You arrived at the World Bank Treasury after having held a variety of posts at the World Bank and in your native Mexico, including most recently as the World Bank’s vice-president of accounting and controller. What was your impression of the World Bank Treasury before joining and how have your impressions been confirmed or changed as you have been on the job? What has surprised you most?
It’s very interesting. I have been sitting in many different chairs around the table — from being a World Bank client to a World Bank board member, then corporate secretary, vice-president for Latin America and the Caribbean, controller more recently, and now treasurer. And in many of these positions I had a chance to interact with Treasury. So I was well aware of a very innovative team. I engaged with Treasury when I was representing my own country, when we did, for example, the first catastrophe bond transaction with Mexico.
When I was in the region we worked on the Pacific Alliance trade bloc cat bond with the Treasury team.
But what has really surprised me in a very positive way is the level of commitment and passion of Treasury staff towards the Bank’s mission. Treasury not only goes out of its way in terms of innovating, but also leveraging everything we do to further the World Bank’s mission.
The World Bank issued the first labelled green bond in 2008 and while the market for green bonds has grown tremendously in the past years, why has the World Bank chosen to move most of its issuance into Sustainable Development Bonds, with just a small share of green bonds every year?
It’s a transition that makes a lot of sense for the World Bank. We have a holistic approach to sustainable development — it is at our core. We are focused on the eradication of poverty and the reduction of inequality in a sustainable way.
We have green projects which are 100% geared towards mitigating or adapting to climate change. We finance renewable energy projects in multiple countries around the world. But that’s not the only way in which we approach climate. When we finance projects in other sectors and other fields we also look at them from an environmental lens.
So we feel that the sustainable label better encompasses all of what we do. When investors are looking for some risk and return profile, but they also want to make a difference from a perspective of impact, our approach to sustainability tells a more comprehensive story of what we do. And as you also know, we trace the funds we raise through markets, we trace them to our activities.
What do you think of the historical model of the World Bank that crowds in private capital, directing it to development? Do you think it is fit for purpose to help tackle climate change in emerging markets? And what about the International Development Association also issuing bonds — how is that the same, or different?
The world put together an incredibly effective machine to mobilise private resources for development. The IBRD has $20bn of paid-in capital — this is what we have received since the bank was formed. And with this paid-in capital, and the reserves we have accumulated from our operations, we have financed over $800bn in sustainable development projects all over the world. That’s quite an impressive story to tell.
We also have IDA, which started as a fund with very strong donor support for the benefit of the poorest countries. The IBRD — the very efficient private capital mobilisation engine — has also transferred resources to IDA, making it stronger. And now IDA is also going to the markets, so that it can do even more.
It’s a very strong and long track record of private capital mobilisation for the benefit of the world’s poorest countries.
Some suggest that the IBRD has additional headroom in its rating and that it should use this to increase the leverage on its balance sheet, as implied by the work of the expert panel which produced the report Boosting MDBs’ Investment Capacity for the G20’s International Financial Architecture Working Group in July. Is the World Bank reviewing that and other recommendations of the report?
We certainly are — we really look forward to engaging with our board and our governors in looking into this and continuing to optimise our financial model, because it is a never ending journey.
I’d also like to take this opportunity to list all the innovations that we have brought to the table in terms of doing more with what we have.
I was talking about cat bonds earlier and they are a good example. Cat bonds are part of our funding programme. But they are like an insurance product that help our client countries transfer risks to financial markets and open up more space so that the available multilateral financing is used for other types of projects.
More recently we issued a “rhino bond”, the very first outcome-based wildlife conservation bond in the world. It’s another innovation — part of our regular funding programme but inviting investors to set aside part of the interest they would be receiving and support wildlife conservations project in South Africa.
If the project is successful and the black rhino population grows above certain levels, a donor will come to make the investors whole, and maybe even, depending on the level of success, pay a premium. This is a type of innovation that we’re always looking for, in terms of doing more with what we have, beyond our regular activities.
So can we expect to see more of these types of innovative structures, dedicated to specific projects?
Our goals are quite significant — the challenges facing the world are significant. And of course our shareholders embrace institutions like ours with very strong financial management. But we certainly want to do more with what we have.
Just bringing it back to cat bonds, I’ve always felt that for them to be truly successful for countries like Mexico, then the rating agencies need to reward them for having these bonds in place.
One fantastic story I was closely involved in when I was in the region on the operational side was Jamaica’s cat bond. Jamaica, in partnership with the Bank, built a very robust disaster risk management safety net.
Jamaica had done a tremendous job in terms of fiscal consolidation for many years. But there was a piece of risk they could not hedge on their own, and they needed support. Donors came in to pay the premium of a cat bond. And credit rating agencies noted the cat bond as a credit positive, because of the higher level of protection. That’s exactly an example of what you’re saying.
Sticking to the subject of innovation, what about risk transfer trades or securitization?
We are always open to looking at innovations and options. As far as risk transfer goes, cat bonds are a good example and we would like to do more of those and help mainstream them.
Of course this year the cat bond market is going through a complex phase, but as opportunities arise we will seize them.
The other issue is that when you think about mobilising resources for development, there are many ways in which the bank supports client countries. Another example is through guarantees, where we help create an environment that is more conducive for private investors to come in and support different development projects.
The Net Zero Asset Owners’ Alliance have called for new blended finance vehicles, outside the MDBs, to leverage private investment in green solutions in EM. Do you think that’s a good idea?
Blended finance has a role to play. It’s important that when it comes to blended finance there need to be a good balance between risk and returns. What I am not convinced would work is a model in which the risk remains with multilateral institutions and the returns remain with the private sector. You need to have an appropriate balance between risk and return.
Instruments like guarantees also have a role to play in de-risking projects and making things more attractive for private sector participation. There are some great examples that come to mind, like renewable energy projects in Argentina, where significant mobilisation of private capital was catalysed through a World Bank guarantee.
It was interesting that when we came to repeat it a year later, we provided a smaller guarantee but the level of mobilisation was even higher.
The other side of the story is providing countries with financing on attractive terms, so that certain projects can happen ahead of others. For example, decommissioning a coal energy plant has financial costs and social costs. It’s important that we find ways of making it attractive for countries to go for cleaner alternatives, like lowering the cost of funds.
Food insecurity and agriculture are big topics right now, given the war in Ukraine, inflation and droughts. The heads of the FAO, IMF, World Bank, World Food Programme and WTO made a highly unusual joint statement in July that highlighted the urgency of the crisis. How can the international capital markets play a role here?
There is a clear need to mobilise resources and put together projects that can help countries cope with the situation. This is a corporate priority that is very high on the agenda, like you say — it’s top of the agenda of the operational side of the Bank.
There is also space to look at this through a long term lens. Capital markets can certainly play a role when it comes to risk management in the longer term. We will need to be very creative and use all the tools at our disposal to help countries come up with solutions to this very complex situation.
The International Fund for Agricultural Development, the United Nations agency, earlier this year issued two private placements, basically capital markets bonds a bit like yours. Given that you do labelled green bonds, and, as we have seen, deals like the Rhino bond, would the World Bank ever consider doing a bond with a food or food security label?
Well, we don’t label our bonds beyond “green” or “sustainable” but could emphasise certain topics when we issue bonds from time to time to draw attention to some of our activities. For example, in some of our sustainable bonds, we highlight themes such as gender. So we could certainly do something like this if we felt it would add value to draw attention to this very relevant development-related topic.
I asked this question of your predecessor, Jingdong Hua — in the past few years there have been some political challenges to the idea of multilateralism. Do you think Covid-19 and the current crises might usher in a new golden age of multilateralism, since so much international co-operation is needed?
We are having our first in-person Annual Meetings after more than two years and if you look at the level of attendance, just by walking through the corridors of the buildings and surrounding streets you can feel the energy that comes from multilateralism. Our stakeholders are showing up in force to take advantage of this very powerful network we have here.
The challenges the world is facing are global. If you think about the pandemic, it starts very locally and then its effects are felt in every single corner of the world. Challenges like these require global co-ordination and global efforts.
I certainly believe that multilateralism has served us well in many areas in the past and has a huge role to play going forward.
Especially in areas such as climate change. It’s a global challenge that affects us all. But the solution is very much local. The projects that will lead to a more sustainable future are local but generate global benefits.
Are you including adaptation projects in that?
Adaptation and mitigation. The example I gave on decommissioning a coal power plant is a local project that clearly has a global impact.
Do you think using ESG or sustainable finance approaches to either manage financial risks or deliver positive impact is advancing today?
The numbers speak for themselves. We issued the first green bond in 2008 and since then $2tr have been issued in the green, sustainable and social bond markets.
We approach this holistically — we look at this from the perspective of a multilateral development bank, an issuer, an asset manager and a provider of advice. And we see lots of interest around this space now.
There are two elements to it. Some of the environmental, social and governance-related issues are relevant for financial decision making. When we think about climate change, and if we agree that it is the biggest challenge facing humanity, it’s hard not to consider environment-related elements when assessing the risk and return profile of an investment. The other aspect is that investors will always focus on risk and return. But more and more they also want to have a positive impact. These two things are not at odds with each other — they can be brought together.
At the same time, though, we do have a bit of pushback on ESG, for example in the US in Florida and Texas. Do the opponents of ‘woke capitalism’ have a point? Has the attempt to inject social values into capital markets gone too far?
I believe we need to continue working, for example, on the quality of [ESG] information available for decision making, because these issues have an impact on risk and return. Investors need to have the tools to incorporate them into their decision making processes.
So yes, I believe we have a way to go [to] having a single set of high quality disclosure standards that will be applied on a consistent basis and will allow investors to make better informed decisions. That is one part of the equation.
And then there will also be investors who start looking at this third axis of investment — focussing not just on risk and return but also on their impact. Again, we need to continue in this journey of providing investors with what they need to fulfil their objectives.
You are a trustee of the IFRS Foundation. From that perch you must be watching the ISSB consultations closely and other country or regional developments to improve climate disclosures and transparency? What do you think will be the outcome of all this? Do you see risks?
I have mentioned quality of information and standards. As I was starting as treasurer at the World Bank I also had the opportunity to support the efforts of the IFRS Foundation as a night job, becoming a trustee.
I’m fully convinced that we need a single set of high quality sustainability standards to face the challenges we have been talking about. What is my hope and expectation? I hope we will get there.
What are the challenges? Well, the biggest challenge is fragmentation. Multiple standards do not meet investor needs. It’s great that there has been this convergence around the IFRS Foundation, which has a proven track record on creating high quality accounting standards at the global level. So I am very hopeful and positive. The reason why I have taken on this night job is precisely because it’s extremely important at this particular point in time.