The Asian Development Bank (ADB) is set to expand its climate-focused financing by up to $7.2 billion, thanks to groundbreaking sovereign guarantees from the United States and Japan. This marks the first time any nations have provided sovereign guarantees for climate finance, offering a fresh model for international development banks aiming to boost climate funding.
This new approach, which could set a precedent for other development banks, comes just as the UN COP29 climate summit in Baku, Azerbaijan, kicks off. Discussions at the summit will centre on mobilising more funds for climate resilience and renewable projects in developing countries.
A Bold Climate Finance Target
The ADB has committed to delivering a cumulative $100 billion in climate finance between 2019 and 2030, with $9.8 billion already disbursed in 2023 alone. However, recent political shifts, including the re-election of Donald Trump in the US—who has signalled a potential exit from the Paris Climate Agreement—have cast uncertainty over global climate commitments, intensifying the pressure on other major economies like Europe and China to drive meaningful results at COP29.
How the US and Japan’s Guarantees Will Work
Under this new financing plan, the US will guarantee up to $1 billion in existing loans managed by the ADB, while Japan will provide a $600 million guarantee. By transferring this risk, the ADB can channel more resources toward new climate-related projects without needing fresh capital injections from member nations, explains Jacob Sorensen, Director of Partner Funds at the ADB.
"The structure is an innovative way to extend a multilateral development bank’s lending capacity without needing a politically complex general capital increase," Sorensen stated.
With the guarantees in place for a 25-year term, ADB’s additional funding flexibility is expected to drive new climate projects over the next five years.
Pioneering Projects: From Cooking Oil to Aviation Fuel
One of the first initiatives to benefit from ADB's expanded financing will be a sustainable aviation fuel project in Pakistan. This venture will convert used cooking oil into aviation fuel, with about half of the $90 million cost supported through the ADB's new funding mechanism. A deal is anticipated to be signed by November 20.
The ADB, headquartered in the Philippines, has been developing this guarantee model over the last three years in partnership with Western governments. ADB hopes that this success will prompt other nations to provide similar backing and is already collaborating with other development banks, including the World Bank, Inter-American Development Bank, and European Investment Bank, to enhance climate funding across the globe.
Beyond Traditional Lending: Broadening Climate Finance Models
Sovereign guarantees, while a first for climate finance, have been used in areas like education funding. Public lenders, like the World Bank, are increasingly guaranteeing third-party investments in climate projects. Earlier this year, the World Bank established a platform for consolidating such guarantees, aiming to scale them up. As of 2023, this programme had already guaranteed more than $10 billion, with a target to double that figure by 2030.
The Growing Demand for Climate Finance
With climate change escalating the frequency of extreme weather and natural disasters, developing nations need an estimated $2 trillion annually by 2030 for clean energy and climate adaptation. Wealthy countries hope that COP29 will deliver a financing agreement that looks beyond traditional donations and encourages development banks and private investors to play a more significant role in funding global climate solutions.
This bold initiative by the ADB, backed by the US and Japan, provides a glimpse into the future of climate finance—a future where development banks leverage sovereign guarantees to support innovative, large-scale climate projects worldwide.
Source: (Investing.com, Reuters)
