How can Asia fill the huge funding gap that’s preventing the achievement of its climate goals?
Even pre-Covid, the region’s investment into the green infrastructure necessary to achieve Paris Agreement targets was falling behind by some 30% of the target of US$1.7 trillion per year.
To help address the shortfall, one of the visionary ways that ADB is pushing the agenda is by promoting and structuring “green and innovative finance” projects.
Through its Innovation Hub, and the ASEAN Catalytic Green Finance Facility (ACGF), the ADB is helping to de-risk green investments by providing well-structured packages and products, and adding an initial level of capital that makes projects more bankable.
Projects are also thoroughly screened to meet the ADB’s “Climate Plus” criteria, which means strict climate and environmental sustainability goals monitored by clear indicators, and meeting standards of bankability and private capital mobilisation.
According to Anouj Mehta, unit head of the Innovative & Green Finance Hub and the ACGF, this approach is helping to boost public funds by 5 to 6 times by attracting participants from the private sector.
Here, he explains the rationale and the features of the initiative.
Teymoor Nabili 0:04
Anouj, thank you very much indeed for talking to me today.
Anouj Mehta 0:06
Morning Teymoor. Nice to speak to you, too.
Teymoor Nabili 0:09
Let’s talk about the Innovation Hub, and the ADB’s position and philosophy on this concept of green financing post-Covid. Put this into context for me. What are you working on? And where did it come from?
Anouj Mehta 0:23
Delighted to do that. ADB’s overall approach is to aim towards a very strong target of climate change, as well as leveraging finance and mobilizing capital for our donor countries, for our member countries. Within that context, the overall target is something like around US$80 billion by 2030, in terms of financing operations, and at least 75% of all operations to be focused on climate change – adaptation or mitigation. So within that, two or three years ago within the Southeast Asia department, we took a considered view, our director general took a visionary idea and took it forward, which is to try and reach the scale of operations needed in green or climate finance – we can talk about the definitions later – one needed to proactively create the pipeline of projects, which could a) be green and b) be innovative in terms of finance and I mean specifically innovative finance.
Teymoor Nabili 1:34
Let’s talk about those definitions very quickly, because there are a number of areas which are not problematic as such but often tend to differ depending on what you’re reading and who you’re talking to. You’re talking about the amount of money you’re willing to pledge and basically what’s motivating this is the idea of accelerating green and innovative finance. Let’s look at those two separately. What do you mean by green? Give me examples of what kind of projects you’re looking at.
Anouj Mehta 2:03
Before I give you an example, I’ll even give you a definition because there’s been such a lot of confusion about green and use of proceeds etcetera. Under the Innovation Hub – and we’ll talk about the ACGF later – we define green specifically as climate-plus. And that’s very important, because it’s climate and environmental sustainability goals, both of which have to be achieved in every project with clear indicators. And that’s why it’s climate-plus. We say it’s a reduction in greenhouse gases, improving climate resilience, air and water quality, ecosystems, biodiversity and use of resources. So a mouthful, but it covers the whole sphere of climate and the environment.
Teymoor Nabili 2:41
And lending under that banner will have to conform to all of those criteria specifically?
Anouj Mehta 2:47
All of those criteria, converted into two indicators: a climate indicator and an environment indicator. That’s on the green side. And why green finance? And this is important, because we also have indicators for bankability and private capital mobilization. So, there are three things: green, private capital and bankability.
Teymoor Nabili 3:06
Okay, let’s also quickly define innovation, because that word is cropping up a lot in the work that you’re doing.
Anouj Mehta 3:11
Correct, and I’m glad you raised that, because specifically on the Innovation Hub, which is what we set up in Southeast Asia in 2018, the focus is innovative finance, which is, how do we leverage public sector funds better to catalyze five or six times multiples of funds from any source of private capital? And how do we do that, structuring innovative financial models in projects? That for me is innovative finance. And innovative finance could be very different from country to country. So, it may be just something which is untested in Cambodia or Laos but it could have been done elsewhere.
Teymoor Nabili 3:50
Tell me why this approach and these particular criteria that you’re setting differ from existing criteria, not only within the ADB, but in the broader context of private financing for green development?
Anouj Mehta 4:04
Let’s take both angles, the finance and the green. You asked the question, why are we doing this in a sense, and that is the numbers. Everybody talks about millions to trillions and all that, and if you just come down just to Asia, US$1.7 trillion per annum needed. And this was before Covid hit. And you had a financing gap of 450-460 billion per year. In Southeast Asia, the requirements for climate-adjusted infrastructure – just infrastructure, I’m not talking about social costs – 210 billion. And you had a financing gap of something like 50-60%. So, the issue is that if one is trying to achieve Paris-aligned targets, and therefore bring financing into climate-adjusted infrastructure, we need 50-60% financing to come from private sector, and that’s not PPP alone. It’s investments from equity, commercial banks, pension funds and PPPs. That’s not flowing at the scale required. That’s basically why we think we need to create better-structured projects, better able to attract private capital, and that’s the whole reason for why the Innovation Hub was set up in Southeast Asia.
Teymoor Nabili 5:20
So give me the pitch. What are you saying to private finance to persuade them to come on board with you in this project?
Anouj Mehta 5:27
Bankability. It’s a simple issue. Private capital will always go to a project which is well structured for risks. That’s always been the ethos for capital to flow. And risk differs from sector to sector and country to country. In some countries, it could be the financial model, the revenues; in some cases, it could be environmental clearances or land acquisition. So, it’s really trying to create that well-structured package which attracts private capital. That’s kind of the rolee that we are trying to play now.
Teymoor Nabili 5:55
And that package and the path that you’re taking people down goes first through the Innovation Hub and then to the innovative financing facility process. Tell me how that works.
Anouj Mehta 6:05
There’s a lot of confusion about how these things link in. So, at the top level, you’ve got the Innovation Hub, the Southeast Asia Innovation Hub. Its focus is to leverage public sector money to catalyze $5-6 from private capital per project, on an average and over time. How do you achieve that? For that, we basically came up with a strategy of five different activities. And I won’t go into all of them but it starts with the capacity building, which is critical at the government levels, to a fund, what we call a de-risking fund, and that is the Asean Catalytic Green Fund or Facility – ACGF. So, not only do we go in and try to structure a project and do capacity and knowledge and all that, we end up also with providing finance into a project, which makes it more bankable. And this ACGF is basically the linchpin for that. So it’s an Asean-owned vehicle. It’s owned by all the countries in Asean, ten countries, plus ADB. The green facility specifically was launched about two years ago – 2019 in April, in the finance ministers meeting of the Asean – and that has its own equity fund from the Asean countries in ADB plus it has attracted commitments for co-financing from many other donors. And that is the ACGF.
Teymoor Nabili 7:23
Tell me about those donors. Who are you aiming at, and who have you tempted to join you thus far?
Anouj Mehta 7:29
Yes, who we are aiming at is, of course, anybody interested in climate finance naturally. But also, to a large extent, donors who’ve got funding which is prepared to take risk – could be concessional, and certainly developmental. If I give you an example, the six donors that we already have, and we have a seventh joining us as of March this year, is EIB, KfW, AFD, the government of Korea, the European Union; these are the donors who’d already signed MOUs with us when we launched. The Green Climate Fund came on with their board approval in March this year. We are still working on some of the legal aspects, but we have seven donors.These are climate-interested development agencies who are interested in the model of ACGF. How do we de-risk projects by using innovative use of their monies?
Teymoor Nabili 8:26
You spoke a moment ago about PPP. How does your activity differ from existing PPP arrangements or mentality or processes? You know, obviously, one of the biggest challenges that you’re going to face is persuading the private sector to be part of what you’re doing. How are you doing things differently to catalyze that private finance upfront?
Anouj Mehta 8:49
Specifically, since you asked about PPPs is because we don’t aim on PPPs. That’s why we are different, because PPP is simply one of the tools in what I call PIC. You’ve got PPPs, you’ve got Investments – which could come from insurance funds or pension funds, which is not necessarily PPPs – or you can have capital markets and commercial banks. PIC, and PPP is a subset of that. The underlying structure for a PPP project or the process, that’s always going to be specific to a project, nothing different about it. How you approach trying to develop a PPP project versus a non-PPP project, which still attracts commercial financing, is a larger sort of approach, and that’s what we are doing. We are saying we can structure a state-owned enterprise project – let’s say a city government project; a water supply project, drilling down – with a better corporate structure, with better governance arrangements, with a better financing plan for that entity, which should be able to attract money not from PPP, but from a commercial bank or it could do a bond issuance which could raise money. That’s not PPP at all. Now, if there is a strategic opportunity for an entity to also bring in a private player, that’s PPP. So we work on all the aspects, including PPPs, working with the colleagues who are already doing PPP structuring across the bank.
Teymoor Nabili 10:12
I’m not familiar with this PIC framing that you’re putting forward. Is that something that you’ve developed?
Anouj Mehta 10:17
Yes, it’s something that we’ve developed as a team over the last few years, and I’m desperately trying to sort of mention PIC all the time, because the moment you mentioned private capital, everybody thinks PPP, and PPP is just a subset. I’m always trying to talk about pension funds and commercial banks and bonds, which are all just a big part of catalyzing capital from the private sector, which is not necessarily PPPs.
Teymoor Nabili 10:40
Back to the previous question of who have you attracted as partners, and how is this conversation going down. Are you finding traction for this broader framing? Are you finding traction for the idea that innovative financing is necessary in the context that you’re working in?
Anouj Mehta 10:54
The funny thing is that a lot of people have been talking about innovative financing for a number of years. It’s not necessarily translated into a number of scalable instruments and approaches. When we launched the ACGF In 2019, internally we were all asking ourselves: would this attract concessional or development finance? We did a couple of road shows to a number of development agencies, and we were surprised that between the conceptualization of the facility and its launch, we attracted six partners on the financing side, and then there are another seven on the knowledge side. It was a lot of money. That’s US$1.4 billion that came in with these development partners, the ones I mentioned already, plus another 300, which is now coming from the Green Climate Fund. So this is a very important question you raised, and it goes to the heart of how money is used innovatively. A few years ago, a lot of people would be saying that to make a project happen in a country, you need to give them a lot of grant financing for climate or green or SDGs, and a lot of the development partners all say: how do we make it more sustainably? How can we use funding from a climate donor agency which doesn’t just go off into three projects but could be used on seven? So, at the simplest level, what we say is we will use money from concessional financiers, not as grants but as soft loans or as revolving grants, use that sort of structure. Our own pricing from the AIF’s own equity is a two-step pricing. It’s more concessional for seven years when the risks are higher and then it goes up a few basis points, quite a few basis points, after year seven, because you want to get a refinancer. The point I’m making is that when we went and discussed the pitch with the development partners, there was a huge amount of traction, a huge amount of interest, because they all wanted somebody to originate projects, structured and better financially, not just technically, and have a model which uses the money better to attract private capital. So, they all liked the idea a lot.
Teymoor Nabili 13:03
Tell me a little bit more about the process of originating projects. One of the challenges throughout the transition process has been finding things that meet the criteria that you’ve already laid down. How do you do that?
Anouj Mehta 13:06
Absolutely. It almost sounds a very good answer now, because we’ve had the benefit of hindsight, but we have a three-pronged strategy for origination. And obviously there is an internal look at project pipelines within the ADB sphere with our sector colleagues, who naturally have a lot of expertise in this arena, and identifying transport or water projects and seeing which ones fit better into the green and bankability aspects. That’s one side. We’ve got a second one, which is reaching out to partners outside our sphere, so not ADB or development agencies but other partners. So for example, the Infrastructure Asia in Singapore, who have also been trying to develop project pipelines, or the Green Growth Institute in Korea. So, working with them to develop new concepts and talking to governments to try and identify where there could be projects which would fit into the criteria. And the third is, is taking the knowledge and fresh ideas from different sectors to our countries in Southeast Asia and saying, could this be something? A marine finance facility in Cambodia, would this be something of interest? So, it is developing three ways of showing projects which could either already be in the pipeline – in a government pipeline or an ADB pipeline – or bringing really new ideas which would be of interest to the governments. We try all the different approaches, and it’s working. We have around 20 projects, which are under structuring through technical assistance grant facilities that we have. So we have some TA [technical assistance] money, we’re using that to develop these ideas and concepts if you like. And we already have four projects, which have been approved by the board of the ACGF, the Asean Infrastructure Fund’s board.
Teymoor Nabili 15:05
That sounds like a good start, but still, 20 projects is not really going to solve Asia’s development problems or the global environment challenge. Is there, within the context of the framings that you put together, and the methodologies and the new ways of breaking down the process, is there a way you can spread that outside of the ADB? Is there a way that you can engage that in the broader challenge of making sure that Asia’s development process post-Covie and beyond, is done according to these green criteria you’ve laid out?
Anouj Mehta 15:37
No, but I’ll also take you up on your “not going to solve Asia’s…”. Any initiative which starts, makes an effort, should be lauded not criticized as a start. So to explain that, four projects with just 40 million from the ACGF has catalyzed 1.4 billion in project costs, 800 million in financing from ADB, 73,000 tonnes per annum climate reductions. I really beg to differ with you in terms of not having an impact. There have been other initiatives from the private sector and other sister banks in the development world, who have been trying to create a pipeline of climate and bankable projects and have not really reached the levels we have. So in that sense, it is an effort which is doing well. Of course, it needs to be replicated. Of course, it needs to be replicated. But what we’re showing is that leveraging and origination and structuring is critical, and that’s really the story of the ACGF.
Teymoor Nabili 16:40
I stand corrected. I wasn’t suggesting you haven’t had an impact. But the issue is the replication, isn’t it?
Anouj Mehta 16:48
Yes. The issue is, why aren’t many more of these funds being created at governments and other development banks? I think we’ve made a really good start. Why is this not being done at many other places? Maybe some are already examining it, maybe some are trying it, and certainly it will be a model I would urge countries to explore. Indeed, countries like Indonesia, they are setting up something similar, the Green Finance Facility under SDG Indonesia One. Super interesting, very well thought through. There is another project which is being developed in the People’s Republic of China under the Shandong Green Fund. There are lots of good things happening, with some support from us, some being done by the countries themselves.
Teymoor Nabili 17:27
So, apart from originating and finding projects, you’re also thinking about how you can use innovative financial instruments or a better use of financial instruments. Tell me about how that works.
Anouj Mehta 17:37
Absolutely. That’s a really good question. Apart from working on project by project, of course we also realize that the issue is scaling up. And so, how can we help countries develop financing instruments that would be able to attract money directly there, for a pool of projects? There are three things that we’re looking at under developing instruments. One is what is commonly referred to as blended or pooled vehicles, attracting money to a large number of projects. So these are things like the finance facilities, which are being developed in Indonesia, there are proposals to other countries in the region. Number two would be bonds. How do we deepen the access to green bonds for countries, and green sustainable SDG bonds? And the third of these are what I would call really innovative finance instruments, which are green securitization. We’ve covered it in our green recovery strategies book, which came out last year. Blue credits, so how do we improve oceans health with using an instrument called credits for oceans or blue credits, things like that. So, three different ways that we are working with governments to structure instruments rather than projects.
Teymoor Nabili 18:43
How is that going down? Do people perceive the ADB as being a natural partner in this kind of activity, or are you finding it difficult to sort of reframe other people’s thinking as to the value of this approach?
Anouj Mehta 18:55
No, I think ADB’s wonderful positioning in Asia, and certainly in our developing member countries, is that there is this very strong sense of partnership between countries and ADB as a neutral knowledge, ideas and funding provider.So, countries have always been very receptive to ADB with new ideas. And certainly what I’ve seen on the bonds initiative, where we’ve been supporting countries in developing the sustainable or green bonds or SDG bonds, has been that there is interest in seeking our support. An example of that is Thailand, where we supported the finance ministry PDMO [public debt management office] last year with a little technical assistance to improve or structure the frameworks behind the sustainability bonds. It was enormously successful. All credit to Thailand for raising almost a billion dollars in the first post-Covid sustainability bond. We were just happy to support that. On the back of that, there was another one which is supporting an SOE, which has also issued a social bond last year in Thailand. And we’ve suddenly got requests from a couple more to actually provide support. It’s interesting. The initial pitching of an idea has led to an example, which is leading to further requests for support from us. So in that sense, it’s a great collaborative effort between our countries and our member regions and ADB.
Teymoor Nabili 20:23
Fantastic. Anouj, thanks very much indeed for explaining all that.
Anouj Mehta 20:25
My pleasure Teymoor. I hope that is useful.