CFA Society New York, in conjunction with the Asset Owner Series, hosted the Multilateral Development Bank Conference which featured a high level discussion among senior leaders from the European Investment Bank, International Finance Corporation, African Development Bank, Inter-American Development Bank, Asian Infrastructure Investment Bank, and the World Bank Group.
The discussion kicked off with the keynote speaker from the European Investment Bank with a focus on climate change. The European Investment Bank (EIB) is the banker of the European Union, and the world’s largest multilateral borrower and lender. They provide financing for sustainable projects that benefit EU policy objectives. Taking a look back at the past 100 years, we had WWI, WWII, Korean War, Vietnam, and various financial shocks, however, these events while extremely disruptive, are even less concerning than the risk of climate change. Climate change is a greater global threat today than any event over the past 100 years. The United Nations describes it as a change of climate that is attributed directly or indirectly by human activity, altering the composition of the global atmosphere. Such activity includes industrial activity and other sources of greenhouse gases, such as carbon dioxide. Excess carbon dioxide, methane, and other gases contribute to warming of the atmosphere leading to consequences across continents. When it comes to financing sustainable efforts to curb climate change, over $70T is needed over the next 20 years. When it comes to mitigating this risk, Europe is the leader and has engaged in strategic thinking and policy actions. The most important project of the European Union is climate change. For example, the EU 2020 package which was set in 2007 has targets of a 20% cut in greenhouse gas emissions from 1990 levels, renewable EU energy consisting of 20%, and a 20% improvement in energy efficiency. In 2014, even more ambitious targets were set and the cuts increased to 40% and renewable and efficiency weightings increased to 27%. The European Investment Bank has a strong focus on climate financing with 25% of all investments allocated to the area. This allocation increases when it comes to emerging markets. The EIB will also engage in co-investments and invest alongside other reputable organizations attracting more investors. One of the key goals of the EIB is to integrate climate change investments across all projects. Also to note, 10 years ago, the European Investment Bank pioneered the Green Bonds market by issuing the first Climate Awareness Bond. Since then, billions have been issued helping to finance renewable and efficiency projects globally. While Green Bonds are still <1% of global bond issuance, they have the potential to transform markets. The allocation of Green Bonds require extensive due diligence on the issue which creates a highly rigorous and complex analysis. Reporting is very methodical with globally recognized parameters and proceeds are segregated and invested in specific climate projects. Climate Change is a very serious threat and needs global cooperation and collaboration in order to reduce the risk of long term impact.
After the keynotes presentation on climate change, we turned to the panel discussion which consisted of senior leaders from the International Finance Corporation, African Development Bank, Inter-American Development Bank, and Asian Infrastructure Investment Bank. The goals of these organizations are to promote inclusive and sustainable growth, feed and integrate the population, reduce poverty and inequality, promote shared prosperity, improve health and education, and ultimately create better lives for the world. It is interesting to note that anywhere from $3-4 trillion in new financing is needed each year for infrastructure spending, and that’s just to keep up with growth. A growing population needs new roads, airports, lights, etc, and infrastructure projects must be extremely high quality and efficient to promote long term growth. While these banks have similar goals, geographic focus may be the only real difference.
Considering recent projects, the IFC financed a $500M solar park in India. With much of the electricity in India generated by coal, this investment was particularly attractive as solar energy is clean but also the solar park’s cost to produce energy was more attractive than the means used to generate coal. The IFC looks for projects that are both attractive from an investment perspective and a climate change lens. The IADB recently worked on the expansion of the Panama Canal which doubled the capacity adding a new lane of traffic to allow larger ships to pass through. The goals were to limit pollution and minimize the impact to families during the process. The project took over $5B to expand and ended up only impacting 8 families. The IADB contributed $400M with the remainder of the financing coming from other participants. The AFDB recently worked on a power project in Rwanda to convert the methane gas risk to a source of electrical energy for locals. Development banks are catalysts for making infrastructure projects happen.
When it comes to accountability, all projects at the IFC are responsible for having an impact which is measured after completion. The need to alleviate poverty, be profitable, and make a positive developmental difference. Simply looking at positive internal rates of return is not enough. The projects need to have a positive ESG impact. Quantitative covenants are straight forward, but the qualitative factors are when the ESG considerations come in. The IADB thinks of transparency when it comes to accountability. All documents are on the website, organized for people to download and read. Reporting is published detailing development, sustainability, and lessons learned from projects. In addition, rating agencies provide addition insight into the projects.
Funding of development banks involves currency management. Most do not take on currency risk and borrowing mostly occurs in USD. Due to this, swaps are used to hedge FX rates, and the development banks diversify their lending exposures by using swaps of different currencies. Many bonds are issued in the local currency, and the development bank then uses swaps and other derivatives to create a divers. Between the AFDB, AIIB, IADB, and IFC, around $50B in new capital market financing is used for development each year.
The presentation ended with the closing keynote address from the Managing and Special Representative to the United Nations. He discussed the 2030 Agenda which intends on transforming the world with a emphasis on sustainable development. Plus, he gave us insight on how the World Bank has launched bonds directly linked to Sustainable Development Goals which support projects that contribute to eradicating poverty, boosting shared prosperity, and tackling climate change.