The Asian Development Bank (ADB) has confirmed it will not provide any support for extraction and power projects in the coal and oil sectors, but will continue to allow some natural gas financing as it seeks to help transition the Asia Pacific toward renewable energy.

The multilateral development bank’s board approved a new energy policy during an October 20 meeting. While the policy bars the bank from most fossil fuel financing, there are some limited carve-outs for oil trading.

The organisation, which lends around US$5bn annually in the energy sector, has had to juggle a desire to help slash greenhouse gas emissions in the Asia Pacific while still supporting member states that are largely reliant on fossil fuels for power production.

“This new policy locks in our strong commitment that ADB will not fund new coal power production,” says ADB president Masatsugu Asakawa. “Together with our elevated ambition to deliver US$100bn in climate financing to our developing member countries in 2019-2030, it provides a clear path for ADB’s contribution to an environmentally sustainable energy future.”

“ADB’s new energy policy will support our developing member countries in the critical and urgent task of expanding access to reliable, affordable, and clean energy,” Asakawa says.

Around 350 million people in the Asia Pacific do not have an “adequate” power supply while 150 million have no access to electricity at all, according to the bank.

Earlier in the week the lender announced it is aiming to deliver US$100bn in climate financing to developing countries between 2019 and 2030, a US$20bn jump on an earlier commitment made in 2018.

The extra financing will be put toward climate change mitigation and adaptation projects, the bank said in an October 13 statement. It will also try to boost its private sector financing.

That announcement came on the heels of a call by the ADB’s independent valuation department for the bank to take a “stronger leadership role” on climate action. The report found that while its approach to climate action has got better over time, it is “not fully leveraging its potential”.

“Going forward, given the current depth of the climate change crisis, a sense of urgency and commitment is demanded,” ADB director general for independent evaluation Marvin Taylor-Dormond said. “ADB’s corporate ambitions should rise.”

The lender has 67 member countries and provided US$31.6bn in loans, grants, equity investments and guarantees last year. Pakistan, Vietnam and Bangladesh are its top three recipients for trade and supply chain finance.

The ADB’s new policy comes during a flurry of private sector initiatives – along with commitments by governments and export credit agencies – ahead of the COP26 summit in Glasgow in November, aimed at breathing new life into the fight against climate change.

Oil carve-out for trade and supply chains

Coal accounts for 36% of primary energy supply in the Asia Pacific as of 2019, followed by oil, renewables, natural gas and nuclear, according to the bank’s energy policy. While fossil fuels make up three quarters of the energy supply, that share has shrunk by around 10% since 2009.

As a result, many Asian export credit agencies and state banks, particularly those in Japan and South Korea, are significant providers of fossil fuel financing and are yet to definitively exit the sector.

Although it is the first time the ADB board has formally endorsed a withdrawal from coal power, the bank has not financed a project in the sector since 2013, when it supported the development of a coal-fired power plant in Pakistan.

The effective ban also applies to downstream activities. “When we say we don’t finance new coal activity, that extends not just to the plants themselves but to dedicated transmission lines serving the plants and things like railways lines from mines to generation plants, so it’s an integrated approach,” Robert Guild, chief sector officer of the ADB’s sustainable development and climate change department, told a media briefing explaining the announcement.

In partnership with British insurer Prudential, the ADB will also pitch at COP26 an energy transition mechanism which will involve snapping up and retiring coal-fired plants in Southeast Asia. It is currently conducting a pre-feasibility study on the plans in Indonesia, the Philippines and Vietnam, director of the ADB’s Southeast Asia energy division, Toru Kubo, told the briefing.

The energy policy also means the bank will not lend any support to oil exploration or extraction projects but may be involved with “limited downstream oil projects where necessary”, such as for remote areas or in conflict situations.

Cases where there is no alternative to oil imports may also be exempt from the new rules, which allow the bank to “continue providing guarantees and loans to partner banks in developing member countries that support international trade and supply chains, which may involve trading in oil to support the immediate flows required to keep economies running in a few countries where there is little private sector support for such import risk”.

“This support may be extended until coordination between multilateral development banks produces a shared approach to trade and supply chain financing in line with the Paris Agreement,” the policy says.

There is also room for the bank to support some liquefied natural gas (LNG) activity, including terminals, pipelines and storage facilities, with the energy policy noting that “natural gas has a role to play as a transitional fuel that can support power system flexibility under specific circumstances”.

Support will also be contingent on evidence that a project reduces emissions, for example by displacing dirtier fossil fuels.

When the draft version of the policy was released earlier this year, it was greeted as a step in the right direction by some environmental campaigners, who also welcomed the bigger commitments on climate finance.

Kevin Gallagher, a professor of global development policy at Boston University, told GTR in May that the ADB’s energy shift “needs to be done with care”, pointing to major coal producer and consumer Indonesia as a member state that “will need real work”.