There is a huge gap in climate adaptation financing, the difference between climate adaptation funding being made available and the climate adaptation financing requirements. “With the way extreme climate events are occurring, the need for this type of financing will continue to be big,” Domenico Nardelli, treasurer at the Asian Infrastructure Investment Bank (AIIB) tells The Asset. “The multilateral development banks (MDBs) are being called upon to plug that gap, but it remains to be seen if the MDBs can do it on their own. It would be unlikely without the support by governments and by private capital. There has to be a coordinated approach to intervene to address this issue.”
Climate financing is an area that lends itself best working with the private sector, according to Nardelli. “This is one of the pillars of AIIB in terms of strategy. Climate finance is an area where we will maintain a close dialogue with the private sector and commercial lenders,” he says.
AIIB has just priced its first climate adaptation bond amounting to A$500 million (US$337 million) for five years, with the proceeds earmarked to projects that have an estimated climate adaptation finance portion of 20% or greater of the total project financing. The purpose of this thematic bond is to raise awareness about climate-resilient and adaptive infrastructure investments.
“The climate adaptation bond fits very well with our strategy, which is to make AIIB a sustainable finance issuer,” says Nardelli. “We are keen to maintain the unity of our approach under the sustainable development bond framework that we have put together three years ago.”
He adds: “This particular bond label came about as AIIB has a strong focus on climate finance. So we put it in our corporate strategy that AIIB would like to reach a 50% share in terms of projects approved for climate finance by 2025.”
AIIB reinforced this commitment in 2022 when it announced at COP27 in Sharm el-Sheik in Egypt that it will issue a climate adaptation bond to raise awareness on climate change. “Asia is one of the most affected regions by climate events,” notes Nardelli. “So there is a high focus here on climate finance and climate awareness.”
The projects eligible for allocation under the AIIB climate adaptation bond include those that the bank has already executed, which strengthen the ability to withstand adverse climate events. Examples of eligible projects are the Punjab municipal services improvement project and the Henan flood emergency rehabilitation and recovery project. “There is a strong pipeline of projects for allocation given the strong focus of AIIB on climate finance,” says Nardelli.
AIIB expects that its cumulative climate finance will reach US$50 billion by 2030. Its investment in climate adaptation finance consisted of projects in water, urban development, transportation and energy, including stand-alone projects, co-financed projects, and sub-components of projects.
The climate adaptation bond represents the third time that AIIB accessed the Australian dollar bond market since 2021. “This is a strategic market for us,” Nardelli explains. “It is one of the first funding avenues that we went to when AIIB decided to diversify away from the US dollar issuance. The Australian dollar bond market provides AIIB with an investor base that is purely additive to us and there is not a lot of overlapping with the US accounts.”
AIIB printed its inaugural sustainable development kangaroo bond in April 2021 amounting to A$500 million for five years. The proceeds were invested in sustainable infrastructure to address climate change. The bond saw a strong uptake both in Australia (32%) and across the Asian region (55%), demonstrating the continued growth of AIIB’s footprint across capital markets.
