Denmark has become the first United Nations member state to pay loss and damage compensation to developing countries for the impact of climate change.
The Danish government is providing DKK100m (€13.4m) to the countries most vulnerable to climate change.
According to Denmark’s development minister Flemming Møller Mortensen, it was time for action and not just words.
“I saw for myself in Bangladesh this spring that the consequences of climate change need increased focus,” said Mortensen when announcing the move.
“It is grossly unfair that the world’s poorest should suffer the most from the consequences of climate change to which they have contributed the least,” he said.
The move reflects the growing support among climate action groups for loss and damage finance, which has been defined as the impacts of climate change that are not avoided by mitigation, adaptation and other measures such as disaster risk management.
More specifically, loss and damage calls on developed nations, the primary polluters and users of fossil fuels, to financially compensate the developing countries that are impacted by climate change.
It has been estimated that by 2050, the economic cost of loss and damage to developing countries will be between $1trn and $1.8trn.
The funding from the Danish government will be divided into four separate channels – €4.7m will go to Frankfurt-based InsuResilience, an organisation backed by the German government that subsidises insurance in developing countries.
Meanwhile, another €4.4m will go to the Danish foreign ministry’s “strategic partnerships with civil society, which work with climate-related loss and damage”, with a specific focus on the Sahel region in north Africa, which covers the Sahara desert.
The remaining funds will be dedicated to “strategic efforts within climate-related loss and damage, which can support the current climate change negotiations up to and during COP27”, and spent on civil society actors within developing countries working on climate change resilience.
It remains to be seen whether other countries will follow Denmark’s lead. The only other countries to make similar pledges are Scotland and the Wallonia region in Belgium.
The initiative has also raised the issue of insurance’s role in the fight against climate change. Some climate activists are sceptical.
For example, Harjeet Singh, head of global political strategy, Climate Action Network International, referred to the involvement of InsuResilience as a “smokescreen to distract from the direct support that impacted communities need”.
He also said insurance is not a solution to slow-onset events like rising seas levels and desertification, and is often inaccessible to many in the developing world due a lack of money and financial literacy.
Singh also suggested that the involvement of insurance would allow “financial corporations from the developed countries to further profit from people’s misery” and would make “vulnerable people pay for the premium toward losses and damages from climate disasters”.
Other suggestions for funding loss and damage compensation include taxation. UN secretary general Antonio Guterres has proposed a windfall tax on oil and gas companies, while a paper prepared by a coalition of developing countries has called for a “climate-related and justice-based” global tax.
For multinational companies and their risk managers, especially those involved in carbon-based industries, the discussions around loss and damage finance and the possibility of levies and taxes will be of great interest.