TWN Info Service on Climate Change (May24/02)
8 May 2024
Third World Network

First meeting of the Loss and Damage Fund Board kick-starts work

Kathmandu, 8 May (Prerna Bomzan):  The historic first meeting of the Board of the Fund for responding to Loss and Damage, convened from 30 April to 2 May in Abu Dhabi, UAE, and successfully set the ball rolling on the process to operationalise the much awaited Fund, amid ever increasing needs faced by developing countries.

The Fund was a landmark win at the 27^th meeting of the UNFCCC’s Conference of Parties (COP27) in 2022 in Sharm el-Sheikh, Egypt, when Parties decided to establish it and a year later operationalise it at COP28 in 2023 in Dubai, UAE.

In his opening address to the Board, COP28 President Dr. Sultan Al Jaber highlighted that the agreement to opertionalise the Fund marked a “moment in history” recalling that it “did not come easy” given make-or-break, final negotiations of the transitional committee in Abu Dhabi that eventually secured the deal and propelled the adoption of the decision at COP28.

The decision included the Governing Instrument (GI) of the Fund which mandates the 26-member Board to govern and supervise it as the decision-making body with responsibility for setting the strategic direction of the Fund and its governance and operational modalities, policies, frameworks and work programme, including relevant funding decisions.

Dr. Jaber particularly emphasised on the need for “ambitious and concrete commitments” to scaling up the Fund to ensure it delivers on its mandate, quoting USD 792 million as initial pledges, including USD 100 million from the UAE.

[It is to be noted that the convening of the first Board meeting was delayed primarily due to late nominations of members by developed countries, known to be linked to seats determined by their contributions. The European Union (EU) has a seat in the Board, which has been an issue of contention, as it deviates from the Fund’s GI on Board composition (which refers to 12 members from developed countries)].

The eventual convening of the meeting with began with a heavy agenda, under the leadership of the newly elected Co-Chairs Richard Sherman (South Africa) and Jean-Christophe Donnellier (France), and is therefore a significant step forward to kick-start the Fund’s operationalisation process.

It is also noteworthy that despite some technical glitches, the virtual setting of the final day of the meeting did not deter the Board from adopting a majority of the decisions. The virtual mode was conducted on an “exceptional”, basis given unusual weather conditions (of heavy rains) and related precautionary measures taken by the host government.

Decisions were taken on: (i) the selection of the host country of the Board; (ii) matters relating to the operationalisation of the Fund as a World Bank-hosted financial intermediary fund (FIF); (iii) selection of the Executive Director for the Fund; (iv) workplan of the Board for 2024; (v) status of resources; (vi) additional rules of procedure for the Board; (vii) arrangements for observer participation; (viii) the administrative budget of the interim secretariat and of the Board; and (ix) dates and venues of upcoming meetings.

[Note: All adopted decisions with relevant annexes are not yet published online. The draft decisions were restricted documents (limited to the Board members only), displayed only on screen during consideration and final adoption by the Board].

[This article covers the deliberations and decisions on the two urgent tasks required to initiate the Fund’s operationalisation process, viz. the selection of the host country of the Board and matters related to operationalisation of the World Bank-hosted FIF. The rest of the decisions will be covered in a separate article.]

Selection of the host country of the Board

The selection of the host country of the Board is a priority issue given that the host country needs to confer upon the Board the legal personality and the legal capacity as necessary for discharging its roles and functions.

Co-Chair Sherman (South Africa), however, clarified that although it was an urgent task, it still does not affect the Board’s ability to enter into (hosting) agreements with the World Bank to fulfill mandates and deadlines. He also shared that there were four offers for host country that was formally received from the Philippines, Barbados, Bahamas and Antigua and Barbuda.

On the first day, a draft decision was put forth by the Co-Chairs on the “Establishment of an ad hoc subcommittee on the selection of the host country of the Board”, as a working modality to get started and deliver on the important issue.

Several members expressed concerns on the draft decision, especially related to the clarity of the committee’s mandate and ensuing work on the issue: first, its interim mandate at the meeting to prepare the terms of reference, evaluation criteria and indicative timeline of the selection process for consideration by the Board for adoption; and second, its long-term mandate of engaging in the selection process adopted by the Board. The long-drawn discussion also resulted in a huddle of Board members from the developing country constituency, which was followed as well among the developed country constituency.

Mohamed Nasr (Egypt) commented on the limitations contained in the background paper by the secretariat, which formed the basis of the draft decision. He emphasised that it should be clear that the Board takes the decision and not the committee, whose mandate would be to report back to the Board with its report and recommendations on the issue for consideration and adoption by the Board. He pointed to clearly differentiating the two mandates of the committee.

Mohammad Ayoub (Saudi Arabia) echoing the same, suggested to add “draft” to the terms of reference and the selection process that the committee is tasked to prepare to ensure that it is brought back to the Board for consideration. He also suggested to add a point on the committee’s reporting of work in progress.

On the selection process, Georg Borsting (Norway) stressed the need for a transparent and “not politicised” process, while Sumaya Zakiedeen (Sudan) cautioned about a “lengthy” process recalling the case of the recent Santiago Network for Loss and Damage and hence, the need for a “flexible” criteria to avoid any deadlock in the selection process.

Rebecca Lawlor (United States) commented about the common expectation of what the host country will be providing as regards legal personality to the Board, pertaining to the terms of reference and evaluation criteria for selection, to which Co-Chair Sherman mentioned about providing privileges and immunities (immunity from any legal process) to the Board and observers as criteria, which is standard practice.

Based on comments from members, the revised decision was finally adopted later in the day to establish an “ad hoc subcommittee” compromising 10 members, five each from the two constituencies: Ayoub (Saudi Arabia), Borsting (Norway), Liliam Beatrice Chagas de Moura (Brazil), Jose Delgado (Austria), Gerard Howe (United Kingdom), Atsushi Kato (Japan), Daniel Lund (Fiji), Nasr (Egypt), Ana Paula Rodrigues (Portugal) and Adao Soares Barbosa (Timor Leste).

As its interim mandate, for consideration of the Board at the meeting, the committee was tasked to prepare: the “draft” terms of reference for the selection of the host country, including the evaluation criteria; and the “draft” selection process of the host country, including modalities, milestones and indicative timeline.

As its long-term mandate, after the selection process adopted by the Board, the committee would manage the process with a “report” and “recommendations on potential host countries” for consideration by the Board.

On the concluding day, the subcommittee co-chairs Lund (Fiji) and Howe (UK) presented the draft decision for consideration to the Board, elaborating on its elements and accompanying annex which contained the terms of reference, evaluation criteria, indicative timeline, process and next steps for the selection of the host country.

Lund (Fiji) underlined that the decision is a “key deliverable” of the meeting and that the selection process needs to be completed as soon as possible, which is reflected in the timeline of the document. Howe (UK) added that if the decision is adopted, then the interim secretariat will issue a public invitation to Parties to submit proposals for the hosting of the Board, to be received by early June (by 7 June 2024). He added that the secretariat will prepare a draft report, which will be reviewed by the subcommittee and presented for consideration of the Board at the second meeting, to make a decision on the host country.

The Board proceeded to adopt the decision on “Terms of reference for the selection of the host country of the Board” which reads:

“The Board,

a. Adopts the terms of reference, including evaluation criteria, for the selection of the host country as contained in annex 1 to this decision;

b. Agrees to the indicative timeline, process and next steps for the selection of the host country as outlined in annex 1 to this decision;

c. Takes note that the terms of reference outlined in annex 1 of this decision only consider the circumstance where paragraphs 21-24 of decisions 1/CP.28 and 5/CMA.5 are not operationalized”.

In relation to para (c) of the decision, Lund (Fiji) explained its framing in the context of the relationship between the host country of the Board and the potentially future-linked hosting of the secretariat of the Fund, which as of current expectation, is by the World Bank and that the terms of reference should not include secretariat elements. He informed that after wider consultations with members, paragraphs 21-24 were included in para (c) of the decision which contain the exit clauses premised on the conditions to the World Bank during the four-year interim period.

Operationalisation of the Fund as a World Bank-hosted FIF

As an urgent priority issue on the agenda, the key matters were related to the process of Board engagement with the World Bank (WB) to move forward on the relevant financial intermediary fund (FIF) documentation and hosting agreement, in line with the mandates and deadlines of the COP28/CMA5 decision. (CMA refers to the Conference of Parties to the Paris Agreement).

The decision provides that within six months (by June), the WB has to confirm that it meets the eleven conditions (paragraph 20 of the decision) and accepts to host the Fund. Additionally, no later than eight months (by August), the WB has to take the necessary steps to promptly operationalise the Fund, by providing to the Board the relevant FIF documentation, including a hosting agreement. These deadlines are linked to the exit clauses contained in paragraphs 21-24 of the decision.

On the first day, Co-Chair Sherman introduced the background paper by the interim secretariat and the proposal by the WB for the establishment of the FIF, stating that the purpose of the session was to have an open, “webcast” public  discussion with the WB on how to “proceed jointly to operationalise” the COP28/CMA5 decision noting the two deadlines with the first coming up on 12 June.

Referring to the WB’s proposal and the outlined potential approach to meet the eleven conditions, he further urged the Board to take the opportunity to seek clarity from the WB on the understanding of the decision, on issues related to operationalising the independent secretariat, the scope of direct access and their liabilities and risks, and on signing of financing arrangements and relevant safeguards, which had come across as key concerns. Sherman informed that the Co-Chairs would come back with a proposal on the procedural issue about engagement with the WB based on the session deliberations.

Renaud Seligmann, representing the WB, reassured that the conditions will be met in line with the June deadline and that they will come back with a finalised FIF model, consistent with the COP28/CMA5 decision.

He shared that some areas needed more discussion, viz. on the roles and responsibilities of the various stakeholders - the Board, the World Bank as the secretariat and the trustee, the implementing agencies, the direct access entities (DAEs) and the FIF role of the WB as an intermediary with the Board and as implementer to ensure entities receiving funds are able to manage those funds; that the responsibility of the end users are the implementing agencies and the DAEs.

A particular issue pertained to “who will sign the financing agreements; whether the implementing agencies or the DAEs?” and that if the WB as “trustee” should sign then it could do via a “new, fourth model” which was different from the existing three FIF models such as the Adaptation Fund, the Green Climate Fund (GCF) and the Climate Investment Funds.

Seligmann added that they are designing the new model accordingly to meet environmental and fiduciary standards, on how to reconcile the “functional equivalency” (referenced in the Fund’s GI) to their standards with fast disbursements, and also how direct access can be designed in such a way in this regard, highlighting that “most complex area is direct access” and it would help to understand more on its types and how urgently to operationalise it.

(The Bank’s proposal on the next steps had called for further clarity on the nature and extent of direct access modalities foreseen for the Fund and the role of the WB in concluding financing arrangements).

He assured (the need for) the independence of the secretariat, noting that the secretariat has to be neutral with the implementing agencies which the WB could be one. He however provided confidence that the “new package” will be “fully comfortable” with the Board as well as the WB’s Board.

Nasr (Egypt) commenting on the “innovative FIF” questioned what the Bank would like to see as assurances from the Board. He made clear that the secretariat has to be totally accountable to the Board and that it is not part of the WB, although hosted by it. He also raised issues about the hiring of staff, whether seconded employees by the Bank, and whether they are covered by its privileges and immunities.

Sebastian Lesch (Germany) said that the legal personality of the Bank includes signing of financing agreements, and that on direct access, it should be consistent with the Fund’s GI on safeguards and fiduciary standards.

Ayoub (Saudi Arabia) highlighted the importance of ensuring consistency with the Fund’s GI as the supreme document, and sought more information regarding documents of the Bank where policies differ from the GI. He emphasised that the secretariat will have to be unique on reporting and being accountable to the Board. On direct access, he said more discussion was needed, pointing out with respect to the safeguards and standards, that the privileges and immunities of the Bank also cover financial transactions, consistent with the decision and the GI.

Djibril Ibila (Benin), David Kabula (Zambia), Lund (Fiji), Zakiedeen (Sudan), Elena Pereira (Honduras) all highlighted the critical importance of direct access in their interventions with Pereira underscoring that on the types of DAEs cannot be prejudged at this point.

In response, the WB representative Seligmann maintained they are showing flexibility and moving forward in an innovative way. He assured that the secretariat will be “functionally accountable” to the Board, with functional independence. He also touched upon “due diligence”, concerning new entities where the WB has a role to play. On privileges and immunities, it stops the day when the funds enter the implementing agencies, which then becomes the latter’s responsibility.

He also underscored that the Bank has not identified any conditions that run contrary to its policies, and that if there is a need for a waiver, then the management will exercise them. Seligmann also took note of the importance of direct access echoed by Board members, and stressed on breaking down paragraph 49 of the decision on the various forms of direct access under the Fund’s GI section, on country ownership and access modalities, which reads:

“The Board will develop various modalities to facilitate access to the Fund’s resources. These modalities may include:

(a) Direct access via direct budget support through national governments, or in partnership with entities whose safeguards and standards have been judged functionally equivalent to those of multilateral development banks;

(b) Direct access via subnational, national and regional entities or in partnership with entities accredited to other funds, such as the Adaptation Fund, the Global Environment Facility and the Green Climate Fund;

(c) International access via multilateral or bilateral entities;

(d) Access to small grants that support communities, Indigenous Peoples and vulnerable groups and their livelihoods, including with respect to recovery after climaterelated events;

(e) Rapid disbursement modalities, as appropriate.”

On the second day, Co-Chair Sherman informed of a potential draft statement to the WB containing high-level principles in relation to direct access. He also reminded about the need for the session to agree on clear methodologies to work with the Bank on the hosting agreement and the FIF documentation to meet the August deadline.

Jens Fugl (Denmark) supported a structured dialogue with the Bank and the statement as part of the dialogue. Antonella Baldino (Italy) stated that a there needs to be a “balance” of risks and responsibilities and how it would be maintained on the different categories of direct access, while Lawlor (US) pointed out that direct access is defined by paragraph 49 (a-b) (referred to above). Further, clarity was sought on the Bank’s 2022 FIF directive mentioned in its proposal by de Moura (Brazil) and Kato (Japan), and a question by Howe (UK) about the establishing of the trustee account and the time required by the WB, as it was essential to ensure resources coming into the Fund.

The Bank’s representative Seligmann said that the statement on the high-level principles in relation to direct access would be helpful to clarify the thinking of the Board on paragraph 49 (a-e). On implementing agencies, some sort of “accreditation” would be required if added later to the list by the Board. On the trustee account, the Board would need the legal personality to sign the trustee agreement. On balancing the risks and responsibilities, the overall risk framework would depend on the different instruments such as different risk profiles between programmatic and small grants.

On the final day of the meeting, two decisions were adopted. The first decision welcoming the engagement with the Bank and the “confirmation made by the World Bank that it will, as trustee, enter into financing agreements on behalf of the Fund”. It also “adopts” the high-level principles statement on direct access contained in its annex to be transmitted to the WB.

The one-pager statement at the outset “notes that the World Bank has confirmed that it is willing to be flexible to accommodate the needs of the Fund with regards to direct access”.

It recognises that some of the entities through which direct access modalities will be operationalised are “non-traditional partners” for the WB and further provides the following  “initial reflections” on the Board’s expectation regarding direct access in light of the Fund’s GI:

“Paragraph 49 (a) and (b) of the Governing Instrument provides the broad categories of entities through which direct access modalities will be operationalized including, through non-traditional partners for the World Bank such as subnational, national and regional entities (which may include those accredited by GCF, the Adaptation Fund and GEF). Paragraph 49 (d) also envisages access to small grants that support communities, Indigenous Peoples and vulnerable groups, and their livelihoods. The activities to be financed by the Fund are set out, in general terms, in paragraphs 6 to 9 of the Governing Instrument, as well as paragraph 47.

At this early stage of the Fund’s evolution the Board still has to determine, beyond what is already in the Governing Instrument, the specific types of entities that might access resources from the Fund under direct access modalities or the small grants modality and, in any event, this will need to remain an evolving definition over time. The Board will also in due course need to define in greater detail the access modalities, including in respect of small grants. 

Notwithstanding that these matters may only be defined more clearly in due course, the Board will naturally seek to build out the Fund in an orderly manner and in accordance with principles of good governance.

The Board draws the attention of the World Bank to the safeguards that have been built into the Governing Instrument in order to manage the risks associated with entering into financing agreements with non-traditional partners. In particular, the Board draws the World Bank’s attention to paragraphs 22(f), 22(m), 49(a), 50, 67 and 68 of the Governing Instrument which highlight the key fiduciary, integrity and environmental and social principles that need to be upheld as well as the functional equivalency test that needs to be met by direct recipients and other implementing entities. 

The Board would welcome further engagement with the World Bank on how these safeguards and standards can be developed in a way that meets the needs and risk tolerances of both the Fund and the World Bank”.

The second decision, on the Board’s engagement with the Bank in relation to the mandated work, reads:

“The Board:

(a) Requests the Co-Chairs to engage with the World Bank on the scope, structure and elements of the financial intermediary fund (FIF) documentation, hosting agreement and the trustee agreement between the Board and the World Bank in accordance with paragraph 19 of decisions 1/CP.28 and 5/CMA.5;

(b) Further requests the Co-Chairs, after each engagement with the World Bank, to report to, and seek input from the Board, in a transparent and inclusive manner through appropriate means, including through virtual meetings, with a view to enabling the Board to

            (i) confirm that the relevant FIF documentation ensures that the conditions set out in paragraph 20 of decisions 1/CP.28 and 5/CMA.5 can be met during the interim period;

            (ii) endorse the FIF documentation, hosting agreement and the trustee agreement; and

(c) Confirms that the Co-chairs’ engagement with the World Bank will be in full accordance with decisions 1/CP.28 and 5/CMA.5 and the Governing Instrument”.

(Decisions on the other agenda items will be covered in a separate article.)