Governments across Asia have deployed a significant amount of emergency capital in response to the coronavirus disease (COVID-19) pandemic, with an initial focus on protecting lives and livelihoods. The next stage of the crisis will require governments to prepare long-term recovery and stimulus packages to support economic growth and employment security. The Asian Development Bank (ADB) has been working closely with governments across Asia and the Pacific in deploying an assistance package of $20 billion to help countries counter the severe impact of the COVID-19 pandemic and address the urgent needs of the sick, the poor, and the vulnerable. For Southeast Asian countries, ADB has provided direct COVID-19 related assistance of $5.4 billion. In parallel, ADB is also supporting projects such as the Geodipa Geothermal Project in Indonesia that will help spur recovery. ADB’s and ASEAN Catalytic Green Finance Facility’s report titled, “Green Finance Strategies for Post COVID-10 Economic Recovery in Southeast Asia”, highlights examples of policies and green finance mechanisms that can both crowd in much-needed capital from across the world, as well as bring a critical focus on the sustainable use of our natural resources. Excerpts…

Southeast Asia requires an estimated $3.1 trillion or $210 billion annually from 2016 to 2030 for climate change-adjusted infrastructure investments. However, with a financing gap estimated at $102 billion per year for selected Southeast Asian countries from 2016 to 2020, the need for private sector financing to fill the gap was already critical even before the pandemic.

The COVID-19 impact on the financing gap. The COVID-19 pandemic has altered the financing landscape, with earlier estimates of government funds available for green infrastructure sharply reduced as government budgets are diverted to large emergency relief programs. For instance, in Indonesia, the government is exploring the reallocation of $3.9 billion from the 2020 budget for COVID-19 related measures. Further, with increased risk perception from sharply lower revenue projections for most infrastructure projects, private capital flows—already in search of the few bankable projects in the sector—are also likely to be much more constrained, widening the financing gap. The Figure below outlines the key conflicting challenges faced by most economies.

Challenges in Attracting Capital to Green Infrastructure
Source: Asian Development Bank

Emerging and developing economies, especially given the fiscal challenges as described above, coupled with capital outflows, run the risk of having onerous debt repayment obligations in the long term, and spiraling debt–to–GDP ratios, ratings downgrades, and the long-term dearth of capital sources due to the increased sovereign risk.

To avoid such unsustainable scenarios, government recovery strategies must plan to better leverage their resources for attracting capital from various non-public sources including PPPs, institutions (pension funds, commercial banks, etc.) and the capital markets, together grouped as private, institutional, and commercial (PIC) sources. Mechanisms for leveraging or blending PIC funds should be especially developed to apportion risks that are best suited to each entity, whether government or PIC sources. Without such a clear understanding of the various risks and roles, needed capital flows will not occur, especially given the heightened risk perceptions by PIC sources post-COVID-19 in developing economies.  

Sizing the Green Finance Market

Based on estimates by the Global Sustainable Investment Review, which collates trends on sustainable investments in local sustainable investment forums across Europe, the United States, Canada, Japan, Australia, and New Zealand, global assets within the sustainable investment universe stood at $30.7 trillion at the beginning of 2018, a 34% increase over the previous 2 years. The study also showed rising interest across the world from retail and institutional investors in using a sustainable and environmental, social, and governance lens for making investments. In the Southeast Asia region, estimates by the Development Bank of Singapore (DBS) and the UN Environment Inquiry indicate the “green finance opportunity” in ASEAN (before COVID-19) to be $3 trillion (2016–2030) from four sectors: infrastructure; renewable energy; energy efficiency; and food, agriculture, and land use.

IFIs have also identified funding availability for climate and green infrastructure. ADB was the first MDB to make a climate finance commitment at the United Nations Climate Change Summit in 2015 setting a target of doubling its annual climate investments from $3 billion to $6 billion per year by the end of 2020. As evidence of the growing green finance market for infrastructure in the region, ADB already achieved that target a year ahead of schedule and is pursuing an ambitious target for climate-related investments to reach a cumulative $80 billion (2019–2030) under its Strategy 2030 with a commitment to make 75% of all ADB projects climate relevant by 2030.

Size of the green bonds market. Green bonds, often seen as a proxy for the size of the green finance market, have seen massive growth in the last 4 years and more recently are giving rise to various thematic instruments such as sustainability bonds, social bonds, sustainability-linked bonds, green loans, and sustainable loans. The Figure below outlines the growth trajectory of the market, with a remarkable jump of 78% in 2018–2019.

Growth of the Green Finance Market
Source: Climate Bonds Initiative. 2020. Climate Bonds Initiative Market Summary H1 2020. August.

Green Recovery Packages and Finance Mechanisms: Examples

A number of countries have begun to develop economic packages or strategies to recover from the impacts of COVID-19 and several of these have a pointedly green focus. Examples of green finance mechanisms and instruments that have been used to catalyze green finance flows have also already been seen in some countries pre-COVID-19. These recent green recovery packages, as well as existing green finance mechanisms and instruments, can be useful to countries in the ASEAN region in developing their own green recovery packages.

Green Recovery Packages in Europe

Several countries, especially in Europe, have announced recovery packages and approaches for specific sectors, which include a green, climate, or sustainability focus. Some of these examples are included below and could be useful tools for policymakers in the ASEAN region when compiling their own green finance strategies.

Germany’s Green Recovery Stimulus: In June 2020, Germany proposed one of the largest green stimulus packages thus far, with a massive €130 billion stimulus “future package” featuring at least €50 billion for climate-related spending. This includes plans to boost electric vehicle sales, improve building energy efficiency, enhance public transport networks, develop hydrogen infrastructure, and shift the cost of renewables subsidies onto general taxation. Subsidies for electric vehicles were doubled. Proposed measures include supporting a green recovery in municipalities, for example, through installing low-carbon energy and heat systems in public buildings. The focus on green measures comes alongside plans to reduce value added tax from 19% to 16% for 6 months starting 1 July 2020, to increase loans for small businesses, and increase investment in R&D and digital infrastructure.

The European Green Deal: In response to a November 2019 declaration of a climate emergency by the European Parliament, the European Commission proposed a Green Deal for limiting global warming and ensuring that GHG emissions are significantly reduced. The European Green Deal aims to transform many aspects of its members’ economies and has received renewed support from its 27 member countries post-COVID-19. Described by European Commission President Ursula von der Leyen as “Europe’s man on the moon moment,” the 27 member states of the EU created a plan to achieve net carbon neutrality by  2050 by overhauling transportation, construction, agriculture, and energy. As noted by EU Vice-President Frans Timmermans on road maps for the recovery, “We can do it in two ways. We can repeat what we did before and throw a lot of money to the old economy, or we can be smart and combine this with the necessity to move to a green economy. I think this is a huge opportunity. In the European Union, we see the Green Deal as our growth strategy.”

Working through a regulatory and legislative framework, the green deal will aim to set clear overarching targets; a bloc-wide goal of net zero carbon emissions by 2050, and a 50%–55% cut in emissions by 2030 (compared with 1990 levels). There will also be incentives to encourage private sector investment, with action plans for key sectors and goals such as halting species loss, cutting waste, and better use of natural resources. Focusing on all EU budgetary spending to be made beneficial to the environment, science, research, and development, budgets will become more low-carbon oriented, and there will be a detailed road map of “50 actions for 2050” for other sectors. Jobs are expected to be created in new high-tech industries such as renewable energy, electric vehicle manufacturing, and sustainable building. The Green Deal aims to catalyze at least €1 trillion into green investments, with the biggest share, €503 billion, from the EU budget which should lead to unlocking contributions of €114 billion from national governments, as well as €279 billion from the private sector. Additionally, a Just Transition Mechanism (JTM) has also been created.

The Republic of Korea’s New Green Deal: The Republic of Korea is aiming for net zero emissions by 2050 and an end to coal financing. The plan includes large-scale investments in renewable energy, the introduction of a carbon tax, the phaseout of domestic and overseas coal financing by public institutions, and the creation of a Regional Energy Transition Centre to support workers’ transition to green jobs.

Green Packages Among ASEAN Member States

Green Program, Philippines: This government program aims to provide ₱2.5 billion in assistance to make 145 cities more livable and sustainable. As part of “Build, Build, Build,” the national infrastructure development program of the Government of the Philippines, this can be a vital component of green recovery packages targeting both green livability as well as investments in urban areas through scaling up projects such as EDSA Greenways that aim to provide non-motorized alternative for commuter travel.

“Build, Build, Build” Program, Philippines: The government has maintained infrastructure as one of the government’s priorities for the economic recovery under its $160 billion plan, which can be a major impetus to creating projects, investment opportunities, and green jobs.

Action Plan to Reduce Plastic Pollution, Indonesia: This was unveiled in April 2020 by the multistakeholder National Plastic Action Partnership, led by the Government of Indonesia. The action plan calls for total capital investments of $5.1 billion to achieve its outlined systemic change scenario from 2017 to 2025 and lays out a road map for reducing plastic leakage in Indonesia’s coastal waters by 70% by 2025 and near zero by 2040 through a circular economy approach. The program can have a society-wide and long-lasting green economic impact with investments likely to flow into green small and medium-sized enterprises and sustainable infrastructure for recycling, new technologies for packaging and recycling, along with waste disposal facilities.

National Economic Recovery Program, Indonesia: Launched in May 2020, this provides the latest stimulus policies for the economy in a program estimated to cost $43 billion and comprising of tax breaks for industries, capital injections into state-owned enterprises (SOEs), and liquidity support for the banking industry, among others. Indonesia had already been working on green bonds and sukuk bonds (Islamic bond) issuance pre-COVID-19 as well as creating a Sustainable Development Goals platform under the government financing institution PT Sarana Multi Infrastruktur (PT SMI). These programs might be further leveraged for green recovery plans.

Thailand: Thailand expects its ongoing investment in major infrastructure to be the basis of growth in the next 5 years, with a plan for 92 PPP projects worth B1.09 trillion ($33.39 billion) from 2020 to 2027. Thailand has also embarked on the issuance of sovereign sustainability bonds to fund green infrastructure projects as seen in August 2020.

Malaysia: Malaysia supports an ASEAN economic recovery plan to ensure critical infrastructure for trade and trading routes via air, land and sea are secured. An allocation worth $450 million has been made from the national budget to implement small infrastructure projects, including $33 million for maintenance of alternative electricity and water supply in rural areas, maintaining roads, bridges, streetlights, drainage systems, and water supplies, at the federal, state, and local levels to assist small contractors and encourage economic activities. It also plans to manage the tender process for a 1,400-megawatt solar power project, expected to generate $1.1 billion in investments.

National Strategy on Green Growth, Viet Nam: The centerpiece of the Government of Viet Nam’s efforts to stem environmental degradation, this strategy will provide a strong framework especially through the development of investment guidelines and methodologies for prioritizing investment opportunities and mobilizing public and private finance for green economic recovery projects.

National Strategic Plan on Green Growth, Cambodia: The plan was prepared to propel Cambodia toward a green economy focusing on efficient use of natural resources, environmental sustainability, green jobs, green technology, and economic reform. It prioritizes green incentives for catalyzing investments, including green taxes, green finance, green credit, and green microfinance.

Capital Markets Instruments

Green and Sustainability Bonds: Any green finance recovery strategy should consider the use of capital markets to raise funds from global investors. Before COVID-19, global green bond markets had been growing rapidly, with increasing investor focus on environmental, social and governance (ESG) factors. Sustainable investing assets reached $30.7 trillion at the start of 2018, a growth of 34% in 2 years in the five major markets of the United States, Europe, Japan, Canada, and Australia and New Zealand. With the Action Plan on Sustainable Finance mobilizing the capital markets toward green investments and the recent ratification of the Sustainable Finance taxonomy at the EU Parliament, momentum can be expected to only grow further. The Climate Bonds Initiative (CBI) estimates that the volume of green bond and loan issuance globally reached $258 billion in 2019, an increase of over 50% from $171 billion in 2018, due to strong investor and issuer interest.

Global Green Bond and Loan Issuance Increases
* ASEAN issuance represents 3% of global total, 12% of the Asia and Pacific region in 2019.
Source: Climate Bonds Initiative. 2020. ASEAN Green Finance State of the Market 2019.

In the ASEAN region, the issuance of green bonds and green loans had almost doubled in 2019 from the previous year, reaching $8.1 billion. The ASEAN region has shown significant growth in the green debt market with a cumulative issuance of $13.4 billion at the end of 2019, with varying growth among individual countries.

ASEAN Country Issuances, 2019
Source: Climate Bonds Initiative. 2020. ASEAN Green Finance State of the Market 2019

Despite these trends, when viewed in the context of wider global and regional trends, ASEAN region issuances represent only 3% of the global total and 12% of the Asia and Pacific region total in 2019. Deepening the green bond market in the region, especially exploring the opportunity for issuances by SOEs, local governments, and special purpose vehicles for utilities is a massive opportunity. However, there remain inherent challenges around credit ratings and capacities and so governments need to create enabling frameworks to grow this area further, which can be a source of much greater flows of capital for each country.

Transition Bonds, Brown to Green: In 2019, this new instrument emerged, with at least three issuances of transition bonds and their accompanying instrument receiving much attention from investors. Transition bonds are different from green bonds, which are designed for green industries alone, i.e., industries in those sectors defined in green taxonomies that are already on the road to reducing GHG emissions, with renewable energy being the most common example. Transition bonds are a new asset class targeted at “brown” industries with high GHG emissions, which have a clear and explicit goal of becoming less brown or greener. These industries include oil, mining, agriculture, and heavy industry (e.g., cement, iron, steel). Accessing the capital markets has been a challenge for brown industries. But given their very high impact on GHG emissions, any effort to reduce these impacts should be encouraged and transition bonds have emerged as a response to this need. Evidently, transition bonds need very clear GHG reduction metrics and targets as well as transparent monitoring under identified “go greener” projects. For example, an energy company could finance its efforts to capture and store carbon emissions or commence new renewable energy projects using such transition bonds.

An example of a bond (the Marfrig Transition Bond) in the food industry shows the potential for impact. The meat industry has been noted for its high carbon footprint through methane emitted by cows as well as cattle ranching that increase deforestation and reduce carbon sinks. A 2013 study by the Food and Agriculture Organization of the United Nations (FAO) conservatively estimated total annual emissions from animal agriculture (production emissions plus land use change) to be about 14.5% of all human emissions, of which beef contributed 41%. The World Resources Institute (WRI) further projected beef-related emissions to grow by over 88% between 2010 and 2050, and pasture to expand by roughly 400 million hectares, putting the global goal of limiting temperature rise to 1.5 to 2 degrees Celsius out of reach. Such bonds could also help companies create strong brown to green metrics such as improving farming practices of suppliers, better supply traceability systems, improving water usage, etc. This would focus attention on the overall behavior of an issuer rather than solely focusing on use of proceeds or existing issuer profile as in the case of green bonds. Given the scale of the need to urgently reduce GHG emissions from existing brown industries, transition bonds could hasten the shift in such industries while also expanding the green credit market significantly, which is still only a fraction of the overall financing need.

Green Finance Catalytic Mechanisms: De-risking Projects

Green infrastructure projects in developing countries often have a higher risk due to a host of reasons—new technology, higher capital cost, higher operating expenses, and higher construction risk—and may not pass the standard risk appraisal processes of commercial banks. In such cases, projects may be unable to attract or service commercial debt, due to their higher pricing and shorter tenors. To make such projects bankable, and attract commercial financiers and achieve financial closure, specific de-risking support may need to be provided. The need for such catalytic mechanisms is even greater now, in the post-COVID-19 environment with a perception of higher risk in many infrastructure sectors in emerging markets. ADB and other development agencies have been helping developing countries create financing vehicles by providing the financial structuring expertise and concessional funds required to de-risk projects and incentivize private sector investments. Some mechanisms and instruments are discussed below, with both regional and international examples.

Shandong Green Development Fund, People’s Republic of China: The Shandong Green Development Fund (SGDF) is a transformational financing mechanism created with ADB support, aiming at leveraging $1.5 billion of funding to Shandong Province in the People’s Republic of China (Figure below). The SGDF aims to blend funding from international financing institutions with private, institutional, and commercial finance for climate impacting subprojects. The subprojects must meet SGDF green framework criteria, aligned with the Green Climate Fund (GCF) investment framework. The SGDF targets higher risk climate-resilient infrastructure subprojects, green and high technology manufacturing businesses, and investment in municipal and sectoral sub-funds in Shandong Province. All SGDF investments must follow the principles, terms, and conditions agreed and approved by ADB and SGDF cofinanciers. These include subproject eligibility criteria, governance, implementation arrangements, environmental and social management systems, gender considerations, monitoring and evaluation, and verification.

Case Study of the Shandong Green Development Fund, 2019
AFD = Agence Française de Développement; KfW = Kreditanstalt für Wiederaufbau; GCF = Green Climate Fund; PRC = People’s Republic of China
Source: Asian Development Bank

Climate Finance Facility, Development Bank of South Africa: The Climate Finance Facility (CFF) at the Development Bank of Southern Africa (DBSA) is the first private sector climate finance facility in Africa using a pioneering green bank model. It aims to de-risk climate-friendly infrastructure projects and improve their bankability to attract private sector investment. Its successful implementation provides a model for replication in other developing countries. Established in 2019 jointly between DBSA and the GCF, it has a $110 million fund, with equal contributions from both. The CFF will use financial tools such as long-term subordinated debt and credit enhancements, subordinated debt, and tenor extensions to catalyze investment for projects that mitigate climate change. The facility aims to address market constraints and play a catalytic role with a blended finance approach to increase climate-related investments in Namibia, Lesotho, and Eswatini. The DBSA’s CFF will deliver outcomes related to GCF’s Investment Criteria. Eligible sectors and subsectors for climate change mitigation and adaptation include renewable energy, energy efficiency, waste–to–energy, wastewater treatment, water efficiency, and sustainable transport. The minimum contribution from the CFF is R50 million ($3 million). The CFF will support commercially viable projects, and a rigorous set of investment criteria will be followed for all potential investments considering economic, environmental, social, and technical aspects of the proposal.

ASEAN Catalytic Green Finance Facility: The ACGF is a green infrastructure financing facility under the ASEAN Infrastructure Fund (AIF), with funding commitments from several global development partners including ADB, the EIB, Agence Française de Développement (AFD), Kreditanstalt für Wiederaufbau (KfW), the Republic of Korea and the EU. This innovative initiative was launched in 2019 to accelerate the development of green infrastructure projects across Southeast Asia in support of ASEAN members’ climate change and environmental sustainability goals. The ACGF uses a de-risking approach in the use of its funds— around $1.4  billion funding commitments from the AIF as well as ADB and other development partners—to bridge the funding gap and create bankable green infrastructure projects that can catalyze private capital, technologies, and management efficiencies. The ACGF, using AIF equity funds, currently offers a two-step sovereign guaranteed loan, designed with a lower rate of interest in the first 7 years and a step-up to a higher interest rate after the eighth year. This can be blended with funds committed by other ACGF partners, to the benefit of projects. This is in line with the principle of de-risking the most significant period of a project, namely construction and initial operations.

Green Public–Private Partnerships, Cambodia Solar Park Project: The PPP mechanism can be a vital tool for catalyzing private capital for green infrastructure. A model structure that could be replicated is that of the Cambodia Solar Park Project. This combined support from government and ADB to part-finance, develop, and bid out a project in the solar energy sector, led to bidding in 2019 that attracted 26 bids, and the lowest solar tariff in the ASEAN region. The project had two components.

Solar park facility – The solar park facility, including a sub-station and transmission lines—to accommodate up to 100 megawatts (MW) of solar photovoltaic (PV) power generation—is being constructed by Electricité du Cambodge (EDC) using public sector funds, including an ADB sovereign loan.

Solar photovoltaic plants – The plants within the park will be developed, financed, constructed, operated, and maintained by a private sector entity. EDC will purchase the power under a power purchase agreement (PPA), with the tariff determined through a competitive PPP bidding process.

ADB is already building on the project approach to create a program for replication across the ASEAN region, entitled ASEAN Scaling Up Renewables + Storage (ASSURE). The auctions strategy used in this project along with the tariff structure will serve as a benchmark for future projects.

Blending Finance through Domestic Financial Institutions, Clean Energy Finance Investment Programme, India: ADB’s sovereign loan of $200 million (a first loan from a multitranche facility of $500 million) to support lending by the Indian Renewable Energy Development Agency (IREDA) in 2015 is an example of a blending structure that aimed to accelerate funds flows into renewable energy. Utilizing the presence and reach of IREDA (a government owned nonbank financial institution established to promote renewable energy investment in India) allowed this facility loan to impact on at least 10 projects.   With the aim of leveraging long-term ADB sovereign debt funds to catalyze private sector investments into renewable energy subprojects including wind, biomass, hydropower, solar, and cogeneration technologies, the program offered ADB funds to finance up to 50% of a subproject’s cost and thus attract multiples of financing from other sources. The program expects to have leveraged an estimated $300 million in equity and other investments from subproject sponsors, and at least $200 million of additional debt funds for a total investment program of around $1 billion, translating into approximately 990 MW of additional renewable energy capacity. 

Green Finance Concepts to Stimulate Post-COVID-19 Recovery

Perhaps the possibility of rising sovereign debt is one of the biggest challenges facing governments in the COVID-19 era, itself arising from the need to spend on relief activities (mostly underway) and recovery activities (mostly yet to start). There is thus a real and critical need to catalyze funds from commercial, private, PPP, and capital market sources. With rising risk perceptions especially arising from at-threat revenue projections, governments have to create the right mechanisms and instruments that can perform this catalytic role of derisking and attracting such capital. This is also an opportunity for governments to innovate and implement such financial instruments that help accelerate their commitments to climate change under the Paris Agreement and the Sustainable Development Goals (SDGs), and hence “build back better” as is being increasingly voiced across the world.

This report identifies some of the green finance mechanisms and approaches that can be incorporated by national and local governments, primarily in Southeast Asia, into their post-COVID-19 strategies, but are also useful inputs for domestic commercial banks and private corporates. Each approach would of course need to be designed per the local circumstances but guided by the principles outlined here.

Government Catalytic Funds

National Green Finance Catalytic Facilities: De-risking Mechanisms The concept of creating national or local green funds or facilities that can act to de-risk green projects is especially relevant in the post-COVID-19 environment. Risk perceptions over bankability considerations have emerged as a key constraint on private capital flows. As a result, a catalytic facility that can transition green infrastructure projects across the bankability gap and hence attract private finance, is much needed.

National Green Finance Catalytic Facility Schematic
CAPEX = capital expenditure, FI = financial institution, IFI = international financial institution, O&M = operation and maintenance, SPV = special purpose vehicle
Source: Asian Development Bank

Debt for Nature Swap Funds: The concept of debt for nature swaps (DNS) has been around for a long time, with perhaps one of the earliest examples being in 1998 with the United States (US) Tropical Forest Conservation Act (TFCA), which provided debt relief to help protect and sustainably manage tropical forests in beneficiary developing countries. As of December 2014, the program used about $233 million to conclude 20 TFCA debt-for-nature agreements with 14 countries, including Bangladesh, El Salvador, Guatemala, Panama, and the Philippines in return for protection of their forests. The principle of a DNS is fairly simple; an agreement to reduce or cancel the level of debt servicing by a developing country in exchange for a commitment to utilize the resultant saved debt payment for investments in conservation or nature projects. However, its design and impact can be more challenging, requiring both the donor or debt provider and governments to carefully address how the “saved” funds will be used, including consideration of local and indigenous people impacted as well as careful monitoring systems, etc. An example is the Costa Rica DNS supported by the Government of the US along with Conservation International and The Nature Conservancy. In return for a reduction in its debt to the US government, The Nature Conservancy has noted that Costa Rica reversed deforestation with 52% of the country forested again (up from 26%) reversing the past trend of close to an 80% loss of its original forest cover. This principle and examples, such as the niche Seychelles Blue Bond, can however be adapted and scaled up for inclusion in green recovery approaches by governments.

Capital Market Instruments

Capital markets are a critical mechanism to access global pools of funds particularly if the markets are highly efficient, well-regulated, liquid, and well performing, thus allowing investors clear exits and transparent procedures to build confidence on.

COVID-19 Recovery Transition Bonds: An approach suggested specifically to build momentum in the capital markets, given the COVID-19 context, is that of the COVID-19 Recovery Transition Bonds (CRTB). These are green bonds tailored and structured to the needs of the time period impacted by COVID-19, supported by government and MDB funds providing risk assurance. They will carry the same level of diligence in terms of green definition to avoid any greenwashing, but with a focus on recovery and an ambition to build back better. Key features of the instrument, structured as a two-step bond include:

Zero coupon period. The first 5 years of bond repayments to be pegged at a 0% coupon rate. This is designed to enable on-lending of funds raised at concessional rates to projects with very low revenue projections in the next 4–5 years due to COVID-19 impacts.

Stepped-up coupon period. A second period of repayment of between 5 to 15 years (ideally long tenure bonds are better suited for infrastructure), would see bond repayments pegged at a market return, likely on a yield to maturity basis coupon payment. This step-up is suggested to ensure returns to investors who have supported the transition period and enable greater liquidity for the bonds.

Sustainable Impact Bonds: COVID-19 bonds could also be issued to be aligned with social or sustainability impact funds. Issued by stateowned enterprises, local governments, or sovereigns. These would aim to finance only projects that have a positive impact on the climate (based on a recognized green framework or taxonomy such as that of the ACGF or Climate Bonds Initiative) and on a sector impacted by the pandemic. This directly links the use of proceeds with green, social, or sustainability impacts especially relevant for COVID-19 responses.

Green Securitization: An instrument of growing interest is that of green securitization. Securitization is a well-established practice in global debt capital markets. It is the process of converting assets into securities, which are then financed through the capital markets via the issuance of an asset backed security (ABS) bond or note. What differentiates it from traditional bonds is that an ABS is collateralized or secured by classes of assets and typically an income stream from those assets, thereby reducing the risk to the bond holder. Credit enhancements in the form of over-collateralization, guarantees, liquidity facilities, first loss pieces, and cofinancing strengthen the structure. Securitization can be equally applicable for refinancing green, blue, or any other environment-related assets. Securitization is a fast-developing and recent part of this market.

Global thinkers are increasingly acknowledging the critical role of green infrastructure in supporting economic growth and livelihoods, while also ensuring the sustainability of the planet’s extremely critical balance of natural resources and achieving the Paris Agreement targets of a less than 2-degree rise in temperatures. The IMF Managing Director Kristalina Georgieva, calling for recovery efforts to catalyze a green transition, has noted that “a ‘green recovery’ is our bridge to a more resilient future.” Private capital investors have echoed the same, such as the Institutional Investor Group on Climate Change, which collectively manages nearly half of all global capital investments worth over $34 trillion. The group cautioned that “As governments pursue efforts to recover from this economic downturn, they should not lose sight of the climate crisis.” It emphasized that “Governments should avoid the prioritization of risky, short-term emissions-intensive projects.”

Such green strategies and infrastructure investments provide a limited window of opportunity to push for investments that significantly reduce greenhouse gas emissions, reduce energy intensity, and support the restoration of carbon sinks. Investing in green infrastructure will stimulate economic recovery and create much-needed jobs.

Governments will need to use innovative financing mechanisms and approaches to attract much needed private capital for such green infrastructure investments, especially now that project risk perceptions will be higher. The leveraging and de-risking role of governments in catalyzing the needed finance, including accelerating the momentum of green capital markets, will be critical.

The report was prepared by an Asian Development Bank (ADB) team led by Anouj Mehta, unit head, Green and Innovative Finance and the ASEAN Catalytic Green Finance Facility (ACGF). The team included ACGF consultants Sean Crowley, Karthik Iyer, and Marina Lopez Andrich, working within the Innovative Finance Hub in ADB’s Southeast Asia Department. The document was prepared under the overall supervision of Ramesh Subramaniam, director general, Southeast Asia Department, and has benefited from significant peer reviewer inputs and feedback. The full report can be accessed by clicking here