Q&A: Innovative Finance Facility for Climate in Asia and the Pacific (IF-CAP)

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 Intergovernmental 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 finance for 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, $4.5 out”, IF-CAP’s current guarantee size of $2.5 billion will create over $11 billion in climate finance for much-needed climate projects across Asia and the Pacific. Alongside lending facilitated by IF-CAP, ADB will provide up to $1 billion in concessional ordinary capital resources lending (COL) from its own resources, in support of projects enabled by IF-CAP’s guarantee structure. In total, resources aligned with IF-CAP amount to over $12 billion.

IF-CAP enabled projects will address both climate change mitigation, which focuses on reducing greenhouse gas emissions, and climate change adaptation, which focuses on building resilience to the worsening effects of climate change. These investments could cover a wide range of sectors, such as transportation, energy, urban, and agriculture and natural resources, as well as social sectors such as health and education, for projects with high climate impacts.

What will IF-CAP not do?

IF-CAP will not support new or existing fossil fuel-based electricity generation facilities or dedicated transmission, or any new or existing natural gas-related projects. Climate finance enabled by IF-CAP will not be used towards early retirement or repurposing of fossil fuel fired power plants.

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 sovereign loans on a first-loss basis, they will help shoulder some of the loss in case of a default by one of our borrowers included in our portfolio.

This is a groundbreaking arrangement because IF-CAP’s portfolio guarantee enables ADB to optimize the usage of our balance sheet, supported by the strength of our triple-A credit ratings and preferred creditor status. This allows ADB to reduce the capital held for credit risk and release more capital for climate loans. Every dollar of guarantee into IF-CAP will result in the capacity to provide more climate finance for eligible projects. Simulations show that for every $1 that is guaranteed, $4.5 of climate finance could be generated. That is a fundamental shift from the traditional “one dollar in, one dollar out” facilities at MDBs, because of IF-CAP’s leverage effect.

Who are the partners supporting IF-CAP?

IF-CAP’s founding partners are Denmark, Japan, Norway, Republic of Korea, Sweden, the United Kingdom, and the United States. In 2023, the Global Energy Alliance for People and Planet established a trust fund under the IF-CAP Financing Partnership Facility.

What sovereign portfolios will their guarantees cover?

IF-CAP will cover a dynamic and diversified reference portfolio consisting of ADB's exposures to a board spectrum of developing member countries, which have been identified to achieve the desired leverage based on the risk appetite of the partners.

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 financing more quickly and at a higher volume.

What are the benefits of IF-CAP?

For DMCs, IF-CAP can help them advance operations with high climate ambition that are currently not in their pipeline, increase climate finance components of existing pipeline projects, and enable greater visibility and demonstration effects for projects including those with innovative components or high climate impact.

For IF-CAP partners, it can 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 optimize our balance sheet, unlock capital resources, and increase our lending capacity by over $11 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?

IF-CAP will be one of the flagship instruments to enable ADB to reach its climate finance target beyond $100 billion and support our target for climate finance to reach 50% of the total committed financing volume by 2030.

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