Devex Invested: Amid reform pressures, development banks turn to teamwork

It seems multilateral development banks are looking to get by with a little help from their friends. There have been a few recent deals where MDBs have worked together to unlock more funding and reduce risk. Last week the Asian Development Bank and the African Development Bank agreed to a $1 billion risk transfer agreement. That’s a tool through which they can exchange loan exposure so that their portfolio risk is more diversified. It can increase both their creditworthiness and how much they can lend. And earlier this month the Asian Infrastructure Investment Bank, the China-based institution under increasing scrutiny for its ties to the country, approved $1 billion in credit guarantees to support World Bank sovereign lending — which will transfer some of the risk to AIIB and allow the World Bank to lend more. While the risk transfer deal isn’t exactly new — ADB has done similar risk transfer agreements with the Inter-American Development Bank — it is still notable. The deal will especially help the banks reduce risk related to investments concentrated in one region. It will also boost the amount of funds they have to lend. Loans won’t actually change balance sheets; rather, the exchange will be “synthetic” and keep relationships between the original lender and borrower. These types of deals could well be part of how MDBs address some of the ongoing reform efforts. For one thing, the Group of 20 capital adequacy framework report last summer suggested a number of changes, including risk transfers, to push the institutions to do more with less and address pressing global challenges. The reform push is making them think more creatively and work together. The AIIB deal is an example of “deepening co-operation” among MDBs to tackle climate and other challenges, Danny Alexander, vice president for policy and strategy at AIIB, told the Financial Times. “This transaction will strengthen the financing capacity of both institutions and is an example of how we can do more by working together.” The World Bank said that it has been working with AIIB to address reform recommendations to expand the use of “financial innovation to provide additional lending capacity.” The deal will help relieve capital constraints, allow the bank to make more loans, diversify AIIB’s portfolio, and enable it to increase lending to low-income borrowers, the World Bank said in a statement. + Read up on all of our coverage of multilateral development banks reforms. DFC demands Last week we got a hint of what lawmakers want to see from the U.S. International Development Finance Corporation, the country’s development finance agency. Senators proposed a slight budget increase for the agency, which was approved by the appropriations committee but has a long way to go before coming to fruition. In a report accompanying the budget bill, lawmakers said they want more information from DFC, including a description of all new loans, grants, guarantees and projects, such as where they are located, who receives the funding, how much DFC is contributing, how much of DFC’s subsidy is used, the “impact score,” and how a project ties to national security. The U.S. Congress would also like DFC to finance nuclear energy projects, and the report instructs the agency to improve capacity and expertise to make those investments, as well as share a plan for doing them soon. Lawmakers also tell DFC to invest more in the Middle East and in biotechnology, and warn that it must limit any waivers of its environmental and social policies and notify Congress when waivers are made. It also seems appropriators would support expanding the number of countries where DFC could work in order to ensure that the agency can have the most impact, including in countering Chinese influence. That has been an ongoing debate among lawmakers, and I expect it will continue, especially ahead of the agency’s reauthorization next year. Read: Bipartisan foreign affairs budget bill sails through U.S. Senate committee + Check out our page dedicated to the future of U.S. aid. Extreme makeover: Paris edition Paris wants to be known for more than fashion and museums. A cadre of Paris-based organization leaders are pushing for France to be a hub for the Sustainable Development Goals. Specifically, they want Paris to be a laboratory of sorts, helping bridge science and finance, Rémy Rioux, who leads the French development agency, tells my colleague Vince Chadwick. The SDGs can serve as a standard of quality for investment, including for financial institutions, who could develop their own instruments to ensure alignment, Rioux says. “At times when ESG [or environmental, social, and governance] is severely criticized or downplayed, that's also where Paris could have a voice, and the Finance in Common movement of public banks. I think it’s needed when these signals somehow are becoming contentious or weakening on the private side,” he says. Read: French development chief on how Paris could be a hub for achieving SDGs (Pro) + Not yet a Devex Pro member? Start your 15-day free trial today to unlock the piece and all our exclusive reporting and analysis. Loss and damage ≠ reparations One of the key agenda items at the COP 28 climate summit later this year is expected to be loss and damage funding, as you read in last week’s edition. But the “unhelpful conflation” of that funding with climate reparations is not what was intended, Avinash Persaud, architect of the influential Bridgetown Agenda to reform the international financial system, tells my colleague William Worley. The idea behind a loss and damage fund was about “global solidarity” and helping countries rebuild after climate shocks, not making amends for burning fossil fuels, Persaud says. And that confusion is hurting efforts as many high-income countries, including the U.S., don’t want to pay so-called climate reparations, Will writes. Read: Bridgetown Agenda author rejects idea of climate reparations ICYMI: How the Bridgetown Initiative envisions global financial system reform (Pro) What we’re reading World Bank chief Ajay Banga eyes corporate philanthropy to raise funds. [Bloomberg] Supply chain laws needed in Africa, too, to fight modern slavery. [Devex Opinion] Blackrock changes set up anti-ESG forces to seek next targets. [Bloomberg Law] The World Bank’s private investment arm considers $1.5 billion in investments in Ukraine banking, farming, and infrastructure. [Reuters]