EXPLAINER: What loss and damage fund means for climate action

As a result of climate change, the tide is rising, and homes that stood for generations are being swallowed by the ocean. Fertile lands are drying up under relentless heat, and floods are sweeping away entire communities. The people who contributed least to the climate crisis are paying the highest price.

For decades, developing nations have demanded that wealthy, high-emission countries take responsibility — not just by cutting carbon emissions but by compensating for irreversible losses caused by climate change. The result? The loss and damage fund, a financial mechanism designed to support countries devastated by the impacts of climate change.

WHAT IS LOSS AND DAMAGE?

Climate change is not just about rising temperatures or melting ice caps. It is about real, irreversible losses that affect lives and livelihoods. In many developing nations, these losses are particularly severe, ranging from destroying farmlands to displacing communities and losing biodiversity.

The concept of loss and damage was formally recognised in 2013 at the 19th Conference of the Parties (COP19) in Warsaw, where the Warsaw International Mechanism for Loss and Damage (WIM) was established. This marked a turning point in climate negotiations, signalling that climate-induced losses were no longer just an emerging concern but an urgent crisis demanding global attention. Since then, more countries have incorporated loss and damage considerations into their nationally determined contributions (NDCs) — the climate action plans submitted under the Paris Agreement.

Although there is no universally agreed-upon definition under the United Nations Framework Convention on Climate Change (UNFCCC), loss and damage generally refers to the harm caused by climate change that cannot be avoided, either because adaptation efforts have failed or because certain impacts are beyond human control.

A 2023 analysis found that, between 2000 and 2019, the world suffered at least $2.8 trillion in loss and damage from climate change – costing around $16 million per hour. Loss and damage can be categorised as either economic or non-economic.

• Economic losses: These are financially measurable damages, such as infrastructure destroyed by floods or agricultural losses due to drought.
• Non-economic losses: These refer to irreparable harm that cannot be easily quantified, such as the trauma of experiencing a cyclone, the loss of biodiversity, or the erosion of cultural identity.

The causes of loss and damage can stem from sudden extreme events — like hurricanes, wildfires and heatwaves — or slow onset changes, such as rising sea levels, desertification and ocean acidification.

For developing economies, the financial burden of climate disasters is disproportionately high. The Intergovernmental Panel on Climate Change (IPCC) reports that in highly vulnerable nations, mortality rates from floods, storms, and droughts are 15 times higher than in low-vulnerability countries.

In 2022, Nigeria witnessed one of its worst floods in a decade. Data from the federal government showed that the floods killed over 603 people, displaced over 1.4 million, and injured more than 2,400 people. About 82,035 houses were reportedly damaged, and 332,327 hectares of land were affected.

Similarly, the KwaZulu-Natal floods in South Africa led to the death of about 436 people, leaving 30,000 displaced and affecting more than 120,000 people. The disaster also caused more than $1.57 billion in infrastructure damage. In India, extreme heat in 2021 alone caused an estimated $159 billion in lost income, equating to 5.4 percent of the country’s GDP.

For many vulnerable communities, these losses are not just environmental concerns; they are existential threats, requiring urgent global action and financial support.

LOSS AND DAMAGE FUND

Despite global efforts in renewable energy investments, early warning systems, and energy-efficient technologies, it is clear that mitigation and adaptation alone cannot prevent all climate disasters. Even if the world succeeds in limiting global warming to 1.5°C, extreme weather events will continue to intensify, leading to widespread and irreversible losses.

The loss and damage fund has emerged as the third pillar of climate finance, standing alongside mitigation (cutting emissions) and adaptation (adjusting to climate impacts).

The fund was created by UNFCCC member states as a financial mechanism to help communities rebuild and recover from irreversible climate damage. While developed nations are expected to make voluntary contributions, developing nations are also invited to contribute.

And finally, in 2022, at COP27 in Sharm El-Sheikh, Egypt, nations took a significant step by creating a dedicated fund to address loss and damage. A transitional committee, comprising representatives from 24 developing and developed countries, was appointed to discuss its governance, institutional framework, funding arrangements, and implementation strategies.

Over the following year, the committee held several meetings, and after protracted negotiations, the loss and damage Fund was operationalised on November 30, 2023, during COP28 in Dubai. The fund initially received over $450 million in pledges, and this increased to more than $700 million by the end of the year.

In November 2024 at COP29 in Baku, Azerbaijan, parties agreed to commence fund disbursement in 2025. As of January 23, 2025, a total of $741 million has been pledged to the fund by 27 contributors. But is it enough? And will it truly serve its purpose?

Developing countries had earlier proposed that the fund be scaled up to a minimum of $100 billion annually by 2030 to effectively address the escalating impacts of climate change.

The World Bank is the host of the loss and damage fund secretariat, providing trustee services for an interim period of four years. Ibrahima Cheikh Diong, a Senegalese-American and former UN assistant secretary-general, has also been appointed as the first executive director of the fund, while the Philippines is the host country of the board. The fund’s board will make all decisions on resource mobilisation, funding allocation, and eligibility, with no decision-making role for the World Bank.

WHAT DOES THE FUND MEAN FOR CLIMATE ACTION?

The United Nations Environment Programme (UNEP) in its 2023 Adaptation Gap Report emphasises that “a justice lens underscores that loss and damage is not the product of climate hazards alone but is influenced by differential vulnerabilities to climate change, which are often driven by a range of socio-political processes, including racism and histories of colonialism and exploitation.”

Here are some of the implications of the loss and damage fund for climate action:

Recognition of climate justice

The fund acknowledges that climate change disproportionately affects developing nations, which have contributed the least to the crisis. This aligns with the principle of common but differentiated responsibilities (CBDR), reinforcing the idea that developed countries, having historically contributed more to the problem, bear a greater responsibility and possess greater capability to address these challenges.

Funding uncertainties and political challenges

Although developed countries have pledged over $700 million to the fund, this falls far short of the estimated $100 billion per year needed by 2030. There is also no binding obligation for nations to contribute, raising concerns about its long-term sustainability. Some countries, including the United States, have opposed mandatory contributions, pushing instead for voluntary funding from both developed and wealthy developing nations.

Operational and governance issues

The decision to house the fund at the World Bank for an initial four years has sparked debate. Many developing nations fear it may be influenced by Western interests and prefer a more independent financial mechanism. Ensuring that affected countries can access the funds efficiently remains a key concern.

Step toward accountability but not a complete solution 

While the fund is a win for climate-vulnerable nations, it does not replace the need for stronger emission reduction commitments. Without aggressive mitigation efforts, loss and damage costs will only escalate, making the fund a reactive rather than proactive solution.

The loss and damage fund represents both a triumph and a test for global climate action, but climate justice cannot end with compensation.