AIIB keen to fund net-zero shift in creative ways

The Asian Infrastructure Investment Bank is seeking creative ways to finance the net-zero transition of developing economies — a crucial task considering the headwinds of climate change and rising debt levels of such economies, the bank's chief economist said.

While the issue of rising debt levels has caused short-term problems in some countries like Sri Lanka and Pakistan, it should be noted that a long-term concern has also emerged, said Erik Berglof, chief economist of the AIIB.

Having a high debt level could restrict developing economies' ability to invest in the net-zero transition and future economic growth, which could render them less prepared for climate change, Berglof said in an exclusive interview with China Daily recently.

"We need to become more creative in addressing that very serious issue of high debt levels," Berglof said.

One innovative way of financing the net-zero transition despite rising debt levels could be lending programs that incentivize developing economies' green efforts. Such lending programs, for instance, should allow them to borrow more cheaply if they contribute to carbon emissions reduction or biodiversity preservation, Berglof said.

The AIIB will continue to firmly support developing economies in building the conditions for the net-zero transition and long-term economic growth, Berglof said. The development bank would also help cushion the short-term blows from debt issues and challenging economic conditions.

The AIIB is now known for extending $2.9 billion, or 48 percent of the total financing approvals last year, to the field of climate finance.

In the Asian Infrastructure Finance 2022 report, the AIIB pointed out that emerging and developing economies are at risk of being left behind by the net-zero transition, unless urgent action is taken to build public sector's capacity in conjunction with the private sector.

Accelerating the net-zero transition in developing economies is not only critical for avoiding a climate disaster but would catalyze reforms beneficial for their long-term growth and help them buffer external shocks like global inflation, Berglof said.

"All the things that you need to do for the green transition are things that you should do to also promote growth," Berglof said, stressing that the reforms to make the public sector more efficient in green innovation will also drive innovation across the board.

Also, building an energy structure heavy with renewables will help developing economies reduce reliance on energy imports. This would mean greater economic resilience against the rising challenges of high global energy prices and monetary tightening led by developed economies, he said.

"When we look at supporting countries, we of course have to take into account the impact on our own credit rating," he said. "But I think luckily the AIIB is very well capitalized and we have the capacity."

With rating agencies Fitch, Moody's and S&P having all reaffirmed the AIIB's AAA rating, the bank had very few nonperforming loans as at the end of last year, the bank said in its 2021 annual report.

Berglof said China's experience in pushing green development can inform other developing economies as the country has made its carbon reduction goals clear to stakeholders and got every government department concerned involved in the pursuit of the goals.

China stands out among developing countries for its "exceptional high contribution" to innovation in the green space, for helping bring down the costs of wind and solar power, and for taking part in keeping the international flow of green technologies open, Berglof said.