond to the damage caused by climate-induced events. Some African nations already see 10% of GDP equivalent spent on adaptation and damage repair annually.

Developing nations wanted, instead of further talks, a time-bound and numerical commitment to loss and damage at Glasgow, namely in the form of a funding pot.

The Pact does confirm that a “technical assistance facility” will be introduced to support loss and damage in relation to climate change in developing countries. This will fall under the Santiago Network from the UNFCCC, but this commits nations to a dialogue around loss and damage and many developing nations left Glasgow reeling from the lack of cooperation from developed nations to support them through additional finance.

What has happened at CO27?

In the first week at COP27, we’ve seen some notable, if not small, funding announcements for loss and damage, but larger nations continue to push back on the funding proposals.

Scotland, for example, announced at the summit that it would provide a further £5m to loss and damage mechanisms, joining the likes of  Germany and Belgium, which committed €170m and €2.5m respectively.

As reported by Euractiv the EU is continuing to balk at the idea of a fund. Jacob Werksman who heads the EU delegation at COP27 stated: “The scope of our conversation is not going to be focused on one single solution, as some parties see it, to the challenge of loss and damage – the establishment of a new fund or a facility – at this COP.”

“Instead, we will start a conversation that is broad enough to be able to contain within it multiple solutions to what we see as a very complex and challenging problem.”

The EU claims it is already one of the largest contributors to climate finance – although loss and damage would account for just one entity under this broad terminology – while the US also claims it is contributing through mechanisms such as Green Climate Fund, which has supported more than 200 climate projects to the tune of £11bn.

As the official texts at COP27 start to be drafted, developing nations will continue to push and demand that a standalone loss and damage fund be established at COP27.

Many leaders from the likes of Barbados, the Maldives and even China, have claimed that a dedicated loss and damage facility should be set up to support them. China’s insertion into this debate both at COP26 and COP27 has irked other nations as the country is the world’s largest emitter and many believe they should be contributing to funding, not receiving it.

Proposals will continue to be made during the second week of COP27. The Alliance of Small Island States is calling for a response fund that would collect funding from public and private sources, while developed nations are pushing for loss and damage funding to be extracted from existing green finance mechanisms.

UN Secretary-General Antonio Guterres has proposed a windfall tax on fossil fuel companies in order to facilitate a loss and damage fund, while Vanuatu has turned to the International Court of Justice to ask to be protected from the climate crisis. Depending on the result of this request, it may become easier for developing nations to request compensation from developed countries when climate disaster strikes.

One of the biggest breakthroughs could come in the form of a Global Shield.

The G7 has previously issued support for the creation of a Global Shield that would cover loss and damage.

A communique from the G7 meeting in Berlin this June emphasised how “averting and minimising” damage is preferable to addressing the issue once it happens. It states: “We commit to scale up climate and disaster risk finance and insurance and will work towards a Global Shield against Climate Risks, building on the InsuResilience Global Partnership and other initiatives. We ask our Development Ministers to make progress on the Global Shield by COP27.”

The Global Shield is expected to launch at COP27 by the World Bank. The Global Shield Financing Facility (GS-FF) would act as a financing solution for adaptation, resilience and crucially, disaster transfer risk. Many are likening the Shield to an evolution of the World Bank’s Global Risk Financing facility, which has delivered around $2bn in project financing.

Regardless, loss and damage continues to be one of the major roadblocks to negotiations at COP27. A reluctance from developed nations to partake in agreements, a lack of unified demands as to how the fund should work and the intricacies of ensuring how money is paid and which countries and disasters would qualify are all muddying the waters.

As such, even if a breakthrough agreement is achieved, don’t expect a dedicated loss and damage fund to be up and running straight away. It is likely that the “dialogue” agreed at COP26 will transfer over to next year’s climate summit in a bid to finally achieve and set up a fund.

How should businesses respond?

Some estimates place the total costs of loss and damage at $1trn by 2050, a figure that should be enough to get the c-suite aware of potential economic pains for businesses with supply chains that span multiple continents.

However, with many politicians pushing back on loss and damage because of a fear that accepting liability could set off various lawsuits, it is unlikely that businesses will be required to act on loss and damage through by regulation.

Instead, businesses would benefit by being proactive in mapping potential cases of loss and damage across their value chain.

Both the Task Force on Climate-Related Financial Disclosure (TCFD) and the Taskforce on Nature-related Financial Disclosures (TNFD) have frameworks set up to enable organisations to map out potential climate and nature-related risks across the value chain and across various different temperature “scenarios” in the future.

Examining business resilience across these frameworks will give an organisation better insight into areas of risk and will enable them to respond accordingly.

In terms of actual response, much of the business focus will be on supplier engagement, unless they have facilities located in vulnerable countries. Many firms have introduced supply chain forums or programmes that trains suppliers (typically in the agrisectors) on sustainability. Many manufacturers and food businesses train smallholder farmers to increase yields and therefore improve livelihoods through sustainable farming practices. Now, that focus needs to shift to improving resiliency against the climate crisis. Climate-smart agriculture, for example, is a growing trend that businesses can explore.

Other ways to respond to loss and damage could be to pay better wages for suppliers located in those nations, to ensure they are financially protected and supported for when climate disaster hits. Others may wish to set up dedicated funding and donations to support small island states, or partner with communities on climate initiatives that generates benefits for those locations. This way businesses are also seen to be taking their fair share of the responsibility, while also protecting their stakeholders, not just their shareholders.

One other way to act is by exploring the World Benchmarking Alliance’s Climate and Energy Benchmarks. These benchmarks are set up to take into account the aims of the Paris Agreement across high-emitting sectors.

“WBA’s Climate and Energy Benchmarks are positioned to be part of the wider accountability mechanism on the Paris Agreement goals with a specific focus on the role of the keystone companies across high emitting sectors,” the WBA’s Yann Rosetti and Jennifer van Beek explain in this blog post.

“These benchmarks effectively assess companies on efforts to prevent costs for loss and damage. Alongside this, the WBA’s Food & Agriculture, Nature, Digital Inclusion and Financial System Benchmarks all assess companies on climate mitigation and/or on ecosystem restoration and conservation efforts. Companies are therewith expected to contribute to the prevention of human-induced climate impacts.”