Finance for Loss and Damage: a comprehensive risk analytical approach

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Finance for Loss and Damage: a comprehensive risk analytical approach

Reinhard Mechler and Teresa M Deubelli

TheclimatepolicydiscourseonLossandDamagehasbeen consideringoptionsforaverting,minimizingandaddressing criticalandincreasinglysystemicclimate-relatedrisksin vulnerablecountries.Researchhasstartedtoidentifypossible financesourcesandmechanisms,butstoppedshortof positioningthoseoptionsalongacomprehensiverisk managementframeworkinlinewiththewholescopeof Loss&Damage.BuildingTakingariskanalyticalperspective,we presentacomprehensiveLossandDamagefinancetaxonomy andframeworkmadeupofthreepillars:financefor

transformationalriskmanagementtoreducerisksandadaptto climatechange,riskfinancetoprovideinsuranceandotherrisk transferforresidualrisksinvulnerablecountriesaswellas curativefinanceforpotentialunavoidablelossofecosystems andlivelihoods.Weapplythistaxonomyandsetsoffinance optionstorecentlyidentifiedlimit-pronesectorsandregions thatareprojectedtoexperiencesoftandhardlimitsasa consequenceofslow-onsetclimate-relatedphenomena.

Address

InternationalInstituteforAppliedSystemsAnalysis(IIASA),Schlossplatz 1,A-2361Laxenburg,Austria

Correspondingauthor:Mechler,Reinhard(mechler@iiasa.ac.at)

CurrentOpinioninEnvironmentalSustainability2021,50:185–196 ThisreviewcomesfromathemedissueonEventsrelatedtoclimate change

EditedbySusanaAdamo,RiyantiDjalante,PrabodhGDChakra- barti,FabriceRenaud,AmsaluWoldieYalew,DoreenStabinsky andZintaZommers

Received:05August2020;Accepted:24March2021

https://doi.org/10.1016/j.cosust.2021.03.012 1877-3435/ã2021PublishedbyElsevierB.V.

Averting, minimizingand addressing climate- related risks

Climatechangeisincreasinglyleadingtosignificantand systemic risks associated with slow-onset hazards (e.g.

drought,sea-levelrise,desertification,glacialretreat)and sudden-onsetevents(e.g.floods,storms)withvulnerable countries havingto shoulderalargepartof theburdens imposed. Scientific evidence provided bythe Intergov- ernmentalPanelonClimateChange(IPCC)aspartofits

6thassessmentcyclehasshownthatclimatechangewill continuetoworsenexistingpoverty,exacerbateinequal- itiesand unsettle livelihoods, thusincreasingly become systemicintermsofdisruptingsystemsevenincurringa potential for collapse in some systems. First reported evidence on soft and hard adaptation limits, strongly characterized by slow-onset climatechange, hasunder- linedtheneedfor strongresponses onmitigation,adap- tationand residualrisks as wellas consideringtransfor- mational adaptation, which includes efforts that reach beyond standardadaptationand riskmanagement practice [1–3].

TheLossandDamage¹(L&D)climatepolicydiscourse hasbeendebatingoptionsandsolutionsfordealingwith suchclimate-relatedrisksaffectingvulnerablecountries and communities. The discourse started already in the early 1990s, and over the last few years has gained substantial traction after institutionalization under the UNFCCC through the Warsaw Mechanism on Loss and Damage (WIM) and an Executive Committee (WIMExCom)[4]aswellastheParisAgreementthrough Article 8. This Article of the Paris Agreement broadly definedtheremitofL&Dtobeto‘recognizetheimpor- tance of averting, minimizing and addressing loss and damage associated with the adverse effects of climate change,includingextremeweathereventsandslowonset events...’[5].

Finance for Loss&Damage (L&D)has stronglymoved intothespotlight.Infact,discussionsregardingtheroleof finance started the Loss & Damage deliberations. In 1991 a proposal by the Alliance of Small Island States (AOSIS) proposed a mechanism for compensation and insurance for losses from climate-induced sea-levelrise [6]. Over the years, both compensation and insurance proposalshavereceivedampleattention,with thelatter seeingimplementationthroughtheG20andV20InsuR- esilienceGlobalPartnership[7]andexplicitattentionto insurance through the Fiji Clearing House for Risk Transferestablishedin2017.Highleveldiscussionshave furtherproceededatUNFCCC’slatest,25thConference ofthePartiesinMadridin2019(COP25).COP25,among

1WhilecapitalizedsingularformLossandDamagehasbeenusedto refertopolicydiscourse,smallletterandplurallossesanddamagesare relatedtocurrent(incl.observedimpacts)andprojectedrisks(seeRef.

[44]).Analystshavealsomadeadistinctionbetweendamagesasphysi- calimpactsandlossesasadversemonetaryeffects.Werefertorisksas actualandpotentialdamagesandlossesthroughoutthediscussion.

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others,suggested that theWIM ExComought to work morecloselywiththeUNFCCCStandingCommitteeon Financeas wellas theGreenClimateFund(GCF),the largestmultilateralfund,inordertoconsideroptionsfor includingLoss and Damage in GCF strategic planning [8].

Research,policyandpracticehaveincreasinglyinformed thediscourseonfinanceandriskfinanceincludinginsur- ance,withkeyquestionsinneedoffurtherattention[9].A lot of focus has been put on risk finance (see Refs.

[10–15,16]).A limited number of academic papers have discussedpotentialfinancesourcesandrelevantfundsand institutions [17–19,2021] A recent UNFCCC technical paper[22,23]hasworkedtowardsarationaleandoverview of sources of finance for Loss and Damage.The report buildsonanincreasinglystrongfocusoncomprehensive riskmanagement²asemergentinthediscourseinorderto presentageneraltypologyforLossandDamageincluding riskassessment,riskreduction,risktransfer,riskretention, socialprotection,recoveryandrehabilitation,andtransfor- mational measures. The report focussed largely on the aspect of minimizing risks through adaptation and risk management, but didnotfurther discuss means of how toaddressresidualrisks.However,understandingthatthe natureofafullsetofnecessarymeasures(minimisingand addressing).fortacklingrisksandanysoftandhardadap- tation limits needs further attention, L&D negotiators, internationalclimatefundinganddonorshavebeengrap- plingwithcomprehensiveapproachesthatcanfindsupport byamajorityofParties.³

Threeissuesparticularlymeritfurtherscrutinyandpro- vide the point of departure of our discussion. First, a comprehensive risk management perspective for L&D needs concrete clarification and operationalization incl.

rolesforslowandsudden-onsethazards.Second,therole of ‘addressing’L&Dneeds to bedeliberated including considerationsforthescopeandscaleofresidualrisksand anysoft andhard adaptationlimits.Third, adistinction between financing sources (national and international), which may generate additional funding for supporting interventionsinvulnerable countries,and riskfinancing mechanisms (insurance etc.),which use risk transfer and other measures to absorb residual risks (but are not necessarilyadditionalfinance), needsattention.

Tacklingthesethree issues,thispaper workstowardsa systematicandcomprehensiverisk-basedframeworkfor L&Dfinanceoptionsforminimisingandaddressingrisks,

whichweapplytokeysystemsatrisk.Methodologically, theframeworkbuildson threeanalytical strands:(i) we use aL&Drisk taxonomy developed byVerheyen and Roderick[24]asacceptedbymanyanalystsandpartiesin theL&D discourse to break climate-related risk down intoavoided,unavoidedandunavoidablerisks,(ii)arisk management framework as operationalized in practice throughtherisk layeringapproach servestooperationa- lize comprehensive risk management for L&D and finance (see [25,26,27]), which we (iii) link through empirical review with possible risk management and L&D finance sources and mechanisms (see Refs.

[20,22,23]).

ThusintegratingdifferentstrandsoftheL&Ddiscourse andbuildingonthestateoftheartinclimateriskscience as reported by the IPCC, we apply our approach to concrete vulnerable systems and associated, largely slow-onsetrisksandlimits,byusingthefollowingfinance options: risk management finance for supporting measures that reduce risks and help to adapt to climate change,riskfinanceforcoveringunavoidedresidualrisks as wellas curative financefor any unavoidable residual losses of ecosystems and livelihoods. We apply our approach to recentevidence on soft andhard limits, as largelydrivenbyslow-onsetevents(includingcompound hazards) as presentedin IPCC [1]. Ourconceptual and empiricalclarificationcoupledwithcaseapplicationsmay furtherinformtheL&Ddiscoursewithregardtofurther debatinganddecidingonasystematicroleoffinancein linewiththewholescopeofthedebate.

The remainder of the paper is organised as follows.

Section ‘Loss&Damageand risk:ataxonomy’ develops ataxonomyofrisksinthecontextofL&D.Section‘Loss and damage finance options: towards a systematic framework’ discusses salient available and proposed financeoptions,andintegratesthoseintoaL&Dfinance taxonomy. Section ‘Application: risk management and finance options applied to key limit-prone systems at risk’appliestheframeworkandlinksfinanceoptions to anumberofrecentlyexaminedkeysectorsandsystems projected to experience soft or hard adaptation limits largelydrivenbyslow-onsetrisks.Weendwithqualifying our approach and suggesting next steps for the L&D policydiscourse.

Loss&Damageand risk:a taxonomy

Anumberoftheissuesassociatedwithdiscourseremain controversialandtherearevariousperspectivesonwhat exactly L&D might refer to. Yet, three key discursive strands associated with ‘averting, minimising and addressing,’differentiallyemphasizedbynegotiationpar- tiesandanalysts,canbeidentifiedashavingemergedas centrallinesofthedebate[28,29,30,31]:(i)Manyparties and analysts have called for increased attention to the sensitivityofkeysocialand naturalsystemsaffectedby

186 Eventsrelatedtoclimatechange

2Comprehensiveclimateriskmanagementhasbeenoneofthecore areasspeltoutbyUNFCCCdecision3/CP.18,whichsuggested:‘... d)Implementingcomprehensiveclimateriskmanagementapproaches, includingscalingupandreplicatinggoodpracticesandpilotinitiatives.’

3AsavertingfocussesonclimatemitigationandachievingtheParis ambitionofnetzeroemissionsbymid-century,wedonotfurtherdwell onthislineofclimateresponse.

CurrentOpinioninEnvironmentalSustainability2021,50:185–196 www.sciencedirect.com

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climatechange,thusunderlininganeedtorespondwith stringentclimatemitigationpoliciesthatlimitwarmingto 1.5C/2Cinordertoavoidirreversibleandsystemicrisks from proliferating (avert); (ii) predominantly higher incomeandAnnexIcountrieshaveproposedtoconsider extendingsupportforfurtherriskreductionandadapta- tion interventions that reduce risk and finance residual risks, particularly for vulnerable regions and countries (minimise);(iii)Non-AnnexIcountriesareinbasicagree- mentwiththeminimisingsuggestion,butfromtheoutset ofthediscoursehavecalledforconsideringburdenshar- ing options, including compensation arrangements, for potentially or actually unavoidable and irreversible cli- materisks(address).

Overall, someconsensus has emergedthatalarge partof the discourse isabout residual risksincludingactual current andpotentialfutureimpactsthatare‘beyondadaptation.’

For example, the recent UNFCCC technical paper of 2019suggestedthat‘initialtechnicalfindings... onloss anddamageledtoanacknowledgementintheUNFCCC processthatlossanddamageincludes,andinsomecases involves more than, that which can be reduced by adaptation.’[22,23,p.7].

Acomprehensiveviewonclimate-relatedevents A distinction generally, and in the Loss and Damage discourse specifically, has been made between slow

and sudden-onset hazards and associated risks as well as the support to be made available for responding to these risks.Increasingly,andas proposedhere, analysts havesuggestedtothinkaboutacontinuumofsuddenand slow-onset hazards, ranging from climate-related processes unfolding over timescales from hours to days (landslides, storms, floods) to weeks and months (droughts, heat waves), to years (sea-level rise and impacts), and decades (glacial shrinkage). Also, a need for addressing the negative impacts arising from the interaction between slow and sudden-onsets processes throughcompoundevents,forexample,risingsealevels leadingtoincreasinglysevereseasurgeevents,isbecom- ing more and more evident [32] (see Figure 1 for a visualizationoftheriskcontinuuminmountainregions).

ForbothslowandsuddenonseteventrisktheIPCC[1]

andmulti-authoredvolumes[29,33]havefoundthatsome softandhardlimitstoadaptationmayalreadyemergeas globalwarmingexceeds1.5Crespectively2C(seealso discussioninSection‘Application:riskmanagementand finance options applied to key limit-prone systems at risk’). Analystshaveemphasisedtherole oftransforma- tional adaptation for extending soft adaptation actions thatfocusonsystemicchangetoaddresstherootcausesof risk, including equity and poverty factors, so that a breaching of limits is prevented or at least postponed [34].Hardlimits,however,implythatavailableadaptive

Figure1

Climatic changes

Glacier mass loss Permafrost thaw Seasonal/permanent snow reduction

Ice/rock avalanches

Glacier floods Landslides/

debris flows Loss of seasonal melt water

Ecosystem change and loss

Landscape change and loss

Loss of lives

Damage to assets

Loss of natural resrouces and livelihoods

Loss of income,

security and social order Loss of identity Bio-physical impacts

Timescale: Minutes Months Years Decades

Slow-onset Sudden-onset

Social and economic impacts

Mitigation Adaptation

Current Opinion in Environmental Sustainability

Spectrumofsudden-andslow-onsethazardsandrelevantimpactsinthecontextofclimatechange(focusonrisksinmountainregions).

Source:Ref.[32].

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technologiesand actionsare physically infeasibleatall, leading to irreversible impacts. For the latter, support, including finance, first and foremost would involve to assist affected communities or countries for instances wherehard limits are transgressed,but also support for relocationsuchas forclimaterefugeeschemes[35].

AtaxonomyofrisksrelevanttoLoss&Damage

In order to translate the L&D language of ‘averting, minimisingand addressing’ into risk-relevant terminol- ogy,webuildonVerheyenandRoderick’s(2008)widely discussedtaxonomy ofrisks beingor becoming avoided, unavoidedandunavoidable,whichweconnecttorelevant sets of interventionsassociated with climate adaptation (CCA), disaster risk reduction (DRR) and L&D policy domains(seeTable1).

Avoidedrisksaredefinedasthosethathavebeenandwill be avoided by stringent emissions reductions (mitigation),whichisattheheartoftheParisAgreementclimate ambition(whichwedonotfurtherdiscusshereduetoour focusonmanagingandaddressingrisks),as wellaswell targeted incremental and transformational DRR and CCA.Unavoidedrisksare,andoftencannot,bereduced duetosocio-economicconstraintsandtrade-offs(finance, governance,politicaleconomy)[36].Unavoidablelosses anddamagesariseatthelimitsofadaptationandareoften seenascentraltothediscoursesurroundingL&D[24,37].

SuchadaptationlimitshavebeendefinedbyKleinetal.

[38]aslociatwhichavailableriskmanagement(DRRand CCA) actions can nolonger guarantee key actor objec- tivesorsystem’sneedsinthepresenceofintolerablerisks [39].Theselimitscanbe soft– requisitetechnology or financemaynotbeavailablecurrentlyyettheremaybe potential for overcoming limits in the future through technologicalinnovation; limitsmaybehard– adaptive technologiesandactionsarenotphysicallyfeasiblemak- ingfurtheradaptationimpossibleleadingto irreversible lossesand damage(seealsoRef.[40]).

Lossand Damagefinance options:towardsa systematic framework

WiththeWarsawInternationalMechanismonLossand Damage (WIM) established at the nineteenth Confer- enceoftheParties(COP19)in2013andthroughArticle 8ofthe2015ParisAgreement,L&Dhasbecomeaformal part of the UNFCCC [41]. Yet, in stark contrast to a substantial body of literature on finance for addressing climatechangemitigation (see, e.g. UNEP’sEmissions Gapreports,[42])andadaptation(see,e.g.UNEPAdap- tationGap reports[43]), financefor L&D remains‘the elephantintheroom.’Sinceitsinception,theWIMhas hadtwowork-planswithdiverseactionareas,butneither theinitial2-yearworkplannorthecurrent5-yearrolling workplanhaveincludedamandatetogobeyondexplor- ingthesourcesofandmodalitiesforaccessingfinancefor L&D[2022,23,44].

AfinancetaxonomyforLoss&Damage

The UNFCCC [22] technical paper represents a step forward for L&D in the context of risk analysis and management as it presents finance options linked to stagesofriskmanagementintermsofassessing,reducing, transferringandretainingrisks.However,whileacknowl- edging that L&D mayinvolve more than what canbe coveredbyadaptation,thetechnicalpaperstopsshortof covering the whole scope of L&D actions and finance required and does not cover the issue of addressing unavoidable risks. Recognizing this gap, we build on theLoss&Damagerisktaxonomypresentedabovealong the whole continuum of avoidable, unavoided and unavoidable risks in order to advance towards a L&D frameworkthat acknowledgesall differentaspectsrele- vantto L&D.

Webase oursuggestionson abroadperspective of risk managementasconceptualisedandpractisedthroughthe risklayeringapproach,which hasbeen proposedto fur- therinform theimplementation of disasterand climate riskmanagementapproaches[25,26].Risklayeringisan appliedmethodwidelyusedin (re)insurancepracticeto identifyrisksegments(‘layers’)tosupportdecision-making for risk cedents in terms of risk bearing (tolerable risk), risk transfer (intolerable risk associated with a chancefor systemic impacts)to insurancemarkets, and risk retention for high-level risk which (re-) insurance wouldnotpickupduetothemassivelosspotential[45].

Forsuchhigh-levelrisks,privatesectoragents,countries or subnational entities (if they insure) have generally reliedon national or international loss distribution and compensation[46].

With climate change affecting traditional risk manage- mentandinsurancepractice,theissueoftransformational adaptationisseeingattention[47,48].Transformationin thiscontextmaygenerallysuggest‘business’asusualrisk management will not suffice due to an increasing loss potential or exceedingly large uncertainty; examples includecoastalorriverinefloodinginawarmingclimate becomingincreasinglydestructiveandsystemicinterms of large-scale impacts rippling through interconnected social systems eventually requiring to plan for retreat of people and infrastructure; or, pervasive drought and heatinagriculturemaymeanfarminghouseholdswillbe hardpressed(combinedwithotherpushandpullfactors) toconsiderstronglydiversifyinglivelihoodstowardsnon- farming income or completely abandoning agriculture (seeRef.[49]).While thismaythus technicallyinvolve movingawayfromthesourceofrisk,procedurallytrans- formationadaptationhasalsobeenlinkedtotacklingthe root causesof vulnerability with a justice and poverty- focussedlense [34].

Figure 2 visually matches (residual) risks to three risk layerswith colouring fromgreento redindicating risks

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becoming increasingly significant and systemic. Risk management for tolerable risk (indicated in green) is needed whereriskisto befurtheravoidedthroughrisk reduction(‘riskmanagementlayerincl.incrementaland transformational risk management’); unavoided residual risk can be transferred through risk finance involving insurance-related instruments (‘risk finance layer’);

finally,increasinglyintolerablerisks,ifrisk reductionor finance/insurancemaynotsufficetopushsoftlimits,and oncehardlimitsarereached,willrequirecurativeefforts involvingcompensation,suchasforforcedmigrationand displacement⁴(‘curativefinancelayer’).Thus,weareput intoapositionto–generically–identifycontext-specific riskportfolioscomposedofthethreelayersformanaging incremental and transformational risk, risk finance for residualunavoidedrisksandcurativefinanceforresidual unavoidablerisks.Intermsofpolicy,wefurthersuggest that DRR and CCA policy and support would largely cover riskmanagement andrisk financelayers,whereas L&Dwouldoverlaptoincluderiskfinanceforvulnerable countrieswithlessdevelopedinsurancemarkets,butalso dealwith transformationalriskmanagement andimpor- tantlysupportcurativeresponses.

For example, for coastal islands affected by compound risk(seeTable3also),thismaymeanforcertainareasand levelsofwarmingandrisk,dykesandinsurancewilloffer protection and cover against coastal flooding, sea surge anddrought&heatlargelybuildingonnationalandinter- nationalDRR&CCAsupportwhiletheriskfinancelayer mayalsodrawonsupportfromL&D;inotherareasand forexacerbatinglevelsofwarmingwithsoftlimitsbeing reached,off-coastal strategicretreatforsome communities andlivelihoodtransformation mayberequired(e.g.

duetoincreasingsalinizationofagriculturalareas).Atone stage–forhardlimitsbeyondholdingtheline–withrisks drastically increasing and compounding, climate risks

may force complete abandonment, for which curative (e.g. financialandlegalsupport)will berequired.

Financialsourcesandriskfinancemechanismsrelevant forLoss&Damage

Drawing on this risk layering approach, we may thus identify three pillars of DRR, CCA and L&D finance inoneframework:financeforriskmanagementtoreduce climate-relatedrisks,riskfinance(risksthatcanandhave notbeen reduced)andcurative financeforunavoidable lossofecosystemsandlivelihoods.Animportantdistinc- tion to be made is between financing sources and risk financing mechanisms. While risk management identifies sourcesoffinanceforDRRandCCA,residualriskfinance and curative financeare risk finance mechanisms (both setsofoptions canbesupportedbydonoraidandlend- ing).Financingsourcesprovidefundingforcarryingout DRR and CCA (budgets, aid and assistance, resilience bonds as well as funds for ecosystem and livelihood restorationandrehabilitation).Riskfinanceandcurative financingmechanismssupportabsorbingandcompensat- ingresidualrisks;they maybeeither pre-arranged(risk pooling and finance,social protectionschemes,national and regional reserve/contingency funds and compensation mechanisms) or simply supported from budgets or aidwhendisastersstrike.

Whatarekeyfinancingsourcesandriskfinancingoptions discussed as partoftheLoss&Damagepolicy discourse and how do they link up to DRR&CCA policy and support? We proceed to populate the framework with financeoptionslargelytakenfromGewirtzmanetal.[20], theUNFCCC technicalpaper[22,23],andLinnerooth- Bayeretal. [50](seeTable 2).

Finance for risk management constitutes an important element of a comprehensive finance architecture as a source for DRR, CCA and L&D (for transformation) interventions.Currently,nationalbudgetsandcost-shar- ingmechanisms,aswellasgrantsandaidthroughofficial developmentassistance(ODA)arethetwomainsources for such investments into reducing risks, but evidence

Table1

Ataxonomyofclimate-relatedrisksandassociatedpolicyactions

Typesofrisks Avoided Unavoided(residual) Unavoidable(residual)

Description Avoidablerisksthathavebeenandcan furtherbeavoidedandreducedby climatechangemitigationand/or adaptation

Avoidablerisksthathavenotbeenandwill notbeavoidedorreducedwithfurther mitigationand/oradaptationmeasures(due totechnicalandfinancialconstraints)even thoughavoidancewouldbepossible

Risksthatcannotbeavoided throughfurthermitigation and/oradaptationmeasures

Interventions associatedwith risk

management andL&D

CCA&DRRforincremental-L&Dfortransformationalriskmanagement:Minimising andaddressing(intolerable)risksex-antethroughriskreductionandriskfinancing

CurativeL&D:Addressing unavoidablerisks

Source:ClassificationfurtherdevelopedfromRef.[26]basedonRef.[24].

4Comparedtovoluntaryandplannedmigrationorretreataswellas livelihoodtransformation,whichweconsidertobepartoftransforma- tionalriskmanagement.

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suggeststhatavailablefundingcontinuestofallshort of theresourcesneeded,particularlyifadditionalneedsfor transformationalmeasures(strategicretreatetc.)arecon- sideredaswell[18,51,52].Resilience-themedbondsand otherinnovativefinancingmechanismssuchas commu- nity-based adaptation and risk reduction budgets offer additionalpathwaysforwardonthisfinancepillar[20,53].

Risk finance through market-based and sovereign risk transferatlocal,nationalandregionalscalesconstitutesa secondimportantfinancepillarforDRR&CCA,butalso L&Dforcoveringunavoidedresidualrisksinuninsured, vulnerable regions and countries. Risk finance reduces thevolatilityofrisks,butdoesnot(directly)reducerisks [50]. Risk transfer is particularly fit for enabling swift recovery from sudden-onset risks (to e.g. floods and storms) and also for some slower onset risks, such as drought(forcropinsurance),butlessviableforrespond- ing to very slow-onset risks, such as glacial retreat and desertification [36]. Risk finance has well documented down-sides, including ‘moral hazard,’ that is, reduced incentives to reduce risk after having attained (partial) financial cover [12]. Also for some slower onset risks, socialprotectionschemesthatworkthroughsocialsafety netsareseeingincreasingattentionasanopportunityfor

addressing residual risk [54,55]. As a cross-cutting approach,risk finance schemesthat build-inadaptation andriskreductionprovisions,suchasreducedinsurance premiums following investments in risk reduction, are also receiving increasing attention [20,53]. Manycoun- triesutilizesuchadditionalex-antemarket-baseddisaster insurance system in lieu of ex-post loss compensation arrangements for respondingto climate change related contingentliabilities[50,56].ExamplesincludeMexico’s NaturalDisasterFund(FONDEN),explicitcost-sharing arrangementsorsolidarityprovisionsfordisasterrecovery fundedfromreservesorbudgetshifts,asforexample,in placein Canada,France,JapanandPeru [56].Regional risk financing pools in theCaribbean and Pacific cover risksassociatedwithsudden-onsetwindstorm(incl.flooding) and earthquake risks (see Ref. [50]). As to slower onset event risk, the key example is the Africa Risk Capacity (ARC) pool, a regional pool established in 2012asaspecialisedagencyoftheAfricanUniontohelp memberstatesimprovetheirpreparednessandfinancial coping capacity for coping with drought in agriculture.

Disbursementsfromthepoolsupport participatinggov- ernments’ drought relief efforts, with requirements on howtheseareused.WhileinitialdonorfundingandARC memberannualpremiumpayments capitalisetheARC,

Figure2

Current Opinion in Environmental Sustainability

Comprehensiveclimaterisklayeringapproachandassociatedfinanceoptionsandsources.

AdaptedfromMechleretal.[25].

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thepooliscurrentlydeliberatingthelaunchofanadditional capitalization mechanismlinked to aclimate attribution trigger,theARCExtremeClimateFacility[57].

Curative financ comes into play, whereintolerable and irreversibleresidualrisks leadto hard limitsclosingthe adaptationspaceleadingtoforcedmigrationandretreat, whichwillrequirefinancialsupportthroughlossdistribu- tion and compensation arrangements. Assuch, curative financemayconstitute acritical(if currentlycontested) pillar of L&D finance [26,29,58]. Some countries are already starting to put in place national compensation mechanisms explicitly tailored to L&D from climate change,suchasBangladesh,wherethenationalgovern- mentisdevisinganationalmechanismtoaddresslosses and damages from climate change [59]. A key open questionforL&Dishowtodealwithslow-onset‘beyond adaptation’processesthathavekicked-offandarethreat- eninglivelihoods already,such asthroughsealevelrise and melting glaciers [35]. The ethical and policy

implicationsassociatedwithcurativefinanceremainsub- jecttomuchdebate,despitequestionsofliabilityhaving been explicitly excluded from the Paris Agreement ([42,43] paragraph 8). Yet, no matter the responsibility for impacts ‘beyond adaptation,’ a comprehensive approach that also addresses this component will be indispensable if theWIM is to deliver onits objective

‘to address loss and damage associated with climate change impacts in developing countries ...’ ([60], decision 3/CP.18).

Application: riskmanagement andfinance options appliedtokey limit-pronesystems at risk

The findings of IPCC’s SR1.5 report thatprojects irreversible impacts in a further warming world already beyond1.5Cand2C[1]alongwithotherrecentschol- arship on thematerialising limitsof adaptation (seefor example, Refs. [44,61]) underpin the need for moving towards a comprehensive approach to L&D as well as

Table2

BuildingblocksofafinanceframeworkforDRR&CCAandLossandDamage

Source:Classificationbyauthors,informedbyGewirtzmanetal.[20].Note:afinancingsourceisdefinedasproviding(additional)financeforrisk managementand adaptation,riskfinance undcurativefinance mechanismproviderisktransferandcompensate residualrisks (butdo not necessarilyprovideadditionalfunding).

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192Eventsrelatedtoclimatechange Table 3

Finance for minimising and addressing L&D for key vulnerable systems Hazard/Process

(type)

System (region)

Residual risks at 1.1C/1.5C/2C

Risk management and adaptation Curative L&D Type of limit (system)

Finance

Incremental Transformational Risk

management

Risk finance Curative interventions Ocean warming

(slow-onset)

Coral reefs (tropics)

50%/70–90%/99%

loss

Water clean-up Artificial reefs, livelihood transformation

Forced livelihood transformation

Hard limit (natural) Ecosystem and livelihood restoration and rehabilitation funds

na Global and national

loss distribution mechanisms (e.g.

solidarity funds)

Global and local warming (slow- onset)

Terrestrial and wetland ecosystems (global)

Species ranges shifting (no estimate)/

6% of insects, 8% of plants, 4% of vertebrates lose over 50%/18% of insects, 16% of plants and 8% of vertebrates with range losses of over 50%

Water and vegetation management, increased connectivity

na na Hard limit (natural) Ecosystem

and livelihood restoration and rehabilitation funds

Livelihood restoration, Global and national loss distribution mechanisms

Extreme heat (-slow - onset)

Human health (global, part.

tropics)

No estimate/+350 million people exposed to deadly heatwaves in megacities by 2050/

annual occurrence of heat-waves similar to deadly 2015 heatwaves in India and Pakistan

Hydration, cooling zones, green roofs

Adjusted working hours and other systemic behavioural change

Forced livelihood transformation

Soft and hard limit (e.g. for outdoor work).

(technological and socio- economic)

National budgets ODA L&D track Resilience- themed bonds

Adapted health insurance

Global and national loss distribution mechanisms Adapted social protection schemes

Sea level rise and increased wave run up, aridity and decreased freshwater availability (compound)

Coastal livelihoods (global, Asia, SIDS in Pacific and Caribbean)

No estimate/31-69 million people at risk with several atoll islands made uninhabitable/32-79 million people at risk

Coastal defences, ecosystem-based adaptation, insurance, reef restoration

Managed retreat, livelihood transformation

Forced retreat and forced livelihood transformation

Soft and hard limit (technological, socio-economic)

National budgets ODA L&D track Resilience- themed bonds Ecosystem and livelihood restoration and rehabilitation funds

Risk pooling and financing (incl. c insurance) Catastrophe and attribution bonds

Adapted social protection schemes Reserve/

contingency funds

Global and national loss distribution mechanisms Adapted social protection schemes

Source: Extended from Royet al.[67] and Mechleret al.[62]. Note: 1.1C is the current level of global warming induced by anthropogenic climate change, The SR 1.5C report largely studied impacts and risks associated with 1.1, 1.5 and 2C of warming.

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CCAandDRRfinance.Buildingonthisevidenceanda recent synthesis by Mechler et al. [62], we proceed to applyingoursuggestedfinanceframeworktofourtypesof critical systemsthat are projected to experiencesoft or hardlimitsandthusasareinneedofincreasingeffortsfor managing climate related risks in a strongly warming world. Slow-onset hazards (incl. compounding hazards) are at the centre of attention. Table 3 presents the evidence and our framework for key residual risks at (current)1.1C,1.5C,and2Cwarminglevels,thescope forincremental,transformationalandcurativeadaptation actionsaswellaslikelysoftandhardlimitstobeencoun- tered. This leads to identifying the types of finance options that may be needed for adaptation as well as absorbing anylosses thatcannotbefurtherreduced.

Coralreefsareakeycriticalandincreasinglywellstudied systemthatisfundamentallyimportantasanecosystem and ecosystem service provider. According to a 2004 study, more than 500 million people globally are dependentoncoralreefsforcoastalprotection,nutrition andlivelihoods,whilethisecosystemishometoabouta quarterofallfishspecies.Economicanalysisestimatedan ecosystemservicesvalueofaroundUSD10trillionglob- ally[63].Furthermoreregional-specificstudieshavebeen undertaken, including on the South Pacific [64] and ecosystem valuation hasseen strong recognition, which may offer opportunities for careful consideration and integration into local to international decision-making across climateandbiodiversityagendas[65].TheIPCC SR1.5Crobustlyprojectsirreversiblelossofupto90%of tropicalcoralreefsbymid-centuryunder1.5Cwarming and nearlytotalloss underthe2Cscenario laterin the century givencurrentemissiontrajectories(thusconsti- tuting ahardlimit)[66].Adaptationpotentialisconsid- eredverylimited:artificialreefsandwaterclean-upmay besupportedthroughriskmanagement financeforeco- system and livelihood restoration as well as through rehabilitation funds to be activated after warming epi- sodes. However, as evidence increasinglyindicates, the potentialisverylimited, andeventuallycoralreefsmay becompletelylostalreadyatwarmingof2.Eventually, financialsupportfromglobalandnationallossdistribution andcompensationmechanismswillneedtobeactivated to support those originally dependent on services from this precious ecosystem projected to be largely or completelylost duetoglobalwarming.

Addressing losses of terrestrial and wetland ecosystem species, which have been found to closely be tracking levelsofgradualwarming,posesasimilarcase.Deliberate adaptationpotential(asinnaturalsystemsgenerally)also isconsideredverylimited,leavinglittleroomforharnes- sing water and vegetation management for adaptation.

Nevertheless, increasedconnectivity may besupported byleveragingfundsforecosystemandlivelihoodrestora- tionandrehabilitationfinance.Givenlimitedadaptation

potential,however,ahardlimitisprojectedhereaswell over the next few decades, and global and national compensation may become necessary as livelihoods wouldbeexperiencingdisruptions.

TheSR1.5C identifiesbothsoftandhardlimitforheat- wavesaffectingtropicalmegacitydwellers’health;asoft limitistooccurwherethoseaffectedareabletogenerally afford airconditioning, and a hard limit where outdoor work (farming, road construction and maintenance) becomesimpossible.Here,allfinanceoptionsandrelated actionsmaybeconsideredfeasiblerangingfromclimate riskfinance,forexample,forinstallingcoolingsystems,to climateproofing,livelihoodtransformation,healthinsur- anceandsocialprotectionschemesbothfortheresidual risk (health impact) as wellas compensation in caseof livelihood loss.

Climate change has been projected to strongly affect coastal and small islands’ livelihoods through sea level rise combined with increasing aridity and decreased freshwater availability. What may be considered a soft limitifcoastaldefences,ecosystem-basedadaptationand reef restoration may not work properly, consequently couldbecomeahardlimitiffreshwatersupplyandcoastal projection fail completely, eventually rendering some small islands uninhabitable. Also here, we suggest the wholesetoffinanceandassociatedmeasurescanbeused to fund risk management, support risk finance pooling efforts for residual risks and consider compensation in caseofa(perceived)need toabandonislands.

Conclusions

FinancehasbeenakeyelementoftheLossandDamage discourse throughout and has recently moved to the centre of attention, yet without a very clear rationale how finance options may support actions that avert, minimiseandaddresstheincreasinglysystemicandirre- versible risks linkedto slow-and sudden onsethazards, whatweconsiderthecoreremitoftheL&Ddiscourse.

Building on broad risk analytics our comprehensive finance taxonomy and framework systematically links finance sources and options to the policy space for L&DvisavisDRRandCCAasmadeupoftransforma- tional risk management and risk finance for insurance- related options in vulnerable countries (minimising) as well as curative (addressing) policy options for forced relocationandmigrationafterhadlimitsbeyondadapta- tion. This leads to three possible components of L&D finance:financefortransformationalriskmanagementfor reducingrisksandadaptingtoclimatechange(asource), riskfinanceforresidualrisks(asourceandmechanism)as wellascurativefinanceforunavoidablelossesofecosys- temsandlivelihoods(asourceandmechanism).Thereis considerableoverlapwithactionsandsupportundertaken nationallyandinternationallythroughDRRandCCA.As

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we, however, suggest the key defining feature of our generictaxonomyistoconsidertheincreasinglysystemic and irreversible climate-related slow and sudden-onset risksinlinewiththeremitoftheL&Ddiscoursecharged with finding solutions for averting, minimising and addressingrisks‘beyondadaptation’.

An application to key limit-prone systems, for which recent evidence suggests that these may be at risk of breaching soft and hard limits strongly drivenby slow- onsetclimatechange,servestoeludicatethedifferential rolestobeplayedbyfinancetobeextendedfromL&D and other policy domains. For at-risk natural systems (coral reefs, terrestrial ecosystems) and social systems (health,coastal livelihoods) we sketch out a systematic wayforwardforinternationalandnationalpolicytolink deliberationonfinanceoptionstothescopeandscaleof risksidentifiedintheliterature—andthustheneedsof thosebeingaffectedtodayandin thefuture.

Ourapproachisgenericandappliedatregionallevelsso far, but it may further be taken forward to relevant decision-makingscalesinlimit-pronesystemsandcoun- tries,andpopulatedwithempiricaldata,suchasbuilding on the UNFCCC [22] L&D finance review and other sources (see 68). In doing so, it may help to further systematically inform thinking about finance for L&D in combination with DRR and CCA policy domains as partofandoutsideofL&Ddeliberations.

Furtherdeliberationappearsindeedtimely,assofarlittle finance has explicitly been made available for L&D, particularlyforunavoidablerisksthatmayleadintohard limits of adaptation. The brunt of finance has been extended to residual risk finance through risk pooling andrisktransferarrangements,suchas throughtheG20 and V20 InsuResilience Global Partnership that has pledgedtoprovidemorethanEuro500milliontoprovide insurance cover to an additional 500 million uninsured peopleindevelopingcountriesby2025[7].Alongthese lines,andincontrasttothelanguageonL&Dfinancein thedecisiontoestablishtheWIM,whichgaveamandate for ‘enhancing’ and ‘mobilising’ finance, more recent ExComdocumentationhasshiftedtowardsacentralrole forinsuranceandother market-basedapproachesasthe primary approach for financing L&D (see Refs.

[20,22,23]). Notions of curative finance, on the other hand, have garnered much less traction so far, while finance for adaptation and risk reduction remains pre- dominantlyaddressedoutsideofL&Dandattendedtoby theDRRandCCApolicy domains,albeitnotalwaysin linewithcountries’ needs.

For impacts in natural systems, such as for slow-onset impactsoncoralreefs,wherethereiscurrentlystrongest evidence that this system is at risk of complete loss alreadyat 2C of warming, very little financehas been

extendedgenerallyforminimisingtherisksandsupport- ingthose facing theaftermathof reaching ahard limit:

According to some estimates less than 0.01% of global climatefinancehasbeenprovidedforsupportingadapta- tionandmaintenanceofthisecosystemovertheperiodof 2010 15,whichisinstarkcontrasttoitsrelevanceasan ecosystemand theservicesitisproviding[43].

TheLossandDamagediscourseisscheduledtofurther proceedtodiscusstheroleoffinancewithkeybodiesand institutions,suchasUNFCCC’sStandingCommitteeon Finance.Aswell,whilethereisnoexplicitmandatefor L&D (yet), the GCF, due to its general emphasis on approaches that lead to transformation and paradigm shifts, is a very relevant institution that may consider further support for this policy domain. In fact, already todayaboutaquarterofGCF’sapprovedprojectsexplic- itlyrefertoL&Dand16%ofprojecthavelinkstoL&D associatedwiththeirmainprojectactivities(Lempaetal., 2021).Fortheseandotherbodiesandinstitutionsinclud- ingtheWIMExCom,itseemsthusverytimelytowork towardsamoresystematicapproachtodefiningwhatrole financecanplayfor thewholespectrumof criticalrisks associatedwithclimatechange.

Conflictofintereststatement Nothingdeclared

Acknowledgements

ReinhardMechleracknowledgesfundingfromtheEUHorizon 2020ProjectRECEIPT(GrantagreementID:820712).Bothauthors acknowledgefundingfromtheZurichFloodResilienceAlliance.

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