Good morning Excellencies, distinguished, Ladies and Gentlemen. First let me thank His Excellencies Ambassadors Blanchard and Rattray for their invitation to speak to you about innovative finance.
As you know, UNCTAD estimates that achieving the Sustainable Development Goals (SDGS) by 2030 will require $3.9 trillion to be invested in developing countries each year. It also notes that with annual investment of only $1.4 trillion, the annual investment gap is $2.5 trillion. Let me therefore take this opportunity thank the Group of Friends of SDG Finance for your leadership on mobilizing private finance to achieve these important goals. At the World Bank Group, we have equally strengthened our focus on mobilizing the private sector for development.
As you know, the World Bank Group comprises of five entities:
1) The International Bank for Reconstruction and Development (IBRD), which lends to middle income countries,
2) the International Development Association (IDA), which provides loans and grants to low income countries,
3) the International Finance Corporation (IFC) which works with the private sector,
4) the Multilateral Investment Guarantee Agency (MIGA), which promotes foreign direct investment into developing countries by offering credit enhancement, guarantees and political risk insurance to investors and lenders,
5) and the International Centre for the Settlement of Investment Disputes (ICSID).
In our work in over 80 countries around the world, we seek to leverage our five institutions to maximize finance for development. For example, we are supporting a EUR20 billion public-private partnership program for Turkey’s health sector. This PPP comprises 50 projects that when completed will complete overhaul to modernize Turkey’s healthcare system and improve service delivery and outcomes. IBRD has been working with the Turkish government at a policy level and has been providing technical assistance to help manage the PPP contracts. MIGA provided political risk insurance for 6 projects totaling $848 million. IFC invested $163 million in senior debt and helped mobilize an additional $430 million from private sector lenders. The European Bank for Reconstruction and Development (EBRD) worked with MIGA to provide credit enhancements for a EUR288 million green bond to build a state of the art hospital.
I believe that we need innovative finance to accelerate the mobilization of the private sector for development. This is evident from our own experience at the World Bank Treasury with connecting the capital markets to development.
First, World Bank Treasury raises $50-$60 billion annually from investors in the capital markets for IBRD to lend to middle income countries. These bond investors range from central banks, pension funds, asset managers, and banks to individual investors. We have also started using IBRD’s bond transactions to promote the SDGs and sustainability as investors are increasingly seeking ways to incorporate Environmental, Social, and Governance (ESG) factors into investment decisions. More recently they are asking for unique products that target specific development issues such as climate change, gender, healthcare, education, and poverty.
In January 2018, we partnered with an investor in Canada, Addenda Capital, to issue a 1 billion Canadian dollar benchmark bond to raise awareness for gender equality, one of the five themes that Canada is promoting during its G7 Presidency this year. This bond highlighted the importance of empowering women and girls to accelerate economic development, reduce poverty, and build sustainable societies around the world.
Some investors have also chosen to highlight several SDGs in one transaction. For example, in February 2018, a Swedish insurance company, Folksam, partnered with us on a $350 million private placement bond that focused on four SDGs:
1) Good Health and Well Being (SDG 3),
2) Gender Equality (SDG 5),
3) Responsible Consumption and Production (SDG 12) and
4) Climate Action (SDG 13)
Investors like these products because they are able to maximize social good and at the same time maximize financial returns.
We have also issued SDG Equity-Linked Bonds totaling $217 million. These are bonds that link returns to the stock price performance of 50 select companies that promote the SDGs. This is a win-win for the SDGs. First, they engage investors who buy the bonds, and second they highlight companies that promote the SDGs. We have sold these bonds to institutional investors in Italy and France, and retail investors in Belgium and Switzerland.
IBRD will continue to seek innovative ways to address investor demand for sustainable development products. The SDGs can provide an important framework and standard approach to help investors contribute to sustainable development.
Maximizing finance for development will require us to to develop innovative ways to complement donor financing. IDA’s successful entry into the capital markets on April 17, 2018 demonstrates investor appetite for sustainability. From when IDA was founded in 1960 until just last month, IDA had relied primarily on contributions and internally generated funds to finance grants and loans to low income countries. IDA is at the forefront of the work that will enable us to achieve the SDGs. From 2011 to 2017, it trained 8 million teachers, improved sanitation for 14.5 million people, provided 30 million pregnant women with prenatal care, gave 35 million people electricity, immunized 250 million children, and provided 602 million people with essential health services.
IDA’s inaugural bond raised $1.5 billion from investors all around the world. This bond was more than 4 times oversubscribed, a testament to strong investor appetite for sustainable investments.
The interest of investors in sustainability has also been fueled by the successful evolution of the green bond market. This market started in 2008 when Nordic investors requested that we provide products that would enable them to address climate risk. Since then we have issued $10.5 billion in green bonds through 140 transactions in 19 currencies. While overall annual issuance of green bonds in 2017 was estimated to be $160 billion, issuer types now include corporates, utilities, municipalities, and sovereign issuers in addition to multilateral agencies. An important trend to highlight is that sovereign issuers are seeing that green financing can access a growing group of investors that are interested in investing sustainably.
In October 2017, we helped Fiji issue the first sovereign green bond from a developing country, raising 100 million Fijian dollars, equivalent to about $50 million. We have also assisted the Association of Southeast Asian Nations (ASEAN) in developing their Green Bond Standards so the region can access the market. We worked with Malaysia to develop a framework that combines green bond principles and Islamic finance principles, a precursor to the first green sukuk issued by a Malaysian corporate in July 2017. In February, Indonesia issued the first sovereign green sukuk, a $1.25 billion for environment-related projects.
The reasons for the success of the green bond market include its focus on impact reporting, enhanced disclosure requirements and transparency. Such success can be replicated with other thematic capital market products. Indeed, we are currently working with the Seychelles and the Global Environment Facility on the first ever Blue Bond, which will promote biodiversity, sustainable fisheries and marine planning.
Another innovative financing mechanism is the Global Concessional Financing Facility (GCFF), an initiative jointly sponsored by the UN, the World Bank and the Islamic Development Bank in response to the Syrian refugee crisis. The GCFF is supported by Canada, Denmark, the European Commission, Germany, Japan, Norway, the Netherlands, Sweden, the UK, and the US. It supports countries that are hosting refugees by lowering their cost of funds. This consequently allows them to expand the economic opportunities available for refugees they are hosting. It has used $200 million in concessional financing for over $1 billion of projects in Lebanon and Jordan. I am delighted that we are using financial innovation to address the refugee crisis and support refugees and their host countries.
Another challenge that innovative finance has addressed is making vaccines available to the 71 poorest countries in the world. The International Finance Facility for Immunisation (IFFIm) was launched in 2006 for this purpose. It front loads financing for vaccines by issuing vaccine bonds backed by the legally binding pledges from donors. IFFIm has received $6.5 billion in donor funds payable over 25 years from Australia, France, Italy, the Netherlands, Norway, South Africa, Spain, Sweden, and the UK. The World Bank, IFFIm’s Treasury Manager, has helped IFFIm raise more than $5.7 billion in the capital markets over the last decade and on the back of these pledges.
We have also leveraged innovation to assist countries with disaster risk management. The global economic losses from disasters are now over $300 billion per year, of which 75% is attributable to extreme weather events. Also, disasters force some 26 million people into poverty each year making this a key development challenge.
Since we first intermediated a cat swap to cover earthquake and hurricane risks for 16 Caribbean countries in 2007, we have provided drought insurance to Malawi, and weather and commodity price insurance to Uruguay. Our “Capital at Risk” notes program has also facilitated the issuance of cat bonds including for Mexico and the Philippines in August 2017. In fact, three weeks later, Mexico received a $150 million payout following the powerful 8.2 magnitude earthquake. In December 2017, the province of Davao del Sur in the Philippines received 83.5 million Philippe Pesos (equivalent to $1.6 million) when Typhoon Vinta triggered a partial payout.
In February of this year the “Capital at Risk” program was used to launch a $1.36 billion transaction for the Pacific Alliance countries, Chile, Colombia, Peru and Mexico. It was the largest ever transfer of sovereign risk to the cat bond markets.
Last year, the World Bank issued the world’s first global pandemic bond that will channel surge funding to developing countries facing the risk of a pandemic. It was designed to prevent another Ebola crisis, and was the first time that pandemic risk in low income countries was transferred to the financial markets. Such a facility, will enable the world to respond more promptly than it did when the 2013-2014 Ebola crisis happened, thereby minimizing the death toll and the negative impact on the economy.
To date we have provided $3.9 billion in catastrophe and weather risk transactions, of which nearly $2 billion has been executed in the last ten months. We have seen increased demand from clients as the frequency of extreme weather events has increased. Cat bonds that transfer risk to the capital markets have become an important complement to emergency funds, budget reserves, and contingent credit lines because it allows countries to leverage their budgets to offer greater protection when disasters strike.
New initiatives that we are also exploring include innovative mechanisms to expand financing for education, famine and World Bank seasoned loans to institutional investors. Examples are:
1) The Education Commission’s International Financing Facility for Immunization, IFFEd, a fund that will not only reduce the cost to developing countries of financing education projects but also increase the capacity of multilateral institutions to lend for education projects. IFFEd is supported by the World Bank and regional development banks. IFFEd has raised $2 billion for education with a goal of $10 billion. It is expected that every billion of aid will leverage $4 billion from development banks. On May 11, 2018 IFFEd was endorsed by the UN Secretary General.
2) We are developing a new financial mechanism to help prevent and prepare for future famine risks. The mechanism aims to provide various layers of financing to mobilize resources before, during, and after famine conditions emerge.
3) We are exploring the transfer of seasoned World Bank loans to institutional investors and will use proceeds to invest in new green field projects. The benefits will include efficient use of funds for donors, new lending capacity for borrowers, and yield and diversification for investors.
We believe that thought leadership is also useful in broadening the understanding of sustainability and the innovative mechanisms that will facilitate the mobilization of private sector financing.
In this respect we partnered with Japan’s Government Pension Investment Fund (GPIF) on research with respect to sustainable fixed income investing. We expect this research to promote strategies for including sustainability criteria in investment decisions. We are equally conducting research for the G20 by engaging investors to come up with concrete actions to scale up long-term sustainable investments and support the SDGs.
There is no doubt that there are sufficient private sector resources that can be channeled to sustainable development. TheCityUK estimates that the global fund management industry managed $161 trillion in assets in 2016. Therefore, all we need to close the $2.5 trillion annual investment gap that developing countries need to meet the SDGs, is to direct 1.5% of global assets under management to sustainable development.
We have shared these examples to illustrate how we can use innovative mechanisms to mobilize private sector financing for development. Each of these examples can be replicated, can be scaled up, and can inspire new initiatives.
Now more than ever, is the time to mobilize private sector financing for sustainable development. Investor momentum is accelerating as investors connect making financial returns to purpose, or connect doing well to doing good. The SDGs provide a welcome framework for sustainability.
I will close by reiterating how important your leadership is in the important quest to maximize finance for development by mobilizing the private sector. Thank you.