ADB increases climate finance after US, Japan give world’s first sovereign guarantees

THE Asian Development Bank (ADB) will increase its climate-related lending by up to US$7.2 billion after the United States and Japan agreed to underwrite risk for some existing loans, an ADB executive said, marking the first-ever sovereign guarantees for climate finance.

The new strategy, shared exclusively with Reuters, offers a potential template for other development banks to follow as the UN’s COP29 climate summit in Baku, Azerbaijan, starting this week focuses on ramping up the amount of finance available to developing nations.

The ADB has set a long-term cumulative climate finance lending target of US$100 billion between 2019 and 2030. In 2023, it lent US$9.8 billion.

The US election victory last week of Donald Trump, who has vowed to remove the United States from the Paris Agreement on climate, has overshadowed the start of the Baku talks, adding pressure on Europe and China to help get a strong result, negotiators said last week.

Under the ADB plan, the world’s richest country would guarantee up to US$1 billion of existing loans from Asia’s top development institution, while Japan would underwrite US$600 million – freeing the bank to lend more for climate-related projects.

“The structure is a fantastic way of extending a multilateral development bank’s (MDB) lending capacity without going through the politically difficult situation of a general capital increase,” which would need to come from fresh country donations, Jacob Sorensen, director of partner funds at the ADB, said.

An ADB spokesperson declined to comment on whether the deals, which were finalised last week, would be affected by the incoming Trump administration.

The extra lending headroom the guarantees generate will be deployed over the next five years, while the duration of the guarantees themselves will be 25 years, according to the ADB.

Cooking oil to jet fuel

One of the first beneficiaries from this new ADB push will be a project in Pakistan to generate sustainable aviation fuel from cooking oil, Sorensen said. About half of the US$90 million needed would come from the ADB scheme with the deal expected to be signed on Nov 20, the bank said.

The ADB, based in the Philippines, has spent three years developing the guarantee deal with a group of Western governments and hopes other countries will follow soon, he added.

It has also been sharing its experience with the World Bank, Inter-American Development Bank and European Investment Bank as part of broader, collaborative efforts to scale up climate-related lending.

“We have been extensively in consultation with multiple other MDBs,” Sorensen said.

While the deals mark the first use of sovereign guarantees for climate finance, they have previously been used to fund other areas of lending such as education.

Public lending institutions have also begun to guarantee other, third-party investments for climate projects. Earlier this year, the World Bank launched a platform to house all such guarantees for loans and investments from across the various branches of the organisation, in an effort to expand their use.

The programme was going “very well”, having guaranteed more than US$10 billion through the programme in 2023 with a goal of doubling that annual figure by 2030, Axel van Trotsenburg, the bank’s senior managing director said last month in Washington.

As climate change increases the threat of extreme weather and disaster worldwide, developing countries are forecast to need more than US$2 trillion a year by 2030 to transition to clean energy and prepare for the conditions of a warmer planet.

Rich nations are hoping that a financing deal at COP29 goes beyond relying on donations from them for climate finance, and instead looks to development banks as well as private investors for the bulk of the world’s climate cash. REUTERS