Expert Speak Terra Nova
Published on May 02, 2023
IF-CAP can be a key financing vehicle that boosts ADB’s ability to financially support Asia’s developing economies in addressing the climate challenge
New funding mechanism could generate US$ 15 billion for climate action in Asia The global effort to address climate change will be won or lost in Asia, which is home to three-fifths of the world’s population and some of the fastest-growing economies. It also is an increasingly large consumer of energy—much of it provided by fossil fuels. The region is now responsible for about 45 percent of global greenhouse emissions. At the same time, Asia is highly vulnerable to the negative impacts of climate change. By mid-century, rising waters will impact nearly a billion people in the region, and most of the world’s disaster displacement, which is caused primarily by environmental and weather-related events, occurs in Asia, according to the Internal Displacement Monitoring Centre.

Introducing IF-CAP

Public and private investment in climate change adaption and mitigation in Asia is growing, but not fast enough to respond to the enormity of the challenge. It is, thus, very welcome news that the Asian Development Bank (ADB), together with several government partners, have created a funding mechanism that will mobilise billions of dollars in financing to address climate change in the region—the Innovative Finance Facility for Climate in Asia and the Pacific Financing Partnership Facility (IF-CAP). ADB has published a paper describing the arrangements for the new facility.
Public and private investment in climate change adaption and mitigation in Asia is growing, but not fast enough to respond to the enormity of the challenge.
The Manila-based Multilateral Development Bank (MDB) plans for IF-CAP to reach an overall size of US$3 billion. IF-CAP will pilot a guarantee mechanism, where every US$1 guarantee from financing partners can generate up to US$5 in new loans for climate adaptation and mitigation projects across Asia. Through such leverage, ADB could ultimately generate up to US$15 billion in funding for climate action. To put that figure in perspective, ADB’s total financial commitments from its own resources for all operations totalled US$20.5 billion in 2022. IF-CAP substantially boosts ADB’s ability to financially support Asia’s developing economies in addressing the climate challenge. The creation of the facility also means that ADB is among the first international financial institutions to respond to the recommendation of the G20 expert panel on MDB investing capacity to expand the use of financial innovations.

Facets of IF-CAP

IF-CAP operates as an umbrella mechanism for mobilising resources for climate adaptation and mitigation projects. Situated under this umbrella is the IF-CAP Guarantee Trust Fund, which will provide guarantees to ADB covering payment defaults. The guarantee of a portfolio of ADB’s sovereign lending exposure will release parts of ADB’s capital currently allocated to that portfolio. The released capital will then allow ADB to enter into new sovereign and non-sovereign (private sector) climate loans. The facility will finance projects over a five-year investment period, but guarantees will remain effective for 25 years. IF-CAP also encompasses a multi-donor grant trust fund that supports technical assistance and grant components of projects. Financing partners will contribute cash grants to the IF-CAP Grant Trust Fund to finance project preparation, capacity building, and knowledge solutions through technical assistance. Grants can also be utilised to finance projects or reduce the cost and risk of high-impact climate projects.
ADB will establish donor trust funds, framework arrangements, and other forms of financing partnerships, such as grants, guarantees, and similar arrangements that support IF-CAP’s objectives and scope.
In addition, ADB will establish donor trust funds, framework arrangements, and other forms of financing partnerships, such as grants, guarantees, and similar arrangements that support IF-CAP’s objectives and scope. IF-CAP will receive and administer contributions by public and private sources to each trust fund, and other financing partnership arrangements (including guarantees) established or entered into under IF-CAP. Most contributions to the facility will be in the form of guarantees or grants. The governments that have committed to (or are thinking about) making contributions to IF-CAP can probably be gleaned from the list of speakers at IF-CAP’s official launch. That event will take place in the Republic of Korea on 6 May 2023. Officials from Denmark, Japan, the Republic of Korea, Sweden, the United Kingdom, and the United States are scheduled to join the launch.

Structure and working mechanism

All developing countries that are eligible to receive assistance from ADB are also eligible for support from IF-CAP. ADB will select project proposals based on criteria agreed with the Donor Committee (see below). In general, projects will be aligned with the Paris Agreement and the key objectives of relevant ADB strategies and policies. Both sovereign and non-sovereign projects will have access to IF-CAP funding unless otherwise decided by the Donor Committee. IF-CAP support can be combined with other ADB resources and forms of bilateral or multilateral assistance and made available to central and sub-national governments, government agencies, the private sector, and other entities eligible to receive assistance from ADB. A Strategic Partners Forum will gather representatives of developing countries, financing partners and other stakeholders on an annual basis to provide strategic guidance on IF-CAP operations with a view to align climate and development needs with available funding. The Strategic Partners Forum will be co-chaired by a developing country representative and a representative from the financing partners.
IF-CAP support can be combined with other ADB resources and forms of bilateral or multilateral assistance and made available to central and sub-national governments, government agencies, the private sector, and other entities eligible to receive assistance from ADB.
IF-CAP’s structure also includes a committee of financial contributors (Donor Committee), which will take decisions on matters including specific guarantee and grant fund considerations, IF-CAP structure, and governance. The Donor Committee will set the general framework for operating IF-CAP but will not get involved in areas of implementation, such as the selection or processing of individual projects. It will take the guidance of the Strategic Partners Forum into consideration in carrying out its responsibilities. ADB will chair the Donor Committee together with a co-chair from one of IF-CAP’s financing partners. The remaining financing partners will be Donor Committee members or observers. Upon completion of IF-CAP’s 5-year investment period, the Donor Committee will decide on whether to continue or wind up IF-CAP investments. Notwithstanding the Donor Committee’s decision, guarantees issued by financing partners bilaterally or through the IF-CAP Guarantee Trust Fund will remain effective until the completion of the stipulated 25-year term, unless otherwise agreed. IF-CAP is expected to be one of the key financing vehicles with which ADB can meet, and possibly exceed, its previously declared ambition to achieve US$100 billion in cumulative climate financing between 2019–2030. It could also inspire and inform the creation of similar climate finance facilities at other international finance institutions.
Bart Édes is a Distinguished Fellow at the Asia Pacific Foundation of Canada, and a Professor of Practice at McGill University’s Institute for the Study of International Development.
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Bart des

Bart des

Bart des a former Director in the Asian Development Bank's Sustainable Development and Climate Change Department is now a Distinguished Fellow at the Asia Pacific ...

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