COP27 creates a loss and damage fund

The COP27 climate summit, held in Sharm el-Sheikh, ended on 20 November 2022 with an agreement to create a fund to compensate the losses and damage suffered by the countries most vulnerable to climate change. It was an issue debated for years, and the agreement was considered an important step in international negotiation, although the details of how it would work remained to be settled. Agreements of this kind are the fruit of long negotiations, and their real implementation is usually slower than their announcement.

A climate summit can seem remote from the activity of a company or a family, but its agreements influence regulation, financing and the expectations of customers and investors. Understanding where the international framework is heading helps to anticipate changes that, sooner or later, reach companies in the form of disclosure requirements, rules on emissions or financing conditions. The existence of the fund does not directly change the situation of most companies, but it indicates the direction of the international agenda.

What loss and damage are

The term is used for the effects of climate change that can no longer be avoided by preventive measures, such as extreme events or sea-level rise, and that affect above all the countries with fewest resources to cope. The agreed fund aimed to ensure that those who suffer these effects most received compensation.

The underlying debate is who should finance that compensation and by what criteria. The countries that have contributed most historically to emissions are usually also those with most resources, and negotiations revolve around that shared but differentiated responsibility. The agreement created the instrument, but how to fund and distribute it remained an open question.

From commitments to regulation

Climate commitments end up being translated into regulation, disclosure requirements for companies and financing conditions. What is a political declaration today can become concrete obligations tomorrow on emissions, sustainability reports or criteria applied by banks and insurers.

This process is gradual but constant. Many companies already receive requests from their customers or lenders to report on their carbon footprint and climate risks, without any specific rule requiring it. Over time, these practices tend to be formalised. Those who adopt them earlier do so with more room and at lower cost than those forced to do so in a hurry. Companies that already publish sustainability information usually find it easier to respond to new requests, because they have processes and data they have been building.

Getting ahead of the rule

It is wise to get ahead before they become compulsory. Measuring one’s own emissions, understanding what data customers and lenders will ask for and reviewing the climate risks of the supply chain are steps that can be taken in good time, without waiting for penalties or for a large customer to demand it.

A simple first step is to take an inventory of the main sources of emissions and of the physical risks that could affect the business, such as extreme heat, drought or flooding. From there one can decide which measures make most sense and in what order. Having an adviser with sustainability experience helps to prioritise and to avoid ineffective investments. The point is not to adopt every practice at once, but to advance in proportion to size and sector, and to document what is done.

Preparing for a rule that does not yet exist costs far less than adapting to it in a hurry.

This article is general information. It is not legal, tax or investment advice, and it does not take anyone’s particular circumstances into account.