Devex Invested: A reality check on development dollars and investment data

Are there actually trillions of dollars out there that could be tapped to address global challenges? While the last decade of rhetoric in the global development space might lead you to believe the answer is yes, a new report finds that the actual amount of money that could be mobilized to solve global challenges is far lower.

The study, which comes from the ODI think tank, also details some of the changes needed to actually mobilize private capital. One thing institutional investors have long been asking for is more data from the development finance institutions so they can better price risk. While some data was released in recent months, development finance experts and investors tell me it might be a starting point but isn’t actually all that helpful.

In this week’s edition, we look at how much private capital is actually possible and what kind of data the private sector would need to take action.

‘Reality check’

Not all European insurance companies and pension funds have capacity to invest in emerging markets and developing economies, which makes the total pool of capital, or market, that could be tapped “smaller than often assumed,” according to the ODI study.

The research found that with some changes, the investment flows of Europe’s top 35 largest asset owners to emerging markets and developing economies could double to about $120 billion annually in about five years. But those investments are likely primarily to be in publicly listed, investment-grade assets in large emerging markets, the research finds.

“It’s a big reality check,” one of the authors, Samantha Attridge, a senior research fellow at ODI, tells me. But “there is an opportunity, there is a prize worth going after. You just need to be realistic about what it is and it is going to take time and there’s a lot of hard work that’s required.”

The research found that while regulations are important, they don’t always limit investments — particularly for pension funds, where the challenge is more behavioral than regulatory, she says.

So what can be done?

There is a need for regulatory clarity, capacity building, education of these investors, and a bit of realism about how these markets fit the demands and strategies of institutional investors.

MDBs and DFIs have an important role to play in structuring financial transactions or instruments that meet the requirements of these investors: think low cost, standardized, and with the right kind of liquidity and risk-return characteristics. Realistically, the focus should be on larger institutional investors who have the capacity to do these types of investments, Attridge tells me. Some of the institutional investors interviewed for the study weren’t even aware of what MDBs and DFIs do, and said they are “invisible to them.”

While the data only looked at the European market, it seems clear that private capital making up the lion’s share of the roughly $4 trillion needed annually to address the SDGs globally anytime soon is highly unlikely.

Not so shiny GEMS

But as the study points out, there may be billions more out there. One way to help unlock it is through more data so private investors can better understand low- and middle-income markets and build appropriate risk models.

One potentially useful source of information is the Global Emerging Markets, or GEMS database, which includes investment data for 25 MDBs and DFIs. GEMS recently released some data about loan recovery rates in emerging markets. But as ODI’s Neil Gregory recently wrote in an opinion piece for Devex, “a closer look reveals important limitations in using this data to gauge true investment risks for private capital in developing economies.”

When I heard about the data release, I reached out to Nadia Nikolova, lead portfolio manager of development finance and impact credit at Allianz Global Investors, who has been bending my ear about how important GEMS data could be for at least five years.

“The bottom line is not enough granularity. You need sectoral, country stratification of data in order to be useful,” she tells me.

Why does that data matter? As Gregory explains, the uncertainty about potential losses in low- and middle-income countries prevents more money from flowing because investors don’t have the experience they need to even quantify risks. The MDB and DFI data could help “dispel some of that uncertainty,” he writes.

Capital markets are built on data and standardization. If development finance doesn’t share more of its data, “mobilization will fail,” Thomas Venon, executive director of the Centre for Development Finance Studies, tells me. More data will help markets grow, the lack of data means investors just won’t come, he adds.

While DFIs and their shareholders talk a lot about mobilization, they often are not making the changes — new rules or incentives or shareholder directives — it requires, Venon says. These institutions should look to release the maximum amount of data that they can provide, which may mean changing contract language and pushing clients to share data, he tells me.

Opinion: This data on loan performance in LMICS isn’t the full picture

Grading time

It’s now been a year since Ajay Banga took over as head of the World Bank — I guess that means we can no longer call him the new president — and it seems a good time to look at how he’s followed through on his commitments.

When he started the job last June, he vowed to prioritize tackling climate change. Devex contributor Sophie Edwards has taken a look at whether he’s followed through.

Banga has:

• Introduced a new climate-oriented mission statement for the bank.

• Committed the lender to spend 45% of its annual financing on climate-related projects.

• Announced an effort to provide affordable electricity to 250 million people across Africa by 2030, with all new power generation from renewable sources.

For some civil society groups, that’s not enough, and they want the bank to stop investing in fossil fuels and methane-emitting industrial livestock.

“There’s been a lot of talk about financing climate adaptation and mitigation in borrowing but little action addressing bank’s own investments. These investments, both directly and indirectly, drive emissions and exacerbate the climate crisis; the very thing he wants to address,” Erich Pica, president of Friends of the Earth, said recently.

Read: World Bank chief Ajay Banga’s one-year climate report card (Pro)

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What we’re reading

The Netherlands is cutting billions from aid. What happens next? [Devex Pro]

‘Damaging’ U.S. foreign affairs budget cuts funding, fuels partisan politics. [Devex]

Opinion: The world needs a new financial architecture. [Financial Times]

Singapore, India, others pitch “clean” projects in U.S.-led framework. [Asia Nikkei]