What is IF-CAP?
The Innovative Finance Facility for Climate in Asia and the Pacific, or IF-CAP, is a multi-donor financing partnership facility with the goal of scaling-up finance for accelerated action against climate change in Asia and the Pacific. IF-CAP partners will provide guarantees for parts of ADB’s sovereign loan portfolios to enable ADB to free up capital to increase lending for climate investments. Supplementary grants will facilitate project preparation, capacity building, and knowledge solutions.
Why is IF-CAP being formed?
The battle against climate change will be won or lost in Asia and the Pacific. And our region is uniquely vulnerable to the impacts. More than 40% of climate-related disasters occurred in Asia and the Pacific since the start of the century, affecting nearly 3.6 billion people. ADB estimates that $1.7 trillion per year will need to be invested in infrastructure in developing Asia between 2016-2030 to meet both climate and development goals. The International Panel for Climate Change (IPCC) says the year 2030 is a significant crossroad after which it will become considerably harder to meet climate targets.
As Asia and the Pacific’s climate bank, the Asian Development Bank is spearheading significant climate change financing and expertise across the region. IF-CAP is the first leveraged guarantee mechanism for climate finance to ever be adopted by a multilateral development bank. It is inspired by the International Finance Facility for Education (IFFEd), which aims to use innovative financing to unlock new education funding in low-and middle-income countries.
What will IF-CAP do?
IF-CAP will allow ADB to significantly increase climate investments that are aligned with the Paris Agreement and other key ADB policies, including the forthcoming Climate Change Action Plan. With a model of “$1 in, $5 out”, the initial ambition of $3 billion in guarantees could create up to $15 billion in new loans for much-needed climate projects across Asia and the Pacific. IF-CAP-supported projects will address mitigation, which focuses on reducing greenhouse gas emissions, and adaptation, which focuses on building resilience to the impacts of climate change. These investments could cover a wide range of sectors, such as transportation, energy, urban, and agriculture.
What will IF-CAP not do?
IF-CAP financing will not support new fossil-fuel-based electricity generation, consistent with ADB’s energy policy approved in 2021. IF-CAP, therefore, could support ADB’s Energy Transition Mechanism, which aims to accelerate the retirement or repurposing of power plants that use coal and other fossil fuels and help direct investment toward reliable and affordable clean energy.
How does the leverage mechanism work?
The program is based on the use of financial guarantees from our partners. By guaranteeing a portfolio of ADB’s sovereign loans, they will help to shoulder some of the loss in case of a default in one of our borrowers in the portfolio.
This is a groundbreaking arrangement because it will reduce the capital ADB needs to hold for credit risk — freeing up capital for a substantial increase in lending to climate projects. Every dollar of guarantee into IF-CAP will result in the capacity to make new loans. Various simulations have shown that for every $1 that is guaranteed, up to $5 of new climate loans could be generated. That is a fundamental shift from the traditional “one dollar in, one dollar out” facilities at MDBs, because of its multiplier effect.
Who are the partners supporting IF-CAP?
The initial partners are Denmark, Japan , Republic of Korea, Sweden, the United Kingdom, and the United States. ADB is in discussions with Italy and other potential partners—such as bilateral and multilateral sources, foundations, the private sector, and philanthropies, including the Global Energy Alliance for People and Planet—to catalyze climate investments.
What sovereign portfolios will their guarantees cover?
The precise compositions of borrowing member countries are yet to be determined and depends on the risk appetite of the participants. The loan portfolios will comprise a synthetic mix of ADB sovereign exposure.
Which countries are eligible for IF-CAP financing?
All ADB’s developing member countries (DMCs) are eligible. Individual financing partners may exercise discretion for certain projects based on their policies and priorities.
Will IF-CAP differ from ADB’s regular climate financing?
Functionally, there will be no difference. IF-CAP’s role will be to enable ADB to approve climate lending more quickly and at a higher volume.
What are the benefits of IF-CAP?
For DMCs, IF-CAP will strengthen their capacity to develop their low-carbon and climate-resilient strategies and build a larger pipeline of potential investments.
For IF-CAP partners, it will enable them to make a greater impact through a leveraged guarantee mechanism not offered by other financing partnership facilities, providing them with an effective and efficient way to fight climate change in support of their national commitments.
For ADB, IF-CAP is an innovative method to extend the usage of our scarce equity capital, and will increase our lending capacity by up to $15 billion so we can make more resources available for critical climate projects in Asia and the Pacific.
Will IF-CAP contribute to ADB’s ambition of $100 billion climate financing for 2019-2030?
Yes, ADB anticipates that the accelerated climate finance that will be leveraged by IF-CAP could help that ambition to be met earlier.
Source: adb
