Legal Response International » Finance Mechanism and the role of the COP

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1. What does it mean for a financial institution to be “under the authority of” and/or “under the guidance of” the COP?

2. Other than explicitly stating ‘under the authority of’, what are the options for attributing authority to the COP over the financial mechanism a) where the mechanism is a new multilateral fund’ and b) where the mechanism is an existing fund under a different institution (e.g. allowing the COP to supersede the authority of the GEF over the LDCF)?

3. If a COP decision was used to decide upon immediate climate finance governance and institutions, would that decision still be able to attribute this sort of authority to the COP in the case of situation a) and b) above? If not, what steps should be taken to secure COP authority?

1. By way of example, the GEF, which is the operating entity of the financial mechanism of the UNFCCC and a number of other Conventions has memoranda of understanding (MOUs) with the COPs of those Conventions whereby the COPs provide guidance to the GEF on policy, strategy, programme priorities and eligibility criteria for access to and utilisation of the financial resources. Whilst there is some debate as to the GEF’s performance in following that guidance, the key point is that provided the GEF is following that guidance, it can act relatively independently. In addition, the GEF will be subject to the direction of its own governing council (note that the representation of countries on that council is not directed by the COPs for which it manages funds and that a key element is that large donor countries may have a greater say on that council).

In contrast, there are other mechanisms established under the UNFCCC and Kyoto Protocol which are subject to the authority and guidance of the COP or COP/MOP, such as the clean development mechanism (CDM). Rules and procedures to operationalise the CDM and to establish the Executive board of the CDM have been taken by the COP/MOP and as such, are directly determined by the Parties. In addition, the composition of the EB is comprised of representatives nominated by the Parties based on regional and country grouping representation.

In the financial context, the multilateral fund for implementation of the Montreal Protocol (MLF) is established by article 10(4) of the Montreal Protocol which states that the MLF “shall operate under the authority of the Parties which shall decide on its overall policies”. Further, article 10(5) states that the Parties shall establish an executive committee (EXCom) to develop and monitor the specific operational policies, guidelines and administrative arrangements, including the disbursement of resources, for the purposes of achieving the objectives of the MLF. The ExCom members are selected on the basis of a balanced representation of the Parties.

Decision 10/CP.7 which decided that an adaptation fund (AF) should be established decided that the AF “shall be operated and managed by an entity entrusted with the operation of the financial mechanism of the Convention, under the guidance of the COP/MOP”. This was revised in Decision 5/CMP.2 which decided that the AF “should operate under the authority and guidance of and be accountable to the COP/MOP which shall decide on its overall policies.”
The operationalisation of the AF has included the establishment of the AF Board, which is appointed as the operating entity to supervise and manage the AF. The AFB has 12 key functions, including developing strategic priorities, rules of procedures and legal and administrative arrangements for the AF for the adoption by the COP/MOP. As with the CDM EB, the AFB is comprised of representatives nominated by the Parties based on regional and country grouping representation.

In summary, where a mechanism is under the authority of the COP or COP/MOP there is more direct Party engagement in the management of the mechanism, in particular influencing the strategic direction and priorities of the mechanism. The difference between under the authority of and under the guidance of the COP (or COP/MOP) relates to the level of oversight that the COP and the Parties have over the body / financial institution.

2. For new mechanisms, a number of the proposed options in Non-Paper 34 (financing) refer to new mechanisms being subject to or under the authority and guidance of the COP. Variations include (i) “establishing a fund with funding windows under its governance” (ii) that the fund “shall function under the guidance of and be accountable to the COP” and (iii) that a convention adaptation fund “function under and be accountable to the Financial Mechanism”.
For the existing financial mechanism, the existing MOU between the COP and the GEF may preclude significant changes to their operation during the term of that MOU. The MOU was annexed to Decision 12/CP.2 and as such, has the status of a COP decision. There is nothing to prevent the COP taking a further decision to provide additional guidance to the GEF, indeed, the GEF is required to report to the COP and regularly review the effectiveness of the financial mechanism. The GEF shall provide its 4th review to COP 16. However, as the financial mechanism itself is mandated by Article 11 of the UNFCCC, which requires it to operate under the guidance of and be accountable to the COP, it would require an amendment to the Convention to alter the governance structure of that mechanism.

In order to achieve the clearest engagement of all Parties in a representative manner, using language such as “under the governance or authority” of the COP is most likely to achieve this outcome.

3. A COP/MOP decision has been used as the basis of the operationalisation of the adaptation fund and is sufficient to do so. However, it would be preferable to have in any new treaty text a clear mandate for the establishment of the financial mechanism and that it shall be under the authority and guidance of the COP. The reason for this is that the treaty will be legally binding upon Parties to the treaty, whereas the effect of COP/MOP decisions will depend upon the power given to the COP/MOP by the Treaty. We have further advice on the legal effect of COP/MOP decisions which we will be happy to provide on request.