ESG International News Roundup

1. Asian Development Bank Launches Climate Innovation Financing Mechanism for the Asia-Pacific Region

The Asian Development Bank (ADB) announced on May 2, 2023, the launch of the Innovative Finance Facility for Climate in Asia and the Pacific (IF-CAP). This mechanism aims to raise funds to support climate-focused projects in developing countries across the Asia-Pacific region. IF-CAP will help the ADB achieve its ambitious goal of allocating US$100 billion to climate change between 2019 and 2030.

IF-CAP's climate finance leverage guarantee mechanism is a first for multilateral development banks. IF-CAP offers a financing leverage of "1:5," meaning that a US$3 billion guarantee can create up to US$15 billion in new loans for urgently needed climate projects in the Asia-Pacific region. IF-CAP's guarantee mechanism reduces ADB's funding risk exposure, allowing the ADB to free up funds and accelerate the provision of new funding for climate change projects.

IF-CAP's initial partners include Denmark, Japan, Korea, Sweden, the United Kingdom, and the United States. The ADB is consulting with these partners on the operational details of the mechanism, including how to provide grants for relevant projects or guarantees for a portion of the ADB's sovereign loan portfolio.

2. Indonesia Plans to Launch Carbon Trading

Indonesia's Financial Services Authority (Otoritas Jasa Keuangan, OJK) stated in early May 2023 that Indonesia plans to launch carbon trading in the second half of the year to promote renewable energy use and achieve its net-zero emissions target by 2060. As Southeast Asia's largest economy and one of the world's largest carbon emitters, Indonesia relies on coal for more than half of its electricity. Its mid-term emission reduction target is to reduce emissions by more than 30% by 2030.

In February 2023, the Indonesian government launched the first phase of mandatory carbon trading, targeting nearly 100 coal-fired power plants under the state-owned utility company Perusahaan Listrik Negara (PLN). Indonesian government officials stated that they hope to use carbon trading to support the early retirement of coal-fired power plants. Only entities operating in Indonesia will be able to trade on the exchange, and the OJK and the Ministry of Environment will oversee the exchange's activities.

Previously, Indonesia had planned to impose a carbon tax on emissions not offset by carbon credits, but this plan was postponed due to unfavorable global economic conditions.

3. EU Carbon Market Reform Will Reduce Investor Reliance on Voluntary ESG Frameworks

In late April 2023, the EU Council of Ministers approved the reform of the EU Emissions Trading System. The EU will gradually phase out carbon allowances and fully implement the emissions trading system by 2027, aiming to achieve a 55% reduction in emissions compared to 1990 levels by 2030. The reform of the EU carbon market includes three main aspects: First, creating a materiality benchmark for each investment product (the carbon price for any activity supported by the EU) to reduce the risk of greenwashing and reduce the EU's reliance on complex and voluntary ESG frameworks. Second, promoting more accurate emission pricing and correct valuation of activities dependent on fossil fuels. Third, standardizing carbon accounting, i.e., establishing a unified accounting method to address the four inherent risks of carbon accounting (additionality, permanence, carbon leakage, and double counting). The reform of the EU carbon market will strengthen the overall control of carbon emissions in Europe and provide support and reference for the development of global carbon markets.

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