Asian Development Bank's $15B big bet on new climate scheme

With wealthy donor states cash-strapped and facing a hurricane of demands on their limited budgets, one development bank is piloting a new model of raising capital that will let it lend an additional $15 billion for climate projects — without having to ask for huge sums from its rich shareholders. The Asian Development Bank’s pilot program is seeking $3 billion in pledges, which it would leverage on markets and turn into $15 billion in one-time lending for projects over five years. The money would go toward both reducing carbon emissions and helping its client countries in Asia and the Pacific adapt to a changing climate. “We have to find a way of being more impactful without necessarily going back to our shareholders and asking for more cash in the current geopolitical environment,” Jacob Sorensen, ADB’s director of the partner funds division, told Devex in an interview. ADB — which last year started a major reform process to modernize itself — expects to be able to confirm the final numbers within months. So far, ADB is in advanced talks with Denmark, Japan, South Korea, Sweden, the United Kingdom, and the United States — though it could also partner with philanthropic funds in the future, too. The bank has 68 members, most of whom are in Asia and the Pacific region, though key European states are also shareholders. ADB is targeting $100 billion in total climate lending in the years to come, arguing that it is fast becoming Asia’s “climate bank.” The new program’s name, as ever with big international institutions, might be the most complicated bit: The Innovative Finance Facility for Climate in Asia and the Pacific, or IF-CAP. The design, though, is fairly simple, according to Sorensen, and will let the bank “lead the pack in innovation.” Here’s how it would work. Normally, a development bank gets money from its shareholders, which it then uses to raise additional funds on capital markets. Depending on its risk profile, a bank can leverage the paid-in capital multiple times over. And this is what ADB does as part of its normal operations. But to avoid having to ask for more money, it is asking donors instead to give explicit promises. The Manila-based lender will then take the promises of cash to bond markets to raise money from investors. The proceeds from the bonds can then be lent onward to client states. “The model is $1 in and $5 out,” says Sorensen, explaining the five-times leverage the bank enjoys. But “the $1 in now is not actually funded. They don’t pay the $1 in,” he said, referring to the countries contributing to the scheme. And that’s the trick. ADB’s bonds under the program would still keep the highest-level AAA rating that the bank argues is fundamental to its operations. “There's absolutely no risk,” Sorensen said. “ADB’s rating is driven by our ability to repay our bonds and this in no way is being impacted by it.” Last year, ADB committed $7.1 billion to climate financing — with about 60% going to projects that reduce emissions, known as mitigation, and the rest to adaptation. IF-CAP could help increase its environmental spending by about 42% per annum over the five-year period, though ADB may choose to front-load the money, leading to larger bumps in the first years and then taper off. One potential catch with IF-CAP is that donors may have to set aside some money as a security precaution to defend the guarantee in case something goes wrong. This means they may need their parliaments or the U.S. Congress to allocate small budgets. Still, it’s a huge bang for the buck at a time when donor states say they want the multilateral lenders to focus on climate but are also reluctant to come up with new cash infusions to the banks. Sorensen stresses the pilot nature of the program and that it has to be seen how such guarantees work in the real world. But if it is successful, ADB plans to work with other development banks to replicate the model, so that more climate finance can go to countries in need. “We are very happy to share the model and our experiences,” Sorensen said. “The way we look at it is that climate change is good development business. We can no longer do development without climate. Climate is integral to any development,” he added. The IF-CAP plan initially envisioned a concessional finance piece, meaning that countries would be able to borrow at exceedingly cheap rates, possibly with grants that would not need to be repaid at all. However, the donors, it seems, were not on board, as this would cost them more. Still, Sorensen said, ADB’s lending rates are below market rates for many of its client states, giving them an incentive to invest in climate at a discount. And is that piquing the interest of borrowing countries to take out the loans? “Yes, we are definitely seeing a demand,” he said.