The world has just experienced its warmest August on record — a grim milestone in a series of warning signs that point to the accelerating reality of climate change. The possibility of global temperatures rising by at least 2.5°C by the end of the century is no longer a distant theoretical prognostication but an increasingly probable scenario. As climate effects and disasters—ranging from heatwaves and droughts to floods, sea level rise and wildfires—intensify, their disproportionate impact on developing countries, where an overwhelming majority of climate-related deaths occur, is becoming painfully clear, on the one hand. On the other hand, the adaptation efforts in these countries are increasingly out of pace with a growing reality of irreversible Loss and Damage (L&D). This imbalance underscores the need for a fair and functional global climate finance system, particularly for L&D compensation. However, the global response thus far, despite some positive signals since the recent creation of the L&D Fund, falls far short of what is necessary.
The advocacy for financial mechanisms to compensate vulnerable countries for L&D dates back over three decades. As early as 1991, the Alliance of Small Island States (AOSIS) proposed an insurance plan to mitigate the consequences of rising sea levels. Yet, it wasn’t until COP28 in 2023 that meaningful progress was made with the establishment of the L&D Fund (hereafter Fund). In principle, as part of their ‘ecological debt’ and historical obligations, high-carbon emitting nations, mostly in the Global North, have committed to compensate for irreversible loss and damage to low-carbon emitting countries and communities in the Global South – which are economically fragile and disproportionately vulnerable to the present and future burdens of climate change. But commitment and finance are far from settled.
The current financial commitments to the fund are woefully inadequate. The pledged amount of $655.9 million is a mere fraction—less than 0.2%—of the estimated $400 billion annual L&D costs facing developing countries. This glaring disparity raises legitimate concerns that L&D financing will follow the same ineffective path as adaptation financing, which has historically fallen far short in terms of scope and scale of Global South countries’ demands.
One underlying cause of such a discrepancy in adaptation as well as L&D finance can be traced to the neoliberal approach to climate governance, which prioritises market-based solutions over climate justice of a compensatory or corrective nature[1]. The persisting tendency of this neoliberal model is to reinforce a market system, which has historically perpetuated inequalities and dependencies in various forms since colonialism. Also, the focus on market mechanisms in climate finance has often excluded the voices of those most affected by climate change—communities that are left grappling with the reality of losing not just their homes or livelihoods, but also their sense of identity, belonging, and well-being.
Moreover, there are ongoing debates about how the L&D Fund should be managed. Since COP28, the World Bank has been identified as the interim organisation to manage this Fund, which was viewed sceptically by many developing nations due to the Bank’s bureaucratic processes. Common sense dictates that funds must be made available – quickly and easily without undue bureaucratic accreditation – to governments, civil society actors and impacted frontline communities (mostly working people, poor farmers, pastoralists, etc.). A more direct, efficient, and equitable disbursement of funds, particularly to frontline communities that are most vulnerable to climate impacts, is needed. Speed and flexibility in assessment and disbursement are essential in addressing loss and damage in a responsible and needs-based manner. Unfortunately, the existing frameworks often fall short of providing these.
Furthermore, all the criteria outlined in normative frameworks that should be met by climate finance mechanisms[2] (novelty and additionality to other forms of climate or development finance, polluter pays principle, no additional financial burden, direct access, etc.) should be even more relevant in the case of L&D finance, given the sensitive and urgent nature of loss and damage. This is in addition to the need – reiterated by several countries and observers in past negotiations – for a majority representation of developing countries in the governance of the Fund. This approach would ensure the balance necessary for the Fund to achieve its objective and to promote equitable outcomes. In this regard, the recent selection of the Philippines as the host of the Fund’s Board and Ibrahima Cheikh Diong from Senegal as the first Executive Director was seen by developing countries as a hope for making their voices heard.
Finally, there is a critical lack of a comprehensive and contextually applicable L&D framework that addresses the full scope of the damage caused by climate change. Current L&D attribution frameworks focus narrowly on economic valuations, overlooking the profound relational and cultural losses experienced by communities. This narrow focus on monetary assessments is at odds with how people view their futures, experience their losses, what they see at stake, and what actions they may [decide to] take.
Both slow-onset processes and extreme events converge to impact lives and livelihoods in diverse ways. These impacts are not only material but also relational – a loss of place, belonging and identity; loss or stress on relationships in the upheaval to lives and livelihoods; the inability to enjoy basic rights and practise specific livelihoods, cultures and rituals which otherwise give a sense of self, community, dignity and belonging. When these irreversible changes occur, there is a high possibility of ‘emotional loss, stress, grief, hopelessness and alienation, ultimately affecting [people’s] health and well-being’. These aspects are central to understanding the true cost of climate change. Without addressing these non-economic losses, any attempt at compensation will remain incomplete and inadequate.
Consequently, there is growing recognition that a more localised and human-centred approach is urgently needed to address L&D effectively. Accordingly, there is an increasing call for a “national turn” in science discussions around L&D for a greater understanding and planning of L&D in national and local budgets and in systems and processes of water-food-environment governance.
National initiatives, such as those undertaken by Bangladesh and Nepal, provide a glimpse of what is possible. These countries have developed national mechanisms to address L&D, although these initiatives focus on different issues and are not necessarily focused on the controversial element of financing Loss and Damage, as well as issues of timely, accountable and appropriate compensation of diverse economic and relational elements of loss and damage. Moving forward, it is crucial to promote South-South collaborations that emphasise these relational dimensions alongside economic damages.
In short, the establishment of the L&D Fund is without doubt a step in the right direction, but it is only the beginning. A comprehensive and equitable approach to L&D must include not only sufficient and adequate funding but also frameworks that respect the lived experiences and relational, non-material losses of affected communities. It must give space and voice to multiple perspectives, especially of those who experience loss and damage, to identify what matters, what should be counted, what can be replaced or compensated, and what simply cannot.
Only by moving beyond the neoliberal schemes which characterise climate governance today, and shifting from the current, expert-driven and model-based attribution science towards a more inclusive, human-centred approach can we hope to address the full scope of the damage wrought by climate change.
[1] Ciplet D, Roberts JT. Climate change and the transition to neoliberal environmental governance
[2] Schalatek L, Bird N. The principles and criteria of public climate finance – a normative framework
Acknowledgement: Sincere thanks to Deepa Joshi, IWMI, for our meaningful discussions and her valuable contributions to this article.
