ADB aims to launch $12bn climate finance platform at COP 29
The Asian Development Bank says it is on track to launch its new $12 billion climate finance programme at the COP 29 summit in November, after a six-month delay and with Australia potentially joining its list of sovereign backers.
ADB plans to support the first transaction under the Innovative Finance Facility for Climate in Asia and the Pacific (IF-CAP) by the end of 2024, said Jacob Sorensen, the institution's director of climate change and sustainable development.
ADB
The multilateral development bank (MDB) expects to make loans through the programme of between $20 million and $300 million and to support around 150 projects during the five-year investment period, Sorensen told AsianInvestor.
Private co-financing opportunities may also emerge from the initiative, which ADB says is the first of its kind because of its structure and complexity.
IF-CAP will mirror ADB’s 60:40 financing split between adaptation and mitigation projects, he added.
Climate adaptation is the process of adjusting to the effects of climate change, while climate mitigation refers to reducing the emissions that cause climate change in the first place.
AWAITING COMMITMENTS
ADB now expects to reach $2.5 billion in combined financial guarantees from seven countries, including Australia, to support a lending programme of $12 billion (including $1 billion of concessional lending from ADB).
It had set an initial target of $3 billion in guarantees when it announced the IF-CAP plan in May last year.
Australia has shown interest to participate in IF-CAP since early 2024 but has not yet made a formal commitment, said Sorensen in early August.
The other six sovereign guarantors are Denmark’s Investment Fund for Developing Countries (IFU), Japan, South Korea, the Swedish International Development Cooperation Agency (Sida), the UK and the US.
There have also been “early discussions” about IF-CAP with Norway, via the Norwegian Agency for Development Cooperation (Norad), Sorensen added. “But it is too premature to expect them to participate in IF-CAP,” he said, after Norway created a new guarantee facility last year, which is still developing.
CLIMATE INVESTMENT OPTIMISM
In the meantime, IF-CAP is fuelling optimism among its existing backers, such as IFU, which sees the facility as a potential model for similar deals elsewhere.
IFU
“A major focus from the Danish government side is to support climate finance investments,” said Magnus Cedergren, head of the IFU guarantee facility.
“Asia provides a good opportunity for that, and ADB is at the forefront of these types of transactions.
“Hopefully we learn a lot from this and can take the concept to other regions,” Cedergren told AsianInvestor.
IFU is exploring deals with MDBs in Africa and Latin America, for instance, he added.
“Other MDBs are aware of what's going on at ADB now and are looking forward to see how this process turns out," said Cedergren. "It could potentially be very interesting for them.”
BUILDING MOMENTUM
IF-CAP reflects a growing focus on climate finance projects in Asia by development institutions such as Norway’s Climate Investment Fund and British International Investment.
Such efforts are critical in building the momentum needed to bridge what the International Monetary Fund says is an $800 billion annual investment gap for climate finance in emerging Asia.
IF-CAP would be one of the largest climate finance deals so far.
It is designed to provide maximum capital relief for ADB, to enable it to increase lending for both private-sector and sovereign climate projects. The vehicle is structured as a 25-year, first-loss portfolio guarantee on a defined portfolio of ADB's sovereign risk.
But there are still details being ironed out.
“This structure has never been done before with this complexity, which has delayed the process by about six months,” said Sorensen. “There are seven participants, who all have different development mandates and priorities, and operate under different legal jurisdictions and mandates.”
PRIVATE-SECTOR INVOLVEMENT?
Private-sector investors, meanwhile, will not be directly involved in supporting IF-CAP. But there may be opportunities arising from any private-sector lending that the platform undertakes.
“IF-CAP projects may be sovereign or private-sector lending,” Sorensen explained. “ADB's private-sector lending can be commercially co-financed, though IF-CAP does not create a new form for private co-investment.”
Private finance will, though, have an indirect stake in the initiative through debt ownership.
The entire IF-CAP loan principal of around $11 billion will be raised through bond issues, Sorensen said. ADB has a triple-A credit rating from each of Fitch, Moody’s and Standard & Poor’s.
“We are not looking to mobilise private participants for two reasons,” Sorensen said.
“Firstly, the guaranteed portfolio is sovereign lending, and ADB's sovereign loan margin does not differentiate amongst the credit risk of our sovereign borrowers, so our margin is too narrow to facilitate commercial guarantee pricing.
“Secondly, the guarantees are 25-year instruments, which presents a problem from a counterparty risk perspective,” Sorensen added.