Asia Pacific has experienced tremendous economic growth in recent years, but it has come at a cost. The region is now responsible for more than half of global greenhouse gas emissions, meaning transitioning to a low-carbon economy must be executed quickly and on a large scale.
Mobilising finance is key. In developing Asia alone, it is estimated that around $1.7tn is needed every year from 2016-30 to maintain the region’s growth momentum, eradicate poverty and respond to climate change. With the size of global private assets under management at approximately $210tn, the key question is how to attract them to climate and sustainable development investments in emerging markets.
Governments need to provide clear policies to incentivise sustainable investments. By establishing coherent transition plans, targets and policies – such as carbon-pricing mechanisms, polluters-pay principles and risk-sharing and transfer mechanisms between public and private sectors – governments can catalyse transition finance.
Regulatory bodies should promote and adopt clear criteria for reporting and disclosure. This is essential for assessing investments that contribute to the United Nations sustainable development goals, while mitigating climate risks. By aligning investment decisions with environmental, social and governance as well as Paris agreement criteria, economies in Asia Pacific can attract private capital flows that support sustainable and resilient growth.
The role of multilateral development banks
Multilateral development banks can steer transition finance into emerging markets at scale. The Asian Development Bank has been supporting developing members to scale up transition and sustainable finance in several ways.
First, ADB was one of the first international financial institutions to launch ESG-themed bonds. Starting with water bonds in 2010 and extending to green, blue, gender, health and education bonds, the principal outstanding amount of our green, blue and themed bonds as of mid-April 2023 reached nearly $19.5bn. In 2022, we issued a record $5.8bn of thematic bonds. With our bonds framework adhering to international standards and receiving a second-party opinion, we set good framework practices to further expand the ESG market in developing Asia.
Second, ADB develops partnerships with standard-setting bodies and regulatory agencies, such as the Association of Southeast Asian Nations Taxonomy Board, to establish taxonomies, guidelines and capacity in the region. As the board provides confidence for ESG-orientated investors, they enable the ESG bond market to thrive and are critical in addressing concerns over greenwashing.
For example, ADB provided support to eight Asean sustainable bond issuers, raising more than $800m in 2022. We also supported three local green bond verifiers, who were accredited by the Climate Bonds Initiative. Having local talent with solid understanding of the local market environment and deep familiarity with international practices is crucial.
Third, beyond its core lending operations, ADB aims to leverage its capital, de-risk projects and improve project bankability, which can eventually attract private capital. Two newly launched initiatives are promising.
The first is the Energy Transition Mechanism, which will use concessional and commercial capital to retire or repurpose coal and other fossil fuel plants on an accelerated schedule, replacing them with clean power capacity. This effort is scalable and designed to foster investments in cost-effective renewable energy solutions and technologies, such as smart grids, hydrogen infrastructure and electric vehicles.
Second is the Innovative Finance Facility for Climate in Asia and the Pacific, which will use guarantees from partners for parts of ADB’s sovereign loan portfolio to enable the bank to free up capital to increase lending for climate change investments. Supplementary grants will facilitate project preparation, capacity building and knowledge solutions. With a model of ‘$1 in, $5 out’, the initial ambition of $3bn in guarantees could create up to $15bn in new loans for climate projects.
Scaling up transition finance in Asia Pacific requires a combination of policy, knowledge transfer, international co-operation and innovation from governments, financial institutions and stakeholders. Multilateral banks, such as ADB, play an important role in assisting developing countries to transition to a low-carbon economy. By mobilising private and concessional finance to meet financing needs, connecting emerging economies to international markets and investors and developing an ecosystem to promote sustainable and transition finance, banks can lead the charge in providing knowledge, technical support and finance necessary to address climate challenges.
With these actions, the battle against climate change will be placed front and centre in the sustainable development and poverty reduction agenda – where it needs to be.
Roberta Casali is Vice President of Finance and Risk Management at Asian Development Bank.
This article was originally published in the OMFIF SPI Summer Journal 2023.