How the World Bank group can scale climate finance

IFC should aim to become the leading equity fund manager and fund-of-funds manager for climate mitigation investment in emerging markets

There has been much criticism of the World Bank for not doing enough on climate. World Bank President Ajay Banga knows he must respond. But in trying to make the Bank also the world’s Climate Bank, he will need to contend with the complexities of a US-Europe-dominated governance structure, the reluctance of its principal shareholders to make any significant new contributions towards expanding its capital base, and perceptions of the Bank’s own primary mission. This will require pragmatic priority setting and radical action.
 
Common sense suggests that to have the greatest impact on global carbon emissions we must focus on the largest emitters. The top 35 global emitters account for about 90 per cent of the annual emissions of greenhouse gases. It is on this group of countries that our collective mitigation efforts must focus. For the rest of the world — certainly for the less well-off countries — adaptation is more important than mitigation. If the Bank is to be relevant in the battle to keep global temperatures from rising above the Paris targets, it must mobilise a lot more capital for addressing the mitigation challenges of those among its existing borrowers that belong to the group of top global emitters. A significant increase in World Bank assistance to such countries, most of which are not so poor, would represent a re-orientation of the Bank’s focus and could be perceived as diluting its poverty-eradication mission. This pivot will have to be managed carefully.

 
The Bank Group has several entities. The International Development Association (IDA) is its window for concessional funding. It is essentially a vehicle for channelling periodic replenishments of official development assistance from its richer members to its poorest members. The International Bank for Reconstruction and Development (IBRD), its window for commercial lending to governments, is funded with borrowings from capital markets against the security of its share capital and jealously guarded credit rating. The fight against poverty will require significant investment for making the poorest countries resilient to climate change. To help the Bank preserve its poverty-fighting credentials and deliver on the climate mandate, the Global North must increase contributions to the IDA, which should focus on delivering adaptation finance to the poorest countries. To move address mitigation, the Bank must in parallel have a laser-like focus on helping 20 of its current not so poor borrowing countries —excluding China and Russia — that belong to the group of the world’s top 35 emitters with hundreds of billions of additional funding for their respective energy transitions.

 

There has been much debate about how to do this, but little progress. One reason is rating-agency restrictions on acceptable levels of leverage on the Bank’s AAA-rated IBRD balance sheet. It is doubtful that these agencies would ever be comfortable with a gearing of much more than the existing five times its usable equity. IBRD could sweat its existing equity more if it changed its product mix from loans to guarantees. But this has been resisted by the staff with a rigid mind and skill sets. IBRD may not be the right vehicle for scaling up the Bank’s climate agenda. Two other entities in the Bank Group are better suited for the task.

 
The Multilateral Investment Guarantee Agency (MIGA) was set up precisely to provide guarantees for mobilising cross-border capital into emerging economies. It is fit for purpose. Compared to IBRD, it makes much more economical use of shareholders’ capital. For every $1 in equity, it underwrites $17 in guarantees. And it could stretch its capital further if it made greater use of credit enhancement and partial guarantee products and were willing to take more risk. It would require only $15 billion in additional shareholder capital for MIGA to mobilise $300 billion in incremental debt financing. But for now, it is unwilling to even provide guarantees for sub-national entities without a counter-guarantee from the government concerned. As a result, quite shockingly, it does no business in India. The Bank would be hugely effective in mobilising climate finance if it worked on increasing MIGA’s risk appetite and expanding its capitalisation, rather than IBRD’s.

 
What MIGA can do to catalyse private debt financing, the International Finance Corporation (IFC), the Bank’s arm focused on the private sector, could do for equity capital. IFC could raise third-party equity financing at scale without straining its own balance sheet by expanding its asset management business. Set up in 2009, IFC Asset Management Company manages 13 funds with modest assets of only $10 billion. IFC has the potential to scale up this business to hundreds of billions of dollars under management. Given its access and positioning, IFC can raise third-party equity capital from insurance companies, pension funds, and sovereign funds, from around the world. And learning from mainstream private-equity managers, it should be able to manage a large pool of assets with only modest contributions from its own balance sheet. IFC should, therefore, aim to become the leading equity fund manager and fund-of-funds manager for climate mitigation investment in emerging markets. 

 
The writer is with the Singapore Green Finance Centre, Singapore Management University