INCHEON, South Korea—A new financing mechanism has been developed by the Asian Development Bank (ADB) to keep it on track to meet its commitment of increasing climate change financing to $100 billion until 2030.
In a briefing on the first day of the Manila-based multilateral development bank’s 56th Annual Meeting on Tuesday, ADB President Masatsugu Asakawa said the Innovative Finance Facility for Climate in Asia and the Pacific (Ifcap) is a first in the world.
Asakawa said Ifcap aims to use financial guarantees from ADB’s partners to provide financing for climate action across Asia and the Pacific region.
“By guaranteeing a portfolio of ADB’s sovereign loans, they will help to shoulder some of the loss in case of a credit event in one of our borrowers,” Asakawa said.
“This is a groundbreaking arrangement because it will reduce the capital ADB needs to hold for credit risk, freeing up capital for a substantial increase in lending to climate projects. Every dollar of guarantee into Ifcap will result in the capacity to make new loans,” he explained.
Asakawa said Ifcap is an innovation because of a multiplier effect that aims to bring $3 billion for Ifcap to unlock up to $15 billion worth of new ADB climate projects.
This will also accelerate the region’s efforts to fight the ill effects of climate change. Asakawa said disasters in the region in 2020 alone led to losses worth $67 billion.
These disasters have affected over 3.5 billion people and claimed the lives of nearly a million people. Asakawa said it will only get worse under a business-as-usual scenario as 1 billion people living in urban areas in 2050 will suffer from air pollution and heat stress.
“Ifcap will change the way we do business. The region needs trillions in investment to combat climate change. To help reach that level, we need to maximize our capital in new ways,” Asakawa said.
“(It) will multiply ADB’s lending capacity through leverage. This will allow us to crowd in substantially more resources from the private sector, and other investors who share our commitment to climate action,” he added.
Ifcap’s initial partners—Denmark, Japan, the Republic of Korea, Sweden, the United Kingdom and the United States—are in discussions with ADB about providing a range of grants for project preparation along with guarantees for parts of ADB’s sovereign loan portfolios.
The reduced risk exposure created by the guarantees will allow ADB to free up capital to accelerate new loans for climate projects. 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.
ADB is in discussions with potential partners—such as bilateral and multilateral sources, the private sector and philanthropies, including the Global Energy Alliance for People and Planet—to catalyze climate investments.