“The battle against climate change will be won or lost in Asia and the Pacific”: so said Asian Development Bank president Masatsugu Asakawa in 2021, as his organisation set out plans to reach $100bn of cumulative climate financing by 2030. “The climate crisis is worsening daily,” Asakawa added, noting that demand for climate finance was also intensifying.
Since then, the pressure on multilateral development banks such as the ADB has only grown. Last year, a G20 panel chaired by economists Lawrence Summers and NK Singh called for reform of the MDBs to enable developing countries to boost their annual spending on climate projects and other development goals by $3tn by 2030. Meanwhile, scientists blame climate change for exacerbating a spate of floods and heatwaves in Asia.
As the self-styled climate bank for Asia-Pacific, the ADB acknowledges this need for a significant uplift in funds — even though, last year, it committed $9.8bn of climate finance from its own resources.
Like other development institutions, its solution is to attract more private finance, through a combination of financial innovation and engagement with would-be borrowers and investors. But it has its work cut out.
“The MDBs need to mobilise between $60bn or $70bn a year in private finance, for development and climate investments, to meet their targets,” says Nancy Lee, director for sustainable development finance at the Center for Global Development think-tank. “Still, that’s a drop in the bucket when you contemplate the trillions of dollars of finance gaps that developing countries are facing.”
She says that the “crowding in” of institutional investors, large pension funds and insurance companies is the “Holy Grail” for MDBs seeking to attract private finance.
Bhargav Dasgupta, ADB’s vice-president for market solutions, says the bank is working both with governments and with commercial banks, insurers and philanthropists to ensure that projects are developed in ways that will appeal to potential investors.
“There is more outreach we can do with the private sector to advise and help in creating more bankable projects, and achieve the impact objective that we want,” he says.
Attracting private investors means ensuring that they feel comfortable putting money into unfamiliar settings, says Erin Murphy, senior fellow for the Asia Program at the Center for Strategic and International Studies, a think-tank. Organisations such as the ADB can help by de-risking — reducing the potential for losses through volatile currencies, corruption, or patchy law enforcement.
It also means encouraging people to take the long view: Murphy says the 20 years it takes for some climate projects to turn a profit falls outside the “Silicon Valley mindset”, where a return on investment is expected within five years.
Investors need to be patient, agrees Sugandha Srivastav, an environmental economist at the University of Oxford. “One of the key things being missed [by the private sector] is the growth potential of green industries in the developing world,” she says. “Frankly, that’s going to be one of the highest growth markets.”
Some financing mechanisms appear to be better than others at bringing in private capital. Research published last year by the Blended Finance Taskforce — a body that aims to mobilise funding for the UN’s Sustainable Development Goals — found that, while loans from development banks bring in an average of $0.25 of private capital for every $1 of public money, guarantees bring in $1.50 for every $1. In guarantee schemes, a guarantor steps in to pay back lenders if a borrower fails to keep up with repayments, or if other factors hit expected returns.
Guarantees are a key part of the ADB’s Innovative Finance Facility for Climate in Asia and the Pacific Structure (If-Cap), which was launched last year. By partnering with six ADB member countries, including Japan, Sweden and the US, the facility provides grants for projects and guarantees for some sovereign loans.
The ADB thinks the resulting reduction in risk will encourage lenders to finance climate projects: it forecasts that its initial goal of $3bn in guarantees could mobilise up to $15bn in new loans.
Despite these efforts, some observers believe the ADB is not doing a good enough job of distributing funds. In a study published last month, for example, aid charity Oxfam found that, for 15 climate adaptation projects between 2021 and 2022, the bank had potentially over-reported its financing by 44 per cent.
It also found that, of $10.5bn reported in adaptation finance from 2019 to 2023, only around 6 per cent was in grants, with 93 per cent provided as loans — of which only 27 per cent were given concessional terms. Sunil Acharya, regional policy and campaigns co-ordinator for Oxfam in Asia, says it is “deeply problematic” that most of the ADB’s lending is at market rates.
The ADB says it stands by its climate adaptation finance numbers, which use a methodology common to all MDBs. “This is important to ensure all MDBs report climate finance numbers that are consistent and comparable,” it explains, noting also the $9.8bn it spent last year was a 46 per cent increase on 2022.
Katherine Stodulka, head of sustainable finance at consultancy Systemiq, says one possible response to Oxfam’s market-rate criticism would be for the ADB to adopt some of the principles of the UN-backed Bridgetown Initiative. Named after the capital of Barbados, and championed by that country’s prime minister, Mia Mottley, this is an action plan intended to make climate finance less burdensome for poor countries.
Crucially, it does not simply look to swap debt for grants, but to encourage long-term loans at low interest rates.
“Development banks are constrained, using the funds given by their shareholders,” Stodulka points out. “If the ADB can look at lengthening the tenor [of loans] or adapting to new instruments, it could align with their ambition of being a climate bank for the region.”
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