It’s time for multilaterals to turbocharge climate financing

BlackRock’s Larry Fink is latest to call on the World Bank and IMF to shift from lending to catalysing private capital investment in emerging markets.

For those of us following this debate, it’s hard to disagree with BlackRock chief executive Larry Fink, who recently called for major multilateral institutions to “rethink” their role when it comes to emerging markets climate finance.

“There is private capital that can be mobilised for the emerging markets, but we need to rethink the way the international financial institutions can support low-carbon investments at scale,” Fink said. That is, multilaterals like the World Bank and the International Monetary Fund should focus less on direct lending and more on mitigating risk, to catalyse private capital investment into emerging markets clean energy.

“If we don’t have international institutions providing that kind of first-loss position at a greater scale than they do today, properly overseeing these investments, and bringing down the cost of financing and the cost of equity, we’re just not going to be able to attract the private capital necessary for the energy transition in the emerging markets,” he concluded.

Fink’s not the first to call for multilaterals to move away from balance-sheet lending. Former World Bank president Jim Yong Kim – now at Global Infrastructure Partners, spearheading its emerging markets efforts – was a proponent of the same idea, and tried to wean the Word Bank off balance-sheet lending. He had limited success, and we wondered at the time of his move to GIP whether that had played a role in his decision.

Regardless, now that Fink’s drawn attention to the idea again, it’s worth dwelling on its obvious merits. Put simply, emerging markets are not getting enough clean-energy investment – they need $1 trillion a year by 2030 but are getting about $150 million yearly, according to the International Energy Agency. If these countries don’t get the requisite investment, the world can forget about achieving its 2050 net-zero targets, with all the scary consequences of that outcome.

As Fink rightly points out, there are hundreds of billions of dollars of private capital that could be channelled to these projects. There’s also no doubt there’s healthy appetite for the energy transition – even beyond vanilla renewables – as long as these assets are not in emerging markets. In that sense, a ‘brute force’, risk-mitigation solution that overcomes groupthink and a tendency to slap a homogenous ‘risky’ label on a pool of disparate markets would be very welcome.

Emerging markets climate investment needs scale and speed. Multilaterals fully committed to risk mitigation, with decades of experience in these markets, would be in a position to help deliver both.

But even if multilaterals would wholeheartedly embrace their new role – a big if – it’s worth dwelling on what price they and their backers would extract to, in Fink’s words, take a “first loss” while “properly overseeing these investments”. Or if you’re feeling uncharitable, to do the heavy lifting to correct a market failure.

At the very least, we envisage some apposite conversations about appropriate return levels and the fees attached to such investments. This in an environment where even those amenable to emerging markets and creating a positive impact can espouse a significant amount of ‘cakeism’, as evidenced in the excellent The Key Man, about the rise and fall of Abraaj (don’t miss co-author Simon Clark’s keynote at this year’s Global Summit, in Berlin).

So, yes to 21st-century multilaterals that fully unleash the power of private capital and the conversations needed to make that happen – we’re running out of time to fiddle while the world burns.