As a structured finance specialist in the World Bank Treasury, I work on a trading floor and talk to banks, investors, and development partners daily, so together we can find cost-effective and sustainable solutions to address climate change.Climate is now a key consideration in all our development projects, and we have committed to ramp up adaptation financing to $50 billion over FY21–25. However, the public sector alone cannot finance the trillions of dollars needed for green infrastructure. Enter: bonds and the power of the capital markets.
I travel light. Usually a carry-on is all I need for business related travel. Attending the Government Debt Management Strategy Design and Implementation Workshops, organized by World Bank Treasury, was no different affair. The month was July, the location was JVI Facilities in Vienna, I thought I didn’t need more luggage!
I attended the workshop wearing two different hats: as a former senior economic advisor to the Angolan government and a macro economist, I was eager to find out what I could add to my information portfolio in terms of debt management know-how; as a World Bank Group Advisor to Executive Director, I was curious about how the Bank builds capacity through training for member countries.
It was ten years ago, right before the global crisis when Lehman Brothers had not collapsed, and Fannie Mae and Freddie Mac had not been placed into conservatorship. For debt managers, the markets were less volatile and the future was less uncertain. In Turkey we were dealing with the implementation of the post-crisis reform agenda.
One day, I got an invitation from my son’s eighth-grade teacher to speak at the school’s “careers day” which aims educate children on different types of jobs. I accepted the invitation but I was a little worried because, as a debt manager I have a “different type of job” that was not necessarily an “exciting” one.
“Ethical finance” is a term used to describe finance that is put to good social and environmental use. Interest in it has risen since the 2008 global financial crisis, with Islamic finance and socially responsible investment (SRI) funds becoming its two fastest areas of growth.
In addition to their often devastating human toll, natural disasters can have an extremely adverse economic impact on countries. Disasters can be particularly calamitous for developing countries because of the low level of insurance penetration in those countries. Only about 1% of natural disaster-related losses between 1980 and 2004 in developing countries were insured, compared to approximately 30% in developed countries. This means the financial burden of natural disasters in developing countries falls primarily on governments, which are often forced to reallocate budget resources to finance disaster response and recovery. At the same time, their revenues are typically falling because of decreased economic activity following a disaster. The result is less money for government priorities like education or health, thereby magnifying the negative developmental impact of a disaster.
To address this problem, the World Bank Treasury has been helping our clients protect their public finances in the event of a natural disaster. The most recent innovation is our new Capital-at-Risk Notes program, which allows our clients to access the capital markets through the World Bank to hedge their natural disaster risk. Under the program, the World Bank issues a bond supported by the strength of our own balance sheet, and hedges it through a swap or similar contract with our client. The program allows us to transfer risks from our clients to the capital markets, where interest in catastrophe bonds is growing.
- cat bonds; catastrophe bonds; capital-at-risk notes program; CCRIF
- bond markets
- Disaster Response. disaster risk management
- Latin America & Caribbean
- Turks and Caicos Islands
- Trinidad and Tobago
- St. Vincent and the Grenadines
- St. Lucia
- St. Kitts and Nevis
- Cayman Islands
- Bahamas, The
- Antigua and Barbuda
- World Bank Treasury
Source: Flickr Creative Commons
Recently, the Dubai Supreme Council of Energy (DSCE) and the World Bank agreed to design a funding strategy for a green investment program in Dubai that would look at financing green investments through a variety of sources, including green bonds and sukuk (Islamic certificates).
Islamic finance is growing in countries like Malaysia (Credit: Asian Development Bank, Flickr Creative Commons)
Over the last three decades, the concepts of Islamic finance have captured the attention of researchers. One of the core principles of Islamic finance is the prohibition of interest and debt-based financing. Instead, economic agents are encouraged to engage in financial instruments of risk-sharing rather than risk transfer. Although the principles of Islamic finance go back several centuries, its practice in modern financial markets became recognized only in the 1980s, and began to represent a meaningful share of global financial activity only around the beginning of this century. The growth of this market has been driven by the high demand for Islamic financial products, as well as the increasing liquidity in Gulf region due to high oil revenues. Table 1 shows the growth trend in Islamic finance for the banking sectors by different regions, with estimates of total Islamic banking assets reaching $1.8 trillion by the end of 2013. Figure 1 shows how the growth of the Islamic financial sector in 2006–10 period surpassed the growth of conventional financial sector in all segments of the market, ranging from commercial banking, investment banking, and fund management to insurance in several Muslim-majority countries.
Why would a group of large investors care about climate change when their primary concern is ensuring adequate returns for their investment portfolio to meet their future financial obligations? This group includes pension funds, insurance companies or foundations. Pension funds alone are estimated to hold over US$25 trillion globally
As Alan Miller indicated in his recent blog, a report published by Mercer (a well-known investment advisor) estimates that uncertainty around climate policy could contribute as much as 10% to overall portfolio risk for investors to manage over the next 20 years. So, investors are beginning to pay attention. Choosing to support investments that help address climate change or increase climate-resilience also helps reduce the exposure of portfolios to this risk.
Green bonds issued by the World Bank is one such instrument. Funding raised through green bonds is earmarked for eligible low-carbon and adaptation projects financed by IBRD in its member countries. For example, the money could be used for funding an eco-farming project in China, or improving the solid waste management in Amman, Jordan. On the mitigation side, eligible projects could include solar and wind farms. On the adaptation side, it could be protection against flooding or droughts.
Earlier, this month, a 'Green Bond Summit' gathered about 110 representatives of the investment community. The event was hosted by State Street Global Advisers -- an asset manager with over $2 trillion under management in different asset classes. The goal was to discuss how green bonds could attract greater participation from large investors to scale-up financing of climate solutions through the capital markets. The World Bank, a pioneer of the green bond, and other issuers such as ADB, EIB, and IFC deliberated with the participants on prospects for common green bond standards, the financial characteristics investors expect, and the policy issues that underlie the demand for climate investments.
A remarkable thing happened at the US Treasury in DC today; the United States, Canada, Spain, South Korea and the Bill and Melinda Gates Foundation agreed to pool resources, and as Bill Gates described it, “put small holder farmers, especially women, front and center” of a new multilateral agriculture and food security program. The Gates Foundation will contribute $30 million.
The Global Agriculture and Food Security Program (GAFSP) will focus on increasing agricultural productivity and linking farmers to markets. A special feature of the program is the focus on country ownership that puts countries in the driver’s seat.
The GAFSP was created in response to a call from G20 leaders last year for the World Bank to work with interested donor to set up a multi-donor trust fund to implement some of the $22 billion in pledges made by the G8 leaders at L’Aquila, Italy.