What’s happening? Developing countries have celebrated a “historic” deal at the COP27 UN climate talks in Egypt for establishing a global fund for “loss and damage”, which will provide financial assistance to countries suffering from the impacts of climate disasters. The deal was well received by countries including Pakistan, with its climate change minister Sherry Rehman commenting that rather than charity, this is a “down payment on investment in our futures, and in climate justice”. (The Guardian)

Why does this matter? This year’s COP27 ended with some wins – namely the deal made on loss and damage – alongside disappointing shortfalls on other outcomes, such as action to phase out the use of fossil fuels. Now that the dust has settled, we take a closer look at the highs and lows of the climate conference.

A success for climate justice –  The decision to establish a new loss and damage fund – campaigned for over decades by developing countries and small island nation states – was the clear highlight and follows frustrations after little concrete progress was made at COP26, particularly in the area of mobilising capital.

The new fund will pay for damages caused by climate disasters that developing nations cannot avoid or adapt to. Whilst keeping liability at arms-length, the decision signals positive steps taken by developed countries – those historically responsible for contributing the most to climate change – toward accepting some accountability for the impacts of their previous emissions, creating a more fair and just global climate response. However, questions remain, over its implementation.

The elephant in the (conference) room – Despite this, there was a clear lack of progress on driving down rising emissions due to pressure from fossil-fuel states and a record number of fossil fuel lobbyists attending the climate conference. The need for action has never been stronger – 2022 is expected to be a record year for emissions, and climate-related disasters and extreme weather continue to grow at an increasing frequencies and intensities. Recent catastrophic summer floods in Pakistan are an obvious example, where over 1,700 people lost their lives and an excess of $35bn in damage to infrastructure, crops and livestock was caused. Climate change was attributed to influencing the monsoon season, which lasted twice as long compared to normal seasons, releasing triple the average amount of rainfall.

Money talks – Regardless of a lack of regulation on emissions, combating climate change will require the mobilisation of substantial amounts of finance – as much as $4tn a year will be needed in renewables each year to reach net zero by 2050, according to the Sharm el-Sheikh Implementation Plan.

Blended finance – For the transition to a low-carbon economy to take place, large sums of money need to be mobilised in the world’s emerging economies, where two-thirds of emissions originate. Without financial intervention, developing countries are likely to follow the fossil-fuel pathway laid before them by developed nations. However, blended finance could be one solution.

Blended finance is a mix of different sources of finance including money from governments and public bodies, development banks, charitable and philanthropic organisations, and private sources of funds. The main appeal of blended finance is that the involvement of public funders at an early stage can improve the risk-reward ratio, thereby attracting private finance. In addition, by having both non-profit and private capital involved, “doing good” and generating a return can be aligned.

There are multiple benefits to this approach. For example, due to the mixed sources of finance, the risk is shared, and moral hazard is avoided. This is an important aspect should a project encounter problems, as all parties are bound and must find solutions collaboratively.

In summary, a lack of movement on several areas leaves much work to be done at the next COP, especially compared to some achievements made at previous COPs. Despite this, there are positives to draw on and considerations to be made over the future use of other mechanisms, such as blended finance, to mobilise the capital required for a just climate transition.