These 'beautiful' banks are expected to save climate finance: Moving Money
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Welcome to Xero. I am Akshat Rati. This week, the mysterious beauty of development banks. It has been a wild couple of months in the world of development finance.

Since January, one by one, we've seen countries pull back from their aid commitments. The US, the UK, the Netherlands, France, the list keeps growing. This comes just a few months after rich countries agreed to ramp up climate spending at COP29. The headline target was $300 billion a year by 2035, tripling the previous commitment of $100 billion, which is supposed to be reached by 2020.

Now, these new commitments are in serious doubt. What isn't under question is the need for that money. Developing countries still require trillions of dollars a year to transition to clean energy and build climate-resilient infrastructure. So where will the money come from? That's the question we'll explore in this episode of Moving Money.

We are welcoming back Avinash Prasad, Special Advisor on Climate Risk to the President of the Inter-American Development Bank and former economic advisor to Barbados Prime Minister Mia Motley. Last week we explored how to reshape the global financial order for the climate era. Today we'll explore the role of Multilateral Development Banks or MDBs. The World Bank is the best known MDB, but there are many others.

Collectively, they funnel hundreds of billions of dollars a year to poorer countries around the world, much of which goes to climate projects. Our conversation was recorded at COP29 in Baku, but remains as relevant as it was then. Perhaps even more so as President Trump doubles down on US isolationism. We sat down to talk about how MDBs can be used to move more money to developing countries, what they can do better, and who will fill the gap if the US withdraws from these MDBs.

Avinash is a special advisor to an MDB that makes him, unsurprisingly, a supporter of their work.

But he's not just an MDB insider. He's come to that role after a long career as a banker on Wall Street in New York and in the City of London. He's also been an advisor on economic issues to a developing country government. So his insights come from seeing all sides of the financial system. As you'll hear in our conversation, he's come to the view that MDBs play a crucial role in the global financial system and one that becomes more important in the volatile times ahead.

Hi Avinash, welcome back for another episode of Moving Money. Thank you. Today we're going to talk about multilateral development banks. Things like World Bank, which most people I think have an idea of, but also so many other development banks. One that you work for, Inter-American Development Bank, Asian Development Bank, African Development Bank.

The fact that they have development in them makes them seem like good banks. What are MDPs? You know, Akshat, when I think we first spoke, I was part of the Bridgetown Initiative, one of the architects of that for international financial reform. And in doing that work, I realized that the multilateral development banks have a very critical role to play, which is why I joined one.

Now, I think it's actually, and excuse the potential perversity, but actually a thing of beauty that at the center of the global financial system are a handful of AAA-rated institutions.

which are development banks, which means they're not for profit. And AAA rating just gives them this credit rating, which allows them to go to private investors and they will invest in this thing because they are guaranteed a return. Did you say just gives them? It's such a powerful thing. So what a development bank can do, and this is very different from, say, a climate fund or development fund. You put a dollar into a development fund, you get a dollar out of it.

You put a dollar of capital into a multilateral development bank and you can get $8 out. How does that happen? So capital, what is capital? Capital is loss absorbing. So I go into the marketplace. The British government's given me a passbook.

of capital. I go into the marketplace. I say to the marketplace, I've got a pound of capital. I can lose this pound. I don't need to pay it back to anybody. I can lose this pound. And as a result, can I borrow money from you? So it's like my first loss. I've got the ability to do first loss. And therefore the market says, oh, I don't mind lending you seven or eight pounds, knowing that if you run into trouble, the first pound to suffer is not my

It's the British government's pound, the capital. So when we go into the marketplace with a pound of capital, I could therefore borrow seven pounds. That seven pounds is comfortable because it knows if there's a loss, their money isn't touched until the first pound is gone. So how big is the MDB system when it comes to total amount of lending relative to, say, private lending? Tiny. Tiny.

So I think I began by saying that it's beautiful that the middle of the system is not-for-profit AAA development banks. The ugly bit is they're really, really tiny. And we need to make them much bigger, at least three times bigger. And at the moment, development banks are lending in the order of around $200 billion a year. We need them to be lending...

three times that amount, with a big chunk on climate, maybe half on climate. So they need to be lending $600 billion a year and $300 billion perhaps on climate. And private lending is in the trillions of dollars, I'm assuming tens of trillions of dollars on an annual basis? So private lending is around $100 trillion, yes. But the point is that we have a very financialized system with lots of assets and debt.

far in excess of the national income. Those assets and debts are recycled and shuffled around and lent and bought. The development banks, therefore, as a proportion of that, do a fairly modest amount. But what are development banks? How do they exactly work? What is the structure of a development bank that makes them a thing of beauty?

What makes my thing a beauty is that you can put some money into a development bank and much more money can come out. Their main job is to give you a loan. Because they're a not-for-profit institution, they try to give you a cheap loan and they try to make it as long-term as possible. They're not trying to maximize the profitability of this loan.

Now, what makes them not for profit is that their shareholders are governments who, again, are not looking to make money from their investment. And these are rich governments mostly, right? It's America, it's Britain, it's the G7 countries. They have about half of the shareholding in most development banks when we looked at the numbers. Akshat, you said half. I mean, half is not most. Half is actually quite small.

So one of the interesting things about the development banks is it is one of the broadest ownership structures. So the third biggest shareholder in many of the development banks is China.

India has a bigger shareholding in the World Bank than a G7 country, Italy. And in fact, a few G7 countries, Italy and Canada. So it's actually fairly broad, but they were set up by the rich countries. Right. And to me, when we think about development banks in that context,

One way to think about it is these are mostly colonial powers that were forced to eventually give up their colonies and realize that if they wanted to remain in a world that remains peaceful, they need to ensure these colonies that they extracted so much value from.

do develop on their own, that will require them to have some capital. And we better create a system that allows some development money to go to these places. And we can control that a little bit so that no way they are not colonies anymore, but at least we have some control over how much money they can get. You're revealing so much about yourself, actually, in this description. Because, you know, the way the World Bank was established was the European reconstruction after the war.

It wasn't actually about economic development and the empires. Like the IMF, the IMF's remit was not about conditionality on poor countries. It was about managing a global system of fixed exchange rates. Damn.

So, in fact, what's quite innovative about these institutions is how they've actually repurposed themselves as their original purpose disappeared. You know, it's a story of all institutions. They were set up to do something. They achieved it.

And they reinvented themselves to do something else so they could stay along. So now these institutions, if you look at the shareholdings, and I recommend any listener just Google the shareholdings of the World Bank, it is an amazingly mixed structure. Russia is a major shareholder. Iran is a major shareholder of the World Bank.

It's not as broad as it could be, but it is surprisingly broad, which is why I think its role in climate finance helps to move us along this process of which we do need a global response to a global problem.

Why are they involved in climate? The name is development and I understand climate change can affect development. Is that the link? Climate is one of the biggest threats to poverty. We're seeing a tremendous number of people being pushed into poverty by climatic events.

I was born in the Caribbean, Akshat, and we often think about these hurricanes. And the same hurricane went over Grenada and almost a third of the population is homeless. The exact same hurricane goes over Caymans. In fact, Caymans is probably underwater at one point and very little damage is done because of differences in development. So climate vulnerability has a lot to do with levels of development. But also...

But also, the energy transition is probably the biggest, best development strategy for many developing countries. So we've just done this work which shows that were Latin America and the Caribbean to reach net zero, the net economic benefits will be 50% of GDP.

And a big chunk of that comes from the savings from electrification. You've taught me a lot about the power of electrification. A big chunk comes now from the fact that renewables are cheap. There's fuel savings.

And an even bigger chunk comes from something that people don't realize. Fossil fuels are really bad for your health. More people are dying from air pollution than dying from climate change. About $4.7 trillion is spent on health to manage the repercussions of pollution. So if we were to get to net zero, we will have a huge positive economic benefit and the development banks

should therefore be playing a role in that. So in this reinvention story from European reconstruction to reducing poverty, is this now a new phase of reinvention? There is a reinvention. And I think it's a function, firstly, of the fact that climate has now become

as a result of inaction, become this global force that is having a huge impact on poverty. It's also a global public good. Very hard for us to manage climate individually. So the World Bank is part of this reinvention, you might say, began to change its strapline. It's not just about eliminating poverty. It's about doing it in a livable world. And I think that's good and important.

I think a recognition that development isn't all about climate is also important. The development banks are committing themselves

to 50% of their lending is climate related, climate positive, which I think is a good and reasonable number. It's, I say reasonable because of the scale of the task, what we need to do, but it's not 100% and it shouldn't be 100%. Okay. So if you're going to triple the lending on development banks, a lot of that supporting climate work,

How exactly do you get there? Because that will require the shareholders to actually put more money into the system, correct? It's one of those wonderful issues where as you begin to

delve into it, it gets more and more complicated. Okay, let's break it down. Well, let's begin at the top where it's simple, which is, you know, you get out a multiple of what you put in. And if they want to do a lot more, they've got to put in some money. So the multilateral development banks at COP are

made an announcement that if business as usual, no new shareholder support, they could probably lend around $120 billion per year on climate by 2030. Right. And that would be roughly double or one and a half times what they're doing now. What they're doing now is not very far short of that number. It's...

more like $75 billion today. And the ability to be much higher is clearly limited by not having new resources. But there are things...

development banks can do. There's been a whole push around what's called the CAF reform, the Capital Adequacy Framework reform. So what is the ratio of capital to lending? Can we change that ratio and lend a bit more with existing capital?

Can we do something that was an idea very much led by the UK on what's called portfolio guarantees? So the development banks might pull together a portfolio of the loans they've got and say to a donor interested in climate, say, well, here's 10 loans that we lent for climate resilience. Would you guarantee this portfolio? Not any individual loan, but the portfolio doesn't lose money.

And that guarantee is unlikely to be hit, that the whole portfolio loses money. But it allows the development bank to reduce the amount of capital it puts in and use that capital somewhere else and lend more. So the whole things they can do with existing money, being clever with it, pulling the lever, the metaphor used is squeezing the lemon. The lemon can be squeezed a bit more.

But there comes a point where you've squeezed all you can from a lemon and you need new money. So if you think about it in the multiplier terms, it's sort of one pound in...

six or seven pounds out initially, and then you do these lemon squeezing activities and you get eight pounds, maybe nine pounds out of the system. Oh my God, that's exactly right, yes. I don't need to explain anymore. Now, okay, so now we've got that level of complexity, let's add another layer of complexity. So adaptation, climate adaptation, building stronger seawalls, better flood defences, better drainage systems,

It's not that easy to get the private sector involved in that because there's no... There's no return to be made. Yeah, there are no returns to be made. There's savings to be had, but no returns to be made. But mitigation, investing in a solar farm, wind turbines, hydroelectric power, today, nuclear is coming back in. Those things, you could probably co-invest with the private sector. Yeah.

Development banks have what's called B loans. They'll do a loan and then they'll have another part of the loan which has almost exact same terms, the maturity, the interest rate, and the private sector may fund that.

So the A loan is the development bank's loan and the B loan is the private sector matching. That's right. So that is another way in which they can expand a bit of leverage, but only for mitigation. So once we've got, say, the one to eight ratio, half of that one to eight could be done for adaptation, adaptation loans. The other half could be on mitigation loans. So I've got now

1 to 8. But my mitigation loans could be blended with private sector loans. Right. So I could go rather 1 to 8, 1 to 16. Right. I could match whatever my lending on the development bank with lending on the private sector. Now you're starting to talk like NASA talks about investing in

$1 and getting $50 a return for the US economy because rockets are cool.

Yes. So on mitigation, maybe a dollar of capital can end up with $16 of lending on mitigation. But whilst adaptation is one to eight. And therefore, that means that if the shareholders of development banks put in, say, $10 billion of capital every year, we could probably expand the amount that development banks lend.

by over 100 billion a year, lend directly themselves or mobilized directly with the private sector. So this idea that was talked about at COP29 around a new collective quantified goal on finance, which is supposed to be rich countries helping poor countries do mitigation and adaptation,

There were these layers of onion, the first being direct money being given from a government to another government, the second layer being multilateral development banks lending more, and then the third being investors come in. Now, already the explanation you've given to me

is that MDBs are really already mobilizing private sector because the lending that MDBs are able to make is because they're able to go and create bonds and borrow from private markets

which consider the MDBs to be a credit worthy lender to give money to. And then they use that money and give it to somebody else. That's a great point that many people don't get. The way that an MDB works is mobilizing private sector money. The donor, the government, has put up one dollar of capital and I've used that dollar of capital to get seven or eight dollars of private sector money. I've already mobilized the private sector.

After the break, Avinash wants to see much more money going to development banks. But what happens if President Trump pulls back? And by the way, if you've been enjoying this episode, please take a moment to rate and review the show on Apple Podcasts and Spotify. It helps other listeners find the show.

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where money means more. There are lots of criticisms of MDBs that come up. One is that because they have to keep their AAA status, they are quite conservative, that they lend to projects, but they do a lot of work on those projects. It takes a long time to get those loans. They make sure that they're going to get their return because if they don't, then their AAA status is at risk forever.

In a world where we're going to have to do this very quickly and we're expanding this lending, how is the MDB going to be prepared? I think that's the important point. However, I would say there is beauty in the leverage of the $1 of capital leading to

$8 of lending. And that is only really possible with a AAA status so that we should maintain that leverage, try to make them as efficient as they can. But I think there's efficiency and there's also caution.

And the caution is linked to the credit rating. So that is not going to change dramatically. But I think what you're saying is that the MDBs can't do everything. They will need to be a form of higher risk taking.

that property has to be funded separately. So there's something called project preparation facility. You know, the most risky dollar in any project is the first dollar. It's the feasibility because you may determine that it's not feasible, in which case you've lost that dollar.

So there's much talk about the MDBs doing more project feasibility and maybe that needs to be separately funded because that's very risky. That's one reason why they don't do it. The MDBs often complain in that they say, we've got money to lend. Actually, all this talk about giving us more money, we've got money to lend. We don't have projects.

And the fact that there aren't projects in countries with huge amounts of potential is because there's not a lot of money invested in project preparation. There's a lot of work being done on solar. And of course, some of the poorest countries in the world have the most amazing solar resources.

but projects aren't there. Is that because there aren't really good projects? No, we haven't got the money to invest in the feasibility. Well, another criticism that private sector banks make is that MDPs sort of are secretive. They do not share the

loan portfolios that they've given out over the years. And if they did, you know, private sector could take that information and be like, actually, building this project in Ghana was very good. We didn't suffer any losses as a result. We don't need the MDBs. We are private sector banks. As long as we know we can make a return on a project, we'll just go there ourselves.

And that would mobilize a lot of private capital. It's a nice narrative. Share the information, please. It's a nice narrative. You know, the reality is the private sector is not as much of a risk taker as it would like to think of itself as. Often the risk taking is done by government, whether it is Tesla or many of these other big investments. Government has to put up the first dollars.

But it's a valid argument in the past. But MDBs have jointly produced a database of their investments and loans and how they performed. So there's lots of information and information sends a strong signal that investing in companies in developing countries is fairly low risk.

The other thing I've learned, actually, I learned this from speaking to the sustainability person at a major oil company about what they were investing in. And they were investing in these very speculative things, particular types of hydrogen. And I was saying to him, but solar and wind is out there. It works. It's cheap. And he looked at me and said, yeah, there's not enough return for us from that.

So, you know, we used to think that the problem was that the renewables weren't profitable. That's not the problem. For a start, they're profitable today. It's they're not more profitable than other things. That's the problem we need to deal with.

We had the CEO of ExxonMobil come on a climate podcast, this one, and he made the case that, you know, ExxonMobil doesn't have any expertise in delivering electrons. It does have expertise in moving molecules and delivering molecules.

Whereas when it comes to renewables, they've never built renewables before. And if the profit is lower anyway, why should they invest in those projects? You know, I think that that's a wonderfully actually political point dressed up as a technical point. Because the reality is that the problem with renewables is the barriers to entry are very low.

Whilst if you look at the oil industry, they have found ways of limiting and restricting supply. They can do that. And as a result, they can get higher profitability. So one of the things that's occurred to me in this space, working in this space, is we actually need to, we have a different industry structure.

We can't expect an industry or a market that is based around restricting supply and generating super profits to be finding this whole thing very exciting because anyone can put a solar panel on their roof. So either we find ways of restricting it, which I think would be a mistake, or we find ways of developing out a different industry structure. We have a once-in-a-lifetime opportunity

generational shift. It's massive. It's another revolution. And we can do it in a good way in terms of societal development and justice and equity, or we could do it in a bad way. The tech doesn't tell us which way to do it. And we need to think about doing it in a way that is as democratic as possible. One other criticism of the MDBs that comes up is that they're pushing an agenda from rich countries.

Many call it the neoliberal agenda because they will end up supporting these developing countries through lending. Maybe some of these developing countries aren't able to pay those loans back. And then comes in the IMF or the World Bank and says, you have to pay this back. We can help you pay it back. Here are the things that you need to do.

Typically, those things are open up your markets, reduce the amount of public spending you're doing on social activities. And it's a very hands-on approach that sometimes MDBs can end up taking, which from developing country perspective can be very annoying, can be quite colonial. I think it's a fair criticism that many of the people in development banks are

Their fundamental sort of starting point is that the problem here is that the countries have the wrong ideas and the wrong policies and that we're here to correct their policies. And that there's a belief, and I say this both as a development bank professional and a economist, there's often a belief in economics.

that comes out of theories that we teach but may not be very road-tested in terms of what actually happens on the ground. But it's equally fair to say that most developing country officials, and I say that as having been one of those too, also start off from a position of believing that the only problem is they don't have enough money. And the truth is probably somewhere in between the two. One of the instruments that...

could be used through development-backed support, but really bring in private players at a large scale and mobilize capital, is to use something called a debt-for-nature swap. Now, simply, it means a country like Barbados, which has plenty of debt, will go to

and say, take some of our debt off our books and instead of us paying you money, we'll try and protect this ocean, which will be pretty beneficial to the rest of the world and to us. And that'll help our economy grow faster and be more resilient. And thus, we'll be a better country that you can continue to lend to. And isn't it all good for business? And to be fair to you, Akshat, it's an industry where it's...

every new debt for NatureSwap is different. So it's hard to kind of pin it down a bit. But within 10 years, it's gone from being exotic to

to being seen as a panacea. And I hate panaceas, so I'm spending most of my time here. And I think you hate exotic too because you want scalable trillion-dollar instruments. Yes, exactly. I'm just a hater. No, I think the challenge is now people thinking that the debt-for-nature swaps will solve everything. So even though we're doing most of them, we're also cautioning people at the same time, which is a slightly odd feeling.

So today, the latest debt for nature swap is one where a country has a pocket of high yielding debt. It's very important that the country is not completely debt laden. So you've got a pocket of high yielding debt. Maybe you issued some debt some time ago. Maybe you've got a loan with somebody that was doing something specific and it's quite high yielding.

And so a development bank will come along and say, well, you know what, I'm going to allow you to use my AAA credit rating to guarantee a new bond that you're going to issue. So you could borrow at 5% and you've got some debt out there yielding 9%. And you used a 5% bond to repurchase the 9% bond. And so you've now saved yourself 4 percentage points of interest rate.

But I'm saying to you, the Devon Bank is saying to you, we're only doing this, putting our credit rating on your debt, stretching our credit to you if you use those savings in a particular way. We want a significant part to be used for a climate or a nature purpose.

We just did a $1.6 billion debt swap in Ecuador where massive conservation in the Galapagos was being funded by the debt swap. We did one in Barbados where we funded marine conservation.

So in the first Barbados debt swap, they were saving about $4 million every year. And because I remember being a little bit skeptical at the beginning, thinking $4 million, because as you say, Akshat, I keep on thinking, will this move the needle? In the second one, we found a way of taking that 10 years of $4 million and basically saving

capitalizing it. So up front in the second one is going to be a massive investment of perhaps $100 million for which they could do a big infrastructure investment and they're basically redoing their waste management system on the south coast of the island. It's going to protect the water quality, it's going to protect the

The US is the largest shareholder in most MDBs around the world. If under a Donald Trump presidency, the US says, we don't care so much about the world anymore. We have so many problems we have to deal at home. We have to deal with this.

We've been giving these tens of billions of dollars every year, hundreds of billions. We can apply that to middle America and re-energize and put America first and starts to not contribute as much to MDBs or reduces its shareholding in the MDBs. Doesn't that pose a risk?

for how much lending and how much more money MDBs can give out, which is the mandate that they are going to have to deal with to increase climate finance? So the World Bank is one of the largest development banks. The U.S. has a 16% shareholding, therefore plays an important role.

I think that in the future, shareholding should relate to money put in. And I think that that's a way in which some of the large middle income countries can have a greater shareholding. If anything, if you look at the shareholdings at the moment, the countries that are disproportionately rich,

positioned are the middle income emerging markets. China's share is too low. India's share is too low relative to where they are in the world economy. Thank you, Avinash. Thank you very much. Thank you for listening to Xero. Join us next week for another episode of Moving Money, where we'll be discussing the role of the private sector. And now for the sound of the weep. That is one of many sounds you may hear at a wastewater treatment facility.

If you like this episode, please take a moment to rate and review the show on Apple Podcasts and Spotify. Share this episode with a friend or someone who thinks banks are beautiful. You can get in touch at zeropod at bloomberg.net. This episode was produced by Oscar Boyd. Bloomberg's head of podcast is Sage Bauman. And head of talk is Brendan Newnham. Our theme music is composed by Wunder Lee. Special thanks to Maithili Rao, Somer Sadi, Moses Andem, Blake Maples, and Siobhan Wagner.

I'm Akshat Rathee, back next week for another episode of Moving Money.