PURPOSE, INC.

Participants:

Michael Young, Host

Alzbeta Klein, Director and Global Head, Climate Business, International Finance Corporation

Michael Young:

Welcome to the Purpose, Inc., the podcast where we discuss corporate purpose and stakeholder capitalism. I'm your host, Michael Young.

Investment in renewable energy, climate smart agriculture, building an urbanization in the emerging world is a vast area of importance and urgency and the role of private capital, public financing, governments and global institutions is vital to ending extreme poverty, boosting shared prosperity and stemming climate change. Research out from the International Finance Corporation or IFC says that 21 emerging market economies alone hold the potential of $23 trillion in climate smart investment opportunities through 2030 and this growth is expected to accelerate, delivering environmental and social benefits while creating value for investors. Analysis of urban investments found that cities across the emerging world could also attract more than $29 trillion in green buildings, public transport, electric vehicles, waste management, water treatment and renewable energy.

My guest today is uniquely qualified to talk about this topic. Alzbeta Klein is the director and global head of Climate Business at the International Finance Corporation. In case you're unaware, IFC is the largest global development institution focused on private sector investment in emerging markets. IFC's a sister organization to the World Bank and a member of the World Bank Group and for more than 60 years has used capital expertise and influence to create market opportunities where they're needed most in the emerging world.

Alzbeta received her Master's in economics from the University of Ottawa where she also studied for her doctorate in economics. She holds a Master's in engineering from the University of Economics in Prague. She's a Chartered Financial Analyst, a CFA and today Alzbeta and I have an in-depth conversation about the role that IFC plays as a provider of capital but also of its role as a convener, providing expertise and influence to investors across the world about how to create long-term financing opportunities in the developing world. We talk about the role the IFC plays. She says categorically that climate is the best investment opportunity around and we get into a wide-ranging discussion about her views of how she sees green sustainable renewable investing in the developing world.

So without further ado, my conversation with Alzbeta Klein of the International Finance Corporation. Alzbeta, thank you so much for coming on the podcast.

Alzbeta Klein:

Thank you, Michael. Great to be here.

Michael Young:

There is a ton to talk about with you. But first, I wanted to just maybe pause on the fact that IFC was the first impact investor in the emerging world. Could you give us a brief summary of IFC's mission and charter in sustainable finance? How do you do what you do? What are the key investment sectors that you focus on? How do you think about impact investing? Have at it.

Alzbeta Klein:

Sounds great, Michael. So, look, we were an organization that was established back in 1956 and I can safely say that that's before any of us were around. And someone very smart in 1956 thought about doing investments in emerging markets in developing countries with impact. That was a pretty good foresight when you think about it that this was 60-some years ago. And to this day, when we go to our articles, to our original charter, I cannot be but impressed that this still holds and it's still there. And so, yes, we were the initial impact investor all this way before we even knew the term. Now we also have a long history of working with investors to create new market standards. So, you look at impact, what is impact? It's something that you're doing something good with your capital. But it has many layers and it has many parts that we probably should take apart a little bit in this conversation.

So, I'm going to give you one example of a market standard which is the Equator Principles. We've done it some 15 years ago and these are most tested and applied global benchmarks for sustainable project finance in emerging markets. So, today if you look at what these principles did to the market, about 80% of project finance transactions in developing countries adhere to those Equator Principles and they are now adopted by some 90 plus institutions in 37 countries. So, when you think about the impact, we bring in market standard and we behave according to that market standard. But that's not enough because we are just a small multilateral development bank. What matters is that we bring it to capital markets. We bring it to banks, we bring it to pension funds and others and they adopt it and they multiply what we do ourselves and they bring it to even more clients and even more markets.

I'll give you another quick example which we are working on right now in climate which is part of impact and I want to mention our sustainable banking network which is another way to amplify the impact. So, we found that the best proponents of sustainable investing are market regulators, folks who manage financial institutions and every country has a financial regulator. And when they become interested in sustainability, in environmental and social issues that pertain to financing projects, they are our best allies to bring that to financial institutions around the world. So, that's just a couple of examples of what has been done in the past sort of 15-20 years. More recently, and that's the first thing I want to talk about, is that we have seen rapidly rising demands from investors for products that deliver clear impact and I am sure you must have seen it in your work. That's why you're doing this podcast. There are many funds and asset owners and asset managers who are getting into the market but the market is very confused about what is sustainable, what is responsible, what is impact investing.

And so, to address it, we started working with a few leading impact investors just a couple of years ago and we launched operating principles for impact management. So, what is it? It's just nine principles that are a set of requirements of what the investments should be looking at to be counted as impact investments. And I'm very happy to tell you that even though we started a couple years ago, we have a hundred institutional investors—just about, about 90, 93 I think institutional investors who signed onto it including one of the biggest ones which is Blackrock. So, when you look at this sort of purpose that you are working on and looking at what can be done in a market, we are seeing huge demand from asset owners, from investors to do it right and we are seeing it in developed markets in North America, Europe and Japan but we are also seeing in it in developing countries, in emerging markets. And it's really very good development in a marketplace.

Michael Young:

That is really exciting to hear and especially that no one institution, no one bank, no one source of capital can do it alone but the gathering together of capital the way you do is really powerful. One of your maybe famous sound bites is the climate is the best investment around. Can you expand on that for us?

Alzbeta Klein:

Michael, it's still the case and even in the middle of COVID crisis that we are recording this, climate is still the best investment opportunity. So, let me tell you a bit about it. Why do we think it's the best investment opportunity around? So, you and your audience are probably familiar with The Paris Agreement. This is when most of the countries around the world agreed that they will do something for climate and that something is called Nationally Determined Contributions. So, every country decided that they'll do something right for the climate. So, as an example, Ivory Coast decided that they'll increase their renewable energy from then 5% to something like 43% and many other countries have made pronouncements about what they're going to do in renewables, what they are going to do in agriculture, what they are going to do about their infrastructure and many others. So, what the researchers and my team did is that we looked at 21 emerging markets, 21 countries in the developing world and we looked at what they committed to do. So, this is not what I wish. This is not what I wish should be done. This is not about anybody in my team wishes. This is what these countries are committed to do in emerging markets. And when we did that, we realized that that investment opportunity is $23 trillion. How did we come to that number? We know how much it costs to put a megawatt of power, we know how much it costs to put a highway road, climate smart agriculture which are some of those opportunities and they're $23 trillion. So, this is the marketplace. This is where investors can come in and do it.

And I would be remiss if I didn't say that we're actually doing it because I can tell you that it's a good investment opportunity and then I don't do it myself. But I'm very happy to tell you that from 2005, we invested close to $25 billion in climate and that would not be enough because that's just us. We managed to bring close to $19 billion through partnership with investors for climate related projects. So, what this tells you is a) there is an investment opportunity—it's a good one—b) multilateral development banks are coming and investing in that opportunity. But even more importantly, you've got investors who see the same thing and they come in and they invest with us. And that is what makes me believe that this is the investment opportunity that we have. Now 15 years ago, this was mainly in renewable industries so solar and wind. But what we are seeing now is that it is much more broad and much more impactful. So, obviously we're continuing with solar and wind but we have added energy storage, we have added energy efficiency, waste management, climate smart agri, green buildings and many other sectors that are at least as important as energy in developing climate smart solutions in emerging markets.

Michael Young:

And if I heard the two numbers, $25 billion and $19 billion is but a drop in the bucket to $23 trillion of opportunities. So, there's a long, long way to go.

Alzbeta Klein:

Absolutely. There is a long way to go because it is a drop in the bucket. So, we have to bring in others.

Michael Young:

Right, right.

Alzbeta Klein:

So, how do you bring in others to see the same opportunity? And what we are seeing is that that amplifier is financial institutions around the world. Why? Because no matter how big your balance sheet is as a bank in headquartered in the United States or a bank headquartered in Europe or in Japan, none of us have enough firepower to make a difference. So, what we have to do is create partnerships and we as IFC, we are financing banks, we are financing financial institutions so that they invest in their local capital markets into the same thing that we care about which is clean energy, climate smart agriculture. When they finance real estate buildings, we like them to finance green buildings. When they finance affordable housing and it happens to be green, we would like to make sure that they do green mortgages. Green mortgage products is a very interesting one in the market. And so, just last year, we invested over $1.3 billion in climate transactions with financial institutions around the world. So, that's why we see them as an amplifier of what do we do ourselves.

And I mentioned at the beginning sustainable banking network. That is really another accelerator. Right? Because if you have a financial regulator that cares about it, they can be a significant force because their regulator can tell the banks maybe you should be looking at more green projects because they are more financially sustainable or they're more climate resilient and that financial regulator has a lot of power. So, right now, we have 40 member countries in our sustainable banking network and they represent 85% of emerging market banking assets. So, we have a large part of emerging market finance included in the sustainable banking network meaning the regulators of those 40 countries are thinking very actively how to do it and it's not IFC telling anyone how to do it. They are learning from each other. So, what we provide as IFC is a platform. We hold a secretariat. We facilitate meetings or virtual meetings as the case is today. But basically you've got a regulator say from Bangladesh learning from a regulator in Sri Lanka, a regulator in China or elsewhere. So, that is the amplifier because somebody who is doing it in their own market can then take it and say well, it worked in that country; maybe I can try it in my country and see how far we can get. So, that's why I think the financial sector is a true game changer and finance can be a powerful tool to make a difference.

Michael Young:

Absolutely. And I think that role IFC plays as a convener and a guide and an adviser collectively is really powerful. It's great to hear. Alzbeta, I wanted to jump—we are, as you said, recording in the age of COVID and there's some talk about the abandonment of sustainable capitalism to first deal with this global pandemic. But that's not really the whole story. What are you seeing in terms of how either regulators or private capital is thinking about sustainability? Are they still taking a long-term view or has everything gone to short-term we'll see after we eliminate COVID? How do you think about that?

Alzbeta Klein:

Great question, Michael. And to a hammer, everything looks like a nail. So, I have to tell you that over the past about 10 days, I can't tell you how many articles I read about the need for green recovery. So, maybe at a risk of I see everything in this pattern but I don't think that's the case. So, let us just lay out the lay of the land in the space. So, if you look at emerging markets, about $100 billion of capital left emerging markets just in the month of March and we have seen a lot of capital outflows from emerging markets. The second thing that we need to take into account is that in developed markets so in Europe, United States, Canada, elsewhere, governments allowed for about 10% to 12% of GDP equivalent to be the packages that are helping to restart the economies in their markets. What we are seeing in emerging markets is that those bailout packages are in the order of magnitude of 2% to 3% of GDP. So, when you're laying the land of this conversation, what you are seeing is that a lot of money had left the emerging markets so investors have left the developing world and governments in those markets are doing what they can with the money that they have but obviously not on a scale where the economy needs to be restarted.

So, what this tells you is that as a multilateral development bank or any sort of systemically irrelevant institution, when you think about it, first and foremost, you have to bring in liquidity to emerging markets. You have to enable trade, you have to enable some working capital, financing and that's obviously the order of the day that all of us are working with. And we've seen it in the United States, we've seen it in Europe and we are observing it now in emerging markets. And for that, we as IFC started with $8 billion liquidity and working capital lines and you've seen other development banks doing something similar. But the question is when this immediate liquidity need is over, what's going to happen next? And this is where the conversation has tilted in the past 10 days to two weeks to a real need for green recovery. Why do we need a green recovery? Why do we have to do green recovery? Unfortunately, COVID has just showed that systemically relevant and systemically important risks cannot be wished away. You cannot wish away the COVID and you cannot wish away the climate. The only difference between the two is that for climate, we already have much better data. We already know how much of a trouble we are in on climate unfortunately and it's the data. It's not my wish, it's not your wish. It's the data.

So, what do we need to do as a world, how do we need to handle that? So, first and foremost even in our relief packages, we need to start thinking about how to tilt them green. Right? And so, there is a lot of talk in the market about putting some conditions when it comes to bailout of some of the carbon heavy industries. There is talk about perhaps putting more of that relief into industries of tomorrow rather than industries of yesterday. And the critical point there is jobs. In COVID we have seen just the impact in the United States and obviously, that impact is seen in emerging markets as well and as it happens, green jobs are actually plentiful and renewable industry has been a great source of jobs and will continue to be a great source of jobs going forward. So, that's in the short term. When it comes to medium and long term, that green recovery really has to become green because what you don't want to see is just getting through the COVID crisis this year and then 5, 10, 15 years from now facing climate crisis of similar proportions or even worse proportions. So, we have an opportunity as the world to rebuild green and rebuild better than we've been doing it in the past.

So, let me give you an example. You happen to be a city and you want to procure a new building. Why don't you make it a green building? Why don't you make it a building that saves you money on heating and cooling because it's designed properly? You use materials that are hopefully more efficient than they otherwise would be. So, you have an opportunity to build a green. And why it matters in emerging markets is that 60% to 70% of cities in emerging markets are yet to be built. There's a lot of new build. If you look at the United States, we're not building that much. Europe, Western Europe, we're not building that much. But in emerging markets, the whole cities are being built up in 5-10 years. And so, you have an opportunity to take that money that flows there through a green rebuild and make it better than what we would have built otherwise if we didn't have this opportunity to rebuild. So, that's where I think we can make a difference and as I said, over the past 10 days to two weeks, this has been a very strong request from leaders in the finance community, from the IMF, from the UK which is leading the climate negotiations this year and many, many others.

Michael Young:

Thank you. And that point you made about the built environment and developing, as you were talking, I was thinking about how the emerging world never got landlines. Right? They just went straight to mobile/cellular.

Alzbeta Klein:

You are so right. That's exactly what it is. I keep telling my colleagues that you can do the same leap as we've done with mobile telephony. You can do the same thing for green built. That's exactly. You are absolutely right.

Michael Young:

And it's that multiplier effect because if you build it right, you build it green to begin with, it has those knock-on effects of efficiency way, way down the line.

Alzbeta Klein:

Absolutely.

Michael Young:

Yeah. That's a really powerful point. And maybe just to go to that, you mentioned capital flight out of the developing world. And so, are green bonds a way to lock in some of that investment? And I know IFC is the first issuer or one of the first issuers of green bonds. Just give us a survey of that work that you do around green bonds and especially the new fund that you launched.

Alzbeta Klein:

Sure. We were one of the first issuers. We were issuer number three in the market about 10-12 years ago and the way how we approach it is similar to what I mentioned to you earlier. We first learn it ourselves on our own balance sheet and then we help our clients do the same thing. And once we help our clients, then we go to why their investment community and we try to mobilize funding for that particular purpose. And the same thing happened with green bonds. So, we issued green bond number three. The first bond was issued by EIB, European Investment Bank, the second by the World Bank and the third one by us. And then by 2013, we issued a so-called benchmark bond which is a billion dollar large green bond and that's how the market started. So, the market started with multilateral development finance institutions and some other large investors. And then increasingly, others started coming to that market as the market developed. And about five years ago, we sort of looked at the market and said okay, so we know how to issue a green bond and for every green bond that we as IFC issue on our own balance sheet, obviously we match it with green projects because it has to be for purpose of climate, for a purpose of green development but we can help our clients, financial institutions to do the same.

And so, we started working with key financial institutions, for example, in Colombia, in Turkey, in Brazil and elsewhere in emerging markets to help our clients, financial institutions to issue their own green bonds. And then we looked at the world and we've been doing that for about five years and we said okay, this is great but how about the supply side, supply side being providers of capital who are buying those green bonds. Right? So, we are seeing from the capital market in developed capital markets a strong demand for green bonds. We are seeing investors from the U.S., Canada, Europe, Japan who are very interested in it. But how can we marry the two? How can we bring those banks in emerging markets and pair them up with investors and create hopefully a nice marriage? So, that's where we set up our first fund, Amundi Planet Emerging Green One which was the first initiative partnership between IFC and large a European asset manager called Amundi. And that fund obviously, we put in some funding into it and then we mobilized funding from the market and the fund is about $1.4 billion and it's expecting to deploy about $2 billion into emerging markets because they obviously reinvest the proceeds.

And even more importantly, not only is this fund up and running, we've done it but we continue training banks on how to do green finance because the bank cannot just issue green bonds. They have to learn how to do it, they have to learn what is green finance, what counts, what doesn't count. And so, we are doing some advisory work for a number of banks in developing countries so that they can learn and then develop this green finance. So, that's where we are and we are finalizing our second closing on another fund called REGIO. It's with HSBC Bank it's called Real Economy Green Investment Opportunity fund and we've done a first closing few months back. Now we are getting ready for a second closing in a week. And that one is focusing on real sector companies in developing countries so not the banks but utilities and other companies that are doing perhaps renewable energy and other projects. So, that's with green bonds and increasingly, you might have seen in the market we issued a social bond. There is a number of banks and large multilateral financial institutions that are issuing social bonds as well again for impact and to help finance projects that are related to alleviating the impact of COVID. So, that is another space that's growing quite rapidly literally in the past few weeks. So, very interesting space for investors to look at and obviously for issuers in the market as well.

Michael Young:

And as I'm sure you're reading the same things that I am about how we are really seeing market performance and outperformance for companies that have invested in all three of ESG, right?

Alzbeta Klein:

Yep.

Michael Young:

And that picture, if there's anything coming out of COVID, there's now a stark relief in terms of companies that really committed, went all-in on the environment, on social and on governance are starting to see market outperformance and a real lift and that's really exciting to see the actual payoff in connection between stakeholder and shareholder.

Alzbeta Klein:

Absolutely. And I think this is critical and it will continue to be critical. We have done some research with an organization called Climate Bonds Initiative. They certify green bonds. They are based in London. We have done some research with them over the past couple of years whether green bonds have better pricing in a market compared to regular bonds and unfortunately, we can't really see a benefit, an immediate benefit in pricing of a green bond. But what we know from experience just having issued a lot of green bonds ourselves and working with our clients is that oftentimes these bonds get oversubscribed. So, we know that there is a lot of investor interest in that space and I think this will only continue going forward because as the COVID crisis has shown us, well-run companies—and well-run means not only financially but environmentally and socially and governance wise—will outperform companies that don't have these attributes. So, the research is still out in terms of how they perform in this current market but cursory evidence that we are seeing is that the companies that have very good ESG and companies that have good financial management outperform those that don't.

Michael Young:

Alzbeta, we're going to have to leave it there and I cannot thank you enough for coming on the podcast and giving us the survey that you've given us in what IFC does. It is greatly appreciated.

Alzbeta Klein:

Thank you, Michael. Pleasure to talk to you.

Michael Young:

The Purpose, Inc. Podcast is a production of Actual Agency, helping innovators communicate in a changing world. More at www.Actual.Agency.

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