In a landmark development for global climate finance, the Asian Development Bank (ADB) has announced a significant expansion of its climate-related lending by up to $7.2 billion. This move is made possible through new sovereign guarantees provided by the United States and Japan, marking the first instance of sovereign guarantees being applied to climate finance, according to ADB officials. The arrangement aims to expand ADB’s capacity to invest in climate projects across Asia, providing a potential blueprint for other multilateral development banks (MDBs) to increase their climate finance commitments.
The announcement comes at a critical time, just as the 29th United Nations Conference of the Parties (COP29) commences in Baku, Azerbaijan. With developing nations seeking greater support for their climate efforts, the COP29 summit will focus heavily on scaling up climate finance to meet escalating environmental challenges. The ADB’s innovative financing model, which could attract more global backers, exemplifies a new approach to unlocking funds without requiring fresh capital injections from donor countries, a process often fraught with political complexity.
The new guarantee-based model is a key milestone for the ADB, which has set an ambitious climate finance target of $100 billion between 2019 and 2030. By the end of 2023, ADB’s cumulative climate lending amounted to $9.8 billion, primarily supporting projects in renewable energy, sustainable transportation, and climate resilience across its member countries in Asia and the Pacific.
Under the agreement, the U.S., the world’s largest economy, will provide a $1 billion guarantee on existing ADB loans, while Japan has committed to a $600 million guarantee. By reducing the ADB’s risk exposure, these guarantees free up resources, allowing the bank to redirect funds towards new climate projects across Asia. Jacob Sorensen, Director of Partner Funds at the ADB, hailed the structure as a breakthrough for MDBs, enabling them to extend their lending capacity without requiring politically challenging general capital increases from donor nations.
“This structure is a fantastic way of extending a multilateral development bank’s lending capacity without going through the politically difficult situation of a general capital increase,” Sorensen stated. ADB has been working on the details of the arrangement for three years, consulting closely with Western governments and other MDBs, including the World Bank and European Investment Bank (EIB), to create a scalable, collaborative approach to climate financing.
The U.S. and Japanese guarantees are expected to be in place for 25 years, providing ADB with an additional lending capacity to be used over the next five years. As climate change intensifies, the guarantees offer MDBs a way to mobilize private and public capital, enabling large-scale, sustainable projects in Asia’s emerging economies.
One of the first projects to benefit from ADB’s new financial structure is a sustainable aviation fuel project in Pakistan, aiming to convert waste cooking oil into fuel. The project, which has an estimated cost of $90 million, will receive half its funding through the ADB’s expanded lending capacity. ADB expects to finalize the deal on November 20, setting a precedent for other climate-focused projects across Asia. This innovative approach to decarbonizing the aviation sector aligns with global efforts to reduce carbon emissions and supports Pakistan’s sustainability goals.
ADB’s strategy aligns with a broader shift in climate finance, where development banks are increasingly supporting private sector investments in climate resilience and adaptation. Public lending institutions, including the World Bank, are also exploring ways to scale up their climate-related commitments through guarantees and innovative financing tools. For instance, the World Bank’s recent creation of a platform to centralize all climate finance guarantees aims to streamline efforts and boost annual climate lending to over $20 billion by 2030.
The timing of the ADB’s announcement coincides with a significant political shift in the United States. Former President Donald Trump, who won the U.S. presidential election last week, has a history of skepticism toward climate change initiatives. His previous administration sought to withdraw the U.S. from the Paris Agreement, and his recent election victory has cast a shadow over the Baku COP29 summit. Although the newly elected administration has not yet clarified its stance on international climate financing, Trump’s position has heightened concerns among other major stakeholders, particularly Europe and China, regarding the U.S.’s role in supporting global climate goals.
Despite these uncertainties, ADB officials have expressed confidence that the U.S.-backed guarantee will remain intact. An ADB spokesperson declined to comment on how a Trump-led administration might affect the new deals, but noted that the current guarantees have been finalized and will be deployed over the next five years, regardless of political changes. ADB’s commitment to climate finance thus appears resolute, underscoring the urgency of developing financial solutions that can withstand political shifts.
The ADB’s guarantee-backed financing model has drawn interest from other MDBs, which face similar challenges in scaling up climate finance without straining national budgets or donor contributions. The ADB has shared its insights with the World Bank, Inter-American Development Bank (IDB), and European Investment Bank (EIB) to encourage a coordinated approach in leveraging guarantees for climate action. The MDBs’ cooperation is essential as countries face growing financial needs to manage the impact of climate change, which experts project will require $2 trillion annually by 2030.
“Sovereign guarantees for climate finance represent a significant evolution in development financing,” Sorensen explained, adding that this model could empower other banks to increase their lending for climate projects in vulnerable regions without compromising financial stability. The ADB’s experience highlights the effectiveness of these tools, which have historically been used in areas like education, to address urgent needs in climate mitigation and adaptation.
With more MDBs poised to adopt similar strategies, the Baku summit will likely see increased pressure on financial institutions to implement innovative funding models. The ADB’s guarantee-based approach, in particular, demonstrates the power of multilateral cooperation to unlock the large-scale funding required for effective climate action.
The ADB’s announcement has underscored the importance of integrating private sector capital into climate finance strategies, as public resources alone are insufficient to meet the escalating costs of climate adaptation. By reducing financial risk through sovereign guarantees, MDBs are better positioned to attract private investments and encourage corporate stakeholders to support sustainable development projects. At COP29, negotiators will push for a broader financing framework that leverages both public and private contributions, moving away from traditional reliance on government funding alone.
While the guarantees from the U.S. and Japan are a crucial first step, MDBs and stakeholders at COP29 are also exploring other risk-sharing tools, such as blended finance, green bonds, and carbon credits, to further incentivize private sector involvement. These tools can help mobilize the estimated $2 trillion required annually for climate adaptation, particularly in Asia-Pacific, where vulnerable economies face the compounded threats of natural disasters, rising sea levels, and extreme weather events.
