Operating entity for Financial Mechanisms

Legal assistance paper

All reasonable efforts have been made to ensure the accuracy of this information at the time the advice was produced. However, the materials have been prepared for informational purposes only and may have been superseded by more recent developments. They do not constitute formal legal advice or create a lawyer- client relationship. To the extent permitted any liability is excluded. Those consulting the database may wish to contact LRI for clarifications and an updated analysis.

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Date produced: 16/11/2009

  1. The various proposals for the “operating entity” for a financial mechanism under the LCA track include an “Executive Board” to govern the financial mechanism (para 16 of Non-Paper 34); a “Global Fund for Climate” (US proposal – para 32); the technical panels and secretariat of the executive board (the original G77 proposal – non paper 34 Annex I, para 11 (b)); or the executive committee and the boards and panels (page 23 of the narrative version of the NGO treaty, concerning ‘institutional arrangements’).  Would any of these proposals be in violation of Article 11(1) of the UNFCCC that says it should be an “existing international entity”?
  2. Can any of the above bodies be considered existing institutions?
  3. What is the most legally robust option (listed above) for designation of the operating entity to ensure any new financial mechanism will not be challenged as not complying with the Convention?
  4. Is it feasible to have an arrangement where a new COP finance board or entity is made the operating entity, an existing institution is made the Trustee, and at first the Trustee carries out broad management, technical analysis, and decision making functions, in order to facilitate fast start funding, but the COP board and fund establish, over time, technical panels and/or boards for funding windows, so that capacity, responsibilities and decision-making authority is migrated over time from the trustee to the COP bodies? 
  1. Violation of Article 11(1)

Article 11(1) of the UNFCCC provides that:

A mechanism for the provision of financial resources on a grant or concessional basis, including for the transfer of technology, is hereby defined.  It shall function under the guidance of and be accountable to the Conference of the Parties, which shall decide on it policies, programme priorities and eligibility criteria related to this Convention.  Its operation shall be entrusted to one or more existing international entities.

As identified in the query, the proposed alternatives for an operating entity of the financial mechanism under Article 11(1) include:

  1. a.      an Executive Board appointed by the Conference of the Parties (CoP) and under CoP’s authority to establish a fund or funds (option 1, para 16, non-paper 34 – option 1 is a consolidation of the proposals presented in annexes I-VII);
  2. b.      the Global Fund for Climate under the guidance of and accountable to CoP and which is to have an existing multilateral financial institution as its Trustee (option 3, para 32&36 and para 1&2 of Annex IX, non-paper 34) (we note that in this option, the Global Fund for Climate appears to be additional to rather than a replacement for the current operating entity, Global Environment Facility (GEF) – see para 38 and para 4 of Annex IX, non-paper 34);
  3. c.       a board appointed by CoP which shall function under the authority and guidance of and be accountable to the CoP to manage the financial mechanism (para 2, Annex I, non-paper 34) which is to be assisted by an independent specialized thematic assessment unit or panels.  The thematic units shall be under the authority of the Executive Board, and together with the professional secretariat of the Executive Board, shall constitute the operating entity of the financial mechanism (para 11(b), Annex I, non-paper 34); and
  4. d.      the Copenhagen Climate Facility which would operate under the guidance and authority of, and be accountable to, the CoP serving as the MOP to the Copenhagen Protocol.  An executive committee (ExComm), four boards (adaptation, mitigation, REDD, technology) and a number of technical panels (designed to support the four boards) would together constitute the operating entity of the Facility (A Copenhagen Climate Treaty, v 1, NGO community, narrative, p23).

As a preliminary point, we note that our response is formulated on the basis that the CoP has an international legal personality distinct from its members (i.e. it is an international entity).  Based on the fact that the CoP is (a) constituted under the UNFCCC; (b) has specified functions set out in Article 7; and (c) its own secretariat established under Article 8, it seems to us that the CoP is an international entity.  Indeed, it is arguable that the states party to the UNFCCC intended the CoP to have a separate legal entity by requiring the Secretariat to “enter, under the overall guidance of the CoP, into such administrative and contractual arrangements as may be required for the effective discharge of its functions” (Article 8(2)(f)).

Options (a) and (c)

Options (a) and (c) both provide for a new executive board or committee to be appointed by the CoP as the operating entity of the financial mechanism under Article 11.  We note that the CoP appears to have capacity under Article 7(2)(i) and (m) of the UNFCCC to be entrusted with the operation of the financial mechanism contemplated in Article 11 and to appoint the boards referred to in options (a) and (c).

As noted in the advice on the Kyoto Protocol Adaptation Fund Board , one of the risks of creating a new board under CoP is that it may be regarded as an new international entity rather than an existing international entity as is required by Article 11(1).  This assumes, of course, that in this scenario it is the executive board and not the CoP which is the “international entity” for the purpose of Article 11(1).

However, arguably the language of Article 11(1) does not expressly, or by implication, prevent the CoP from being an operating entity.  Whilst the financial mechanism must function under the “guidance of and be accountable to the Conference of the Parties”, the only limitation placed on the operating entity is that it should be an existing international entity.  If it could be successfully argued that the “international entity” for the purpose of Article 11 is the CoP, and the board is not a separate entity but a functional arm of the CoP, then these two proposals may be less likely to be in breach of the requirement for the appointment of an existing entity.

However, if the CoP is an international entity, its establishment (under Article 7(1)) coincides with the operation of Article 11.  Therefore, it is arguable that it can not be an “existing” international entity for the purposes of Article 11(1).

Naturally, if the argument that the CoP and not the board is the international entity was not successful then there is a risk that the appointment of a new board as the operating entity of a financial mechanism under Article 11 could be challenged on the basis that it is (a) not an international entity; or (b) it is a new and not an existing international entity.

We note an alternative may be to amend Article 11, at the very least, to remove reference to “existing”.  However, we recognise that due to the provisions of Article 15(2) (which requires that the text of any proposed amendment is communicated to the Parties a minimum of six months prior to the meeting at which the amendment is proposed for adoption) an amendment can not be proposed at Copenhagen.

Option (b)

The text for option (b), the Global Fund for Climate, states that the fund will be “governed by a body with balanced representation of net contributors and net recipients” and the process for constituting the governing body is to be agreed by the Parties .  This seems to indicate that it is not intended that the governing entity will include an international entity or entities similar to the manner in which GEF is structured, nor will it necessary be an executive board appointed by CoP.

As the Global Fund for Climate and its governing body do not currently exist, it seems likely that this option would not meet the “existing international entity” requirements of Article 11(1).

Option (d)

The NGO option referred to in (d) above appears to be prefaced on a new Protocol being created at Copenhagen.  In this way, the NGO alternative for an operating entity is analogous to the Adaptation Fund Board created under the Kyoto Protocol.  As noted in the response to Query 15, decision 1/CMP3 decided that the adaptation fund “operates under the authority and guidance of the Conference of the Parties serving as the meeting of the Parties to the Kyoto Protocol [the “CMP”] and shall be fully accountable to the [CMP]”. In other words the Kyoto Protocol Adaptation Fund Board is accountable to the CMP and not to the CoP and is governed by the provisions of the Kyoto Protocol and not the UNFCCC.

If the drafting of the NGO option is equivalent to the drafting of the adaptation fund under the Kyoto Protocol then it would be governed by the provisions of the new Protocol which would effectively circumvent the need to comply with the requirement under Article 11(1) that the operating entity of the financial mechanism be an “existing international entity” (this does assume that the drafting of the new Protocol does not include wording which is equivalent to the “existing international entity” provision in Article 11(1)).

But this would also mean that the financial mechanism obligations created under this option would only apply to countries that ratified the new Protocol.  Consideration would need to be given to the extent to which obligations under a new Protocol would impact on or detract from the existing funding obligations under Article 11 of the UNFCCC and adaptation funding under the Kyoto Protocol.

2. Existing institutions

See comments in (1) above in relation to the argument that CoP (and not the board) is the existing international entity for the purpose of Article 11(1).

3. The most legally robust option

Of the four options canvassed in this query, option (d) appears to be the least likely to be challenged on the basis that the proposed operating entity is not an existing international entity (assuming that the drafting of the new Protocol does not include wording which is equivalent to the “existing international entity” provision in Article 11(1)).

However, as noted in  (1) above, other issues arise in circumstances where the board and the financial mechanism operate under a subordinate protocol to the UNFCCC and not the UNFCCC itself.  In particular, any obligations imposed under the new Protocol will apply only to those countries that ratify the new Protocol.

4. Feasibility of international trustee transitioning functions to the executive board

We note that any trust created in relation to a fund under Article 11 would be governed by the principles of international law which would govern the rights and obligations between the CoP and the trustee.  Whether or not it is feasible to appoint a trustee (i.e. an experienced international entity) as trustee of a fund who, over time, transitions broad management, technical analysis, and decision making functions to a new executive board (and relevant committees) of a financial mechanism under Article 11 is dependant, amongst other things, on the degree to which the CoP is able to influence the trustee.

If the trustee were to take on a quasi-operating entity role (rather than a pure trustee role), such an arrangement would need to be carefully crafted to ensure that it is the CoP and not the trustee that decides when and how the transition of functions is to occur.

An option which may assist in avoiding a situation in which the trustee does not transition the relevant functions (despite direction from CoP to do so), is to give the trustee a capacity-building/advisory role for a limited period of time, instead of the trustee being the entity actually carrying out the executive board’s functions.