(Bloomberg) — The World Bank is set to wield outsized influence over how we finance the energy transition, which could dwarf promised efforts by Wall Street giants like JPMorgan Chase & Co. or BlackRock to help cut emissions.
Indeed, without the World Bank and so-called multilateral development banks (MDBs), the dollars on the balance sheets of financial companies may never be reallocated to climate positive investments of the scale needed to slow catastrophic warming.
Just as the Bretton Woods Foundation created the institution to help rebuild war-torn Europe, there is a theory that multilateral development banks could become the basis of a new Marshall Plan for the planet.
While asset managers, banks and insurers with more than $140 trillion in assets have promised to fund zero emissions by 2050, only a fraction of that money has been used to tackle the climate crisis. Getting financing to where it is needed most – developing economies – requires overcoming several investment hurdles, including credit rating restrictions, foreign exchange risk and the potential for an emerging market debt crisis. In short, there are not enough public funds to finance the transition and private capital sources are not sufficiently incentivized to bridge the gap.
That’s where the multilateral development banks come in: As Larry Fink, CEO of BlackRock, has argued, the World Bank and International Monetary Fund would be more helpful in the transition to clean energy if they acted like insurance companies that reduce risks for private investors.
Similarly, the Sustainable Markets Initiative suggested that multilateral development banks create a “large pool of funds” that can provide “first-loss” or “second-loss” guarantees, meaning that they will be the first or second in a row to incur losses in the loan portfolio, thus reducing risks. And raising the credit rating of other buyers in order to “stimulate a large multiplier of private sector investment and financing.”
Of course, such an approach is not without risk or criticism. “Wall Street may be saying to the MDB that we need you to de-risk us, but should Wall Street support really be a primary goal of these publicly funded institutions?” said Sonya Dunlop, who oversees the work of the E3G Climate Change Research Center at Public Banks.
Nick Otiello, vice president of environmental, social and governance strategy at State Street Corp. He is also the Director of Impact at the Investor Leadership Network. He said that while these criticisms are true, delivering the energy transition in the time frame required to curb global warming means finding a way to involve private financing.
MBD shareholders may ask, “Why should it be my turn to de-risk private investments with taxpayers’ money?” Autiello said. “But that’s not the right way to look at it.” History has shown us that public and philanthropic investment, if properly targeted, can unlock huge amounts of private investment, and it is critical that we mobilize every resource we have to solve the climate crisis, Otiello said. It is this potential that drives the momentum for change.World leaders at the UN’s COP27 climate talks in November called for retooling MBDs to support climate action by “mobilizing” capital from private equity investors.
French President Emmanuel Macron, along with Barbadian Prime Minister Mia Motley, a major proponent of development finance reform, plan to hold a summit in June in Paris to focus on the environmental role of multilateral development banks. Meanwhile, India said reforming the Mediterranean Development Bank is among the priorities of its G20 presidency, and world leaders are expected to discuss the topic at the meeting in September.
The hope is that pressure like this will start paying off. And it may be.
In response to requests from the United States and other contributing countries, the World Bank has put forward a new “road map” that will boost its lending capacity to address climate change. “Multilateral development banks have a rare opportunity to define the future of climate finance,” said E3G’s Dunlop. “Compared to private banks, public banks control a relatively small amount of money available for climate investments. However, they have unparalleled power to determine financial trends.”