The Innovative Finance Facility for Climate in Asia and the Pacific (IF-CAP) is a strategic initiative of the Asian Development Bank (ADB) to mobilise finance at scale to provide funding for climate action to developing member countries. The initiative is supported by a collaboration of eight donor countries jointly providing a guarantee.
Innovative Finance Facility for Climate in Asia and the Pacific
Abstract
Multilateral development banks (MDBs) are challenged by limited capital headroom and slow capital recycling. Like commercial banks, they are subject to capital adequacy requirements ensuring they maintain a strong financial position to uphold their AAA credit ratings. These requirements limit their lending capacity. Also, capital is typically tied up for long periods and cannot be re-used for new projects. This limits the speed and volume with which they can support additional development initiatives. Providing guarantees to MDBs allows them to stretch their capital without needing new funding and to scale their operations more quickly.
The Innovative Finance Facility for Climate in Asia and the Pacific (IF-CAP) is a strategic initiative of the Asian Development Bank (ADB) to mobilise finance at scale to provide funding for climate action to developing member countries. It is an innovative financing mechanism that enhances the ADB's lending capacity by leveraging partners’ guarantee contributions to unlock resources for climate change mitigation and adaptation finance.
Eight participant countries (Australia, Denmark, Japan, Korea, Norway, Sweden, the United Kingdom, and the United States) have committed to jointly provide unfunded guarantees for USD 2.5 billion which will enable the ADB to release USD 11.25 billion to be used for new climate finance provided under the ADB's ordinary capital resources terms and conditions. Combined with the ADB's USD 1 billion concessional finance contribution in support of projects backed by the IF-CAP guarantee, the total value of the IF-CAP programme is USD 12.25 billion.
The IF-CAP Financing Partnership Facility includes a multi-donor IF-CAP Grant Trust Fund which may be used for project preparation, capacity building, and knowledge solutions through technical assistance and grants. Also, the Global Energy Alliance for People and the Planet, a philanthropic entity, has committed USD 35 million to an associated single-donor trust fund established under the IF-CAP-Financing Partnership Faclity to catalyse climate investments. The additional lending is 20% private and 80% sovereign lending. Forty per cent of investments will be adaptation and 60% mitigation.
The guarantees cover payment defaults in a reference portfolio which is sized at USD 10 billion, diversified across 29 member countries. New IF-CAP enabled lending must adhere to a set of defined Eligibility Criteria, and while donors participating in the transaction will not approve projects, the Secretariat must prepare an indicative pipeline at the annual donor conference.
The legal structure of IF-CAP consists of bilateral contribution agreements, common terms schedule, and implementation guidelines. All legal documents of IF-CAP are freely available so the model can be easily replicated to other financial institutions.
IF-CAP shows how a large group of bilateral donors can collaborate on providing unfunded guarantees and hence use limited contributions from development cooperation budgets to unlock substantial financing for sustainable investments within an MDB. The headroom of USD 11.25 billion released by the guarantee represents the biggest amount of additional investment funds in the history of development guarantees. IF-CAP could be replicated to other MDBs or regional development banks (RDBs) thereby leveraging balance sheets and scaling mobilisation significantly.
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