Financing gap for sustainability projects demands ‘innovative’ response, ADB says

THE inability of Asian banks to fund their countries’ sustainability projects requires a resort to “innovative” means like blended finance, securitization, crowd financing, debt-for-nature swaps, and carbon credit markets, the Asian Development Bank (ADB) said.

“Asian banks are largely risk averse to infrastructure projects because of the tightening regulations on credit lending, including credit risk measurement. In the absence of venture capital or its inadequacy and limited government funding, it is difficult to finance capital intensive infrastructure projects,” the ADB said in a report.

“As a consequence, there is heavy reliance on credit intermediated forms of financing. This is both an inefficient and expensive modality for infrastructure financing. In the case of green energy projects, it is even more difficult to obtain financing; this serves as a disincentive for parties that wish to undertake projects that seek to advance the expansion of green renewable energy,” it added.

Citing one of its studies from 2017, the ADB said that developing Asia will need to invest $13.8 trillion or $1.7 trillion in infrastructure annually from 2023 to 2030 to “sustain economic growth, reduce poverty, and respond to climate change.”

Other innovative financing channels include asset recycling, convertible debt, municipal bonds, green bonds, and government green funds, it said.

Since 2000, more than 40% of climate-related disasters have occurred in Asia and the Pacific.

The ADB also cited the World Risk Report, which ranks six ASEAN countries in the top 35 most vulnerable and high-risk nations. The Philippines is first on the list.

“With the increase in intensity and frequency of extreme weather events, disaster risk reduction measures need to be adopted in conjunction with developing resilient infrastructure,” the bank said.

The ADB added: “The financial sector in the ASEAN+3 region is narrow, being largely dominated by banks. Therefore, banks are more often than not the main source of finance for projects and businesses. Since banks can provide only short-term financing as they are constrained by their liabilities (deposits), any allocation to long-term investments leads to a maturity mismatch,” the ADB added.

“(Blended finance and asset securitization) help to mitigate and better allocate risks between the public and private sector. Green bonds and government green funds can help to attract funding from the private sector to support infrastructure investments that are environmentally sustainable,” it said.

“Debt-for-nature swaps could provide some relief to foreign debt-stressed economies while ensuring that their natural resource conservation and environmental programs are adequately funded,” it added.

The ADB also cited the Energy Transition Mechanism, which was piloted in Indonesia and the Philippines.

“The Energy Transition Mechanism is designed to leverage the power of blended finance to accelerate retiring or repurposing coal-fired power plants, helping support a country’s transition to a green economy. ADB hopes this will become the model for retiring coal plants across the region and massively reducing carbon dioxide emissions,” it added. — Luisa Maria Jacinta C. Jocson