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The launch of the J.P. Morgan Development Finance Institution in January 2020 was a pioneering effort for a private financial company. It set out to focus on development-oriented financing in emerging markets and aimed to bring an impact framework to some of its investments. It also wanted to help build development finance into an asset class.
In its first year, the JPM DFI has “qualified” as eligible 437 of the bank’s transactions amounting to $146 billion — well above its $100 billion target.
The new DFI model raised eyebrows when it was launched. For one thing, other DFIs are publicly funded and largely invest their own capital, while JPMorgan does not hold the investments it puts together.
Also among development experts’ and advocates’ concerns is how few of its transactions are being scored as having a high or very high “development intensity” — or development impact based on the market gaps and the expected results. They also worry the bank isn’t mobilizing new capital to address development challenges, but rather conducting a marketing campaign that may oversell the impact of the investments.
Many of those questions have remained as JPM DFI has become operational, despite its efforts at transparency.
But the new institution has been upfront about what it can do, said managing director Faheen Allibhoy.
The JPM DFI isn’t trying to play the same role as other, publicly funded DFIs, though it is working with them. Allibhoy believes it can innovate through its efforts as a structuring agent and by bringing in investors who are interested in impact investing and drawn to its impact framework, she told Devex.
“Where we can unlock things at JPMorgan is bringing institutional capital into the deals we do,” she said. “If we can bring in incremental investment because people like the impact of the transaction, I think that could really be the turning point to bring very large-scale investments to meet the SDGs.”
The first year
In Allibhoy’s eyes, the DFI has accomplished three main things in its first year: putting its methodology into practice, serving as development finance structuring agent, and collaborating with other DFIs and multilateral development banks.
Many of the transactions that were qualified as “development finance” would have likely taken place anyway, Allibhoy said, though by qualifying them the JPM DFI applies an impact methodology and gives them a development impact or “intensity” score.
The multinational investment bank announced this week that it has created the J.P. Morgan Development Finance Institution, a business division that will use IFC standards to lend money in emerging markets.
Where Allibhoy thinks the JPM DFI can bring innovation to the market is through its work as a development finance structuring agent for both corporate and sovereign transactions. By getting involved as projects are seeking to raise funds, the DFI has helped them with disclosures about their development impact, and the borrowing entities have committed to reporting on it, she said. Bringing in that additional disclosure can bring in new investors, too.
The JPM DFI has collaborated with the development finance community “to advance best practice of impact measurement,” Allibhoy said. It has also brought in publicly funded development banks and DFIs — including the Netherlands Development Finance Company, or FMO, the German DFI DEG and the Asian Development Bank — as anchor investors in some of its transactions.
The interest and appetite from clients is growing as environmental, social, and governance — o ESG — and impact investing grow, Allibhoy said, adding she was “impressed by” the demand from clients, including institutional investors.
Getting more of that interest at the transaction level of how the funds are being used is “where you start to build an asset class” — though the trajectory is a medium to long-term one, Allibhoy said.
From the scoring of projects, to the lack of an accountability mechanism, and to questions about intentions, development experts and advocates still have many questions for the fledgling DFI one year in. Unlike publicly funded DFIs, the JPM DFI does not face the same public accountability and recourse through government pressure.
“I think they are trying to play as a development actor while in fact they are not. We have to actually scrutinize attempts to financialize development because it’s not about showing nice and big figures.”— María José Romero, policy and advocacy manager, European Network on Debt and Development
Some of the data around the JPM DFI’s investments in its annual report raised concerns. Of the 437 transactions in 2020, only 6.4% were considered to have a high or very high “development intensity.”
Some of the low scores seem to be “on the basis of a lack of information of the impact of the end use of this money” according to the annual report, which is concerning, said María José Romero, a policy and advocacy manager at the European Network on Debt and Development, or Eurodad, a network of European civil society organizations.
“Is this about SDG washing? About making itself attractive as an impact investor?” she asked.
Nearly two-thirds of those projects have a low development intensity, which raises questions about its impact, Bart Edes, a professor of development practice at McGill University, told Devex. In addition, while it did invest in projects around the world, only a small percentage went to regions where the largest concentrations of low-income people reside, he said.
A key disappointment is that it appears the JPM DFI may not bring in a lot of new money to address development issues, but is rather “basically rearranging existing investments,” Marcos Neto, the director of the finance hub at the U.N. Development Programme, told Devex.
“At some point, especially in terms of capital flowing to developing countries, new money needs to come into the conversation,” Neto said, though he added this reclassification problem is not only a JPM DFI issue.
If the JPM DFI is helping direct finances to the right place, then it is “welcome,” but the question is about the “level of rigor and integrity of the classification of something as development finance,” he said.
Eurodad’s Romero questioned whether a DFI is the right mechanism for JPMorgan and questioned its motivations.
“I think they are trying to play as a development actor while in fact they are not,” she said. “We have to actually scrutinize attempts to financialize development because it’s not about showing nice and big figures.”
“What is needed is more accountability and positive development outcomes,” she continued. “We still have many questions and concerns about the capacity of institutions like this to deliver.”
The JPM DFI is working to figure out how to monitor and track development impact over time and ensure that its investments are achieving their goals, Allibhoy said. How it will do so, especially when in most cases it is not holding the asset, it is still up in the air — as is the question of whether falling short of impact targets will result in changes to the framework or to investments.
But the JPM DFI is “actively looking” at solutions for monitoring investments, who should do so, and whether it should be done independently, Allibhoy said.
Most DFIs have an independent accountability mechanism — but the JPM DFI does not. Asked if it is considering developing one, Allibhoy said: “ I don’t really have anything to say on that topic.”
Accountability mechanisms create a feedback loop that is both helpful for communities where investments are made to raise issues, and for investors to address any challenges, said Margaux Day, policy director at Accountability Counsel.
“It’s good for the investor and communities to have an efficient, effective way of managing unintended risk and unintended impacts,” she said, adding that she encourages JPMorgan to consider creating an accountability mechanism.
Despite those concerns, not everyone is wholly skeptical.
“This is a welcome initiative. While it may be a bit of branding and flash, they have taken some steps that are laudatory,” Edes said.“Ultimately the success of the initiative will be judged by additionality, how much new finance is brought in to new markets, frontier, fragile, conflict states and high poverty.”