In the first three months of 2023, India tackled part of its funding challenge to achieve the government's net-zero emissions target by issuing their inaugural $2 billion green bond. Vietnam financed a clean water project thanks to a pathbreaking $50 million Emission Reduction-linked World Bank-issued bond. Chile protected its public finances against earthquake risk with a $630 million World Bank-facilitated transaction. These are some recent examples of innovative financing strategies the World Bank has supported for emerging market economies.
Why do we need innovative financing strategies?
Financial innovation is critical to bridge the gap between the development needs of the poor of more than $3.9 trillion in external funding a year and the amount of funding currently available of $ 1.4 trillion. The World Bank has been at the forefront of efforts to provide innovative financing solutions to address these challenges.
The "green bond" (2008) has been a key innovation that has led the way to the development of a green, social, and sustainability (GSS) bond market, totaling $3.8 trillion in financing by the end of 2022. Today, the World Bank is the largest issuer of sustainability bonds. Building upon our experience in the GSS bond market, we also provide technical assistance to help countries raise private sector capital to finance environmental and social priorities. In Egypt, for example, our advisory teams helped the Government issue its inaugural Sovereign Green Bond—the first in the Middle East and North Africa (MENA). We recently helped the Government of India establish its sovereign green bond program and issue its first green bond. Still, the green, social, and sustainability bond market only represents only fraction of global capital markets financing.
"The World Bank is working on expanding access to financing and leveraging investors' interest in sustainability and global capital markets to assist member countries in tackling development challenges," said Jorge Familiar Calderon, Vice President and Treasurer. "The World Bank is one of the most effective engines for facilitating private capital to support sustainable development."
One of the World Bank's latest innovations is the Emission Reduction-linked bond designed to provide clean drinking water to about two million Vietnamese schoolchildren. The bond will finance the production of 300,000 water purifiers and their distribution to 8,000 schools and other organizations nationwide. By avoiding burning fossil fuel during the water purification process, this single project has the potential to reduce nearly six million tons of carbon dioxide, the equivalent of taking almost two coal fire power plants out of service for a year.
The Emission Reduction-linked bond is the second in the series of "outcome-based" bonds. With this innovative instrument, the World Bank guarantees the principal on these bonds but investors agree to forego some coupon payments in exchange for contingent future payments tied to project outcomes. In lieu of redeeming investor coupons that they forego, the funds are allocated to a project—such as in the case of the Rhino Bond in support of the recovery of the black rhino population in South Africa.
In addition, the World Bank (IBRD) has structured and executed several catastrophes (Cat) bonds. These transactions mobilize the risk-bearing capacity of private investors to assume clients' natural disaster risk. While proceeds are used for IBRD sustainable lending, a specific underlying outcome risk is transferred to the bond investors. Since 2020, the World Bank has issued Cat bonds for Mexico, Jamaica, the Philippines, and Chile, among others, providing financial protection against earthquake, hurricane, and tsunami risk. The newest issuance, the Chile Cat bond, was the largest single-country catastrophe bond and swap transaction executed by the World Bank and joined another key issuance Jamaica Cat bond in providing financial resilience against disasters. The World Bank has played a pivotal role in mobilizing private capital in these markets while helping client countries manage disaster risk. Such bonds not only help provide immediate liquidity in case of a disaster but also "immunize" the public budget by leaving fiscal space to help address highly destructive but low-frequency events.
We are asked to do more
However, in addition to innovations, this is a time in which the World Bank is asked to do more. To expand access to financing while preserving its AAA rating and long-term financial sustainability, the World Bank Group (WBG) is enhancing its contributions as part of its evolution roadmap along with three workstreams.
Among many recommendations from the Roadmap, the World Bank's private capital facilitation efforts aim to enable capital by addressing an economy-wide or sectoral environment, maximizing the development project pipeline, and connecting with markets to match private capital investments.
On April 14th, 2023 at 9 AM EDT, join us live for an informative session on "The Power of Private Capital for Sustainable Development" during the WBG's Spring Meetings 2023, which will showcase how the Bank can help member countries tackle critical financing challenges. The event features two key events:
A fireside chat with the Bank Group President and the Group Charmain of Standard Chartered Bank, highlighting their experience and understanding of development and finance.
A high-level panel discussion with both public and private sector representatives. The panel will share views on joint work with the Bank to create innovative financial instruments with the private sector and provide advisory services to the public sector. The discussion will call attention to the needs and demand for sustainable finance and showcase success stories benefitting countries. The panelists will also discuss Bank plans to address the G20 Capital Adequacy Framework recommendations.