World is waking up to how multilateral development banks can fund social good

Calls are growing for MDBs to play a bigger role in tackling global challenges, from climate change to infrastructure renewal, as an elegant solution to channelling savings into long-term investment

Anthony Rowley

Published: 3:30am, 24 Oct, 2022

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Stock markets have been the king of the castle – in terms of influence, if not size, relative to other forms of financing – for longer than is good for the global economy and the financial system. They may not be about to be toppled completely but they face the prospect of being cut down to size.

This has less to do with the latest bear market (one of a depressingly long series of such slides) as with the dawning realisation that stock markets have not been doing a good job of converting savings into long-term investment, and that new financial intermediaries are needed.

We see this in the growing calls for a boost to the capital of government-owned multilateral development banks (MDBs) such as the World Bank, so they can play a bigger role in financing the battle against climate change, infrastructure renewal, fighting pandemics, and so on.

MDBs are an elegant concept and, if they had not existed for decades, we would certainly need to invent them now. But they have been greatly underused, owing largely to an ideological bias in Western economies in favour of market financing and private-sector solutions.

Yet stock markets have fallen down on the job of providing finance for multitrillion-dollar socio-economic priorities. Instead, they have funnelled savings on a massive scale into consumer-oriented “tech” situations – a boom now gone bust.

The calls for development banks to assume a greater role in financing have been heard widely of late, from the Asian Development Bank (ADB) meeting in Manila last month to the recent World Bank meeting in Washington. And they are likely to be echoed at November’s G20 summit in Bali.

If markets can’t be trusted to invest wisely, governments should step in

One precipitating event at the G20 meeting will be the formal unveiling of the ADB’s Energy Transition Mechanism (ETM) which represents an imaginative way of combining public and private financing from sources as diverse as governments, MDBs, pension funds, philanthropies and so on.

The ETM aims to tackle the huge problem of “ stranded assets” by buying up coal-fired power plants in Indonesia, Vietnam and the Philippines, closing them ahead of schedule and replacing their output with renewable energy. It could become “the largest carbon reduction programme in the world”.

A pilot project is under way in the Philippines and G20 chair Indonesia is expected to announce another pilot scheme at the summit. The meeting coincides with the COP27 UN climate change summit in Egypt’s Sharm el-Sheikh and there, too, the issue of an expanded financing role for MDBs is likely to loom large.

An Afghan girl warms her hands, resting from carrying water on December 14. The Middle East is one of the most vulnerable regions to climate change. Photo: AP

The potential for MDBs to play a much expanded role in organising and financing mega capital projects extends well beyond the area of climate change, as the G7 nations recognised in June 2021 by calling for greater MDB involvement in infrastructure provision.

Fully exploited, MDBs (among which there are some 25 principal multilateral and regional institutions worldwide, led by the World Bank) could constitute an alternative to stock markets as a conduit for channelling billions or even trillions of dollars into long-term investment.

Because they are owned by as many as 189 governments, including the world’s leading economic powers, these MDBs are able to borrow many billions of dollars on international bond markets at relatively low rates of interest, with only small amounts of paid-in capital. They thus produce a big bang for the buck.

Their bonds can be bought only by huge institutional investors like pension funds or insurance companies, but given a little financial ingenuity and political will, there is no obvious reason MDBs should not issue a wider range of financial securities to attract smaller investors.

Market slump is perfect time to launch climate banks and bonds

A first step, as the International Monetary Fund has suggested, would be to increase MDBs’ capital so they can make greater use of equity finance and draw much more private finance by broadening their investors base to include banks, investment funds, institutional investors and philanthropic capital.

Such moves are key, for example, to fund the battle against climate change because, while millions of investors are eager to put their money behind this fight, they are restricted to indirect and often ineffective ways of doing so such as via ESG investment, buying green bonds and the like.

In a recent blog, the IMF argued that it was “unclear whether very large and quickly growing environmental, social, and governance, or ESG, investment flows alone could have a real impact in scaling up private climate finance.” Yet scaling up is precisely what is needed, and MDBs seem the way to go.

The trouble is, MDBs are “caught between a rock and a hard place by [expanded] mandates and stagnating resources”, to quote Britain’s Overseas Development Institute. They are expected to address challenges ranging from economic development to humanitarian crises, pandemics and many more.

The message is that MDBs need more resources – financial and human – and political support. The magic of the marketplace needs to give way to a more sober assessment of what role multilateral public institutions can play in tackling the needs of both “market” and state economies.

Anthony Rowley is a veteran journalist specialising in Asian economic and financial affairs

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