Remarks delivered by Joaquim Levy at the 2018 Extreme Events and Climate Risk Forum organized by the Geneva Association in Toronto, Canada, on September 18, 2018
Good morning, ladies and gentlemen. I am pleased to be with you to speak about critical infrastructure—infrastructure that is critical to achieving the U.N. Sustainable Development Goals and that is resilient to the potential impacts of climate change.
The World Bank Group is deeply committed to sustained economic growth, social inclusion, and environmental protection, recognizing the major threat of climate change to its development agenda of ending extreme poverty and boosting shared prosperity to achieve the SDGs by 2030. It is estimated that more than 90 percent of people facing extreme poverty today are in countries that are politically fragile or vulnerable to natural disasters, or, in many cases, both. Hence, climate-resilient infrastructure is also critical to arrest a downward spiral of economic degradation that affects those who are already the most vulnerable.
The insurance sector plays a critical role here—as entrepreneurial risk-taker as well as long-term investor—in supporting resilient societies and sustainable growth. We are working very closely with the insurance industry to help mitigate the impact of climate risk and its consequences in emerging markets and developing economies. Of course, you all are familiar with our CAT bonds and disaster risk mitigation programs. We have also partnered with the private sector through the Insurance Development Forum (IDF) and some donor countries, in particular to cover natural disaster risks through better modeling, a clear framework for reinsurance across borders and other elements of critical soft infrastructure that are crucial to achieve the SDGs.
Finance can play many roles in fostering resilience. Risk transfer can help finance reconstruction and reduce hardships. But resilience goes beyond that, as comprehensive disaster risk management also requires high levels of preparedness and the kind of infrastructure that can enhance resilience. In this context, the concept of quality infrastructure is becoming ever more important. Quality means obtaining assets that are economically sound, are built and kept safe, and respond to ESG requirements, providing additional layers of resilience to communities.
Insurance can play a key role by pricing risk exposure and creating incentives for investing in preparedness in climate-resilient infrastructure. Of course, pricing climate risk is a whole new endeavor, especially when looking at the long term where we can have a lot of non-linearities. However, it is essential to provide the right signals and ensure the viability of the insurance industry. Regulators are recognizing this, and this is why we are involved in the Network for Greening the Financial System (NGFS). The NGFS is a group of central banks and supervisors willing, on a voluntary basis, to exchange experiences, share best practices, and contribute to the development of environment and climate risk management with a view to developing policy cohesiveness across jurisdictions and between policy-makers and the private sector.
The quality of climate-resilient infrastructure is essential for investors—notably institutional investors, whose risk tolerance is limited and whose willingness to assume the management of assets low. So we have to inject quality and information to foster evidence-based decisions in the infrastructure financing space, which is so important to investors with long-term liabilities, notably life insurers. Infrastructure can bring predictable yields and stable cash flows, with low correlation to other assets and low downgrade risk, making it an attractive, natural match to many insurers’ needs. If we get the conditions right.
The World Bank Group has just surpassed its commitment of having 28 percent of its operations addressing climate change (by 2020) —we closed FY18 with 32 percent, thanks also to the proactive stance of IFC. And we are focusing more and more on the origination of good, bankable infrastructure projects. This is the objective of the Global Infrastructure Facility (GIF), which brings together multilateral development banks as technical partners and private sector investors to prepare, structure, and implement complex infrastructure projects. The GIF also helps standardize projects and contracts, ensuring high levels of ESG and quality in general. It has currently a portfolio of 41 projects, which is expected to mobilize over $36 billion in total investment. More than half of the GIF-approved funding has supported climate-smart projects.
Among GIF climate-smart projects in critical infrastructure are:
- The Vietnam Solar Auction, which mobilizes $1 billion toward achieving the target of 20GW by 2030 that was set in Vietnam’s Revised National Power Development Plan;
- The Indonesia Geothermal Resource Risk Mitigation Facility, which we help the government design and operationalize a private sector window that mobilizes $4 billion; and
- The Brazil Streetlighting Modernization Program, whose contingent guarantee fund has raised $538 million of private capital.
We also remain active in “traditional” activities, such as water security in Mexico, but we believe that even in these sectors innovative approaches and new technologies to build, maintain, and charge for the services hold great promise. And we continue to innovate on thematic bonds related to sustainable development, such as the “blue bond” issued by the Seychelles.
We need to remember that the infrastructure we are planning today and will build over the next few years will not only have to help mitigate the risk of climate change but also support the adaptation to the changes we may not be able to avoid. For many countries this will be one-shot opportunity to transform their societies and make their economies more resilient.
We also address other reasons why infrastructure investment, especially by the private sector, is still too low. We know that infrastructure investments can be highly complex, but standardization can help. Wrapping projects to reduce the informational burden to investors (and enable a portfolio perspective on infrastructure through greater comparability) is also needed. And increasing the data available is a major priority to open new venues, including on financial regulation.
Financial regulation tends not to differentiate infrastructure investment. For instance, many insurance solvency regimes treat infrastructure debt as if its credit risk evolves like that of corporates, whereas infrastructure debt has a risk profile that is very different. Indeed, risks in EMDE infrastructure may be lower than usually perceived. The World Bank has conducted some studies using large samples of infrastructure debt. The findings suggest that if current regulations reflected the lower default risk and higher recovery rates these transactions have shown over the last 30 years, a significant amount of regulatory capital could be freed, lowering the cost of infrastructure finance. There are incipient indications that this favorable profile is even more pronounced for “green projects,” i.e., those projects that would meet use-of-proceeds requirements of the Green Bond Principles.
So, we believe there is scope for a discussion to solvency regimes to reflect the special features of infrastructure and reduce the cost to long-term regulated investors, including insurance companies and pension funds, when investing in quality and climate-resilient infrastructure. This understanding is also found in the recent consultation paper of the Financial Stability Board (FSB) on the impact of regulatory reforms on infrastructure finance, which recommended that we should not preclude further analysis of this issue by insurer supervisors. Thus, we strongly welcome that the International Association of Insurance Supervisors has taken a special look at infrastructure investments in their recently concluded field testing exercise of Insurance Capital Standard (ICS), which will be finalized by the end of 2019, setting the minimum risk-based capital requirements for internationally active insurance companies.
In sum, climate change is a reality already, and we need to accelerate the origination of quality and climate-resilient infrastructure and better align the financing of the economy and the liabilities-driven investment of the insurance sector. The long-term implications of such alignment are hard to exaggerate, especially in a world with persistent excess of capital and increasing climate-related risks.