By Masatsugu Asakawa
The current state of the world is critical. The aftermath of the pandemic has resulted in a harmful impact of increasing poverty, overwhelming debt, and unequal distribution, all in the midst of a growing crisis of high living expenses. The issue of climate change is even more concerning, posing a long-term danger to our existence and already causing significant damage and immense financial loss.
grading the quality of life of future generations.
The recent natural disasters caused by climate change are a warning of what is to come if we do not take action to prevent these multiple and interrelated threats from negatively impacting the lives of future generations.fining our future.
As the president of the Asian Development Bank (ADB), I believe that multilateral development banks (MDBs) have a responsibility to take swift and decisive action to address the current crises and provide assistance to those in need. It is crucial that we act promptly as time is running out. Maintaining the status quo is not a viable option, particularly in Asia and the Pacific where the pandemic has caused nearly 70 million people to plunge into extreme poverty. This region also contributes more than half of the world’s greenhouse gas emissions.
According to the G20, we must take decisive measures to secure the estimated $3 trillion required every year by 2030 in order to address worldwide issues and restore advancements towards the Sustainable Development Goals (SDGs).
The G20 is of the opinion that MDBs can contribute to achieving this goal.finance by wringing every last dollar from their balance sheets. I agree, and at ADB that process is well underway. In September, we announced capital management reforms that include optimizing our prudential level of capitalization.
The implemented changes will increase the bank’s ability to make new commitments by $100 billion in the next 10 years. This will result in an annual capacity of over $36 billion, a 40% increase, and a total of $360 billion available for climate investments, promoting sustainable development goals, and aiding economies affected by the pandemic. It is worth noting that these reforms have been carefully crafted to protect ADB’s AAA credit rating.
This is part of a series of innovations ADB has made to expand its lending capacity. In May, ADB announced the Innovative Finance Facility for Climate in Asia and the Pacific, which allows donors to guarantee parts of the existing sovereign loan portfolio on ADB’s balance sheet, allowing ADB to leverage and generate $5 in climate finance for every $1 of guarantees. ADB has also entered into sovereign exposure exchange agreements with other MDBs to reduce portfolio concentration risks.
This will not be our final action. I view it as another progression in an ongoing process of change that all MDBs must undergo to effectively address constantly changing challenges such as climate change.
In order to effectively tackle these challenges, multilateral development banks must promptly take action on three fronts.
First, it is vital that MDBs expand their capacity to mobilize private investment for climate and sustainable development programs. MDBs are uniquely placed to catalyze the move from billions of dollars in development finance to the trillions needed, by leveraging their balance sheets to generate private investment at all stages of the project cycle.
providing access to finance downstream.
This involves encouraging the development of policies earlier on to establish a favorable setting for private investment, generating feasible projects in the middle phase with advisory assistance, and offering opportunities for financing in the later phase.fi
Encouraging projects to attract private investment at a later stage.
Additionally, due to the financial strain caused by the pandemic, many countries are unable to borrow money and therefore must find ways to generate more funds within their own borders. The G20 has determined that approximately two-thirds of the necessary $3 trillion for addressing global issues can be obtained through increasing domestic revenue and utilizing local resources.finance.
Countries need to increase their tax revenue, update their tax agencies with technology, and work together to establish a just and effective global tax system. Implementing environmental taxes can help generate domestic funds and support environmentally-friendly development, while improving the effectiveness of value-added tax (VAT), including VAT for the digital economy, could be a significant source of income for developing nations. Governments should also reconsider their policies regarding subsidies for fossil fuels.
The promotion of financial innovation is crucial, and the ADB is actively working towards strengthening domestic capital markets in the region. Utilizing blended finance can attract private investments, and implementing de-risking techniques like credit enhancement and insurance can increase funding for climate initiatives. Thematic and sustainable bonds are also effective instruments for financing climate action.
We can enhance efforts towards addressing climate change by participating in the developing carbon markets. ADB’s Climate Action Catalyst Fund offers carbon upfront payments to support relevant projects aimed at mitigating climate change.fi
We are supporting our members in acquiring carbon credits through Article 6 of the Paris Agreement. This aligns with our efforts to assist them in developing the necessary policies and skills to engage in carbon trading.
Crises can escalate quickly. We must move even faster to reduce the pain they cause and help secure a bright future for our region and beyond.
The president of the Asian Development Bank is Masatsugu Asakawa.