The World Bank’s private capital push

The World Bank’s cafeteria is going meatless on April 30. By the time the IMF and World Bank meetings roll around again in October, we can expect lamb tagine will be off the menu and falafel will be more in vogue.

It’s not the only change at the World Bank. As I report today, there is a subtle turning of the battleship under way thanks to the World Bank’s new president Ajay Banga.

Separately, away from Washington, Simon has a piece about the Net-Zero Asset Owner Alliance and its latest marching orders for members. — Patrick Temple-West

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Climate finance

Banga’s private sector charm offensive

Ajay Banga started his five-year term as World Bank president less than a year ago. Now, signs of change under the former Mastercard chief executive are starting to be felt at the World Bank.

Participants at the IMF and World Bank meetings this week in Washington said they were surprised and encouraged by a new focus on private investors as partners with the World Bank for renewable energy projects.

On Wednesday, the World Bank and African Development Bank Group pledged to provide at least 300mn people in Africa with electricity access by 2030. To get there, billions of dollars are needed, presenting an opportunity for investors.

To highlight its partnerships with private sector investors, the World Bank hosted a panel with Hassanein Hiridjee, chief executive of Axian Group — a $1.6bn investment group with a focus on Africa — and Actis, another developing economies focused investment group, which was bought by US private equity group General Atlantic earlier this year in a bet on infrastructure growth.

While combating global warming is a priority at Banga’s World Bank, there have been other motivations at work in stimulating private capital. The focus on Africa has been a priority for the Biden administration as it competes with Russia and China in the so-called global south. Treasury department staffers have been “everywhere” at these meetings, sources told me, suggesting that the Biden administration sees the World Bank — in which the US is the biggest shareholder — as an important tool in cultivating good relationships with hesitant governments.

Wednesday’s private financing panel held in the World Bank’s atrium sent a subtle message to the organisation’s workers that changes are under way, an executive at one of North America’s largest pension funds told me.

Banga faces a challenge in redirecting a large bureaucratic agency like the World Bank, the pension official said. Staffers might be reluctant to welcome partnerships with highly paid Wall Street financiers. On the other hand, Wall Street might be wary of investing too much with the lender on risky energy projects that could take years to generate returns.

But Banga still looks like the right person for the challenge, the executive said. “If anyone can do it, it’s him.” (Patrick Temple-West)

TAX POLICY

Taxes take centre stage

Monday was the US federal tax due date for Americans — a culmination of our annual slog through the IRS’s painfully complex rules.

But this week’s real action on taxes took place on Wednesday with the first official meeting of the International Tax Task Force. This organisation, which launched at COP28 in Dubai, aims to develop co-operation around international taxes that could close a climate finance gap for vulnerable countries.

These could include taxes on private jet travel or windfall levies on fossil fuel profits, among other options, the organisation said.

“Finding new ways to raise the billions needed to fight climate change effectively and equitably is a huge, but necessary task,” Laurence Tubiana, a French economist who was a key architect of the 2015 Paris Agreement, said in a statement. (Patrick Temple-West)

INVESTOR ALLIANCES

Asset owners up the ante

Climate-focused investor alliances have had a difficult time of late, notably with the exit of major asset managers including State Street and Pimco from the Climate Action 100+ initiative.

Yesterday, another key coalition — the Net-Zero Asset Owner Alliance — published an updated version of its “target-setting protocol”, putting new pressure on its members in an effort to maintain the momentum around financial sector climate action.

Founded in 2019, the UN-backed NZAOA has 89 members in 19 countries — largely pension funds and insurers — with an aggregate $9.5tn assets under management. Members have committed to achieve emission cuts in their portfolios in a collaborative effort to support the global push for net zero carbon emissions. They’ve also pledged to put pressure on businesses they invest in, and on the asset management companies that invest much of NZAOA members’ money, to clean up their own act.

But while the NZAOA secretariat has previously given members extensive guidance on how to approach investments in markets such as publicly traded equities and corporate bonds, it has left some gaps in key asset classes.

Yesterday’s revised protocol is an attempt to fill those gaps, pushing members to expand their decarbonisation efforts “across nearly the entire investment portfolio”. A key change is the expansion of the coverage to include a much wider range of non-public assets, including private debt funds, directly held private debt and directly held real estate funds.

“Now that we have expanded the scope, there is nowhere to hide in terms of sources of capital,” said Jean-Francois Coppenolle, sustainable investment director at French insurer Abeille Assurances and a co-author of the new document.

The extended coverage is crucial given the huge growth of private credit as an asset class in recent years. JPMorgan Chase recently estimated the size of that market at $3.1tn.

It also reflects concerns about perverse incentives resulting from greater investor pressure around climate disclosure in public markets, relative to private assets.

“We’ve seen many listed companies sell high-emitting assets to the private side where in general the scrutiny is lower,” said Udo Riese, head of risk and monitoring at Allianz Investment Management and another co-author of the new protocol.

Another important development is the NZAOA’s decision to pay more attention to the climate profiles of sovereign debt issuers. The NZAOA document warns that — as Lee wrote earlier this week — carbon emissions are a blunt metric, especially for assessing national progress on climate action. The NZAOA will now trial the new ASCOR database, which is intended to give a more sophisticated picture on this front.

In the absence of more serious government action, as the new NZAOA document warns, there’s a risk of a growing gap between the emissions pathway with which NZAOA members align their investments, and the course the world is actually on. That, in turn, will raise tough questions around fiduciary duty, and whether these climate-friendly investment strategies are maximising returns for clients.

But given the long-term investment horizons of pension funds and insurers, Riese said, it really is in their interest to use their collective economic clout to mitigate climate risk for themselves and their beneficiaries. Since NZAOA members are invested in virtually every public company on the planet, and a huge range of private assets to boot, their work has implications for all other investors in these markets.

“We do not know what the outcome is, but we just push because for our portfolios, the lowest achievable temperature is the best outcome,” Riese said. (Simon Mundy)

Smart reads

• Less than a quarter of aviation emissions were caught last year by European carbon trading schemes, according to new data.

• JPMorgan has told clients that investment in renewable energy “currently offers subpar returns”, and that a “reality check” is needed on the global energy transition.

• Scotland’s government has ditched its 2030 goal of cutting greenhouse gas emissions by 75 per cent from 1990 levels.