The Asian Development Bank (ADB) has announced a significant boost to its climate-related lending, increasing its capacity by up to $7.2 billion following the unprecedented decision by the United States and Japan to underwrite risk for certain loans. This groundbreaking move marks the first-ever use of sovereign guarantees in climate finance, providing a new model for other development banks to expand their climate financing efforts.
The new strategy, revealed exclusively to Reuters, comes ahead of the critical COP29 climate summit in Baku, Azerbaijan, which is set to focus on ramping up financial support for developing countries battling the effects of climate change. The ADB’s increased lending capacity aligns with the growing urgency to address climate change, as developing countries face an escalating need for funding to adapt to extreme weather events and transition to cleaner energy sources.
Under this arrangement, the United States will guarantee up to $1 billion of existing ADB loans, while Japan will back $600 million. This move will enable the ADB to extend additional climate finance loans without requiring a politically difficult capital increase. According to Jacob Sorensen, director of partner funds at the ADB, this mechanism is a game-changer for multilateral development banks (MDBs). “It’s a fantastic way of extending a multilateral development bank’s lending capacity without going through the politically difficult situation of a general capital increase,” Sorensen explained.
The $7.2 billion increase in the ADB’s climate lending capacity will be deployed over the next five years, with the guarantees themselves lasting for 25 years. This decision comes as global concerns about climate change continue to mount, particularly in light of the recent U.S. election victory by Donald Trump. Trump’s stance on climate change, including his pledge to withdraw the U.S. from the Paris Agreement, has cast a shadow over the start of the COP29 talks, placing added pressure on other countries like Europe and China to take a leading role in global climate efforts.
The sovereign guarantees are expected to give a significant boost to the ADB’s climate finance initiatives, with the first project to benefit being a sustainable aviation fuel (SAF) initiative in Pakistan. The project, which aims to convert cooking oil into jet fuel, is expected to receive around $45 million in funding from the ADB’s newly available climate finance scheme. This project is expected to be signed on November 20. Sorensen emphasized the importance of collaboration in this effort, stating that the ADB has spent three years developing this guarantee deal and is working closely with other MDBs such as the World Bank, Inter-American Development Bank, and the European Investment Bank to scale up climate-related lending.
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While sovereign guarantees have been used in the past to support other development areas like education, this marks the first time they have been applied specifically to climate finance. Public lending institutions have increasingly relied on guarantees for third-party investments in climate projects. In fact, earlier this year, the World Bank launched a platform to house all such guarantees, helping to expand their use across the globe. Axel van Trotsenburg, the World Bank’s senior managing director, noted that the bank had already guaranteed more than $10 billion in climate-related loans in 2023, with a goal to double that amount by 2030.
The new initiative is a response to the growing financial needs of developing countries as they face the intensifying impacts of climate change. It is projected that these countries will require more than $2 trillion per year by 2030 to transition to clean energy and prepare for the worsening effects of climate change. The ADB’s new plan underscores the shift toward development banks and private investors as crucial sources of climate finance, moving away from reliance solely on donations from wealthy nations.
At COP29, the expectation is that countries will agree to a financial framework that incorporates both public and private funding, ensuring that climate finance is more accessible and sustainable. The ADB’s innovative approach could serve as a model for other international institutions, potentially transforming the way climate finance is mobilized to support vulnerable nations in their fight against climate change.
