The China-led Asian Infrastructure Investment Bank (AIIB) is months away from launching an investment framework it says will mobilise capital for climate-friendly infrastructure projects.
The bank, which was initiated by the Chinese government in 2015 and counts Australia among its 75 nation members, says the framework will identify projects that specifically help developing nations meet their Paris Agreement goals.
“There is no clear way to align an investment portfolio with the Paris Agreement,” said Laurel Ostfield, the bank’s Beijing-based head of communications.
“We want to take a leadership role in this. We saw a gap, and so what we’re trying to do is address the gap we see in terms of leveraging capital markets to unlock the private sector capital.
“If the markets are investing in climate-aligned infrastructure investors, now those infrastructure issuers are getting more access to capital so they should be able to invest and build more infrastructure.”
The bank has set aside $US500 million for the project, which it will invest in green bonds issued by infrastructure companies. The initiative is a joint venture with French fund management giant Amundi.
The core criteria of the fund is to finance projects that help the nation in which they are based meet their commitments under the United Nations Paris Agreement 2015.
Ms Ostfield said fossil fuel investments were not banned, but would only be considered if they were consistent with the relevant nation’s Paris goals. That might allow, for example, funding the construction of commercially viable gas-fuelled power stations to replace coal or support renewable power.
Ms Ostfield said the aim of the initiative was to “promote climate positive impacts”.
“These are our theories, we are putting our money where our mouth is. We are starting to make investments now. Once we have done it for a long enough time, we’ll really start sharing that data with the market.”
The hope was that from there global institutional investors such as sovereign wealth funds and pension funds would have a ready-made framework for investing directly in Paris-aligned projects, including in Australia.
The AIIB’s focus on climate change puts it in line with the European Investment Bank, the lending arm of the European Union, which last week announced it would end financing of all fossil fuel projects by 2021. It also said it would align all financing activities with the goals of the Paris Agreement from the end of 2020.
“Climate is the top issue on the political agenda of our time,” EIB president Werner Hoyer said. “Scientists estimate that we are currently heading for 3-4°C of temperature increase by the end of the century. If that happens, large portions of our planet will become uninhabitable, with disastrous consequences for people around the world.”
He called the move a “quantum leap” in the EIB’s ambitions to be “Europe’s climate bank”.
Rebecca Wright, Sydney-based director of the Asia Investor Group on Climate Change, said the AIIB’s initiative was a “welcome and extremely necessary step”.
“With the growth of cities in Asia, the need to lock in low carbon infrastructure is so important now, because once it’s built, it’s set and forget for 25 to 30-plus years,” she said.
Ms Wright said other institutions, including the World Bank, the Asian Development Bank, the European Investment Bank and the UN Green Climate Fund, had also put increasing emphasis on climate-friendly investments.
“There’s room for more players. It’s still difficult for institutional investors to access those investments in some markets. These mechanisms do help bridge those gaps,” she said.
“This project is a good example of AIIB working to stimulate climate finance flows in the Asia region and build knowledge and capacity in Asian markets.”
China’s decision to launch the AIIB in 2015 was a cause for controversy as critics, particularly in the United States, warned it was a clear attempt by the rising superpower to extend its global influence. It was considered a China-led competitor to the World Bank and the Asia Development Bank.
Ms Ostfield rejected this assessment, saying it was complementary to those institutions.
China is by far the biggest stakeholder in the AIIB, contributing around a quarter of the capital, and holding a similar proportion of shares. India is the second-biggest shareholder, with 7.6 per cent, followed by Russia with 6 per cent.
Australia was a founding member, subscribing $US3.69 billion of shares, of which it paid in $A930 million. Australia holds 3.47 per cent of voting power. Former Australian Treasury official Christopher Legg is one of the bank’s 32 directors.
The bank has so far raised almost $US20 billion in paid-in equity from its members, and a total of almost $US100 billion of subscribed equity, most of which hasn’t been paid in. $US10 billion has been invested.
Despite criticisms of the bank, many Western nations have joined the initiative, including the United Kingdom, Canada, Israel, Germany and France. Four years on, the United States is still not a member.
To date, India has been the bank’s biggest beneficiary. Energy infrastructure projects make up 34 per cent of investments, followed by transport projects (23 per cent) and water projects (13 per cent).