Pakistan's climate minister Sherry Rehman, who was part of the campaign by developing nations to win the commitment at the two-week U.N. summit in Egypt, hailed the landmark decision as "downpayment on climate justice".
But the text of the agreement leaves open a number of crucial details to be worked out next year and beyond, including who would contribute to the fund and who would benefit.
Here's what you need to know about the agreement:
What is 'loss and damage'?
In U.N. climate talks, "loss and damage" refers to costs being incurred from climate-fuelled weather extremes or impacts, like rising sea levels.
Climate funding so far has focused mostly on cutting carbon dioxide emissions in an effort to curb global warming, while about a third of it has gone toward projects to help communities adapt to future impacts.
Loss and damage funding is different, specifically covering the cost of damage that countries cannot avoid or adapt to.