Skip to Main Navigation
Speeches & Transcripts January 29, 2018

Keynote: Sustainability in Fixed Income Investments

It is an honor for me to join you at the third in a series of global conferences that PRI has organized for fixed income investors. Let me start by acknowledging PRI for the significant role it has played in mainstreaming sustainable investing. Since 2005 when the then UN Secretary General, Kofi Annan invited a group of the world's largest institutional investors to join a process to develop the Principles of Responsible Investing, PRI has been at the forefront of the drive towards sustainable investing.  While the number of signatories to the PRI has risen from 100 when the principles were launched in April 2006 to more than 1900 today, there is greater appreciation of the value of integrating Environment, social and governance(ESG) factors into investing.

Let me also commend all participants at this conference because your individual efforts on integrating ESG into investing is shifting sustainable investing from a niche 'play' to mainstream. 

In my remarks today, I will review the global context for sustainable investing, share some examples of how we have approached sustainability at the World Bank and conclude with my views on the road ahead.

Since 2015, global leaders have accelerated the focus on sustainability first through establishing the 2030 agenda and the seventeen global or sustainable development goals as well as through the COP 21 Paris agreement to maintain global warming below 2 degrees Celsius. This has been reinforced by COP 22 in 2016 and COP 23 in November 2017. 

Also crucial are the recommendations published by the Financial Stability Board's Task Force on Climate Related Financial Disclosures in June 2017. While the recommendations do not promote any position on the climate change debate, they provide a neutral framework for disclosing the impact of climate risks on an entity's business, thereby promoting transparency on the material risks that entities face. 237 companies with a combined market capitalization of over USD 6.3 trillion have now public committed to implement the recommendations.

I believe that market forces are moving in the right direction. The report that the World Bank co-sponsored with the UN - The Roadmap for a Sustainable Financial System - found that transition towards a sustainable system is already taking place through the interaction of market- based, national and international initiatives. The Sustainable Stock Exchanges (SSE) initiative now includes over 60 stock exchanges, representing more than 70% of listed equity markets and about 35,000 companies with a market capitalization of over USD55 trillion.  At the One Planet Summit in Paris in December 2017, global investors launched a new initiative Climate 100+ to drive action on climate change from the world's largest corporate greenhouse gas emitters. Under this initiative 225 investors with more than USD 26.3 trillion assets under management will engage 100+ companies to accelerate climate action.

At no time in history is it more obvious that, we must transition to a sustainable, inclusive, low carbon, resilient global economy.  While a focus on sustainability can help us tackle income inequalities, populist tendencies and climate risk, it presents vast investment opportunities, will drive innovation and create new jobs. For example, it is estimated that the World will require USD90 trillion in climate-resilient infrastructure by 2030 while closing the gender gap can unleash up to USD 28 trillion in global GDP.  

At the World Bank, our mission is anchored on sustainability as it is centered around two objectives - end extreme poverty by 2030 and boost shared prosperity amongst the poorest 40% around the world. The three ways to achieve these objectives are (a) accelerate inclusive and sustainable economies through good governance and policies as well as infrastructure and private sector development, (b) investing more effectively in people, (c) helping our client countries build more resilience to global shocks and threats. We bring our unique combination of financing, knowledge and experience to promote sustainability and to tackle complex challenges such as climate, forced migration, pandemics, and natural disasters.  

At the World Bank, we leverage our long track record of supporting various countries around the world, our partnership with public and private sector, notably through the Invest4Climate platform that we co-sponsored with the United Nations in September 2017 to scale up finance for climate. We also leverage modern tools and technologies to design cutting edge solutions for our clients. For example, we have multi-disciplinary teams including economists, mathematicians, and environmental experts working together and using techniques that combine the growing volume of data from satellite imagery and distributed ground sensor networks, with administrative and survey data regarding economic activity and  poverty.  They are developing tools that improve our ability to consistently compare environmental outcomes across countries, country groupings, or even different regions within a country, or municipalities within a city.  These comparisons help us understand the dynamic interlinkages between poverty reduction and environmental degradation.  

Combining these new techniques and sources of data with cloud computing and artificial intelligence promises to fundamentally transform our ability to assess the trends in sustainability performance.  We will be able to evaluate trends across various actors – whether they be sovereigns, sub-sovereigns or corporates – and, by extension, the risk and impact of the financial instruments with which they are associated. Our hope is that these improved insights will help drive global capital flows towards more sustainable investments.

In respect of financing, our approach is to catalyze private sector participation through our role as an honest broker. Since 2011, we have committed an annual average of more than USD 10 billion to 1,000 climate-related projects. By 2020, we expect at least 28% of our portfolio to go to climate finance. Our specific goals are to assist our client countries to add 30 gigawatts of renewable energy( or energy to power 150 million homes), and to develop climate-smart agriculture investment plans for at least 40 countries. 

Our work in developing the green bond market has also promoted an understanding of the risks and opportunities that environmental issues present. Since 2008, we have raised USD 10.2 billion while IFC has raised USD 5.8 billion through green bonds.  It is important to note that our first green bond was issued in response to demand from Scandinavian institutional investors seeking a triple 'A' plain vanilla fixed income product. Also, the California State Treasurer became our first US dollar denominated green bond investor when it participated in our USD 300 million green bond issued in 2009. The green principles that we developed along with other multilateral agencies, including transparency around the use of proceeds, an independent second opinion and third party verification have further supported the development of the green bond market. According to Bloomberg, green bond issuance reached USD 164 billion in 2017 and now covers corporates, sub-national and sovereign issuers. It is however still a small proportion of the USD 100 trillion bond market.

To finance our activities, World Bank Group Institutions, IBRD, IFC and IDA ( from this year) issue bonds totaling over USD 70 billion annually. This means that we offer fixed income investors, opportunities to invest sustainably by buying our bonds. Beyond green bonds, we are therefore able to create opportunities for investors to support the sustainable development goals. Examples include a private placement, focused on health, for an insurance company.  Last year, we issued bonds with returns linked to the performance of companies promoting SDGs for institutional investors in Italy and France and subsequently for retail investors in Belgium and Switzerland. Earlier this month, we issued a CAD 1 billion benchmark transaction anchored by a Canadian ESG investor Addenda Capital, to raise awareness on the important role of women empowerment in building sustainable societies.  The strong demand for our sustainable development bonds demonstrates investor appetite for sustainable and responsible investments. 

In light of the recent devastating natural catastrophes that the World has recently experienced- from Bangladesh, the Caribbean Islands, Italy, India, Nigeria, Sierra Leone, Spain, the U.K. and the US - California, Puerto Rico and Texas, it is important that I highlight the work the World Bank Treasury has been doing in promoting natural disaster risk management for our clients. This is a critical challenge, because the impact of natural catastrophes, like earthquakes, hurricanes and droughts, holds the very real risk of rolling back years of development gains.  In fact, the impact of extreme natural disasters is equivalent to a $520 billion loss in annual consumption globally and forces about 26 million people into poverty each year.

In response to this challenge, we have greatly stepped up our work in this area. We have executed transactions that in the aggregate have passed more than USD3.5billion of catastrophe and weather risk from our member countries to capital markets investors, including a truly ground-breaking $425 million pandemic risk transaction launched in June 2017,  that provides insurance to the 77 poorest countries in the world against the out-break of epidemic influenza, SARS, Ebola and other deadly diseases. Another transaction we executed this year passed $360 million of Mexican sovereign earthquake and hurricane risk to the capital markets. This transaction was launched in August 2017 which turned out to be timely since one month later, a massive 8.1 earthquake just off the Pacific Coast of Mexico triggered a $150 million payout to Mexico that will help the country rebuild vital infrastructure.  A few days ago, we announced landmark CAT bond transactions covering earthquake risk in Chile, Colombia, Peru and Mexico, simultaneously.  The transactions which together amount to more than USD 1 billion create an opportunity for investors to get exposure to diversified catastrophic risk factors.

We also manage about USD 189 billion for the World Bank Group, central banks and other official institutions. Our pension plan has benefited enormously from being a signatory to the PRI.  The reporting covers the integration of ESG into our investment processes, our responsible ownership efforts through proxy voting and engagement; and our outreach with peers and stakeholders.  

Our ESG work program includes engagement with asset managers, particularly during the due diligence process.  In addition to the guidelines and templates provided by the PRI, we have introduced an internal assessment and scoring system to give us a sense of the level of ESG integration in our portfolios. Our due diligence process has resulted in fruitful interaction with managers, resulting in the adoption of a formal ESG policy in a number of cases.  

Our ongoing efforts as responsible investors has also improved our understanding of the impact of ESG issues on our investment portfolios. We are also exploring ways to better understand exposures to key long-term systemic risks, such as climate change.

In October 2017, we announced a partnership with Japan's Government Pension Investment Fund (GPIF) to expand markets for sustainable investing.  This initiative includes a joint research program that will explore practical solutions for integrating sustainability considerations into fixed income portfolios. Research areas include benchmarks, guidelines, rating methodologies, disclosure frameworks and ESG risk correlations for fixed income portfolios.

I am excited about the road ahead as fixed income responsible investing is the next big opportunity.  First, ESG implies greater depth of analysis which ensures better information for investment decisions.  Second, there is sufficient research to confirm that sustainable investing is not only the right thing to do but also makes good business sense.  More generally, sustainability drives innovation, and resonates with millennials whose influence will grow as they make up an increasing proportion of consumers, the global work force, and the voter base. For example, Ipsos Reid's recent survey showed that millennials who are the largest demographic North America's workforce are set to inherit more than USD 30 trillion in the near future.  

Tackling challenges such as data quality and inconsistencies in the interpretation and understanding of ESG risk and opportunities will accelerate the shift from sustainable investing as a niche 'play' to sustainable investing as mainstream. Emerging technologies can be a catalyst in this respect.

As asset managers and asset owners we have the power to make responsible investment decisions that not only enhance our individual portfolio returns and better manage risk, but also promote the sustainability of financial markets and economies.  

Notwithstanding the success of the World Bank at fostering sustainability and resilience, it is clear that the aggregate financial resources of the Bank, and our peer institutions in the public sector, are simply too limited to play the central role in the transition to a more sustainable, global economy. The Bank is principally a catalyst in this endeavor, pioneering new forms of financing and creating accommodative investment environments. Ultimately, it is private investors, and specifically the capital markets, that can meet the sizable funding requirements.

For the private sector, finding solutions to these problems is a challenge but also an enormous opportunity. The investors that most aggressively embrace this challenge today will be the winners of the future, because reorienting financial flows to be more sustainable will no doubt create new jobs and drive economic growth. 

Finally, I believe that everyone who has taken time to be at this conference on responsible investing in fixed income is a winner because this is an area where the first mover advantage is huge and you are first movers.

Thank you.