Going beyond green bonds to finance sustainable development in emerging economies
While green bonds grab the news headlines for financing sustainable development in emerging economies, in fact they are a small part of the picture. Multilateral development banks are the most active agents of change as they pioneer methods of financing that encourage sustainable growth and foster more direct involvement from private sector banks and investors.
At stake is the USD 2.6 trillion that the United Nations calculates is needed annually to bridge the investment gap observed since 2015 to achieve the SDGs by 2030, much of it in emerging economies that may be hit hard by the coronavirus pandemic.
Multilaterals are playing a growing and evolving role in bridging the gap, both by directing private sector capital they have borrowed and seeking new ways to make projects financeable directly on wholesale markets. Not only has sustainability always been at the heart of their activities, but they are giving a strong focus on projects that have a positive impact rather than those that simply avoid environmental or social harm.
Multilaterals’ growing activity
Both established and new multilaterals are putting more capital to work. Founded in 1956, the International Finance Corporation (IFC) is an arm of the World Bank and the largest multilateral focused on the private sector. It aims to more than double the level of its yearly commitments over the next ten years, from about USD 20 billion a year to USD 48 billion, according to Ousseynou Nakoulima, the IFC’s Director for Western Europe.
Established more recently, The New Development Bank, set up in 2015 by the five BRICS countries – Brazil, Russia, India, China and South Africa – is ramping up activities, with a mandate to fund sustainable development, especially in infrastructure. “The core part of our mandate is to finance infrastructure and sustainable development projects in BRICS countries and other emerging and developing countries,” explains Irina Burukina, the New Development Bank’s Head of Funding, Treasury and Portfolio Management.
« In this respect, sustainable infrastructure is at the core of our strategic focus and, according to the general strategy of the bank, it has to represent about 70% of the projects that we finance. »
As the multilaterals’ activities grow, so too does the emphasis on contributing to the UN SDGs through creating positive sustainable impacts and galvanising private sector finance. “Ten to fifteen years ago, our priority was to make sure that our projects and programmes were compliant with environmental and social performance standards, but today we want to go further and measure accurately the positive impacts of our investments and induce systemic change, especially for the lowest income segments,”notes the IFC’s Nakoulima.
Illustrating the move towards using funding to promote sustainable economic activity, Proparco, the private finance arm of Agence Française de Développement (AFD), recently provided long-term funding for a major cocoa and coffee trader’s investment in Africa, especially the Côte d’Ivoire. The funding provided financial incentives for the trader to source beans from local farmers using environmentally sustainable practices.
Guillaume Barberousse, Head of Proparco’s Financial Institutions Group, explains:
The financial incentive – which is basically a technical assistance to the company to help them design the programme, plus financial rebates on the cost of funding – encourages the trader to work more with these farmers and help them further improve the way they handle their farms. In this context, they are supporting sustainable, both economic and environmental, farming.
Making projects financeable
Yet there remains a shortage of projects where the balance of risk and return is suitable for private sector debt financing, whether through bond or loan markets. Often developing countries lack appropriate policy frameworks, not to mention the physical infrastructure needed to make a project viable. The multilaterals are working together to do what they can to remedy this situation.
For example, in Jordan, the IFC, Proparco and the European Bank for Reconstruction & Development joined together in 2016 to finance a photovoltaic solar energy project. They provided support to the government in designing the policy framework, and funding was also provided by AFD and the European Investment Bank to the Jordanian authorities for the construction of the transmission network required to carry energy from new solar fields in the south of the country. With this in place, private developers were keen to invest in solar IPPs building over 200MW of additional capacity, which Development Finance Institutions contributed to finance through project finance facilities, while commercial banks were unwilling or unable to take the risk of long-term debt funding (save for Arab Bank being a lender to a few projects), according to Proparco’s Barberousse.
Raising local currency debt funding at a sufficiently attractive price is a barrier to private sector involvement that remains especially hard to overcome. “We have set up creative options and schemes, but I must say that it is a challenging problem to solve,” says the IFC’s Nakoulima.
Attracting private sector funds to span the UN’s SDG funding gap faces significant practical difficulties. Many projects are simply not financeable in the eyes of investors or bankers used to a market level of risk and return. Yet the multilaterals are becoming vital agents of change as they increase their financing activities and pioneer new ways to make finance spur sustainable development.