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When the United Nations held its General Assembly last week, the attention of the media and protesters was mainly focused on politicians. But in its shadow, something else is happening, and investors would do well to take note: The Private Sector Investment Laboratory was recently established The World Bank held its inaugural meeting to discuss how to strengthen banking operations.
The 15-member body – which includes CEOs such as Axa’s Thomas Buberl, BlackRock’s Larry Fink and Ping An’s Jessica Tan – has not released any public reports; its co-chairs, former central bank governor Mark Carney and Neither did Prudential Chairman Shriti Vadra.
However, I understand that these CEOs are brainstorming a series of recommendations for the central bank. The actions they decide to take could be crucial in determining whether the agency can become more relevant and credible under new chairman Ajay Banga.
After all, Banga (former Mastercard CEO) was appointed with an implicit mandate for reform after his predecessor David Malpass was ousted for being cautious about climate finance.
Banga is already working hard to achieve this goal.this week he told the council on foreign relations in new york He will ask the bank’s shareholders to change its official mission statement when they hold their annual meeting in Marrakech next month.
Most notably, he wants to expand the Bank’s current mandate based on “poverty alleviation” and “shared prosperity” to address broader issues such as climate, food insecurity and pandemics. “The twin goals must be transformed into eradicating poverty, but on a livable planet,” he explained.
Banga also revealed that he hopes to increase the Bank’s new lending capacity by $100 billion to $125 billion over the next 10 years (compared to a total new commitment of $145 billion in 2023), a goal that will be achieved in part because It is countries such as the United States, Germany and Japan that are providing more funds through the so-called “capital adequacy ratio” framework. However, Banga said he also intends to “expand my balance sheet” through “all the financial engineering I can do” – even while maintaining the bank’s AAA rating.
Sounds impressive. But there’s a problem: Even if that $100 billion in new lending becomes a reality, it’s a small amount of money, given that about $3 trillion in additional spending will be needed each year to combat climate change and poverty by 2030, according to a recent report. independent expert panel report Commissioned for the G20. That’s not a huge amount either, considering that the organization is calling for about $500 billion in new development financing annually by 2030, $260 billion of which is through multilateral development banks (of which the World Bank is the largest).
The 15-member CEO committee is therefore important: the only way Banga hopes to mobilize the needed funds is to persuade Western asset managers to use some of their investments to support the Bank’s goals. Existing philanthropic capital, public funds and multilateral development bank loans cannot fill the gap. Or as Banga puts it: “[Our capital]is like a pimple on the dimple of an ant’s left cheek compared to what we need in the world”.
Will this happen? It’s not clear yet. Western funds have so far avoided investing in emerging market climate plans of any scale due to concerns about political and foreign exchange risks. These projects tend to be small and opaque, making them difficult to price or trade.
However, the Executive Council is considering options to address these issues. One idea is to try to use multilateral development banks or philanthropic funds to absorb the first wave of project losses, thereby reducing project risks; experiments in this direction have already emerged.
The second option would seek to securitize development loans – again to spread risk. The third goal is to have the World Bank operate the carbon market on a more credible and transparent basis; this could channel funds from developed country companies and investors (who typically purchase carbon credits) to poorer areas (which provide carbon Credit).
The fourth recommendation is for the World Bank to use its political power to force developing countries to create more regulatory certainty for investors. The fifth is for accountants to adjust carbon reporting rules to enable lenders to provide bridge finance to reduce significant emission activities without penalty (as is currently the case).
These are very smart ideas that can and should be adopted as soon as possible. In fact, sadly, these measures were not implemented a few years ago, when money was so cheap that Western asset managers were eager to take risks. Now the credit cycle has turned.
But, as the saying goes, better late than never – and the fact that Banga has even established a CEO Council (the first of its kind) shows that momentum for change is building. It’s not that simple; the idea of using MDB capital to de-risk private sector projects is controversial.
Yet the global financial community has good reason to hope that at least some of these ideas will come to fruition, as do the millions of people around the world suffering from the effects of poverty and climate change. All eyes are on Marrakech.
gillian.tett@ft.com
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