Floods, wildfires, heatwaves and water shortages around the world are focusing attention on the harm that climate change will continue to cause in future.

A major focus of COP28, the UN climate change conference opening in Dubai on November 30, will be the proposal for a “climate loss and damage” fund to help address the harm caused by historic greenhouse gas emissions. The expectation is that high-income countries – which were responsible for a large percentage of these emissions – should foot this bill.

The loss and damage fund is to be used as a safety net when climate impacts threaten to overburden a country’s capacity to cope. It should also be used to help those victims avoid future losses.

The broad aims have been agreed but the most contentious details have yet to be ironed out: Who will pay? How much should they pay? And how can the finance be used most effectively?

The complexities of climate change adaptation, international financing and the unique characteristics of each of the potential recipient countries mean that a wide range of mechanisms will need to be deployed in order to use the fund effectively.

There will be multiple competing uses for the funding which will raise questions about how to prioritise across different victims, what types of measures to allow for funding and even how to monetise the level of damage. The challenge facing those responsible for allocating this funding is to match the best projects with the right level of funds.

Our recent work for the Climate Change Committee looked specifically at barriers to financing adaptation, how to overcome coordination problems and how to leverage public funds to achieve greater impact. There are lessons from this work for the financing and allocation of funds for loss and damage. In our work we looked at case studies of various financing techniques. These focused on the United Kingdom but hold lessons more widely, particularly as the UK has been at the forefront of innovation in this area.

We found that blended finance can be a crucial mechanism in overcoming barriers to crowding in private investment into adaptation projects. The loss and damage fund could be an opportunity to catalyse further private funding for adaptation, new insurance coverage for countries and projects to minimise future impacts.

Barriers to financing adaptation projects

Our work suggests that the main hurdles to financing adaptation projects are:

• Lack of a revenue stream: A critical barrier to the scalability and sustainability of adaptation projects is the lack of a revenue stream. Unlike mitigation, where new electric vehicles, wind power other technologies will produce their own revenue, generating private finance to deal with the consequences of flooding, overheating, water shortages, biodiversity loss and other consequences of climate change is more challenging. While some insurance companies are making a start, paying to insure against future losses will not be the full solution. There are economic opportunities from the changes and building that is required – the new fund should help mobilise other financial resources to meet these opportunities.
• Bankability: Projects that involve a combination of public and private funding will need to be deemed ‘bankable’ by private investors. This can be difficult due to the inherent financial risk involved. For example, innovative new financial arrangements may be needed for flood recovery projects adaptation projects take more time and resources to develop than mitigation schemes because the site and context differ from one project to another. The fund might help to develop flexible financial products.
• Coordination failures: Recovery from climate damage often involves numerous stakeholders or many diffuse actors. This complicates financial structuring and can result in coordination failures. For instance, a project might encompass entire catchments, forests or towns, affecting many communities. Can a fund be used to help bring them together?
• Information barriers: Inadequate information was one of the most commonly identified obstacles across our case studies, including an underestimation of the importance of adaptation measures (and/or their costs and benefits). These barriers arise when there is a lack of precise data on the likely outcomes or impacts of projects, often because there is no precedent to serve as a reference. The fund can help provide reliable data and evidence from other projects.
• Lack of regulation: Another common theme that emerged from our case studies is that many of the markets and funding streams are relatively new. The lack of market capacity, rules and regulation associated with such nascent markets can make it harder to scale up solutions. Given that they frequently have no precedents, adaptation projects are often seen as experimental in nature, raising the risk perception.
  A credible loss and damage fund could help to overcome some of these barriers, alongside providing compensation to the victims of climate change.

Recommendations of how to overcome these barriers

Action can be taken to help surmount these hurdles and ensure more effective use of the fund promised from COP28:

• Firstly, develop blended funding models that combine money from the new fund with private investment: by crowding in private financing or integrating adaptation measures into existing funded projects, extra money can be catalysed and make a big difference to reduce future suffering by the same groups of people
• Support to reduce coordination issues is important to developing bankable projects. There needs to be a sharper focus on the coordination of projects after the point of inception so that individual stakeholders can work well together, e.g. by sharing sensitive information to everyone’s benefit.
• Better dissemination of public information relating to projects will improve outcomes. Project preparation facilities and the development of institutional mechanisms can highlight high-quality investment opportunities.
• Regulatory changes can play an important role in inducing larger flows of adaptation capital, by creating a stable environment in which to invest. Relevant issues might include how such investments are taxed and how required new measures, such as new building designs, are regulated.

Achieving agreement at COP28 to provide financing for loss and damage from global warming would be a significant victory, but it would just be the start. Ensuring the best use of the money available will be crucial to properly compensating victims while also helping them to meet the huge challenges that climate change represents. Combining market mechanisms, private initiatives and regulatory changes will help put this new source of funding to best use.

Landscape Resilience Fund - a public-private partnership codeveloped by South Pole and WWF that will finance adaptation in landscapes where communities are most vulnerable to floods, droughts and other climate-related risks.

Combines public, private and philanthropic financing to mobilize $100 million by 2025 for climate adaptation projects that support more sustainable agricultural and forestry supply chains – in turn benefiting the private investors - whilst protecting smallholder farmers in developing countries.

The support of third parties – South Pole and WWF – help to overcome the coordination failures that are often suffered by adaptation projects.