Why the World Bank must boost green investment in emerging markets

Multilateral Development Banks are currently not fit for purpose when it comes to financing the green transition. With the new incoming leadership of the World Bank, there is an immense opportunity for change, writes Günther Thallinger.

Günther Thallinger is Chair of the Net-Zero Asset Owner Alliance and Board Member of Allianz SE.

The global economy must undergo an unprecedented transition if the world is to avert catastrophic climate change. Major investments in clean technologies, low-carbon infrastructure, sustainable business models and adaptation measures are needed across the entire planet.

Private capital is available but not flowing in sufficient quantities or at an adequate scale, especially to get projects in Emerging Markets and Developing Economies (EMDEs) off the ground. While some institutional investors have already diversified their portfolios by finding investment opportunities in EMDEs with attractive risk-adjusted returns, the number of investors and the investment volumes remain very limited.

At the heart of the problem is the lack of economic incentives for private capital to flow towards decarbonisation in EMDEs.

Given their local knowledge, expertise, and sourcing networks, Multilateral Development Banks (MDBs) and Development Finance Institutions (DFIs) are uniquely positioned to overcome private investors’ barriers in EMDEs and to scale and enhance existing instruments, vehicles, and facilities to address the same. Therefore, MDBs and DFIs play a key role in catalysing private investments supporting the transition towards net zero in EMDEs. And while they’ve made a lot of strong public commitments, efforts to mobilise  private capital have not reached the required levels.

On behalf of the UN-convened Net-Zero Asset Owner Alliance, I have written to G7 Finance Ministers ahead of the Spring Meetings of the IMF and World Bank, outlining why we think ample opportunities exist to develop an optimal environment for MDBs and DFIs to act fast and at scale.

MDBs should be incentivised through clear key performance indicators linked to climate action. While there have already been some positive changes, more must be done, such as MDBs setting more concrete targets per region and per country, with money specifically put aside for climate action.

Additionally, MDBs and DFIs should be incentivised through ambitious target-setting to optimally leverage their balance sheets and make private capital mobilisation for the net-zero transition a core focus. MDBs should use their unique weight in EMDEs to ease restrictive policies and encourage more money to flow into projects, for example, by shifting to co-investing with the private sector.

Through co-investments with DFIs, private investors can benefit from the so-called “preferred creditor status” of those public institutions, which alleviates concerns around tax and regulatory constraints – in essence, crowding-in private finance as the way in is simplified.

The risk frameworks of the MDBs and DFIs should be adjusted to ensure additionality by increasing the type of financing currently undersupplied in the target markets, for example, equity, including early state project development finance and local currency financing. Equally, MDBs should scale up the provision of guarantees which have proven highly capital efficient in mobilising private capital.

Collective solutions involving both domestic governments and the private sector are crucial to accelerate capacity-building and create a robust pipeline of investable financial assets that meet investors’ fiduciary requirements.

Additionally, investors face a lack of robust, comparable, and transparent EMDE risk data. What if the actual risk of investing in EMDEs is much lower than the perceived risk? If asset owners and asset managers were to have access to details about the default and recovery rates experienced by MDBs and DFIs across sectors and regions over decades, such overestimates could be avoided. Publicly accessible country-specific default and recovery rates reporting via the Global Emerging Markets Risk Data Base (GEM) would provide investors with the necessary track record data to more adequately price credit risk in EMDEs.

The Alliance calls for systemic change in the governance and business models of the MDBs to get climate finance to where it is needed. All stakeholders need urgent collaborative action to scale the necessary investments in the short- and medium-term and address systemic and regulatory barriers.

With the Spring Meetings of the IMF and the World Bank underway, we urge stakeholders such as G7 finance ministers to take advantage of this opportunity to push for a rapid deployment of investments at speed and scale. Accelerating the energy transition is crucial to addressing the global climate crisis and energy security.