BlackRock Inc. Chief Executive Officer Larry Fink told global leaders the World Bank and International Monetary Fund are outdated and require a total overhaul if they’re to marshal the trillions of dollars in investment needed to bring sustainability to the developing world.
Specifically, he called for a “rethink” of their role as financiers—instead of lending money themselves to promote development and economic stability, the World Bank and IMF would be more useful in the transition to clean energy as insurers that reduce risk for private investors. Fink commented in prepared remarks to the Venice International Conference on Climate, part of the weekend meetings of the Group of 20 in Italy.
“There is private capital that can be mobilized for the emerging markets, but we need to rethink the way the international financial institutions can support low-carbon investments at scale,” he said of the two organizations established 77 years ago in the waning days of World War II. “We need a financing system that isn’t built around bank balance sheets.”
A representative from the IMF declined to comment and the World Bank didn’t immediately respond to a request for comment.
Fink, arguably the world’s most powerful investor with about $9 trillion under management at New York-based BlackRock, used his speech largely to highlight what he considers flaws or risks in the approaches many countries are taking to reach net-zero emissions. He flagged the unintended consequences of climate-related regulation on public companies and the potential for “politically untenable” $100-a-barrel oil if fossil fuel demand doesn’t slow fast enough.
BlackRock has made a big bet on sustainable investing in the past two years and stands to benefit as more capital flows to environment-friendly solutions.
The financing challenge, as Fink sees it, is creating “long-term, durable returns” in developing economies for private investors who shudder at the prospect of steep losses or wild volatility. His solution, using a crisis-fighting tool developed by the U.S. Treasury as a model, is turning the World Bank and/or IMF into “first-loss” guarantors.
In 2009, with the world reeling from the near-collapse of the financial system, the Treasury lured investors to buy portfolios of toxic assets by offering them insurance against initial losses. As the economy recovered, the participants in the Public-Private Investment Program made money and the government reaped $3.9 billion in interest on its $18.6 billion.
“We need global solutions and international organizations that are willing to mitigate the risks of investing in emerging markets,” Fink said in his speech. “We need more solutions like those used in mortgage-backed securities where some degree of losses is absorbed before they impact private investors.”
There is precedent for similar arrangements. In 2015, the World Bank’s International Development Association provided a policy-based guarantee, or PBG, insuring 40% of a $1 billion bond issue by Ghana. As a result, the debt received a higher credit rating, and Ghana was able to extend its maturity and lower the interest rate. Other PBG recipients under the same framework include Albania, Angola and Pakistan.
BlackRock also built a similar guarantee feature into the Climate Finance Partnership it formed with France, Germany and Japan and two philanthropies. That effort has raised more than $250 million so far to invest in carbon reduction in emerging markets.
“As excited as I am about this partnership, we need solutions of a much greater magnitude,” Fink said in Venice.