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Asian Development Bank urges faster action on climate for world’s most vulnerable countries

A makeshift tent camp in Pakistan, set up following the 2022 floods, which
displaced eight million citizens and caused damage totalling nearly $15bn (Photo: Rizwan Tabassum/AFP via Getty Images)
A makeshift tent camp in Pakistan, set up following the 2022 floods, which displaced eight million citizens and caused damage totalling nearly $15bn (Photo: Rizwan Tabassum/AFP via Getty Images)

The threat from climate change was top of the agenda at the ADB’s 2023 annual meeting, with a focus on how to finance mitigation and recovery.

When the Asian Development Bank last held its annual meeting in person in 2019, the pan-regional development bank covered a broad range of issues, from digitisation to intra-regional partnerships, with a view towards the climate crisis.

Four years and a global pandemic later, the tone of discussion around the environment has become urgent. While panels touched on financial inclusion and showcasing host country South Korea, the itinerary was dominated by the impact of climate change and how the region is at the bleeding edge of many of the greatest climate risks.

The development bank presides over some of the world’s most vulnerable nations to the impact of climate change. To the west, the South Pacific island nation of Kiribati is already facing the impacts of global warming. Standing no more than two metres above sea level, the country is at risk of rising tides, with some areas already being eroded. The rising sea levels also impact freshwater supplies, affecting the ability to grow crops and threatening food security. There are already plans in place for mass migration should the country become uninhabitable.

Meanwhile, in the east, Pakistan is still reeling from the devastating floods that hit in 2022. Affecting one-third of the country, the flooding caused 1,700 deaths and displaced almost eight million people. Six months later, 10 million people were still unable to access clean drinking water, according to Unicef.

Speaking at the conference, held between May 2 and 5, Tiziana Bonapace, director of information and communication technology and the disaster risk reduction division at the UN Economic and Social Commission for Asia and the Pacific (Unescap), outlined the full impact of the floods on Pakistan. The country now faces economic losses of $15.2bn, with a gross domestic product loss of 2.2 per cent, while total damage costs reached $14.9bn.

As for the social impact, 33mn people were affected, with 9.1mn pushed into poverty and 1.9mn pushed into non-monetary poverty – meaning they lost access to services such as education, employment and healthcare, and suffered a decline in their housing situation, and a reduction in services such as sanitation, utilities and public transport.

In his opening meeting with the media, ADB president Masatsugu Asakawa noted that climate change does not care about borders. Within the ADB, there has been a semantic shift towards referring to the bank as a climate bank, deeming anything climate-related to be intrinsically linked to the work of the bank.

Financial innovation

The ADB has estimated $1.7tn would need to be invested per year in infrastructure in developing Asia between 2016 to 2030 in order to meet both climate and development goals, a huge increase on the financing that is currently available.

During the 2023 event, the ADB launched the Innovative Finance Facility for Climate in Asia and the Pacific, a funding mechanism to support greater investment into climate programmes by utilising a leveraged guarantee mechanism. IF-CAP was developed following the push from the shareholder community for more ambitious plans in tackling the climate crisis and the ambition of the ADB to increase its climate financing commitment to $100bn by 2030.

The plans were also assisted by reforms to the capital adequacy framework proposed by the G20 in 2022. The Independent Review of Multilateral Development Banks’ Capital Adequacy Frameworks report, submitted to the G20, outlined how MDBs could free up existing funds without impacting their financial stability or their AAA credit rating.

IF-CAP will use guarantees from donor governments and a carve-out from part of the ADB’s existing sovereign loan portfolios to take risk off the bank’s books. This frees up capital for the bank to use the funds specifically for climate projects. For a guarantee of $1bn, this will enable the ADB to utilise up to $5bn on new projects. The bank has a solid track record on its sovereign portfolios and has recorded no defaults on this area of lending, meaning it is likely the donor that contributed the initial funds will get them back.

The World Bank has likewise responded to pressures to provide more assistance with plans to change its internal lending guidelines, a move that would free up to $4bn in lending capacity each year. To achieve this, the bank’s International Bank for Reconstruction and Development arm may lower its equity-to-lending ratio by one percentage point to 19 per cent, allowing the World Bank to take on more risk, with rating agencies indicating this would not impact on the bank’s AAA credit rating.

Built-in concessions

For the most vulnerable countries, there are concerns that even these steps may not be enough. IF-CAP will be similar to how the ordinary capital resources of the bank are mobilised, but with some concessions. For those projects that meet the requirements, there is the hope that concessional finance or grant finance will be accessible to make the investments soften, especially for the Pacific Island nations, which are both some of the region’s poorest and the hardest hit by climate change.

For some, direct concessions are the only way to enable countries to access the support they need, when they need it. Tuvalu finance minister Seve Paeniu says there is now recognition in the international community of how storm surges, cyclones and sea level rises are impacting his country and other atoll nations, but calls for more decisive action in how to provide support.

“There is ongoing discussion on how the MDBs and international financial institutions could restructure their financing modality to address these effects. There is discussion into how they could escalate their climate finance in terms of speed and streamlining access to benefit the countries that most require it,” says Paeniu.

The speed with which countries gain access to support can be painfully slow, taking years for funds to reach the projects that need it. Paeniu notes that having a one-size-fits-all approach to providing funding across the world does not fit with the island nations as it would with larger, more resilient markets. He calls for future instruments to have different templates and methodologies.

“We are calling for the creation and recognition of a funding window for small island states and the most vulnerable, such as the low-lying atoll nations,” he says. “It needs to have a special criteria and access procedure, so that countries could readily access the money and implement adaptation programmes.”

ADB climate change envoy Warren Evans says the development bank is taking a more aggressive stance towards tackling climate risks, which includes economic factors.

“We are increasingly having to deal with the aftermath of climate events,” he says. “Events like the floods in Pakistan show how countries and communities need to build up resilience to climate events. This is a longer-term, more complicated process than initial disaster recovery.

“We need to rethink investments to ensure we’re building resilience. The best way to do this is to build economic resilience. We’re looking at each sector to understand how we can maximise the support for strengthening the resilience of communities,” he adds.

From a purely economic perspective, Asia-Pacific experiences the highest loss of GDP by region due to disasters, at 1.6 per cent.

ADB chief economist Albert Park warns that protectionist trade policies may exacerbate the climate crisis. “We would like to see free trade in environmental goods and services, so countries could get access to the best technologies at the cheapest prices, and protectionist policies get in the way of that,” he says.

“The economic returns to tackling climate change are high, but require global co-operation towards carbon-reduction goals. Because climate risks are really high in Asia, and many countries are more vulnerable to disasters, we have calculated that the benefits of aggressively tackling climate change will outweigh the costs.”

Park says meeting these goals will require efforts from international MDBs and the need to mobilise other sources of finance domestically. He recognises some countries are reluctant to make systemic change due to perceived risks to their economic positions.

“We emphasise that renewable technologies now are very efficient and with a good return on investment,” he says. “We also want to emphasise that to make the transition efficient it is important to establish carbon pricing mechanisms, to signal to all producers and consumers in their country that will promote a more rapid decarbonisation.

“The first step is to get rid of fossil fuel subsidies, which are still prevalent in the region. But also to support the development of emissions trading systems and carbon taxes that create a good price signal to guide change. Once these systems are developed, they need to be integrated internationally so those countries that are most efficient can pull their weight and be compensated for those efforts.”

Banking on data

Tackling the impacts of climate change on the region requires innovative thinking. The Asia-Pacific region accounts for 40 per cent of the world’s land and 60 per cent of the world’s population, illustrating the potential size and the scope of the problems to be tackled.

Unescap’s Bonapace called for the greater use of data and technology to understand the risks of climate change and as an educational tool.

In mapping risk areas, she says the use of ‘Big Earth’ data, cloud computing and artificial intelligence would save cost and time, provide more accurate information and analytics that are both spatial and temporal. Through using satellite imagery, it is possible to map surface water and flooding, while the Google Earth Engine platform can be used for drought detection and monitoring.

While Asia-Pacific has some of the most digitally connected populations in the world, the contrast with the digitally disengaged means it is the most digitally divided region. This could impact how effectively people are contacted and given early warnings about risks.

Utilising technology and available data will be necessary to increasing understanding, says the ADB’s Evans. “We will learn by doing. We don’t have time to [stop and study] this; we have to learn as we are going.

“This means increasing the upstream analytical work to better understand the risks and the uncertainties of the risks. We might convince a government to invest 50 per cent more to increase flood resilience, and then we get an even more extreme climate event that could not be predicted and our credibility goes out with the flood water,” he adds.

Just transition

Among the discussion of transition and decarbonisation has arisen the understanding there is a need for an equitable transition. Recognising the impact that closing coal mines and carbon-fired power plants has had on communities elsewhere in the world, the ADB is planning for these communities as it develops its programmes.

“We have a just transition team and platform. We have to understand the implications of the decarbonisation actions,” Evans says.

The development of just transition policies are interwoven with the bank’s energy transition mechanism (ETM), which will help to expedite the early decommissioning of coal-fired power plants. The first ETM project on the table is the decommissioning of Cirebon-1, a 660-megawatt plant located in West Java, Indonesia.

“We expect to learn from our initial ETM projects in Indonesia as to how to identify those who will be affected, understand the options to help them, and build the social safety nets and educational elements that are required,” says Evans.

“There is a lot of discussion about a just transition, but there is little experience of making it happen. We are thinking about it ahead of time and resourcing it, so when budgets are allocated to decommission coal-fired power plants and increase renewable energy, we expect timely budget allocation and supporting policies to ensure a fair and equitable transition. But achieving a just transition is unbelievably complicated.”

Despite this complexity, the requirement to act has never been felt more urgently.

This article was first published in The Banker

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