Promotion of green finance

Explanation

As the most recently established MDB, the AIIB has quickly positioned itself as a key green finance actor in Asia. The Bank’s strategic approach emphasises investments in “green infrastructure”, with a focus on renewable energy, energy efficiency, sustainable cities, and climate-resilient projects. This strategic focus has informed its efforts to green the financial system, focusing on catalysing private sector finance to meet financing needs for infrastructure development through an environmentally sustainable approach.

Greening the system

In 2019 the AIIB launched the Sustainable Capital Markets Initiative (SCMI), which aims to build capacity among capital market actors across Asia to support the mobilisation of private capital for green infrastructure development at scale. The initiative comprises four pillars: 

• Capital market portfolios (discussed further in the “Green bonds” section), aimed at building evidence-based proofs of concept and encouraging responsible private investment.  
• ESG research involving varied and in-depth collaboration with research partners relevant to regional infrastructure investing and ESG investing. 
• Transparency and disclosure efforts aiming to work with market stakeholders to strengthen the impact and robustness of ESG ratings.
• Capacity building to contribute to learning and knowledge development on ESG investment in the market among key actors including corporates, rating agencies and securities regulators. 

The SCMI is regarded by industry experts as “an initiative that could catalyse ESG investment strategies and financing at scale in a market that is still nascent regarding ESG”. Moreover, the SCMI was awarded “Impact Initiative of the year – Asia” by the Environmental Finance IMPACT Awards 2021.

Following the SCMI, in 2020 the AIIB launched the Climate Change Investment Framework (CCIF), an information sharing and capacity building tool. The CCIF helps investors evaluate how companies manage climate-related risks and opportunities. By converting three objectives under Article 2.1 of the Paris Agreement (on mitigation, adaptation, and making financial flows consistent with the transition) into measurable metrics, investors can track the consistency of their investments with global climate goals.[1] Since launching the CCIF, the AIIB has outlined indicative investment metrics and methodologies for assessing alignment across the three areas. While this initial detail is welcome, there is undoubtedly scope (also alluded to by the Bank) to concretise this further going forward. To strengthen the case for the CCIF and support socialisation, the AIIB has also implemented the framework through its AIIB Asia Climate Bond Portfolio.[2] The framework has been endorsed by the Climate Bonds Initiative.  

In 2023 the AIIB published the Companies and Climate Change Report, jointly developed by Fitch Solutions, the Carbon Trust, and CBI, to consolidate insights from the application of the CCIF as a benchmarking tool. The report provides an overview of the current Paris alignment progress of companies, sectors, and debt issuers domiciled in AIIB member states, and operating within major infrastructure sectors (energy, water, sustainable cities, and digital infrastructure). This also provides member countries with valuable benchmarking data regarding how different companies and sectors are approaching climate change. This can inform both effective national transition planning, and standalone regulatory and policy solutions that incentivise climate action.

Beyond its flagship SCMI and CCIF efforts to green the financial system, the AIIB notably launched (also in 2023) a report on Nature as Infrastructure, aiming to define, measure, and quantify nature as a form of infrastructure and asset class. This report also considers how natural capital can affect the credit ratings and future debt capacity of developing economies, providing highly relevant insights regarding how natural capital and biodiversity can be accounted for and translated into economic performance.

Green bonds

As part of the SCMI’s capital market portfolio pillar, the AIIB has launched two bond portfolios:

1. The AIIB Asia ESG Enhanced Credit Managed Portfolio, to catalyse ESG investment strategies in Asia’s debt capital market and unlock private capital for infrastructure-related bonds. Primarily, the portfolio achieves these goals by investing in sustainability and green bonds to deepen sustainable debt capital markets in Asia. This also involves requiring the asset manager (Amundi) to analyse and rate more Asian companies on their ESG performance to expand data coverage. Recognising that comprehensive ESG data is crucial to helping investors identify and invest in companies that meet environmental and social responsibility standards, the AIIB has developed its own ESG framework in parallel to this initiative and is seeking to build capacity among market participants for ESG assessment.
2. The Asia Climate Bond Portfolio is a managed fixed income portfolio that identifies and invests in “climate champion” issuers based on the AIIB’s CCIF (see the “Greening the system” section above). This portfolio is currently sized at USD 500 million and is expected to raise another 500 million through climate change-focused institutional investors. The portfolio will also help inform further iteration of the CCIF under the SCMI to improve assessment of climate change investment risks and opportunities.

Both of these portfolios are intended to contribute to developing the green bonds market in the Asia–Pacific region, which has been growing steadily since the first issuances in 2015 (reaching USD 190.2 billion in 2023). In particular, the ESG Enhanced Credit Managed Portfolio is the first ESG-driven credit mandate in Asia, and won the “Investor of the Year (fund)” category of Environmental Finance’s 2021 Bond Awards.

Separately, the AIIB has also financially supported green and blue bond issuances by other regional financial institutions. For example, in 2024 the AIIB committed USD 75 million to green and blue bonds issued by Southeast Asia Commercial Joint Stock Bank. This initiative marked AIIB’s first investment in a blue bond, as well as the first blue bond issuance from Vietnam.

In terms of AIIB’s own bond issuance, the Bank issues “sustainable development bonds” in accordance with its Sustainable Development Bonds Framework (SDBF), which serves as “the blueprint of the Bank’s green bond offering”. The SDBF specifies that the proceeds from issuances will prioritise (but not only be used for) investments in sustainable infrastructure and climate action.

Although the Bank has issued climate-specific thematic bonds under its SDBF (see below), it has yet to issue a certified green bond. The Bank has set out views that the issuance of green bonds with earmarked use of proceeds (i.e. specifically to finance projects that are environmentally friendly) prevents investors from seeing the AIIB as a sustainable institution and issuer as a whole (i.e. not just in the use of green bond proceeds). Consequently, the SDBF applies to all debt issued by the AIIB, in lieu of standardised issuance of dedicated green bonds with earmarked proceeds specifically for both climate mitigation and adaptation projects. Notably, the AIIB annual Sustainable Development Bonds Impact Report includes a full list of disbursed projects alongside (since 2021) a project-level SDG mapping (including SDG 13 on climate action) to indicate towards which SDGs sustainable development bond proceeds were allocated.

While the integration of sustainable development objectives across all bond issuances is laudable, the extent to which this results in increased mobilisation of funds for climate action in practice relies heavily on the institutional decision making underpinning the SDBF. Without clearly earmarking proceeds for climate projects, there is no guarantee that bond issuances would contribute to increased mobilisation of funds for climate action. There is clear investor demand for green bonds and issuance can play a significant role in market creation, in particular in regions with a high need for investment in the energy transition in the coming years. Not issuing certified green bonds and relying instead on the broader use of proceeds criteria within the SDBF can reduce transparency and accountability regarding delivering additional climate-specific investments as a result of bond proceeds. Accordingly, the inability to verify the climate component in the use of proceeds, along with the absence of dedicated certified green bonds, may restrict access to capital from investors with specifically green mandates.

That being said, the SDBF paved the way for the issuance of the AIIB’s first dedicated Climate Adaptation Bond in 2023. Use of proceeds from this bond are earmarked for projects with an estimated climate adaptation finance portion of at least 20% of total project financing. The bond defines climate adaptation based on the  Joint Methodology for Tracking Adaptation Finance and the  Common Principles for Climate Change Adaptation Finance Tracking. This issuance directly contributes to the AIIB’s target to increase adaptation finance levels by unlocking finance from capital markets. Since this successful first issuance, the AIIB issued a second Climate Adaptation Bond in early 2025, promoting climate-resilient infrastructure. Relevantly, the Bank is also part of the Resilience Taxonomy Advisory Group of the Climate Bonds Initiative, which is developing a Climate Bonds Resilience Taxonomy, and has recently published a methodology for this purpose.

Innovative financial instruments

The AIIB’s mission is to fund green infrastructure, “with sustainability, innovation and connectivity at its core”. Accordingly, the Bank has developed financing instruments for this purpose. Given the long-tenor, big ticket nature of infrastructure projects, AIIB offers local currency financing to clients through various means. This includes cross-country swaps, issuing local currency-denominated bonds via the Bank’s Global Medium Term Note Programme, and onshore local currency bonds in a specific country. Providing local currency financing can help to mitigate foreign currency risks for clients in developing countries, especially for green infrastructure projects. However, local currency financing instruments are currently only available to non-sovereign clients.[3]

As part of its efforts to diversify its financing approaches, the Bank partnered with Clifford Capital in the establishment of Bayfront Infrastructure Capital in 2019. This first-of-its-kind initiative buys and repackages infrastructure loans into tradeable securities, aiming to mobilise new institutional capital for infrastructure debt in Asia. To date, this has attracted institutional investors like Amundi, DBS Bank, John Hancock Life Insurance and Prudential Insurance Singapore, who are backers of the project. By transforming infrastructure loans into more liquid securities, this program helps create a secondary market for infrastructure debt, aiming to lower financing costs for infrastructure projects. The repackaging of loans also allows banks to free up their balance sheets, enabling them to make new infrastructure investments to support development in Asia. As the program is not explicitly targeted at green projects, the degree to which these investments support the development of green finance is highly dependent on the characteristics of the underlying assets and investor decisions.

Recommendations: 

• The AIIB should strengthen its contribution to green bond market development by issuing certified green bonds with earmarked proceeds specifically for climate projects. This could be either separate to or under its current SDBF. This would provide greater transparency and assurance to investors regarding the use of funds for climate-related initiatives, and would help to unlock access to further capital from investors with specifically green mandates or targets.
• To further strengthen its value, the Bank could enhance the “contribution to the transition” assessment of its CCIF by incorporating more robust criteria for assessing Paris Agreement alignment in this regard, particularly in terms of phasing out support for fossil fuel projects. For example, considering evidence of transition criteria similar to those used by the Dutch entrepreneurial development bank (FMO) – which establish clear pathways to phase out fossil fuel exposure while prioritising renewable energy and low-carbon investments – would significantly enhance the framework.
• The Bank should look to build on promising initiatives such as the SCMI and CCIF to promote regional uptake of best practice approaches in these areas.  This should, in turn, be connected to the Bank’s engagement with countries at the policy level, to help client countries pre-empt and respond to the requirements and opportunities of private sector transition planning, promote good practice in green investment and encourage the development of suitable enabling policy frameworks.[4]

[1] These metrics are focused both at the issuer level (such as assessing an issuer’s climate change strategy), and the investment level (such as assessing transition and physical risk exposure, and an investment’s contribution to the low-carbon transition).

[2] See the “Green bonds” subheading under this metric for further details.

[3] Sovereign borrowers, especially those with a smaller forex reserve and/or more volatile currencies, can greatly benefit from local currency loans to provide a better hedge against external shocks, and in turn improve debt sustainability.

[4] For further detail, see the “Country level work” metric.