How the Asian Development Bank can be a key player in turning billions into trillions for climate finance

The Innovative Finance Facility for Climate in Asia and the Pacific will leverage lending on the back of mutual guarantees, a first for a multilateral development bank
Other development banks may take inspiration, boosting the global pot for climate finance and taking their place as climate leaders instead of bit players

Anthony Rowley

Published: 3:30am, 7 May 2023

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Debate and action on two of the most critical physical and financial challenges facing Asia and the world – climate change and infrastructure – are finally beginning to get real, as an initiative launched this month by the Asian Development Bank (ADB) at its annual meeting in Incheon, South Korea, showed.

With the unprepossessing title of the Innovative Finance Facility for Climate in Asia and the Pacific (IF-CAP), it is hardly surprising that the initiative failed to take the world by storm. But the international cooperation among governments and multilateral agencies that it involves is truly groundbreaking.

Put simply, governments – including those from the United States, Japan, Britain, South Korea and Denmark – plus multilateral development banks and other public and private sector agencies would guarantee loans made by the ADB so it can grow into its self-designated role as the climate bank of Asia.

As ADB president Masatsugu Asakawa said: “Climate change is the critical issue of our lifetime and here in Asia and the Pacific we are on the front lines of that battle.” The battle will be won or lost here – since 2000, more than 40 per cent of the world’s climate-related disasters have occurred in the region.

The principle of leveraging lending on the back of mutual guarantees is likely to spread, helping to make a reality of the ambition to transform climate (and infrastructure) financing “from billions to trillions” of dollars and allowing private investors more options to get involved.

If there is a dark side to the IF-CAP initiative, it is that, in certain circumstances, it might contribute to global division by serving as a Trojan Horse for Western powers to counter China’s Belt and Road Initiative on infrastructure building. But, in the climate change area, it is a winner.

This is because efforts to finance the battle against climate change and improve critical basic infrastructure in advanced, emerging and developing economies alike have foundered on the fact that they relied too much on private-sector initiatives while undervaluing public-sector efforts.

I have long argued (including in books on climate change and infrastructure) that if multilateral development banks (MDBs) such as the ADB did not exist, we would need to invent them. Fortunately they do, but their potential is greatly underexploited.

They are marvellous financial “leveraging” agents, and when global demand for climate solutions and infrastructure (physical, digital and health service provision) is escalating toward scores or even hundreds of trillions of dollars, financing “at scale” is what the game is all about.

For every dollar of capital contributed by member governments, MDBs can borrow multiples more in global bond markets to become really muscular players. But, for a host of political reasons, governments can be wary of giving them more capital on which to base this leveraging act.

This is where the ADB under Asakawa (a former Japanese finance ministry bureaucrat) is being highly inventive. Instead of seeking more money from shareholders, it will shift some loans off its books, freeing up capital so it can lend and borrow more.

Asian Development Bank president Masatsugu Asakawa speaks in Tokyo on November 29, 2019. Photo: Reuters

IF-CAP will help the ADB finance an increase of US$20 billion (to potentially US$100 billion) in its own lending for climate projects but that is likely to be only the beginning. Other MDBs, among which the World Bank is the biggest, could use the mutual guarantee principle to boost their climate lending.

As well as with the initial IF-CAP partners, the ADB is in discussions with Italy and other potential partners, such as bilateral and multilateral sources, foundations, the private sector and philanthropies including the Global Energy Alliance for People and Planet, to catalyse climate investments.

According to the ADB, such a “leveraged guarantee mechanism for climate finance” has never before been adopted by an MDB: “With a model of ‘$1 in, $5 out’, the initial ambition of $3 billion in guarantees could create up to $15 billion in new loans for much-needed climate projects across Asia and the Pacific.”

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It is understandable that the ADB should take the lead in climate change mitigation. The Asia-Pacific region is responsible for around half of all atmosphere-warming carbon dioxide emissions – the region serves as the “factory to the world”, and others benefit at its expense.

The ADB has already launched another pioneering climate change initiative in the shape of the Energy Transmission Mechanism, under which the bank and partners will buy up coal-fired power plants to close down ahead of schedule and replace their output with clean energy.

The Manila-based bank is going beyond any moral obligation that Asia may have to the rest of the world by way of climate change solutions – and its initiatives are helping to make MDBs into leaders, instead of players at the margin.

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As I have also argued, private financial initiatives in the shape of environmental, social and corporate governance (ESG) investment were never going to make a substantial dent in the climate change problem without leadership from MDBs and their financial and organisational abilities.

What is intriguing about the IF-CAP is that it will also enable extra ADB investment in “a wide range of sectors, such as transport, energy, urban [projects] and agriculture”. This implies that its backers see the bank becoming bigger, alongside other players like China’s Belt and Road Initiative. Yet ideological competition should not be allowed to stain a principled scheme.

Anthony Rowley is a veteran journalist specialising in Asian economic and financial affairs

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