ADB to Boost Climate Lending by $7.2 Billion

By Simon Jessop, Karin Strohecker, and Katy Daigle

BAKU (Reuters) – The Asian Development Bank (ADB) plans to increase its climate-related lending by up to $7.2 billion after the United States and Japan agreed to underwrite risks for some existing loans, marking the first-ever sovereign guarantees for climate finance.

This new strategy, shared exclusively with Reuters, provides a potential model for other development banks as the U.N.'s COP29 climate summit in Baku, Azerbaijan, kicks off this week, focusing on enhancing financial resources available to developing nations.

The ADB aims for a long-term cumulative climate finance target of $100 billion between 2019 and 2030. In 2023, it provided $9.8 billion in loans.

The election victory of Donald Trump, who plans to withdraw the U.S. from the Paris Agreement on climate, casts a shadow over the Baku negotiations, pressuring Europe and China for strong outcomes, negotiators noted.

Under the ADB's plan, the U.S. will guarantee up to $1 billion of existing loans from Asia's leading development bank, while Japan will underwrite $600 million, allowing the bank to allocate more funds towards climate-related initiatives.

Jacob Sorensen, director of partner funds at the ADB, indicated that this structure enhances a multilateral development bank's lending ability without the need for politically challenging general capital increases.

The guarantees will create additional lending capacity over the next five years, with a 25-year duration for the guarantees themselves.

Cooking Oil to Jet Fuel

One of the first projects to benefit from the ADB's efforts will be a sustainable aviation fuel initiative in Pakistan, converting cooking oil. The ADB scheme is expected to contribute around half of the $90 million required for the project, with a contract anticipated to be signed on Nov. 20.

The ADB, headquartered in the Philippines, has spent three years developing the guarantee deal in collaboration with Western governments and hopes similar actions will follow from other nations.

Additionally, the ADB is sharing its experiences with other financial institutions like the World Bank, Inter-American Development Bank, and European Investment Bank to enhance collaborative climate-related lending efforts.

While these guarantees are new for climate financing, they have seen previous applications in other sectors like education. Public lending institutions are also beginning to secure third-party investments for climate projects. Earlier this year, the World Bank initiated a platform for all such guarantees that coordinate loans and investments across its various branches, aiming to expand their application.

The program is reportedly progressing well, with more than $10 billion guaranteed in 2023 and a target to double that by 2030, according to Axel van Trotsenburg, the World Bank's senior managing director.

As climate change amplifies extreme weather threats, developing nations are projected to require over $2 trillion annually by 2030 to transition to clean energy and adapt to the realities of a warming planet. Rich nations hope that financing agreements at COP29 will shift reliance away from donations and towards development banks and private investors as primary sources for global climate funding.