Treasury: Need for development banks’ reform is ‘unequivocally clear’

The United States has marched into the 27th United Nations Climate Change Conference, or COP 27, as the face of a movement to reform the multilateral development banks, with a senior U.S. Department of Treasury official telling Devex that the pressure is on for lenders to unlock billions of dollars for countries in need, particularly for climate finance. A landmark speech by U.S. Treasury Secretary Janet Yellen last month demanding that the World Bank produce a road map for reform by year end was not some fleeting remark, but a major U.S. policy priority on the international stage, Alexia Latortue, assistant secretary at the U.S. Treasury, said in an interview. “The message was unequivocally clear that this is not a passing speech from the U.S., it was not passing commentary from some shareholders,” Latortue told Devex. The U.S. is the largest shareholder in many of the main financing institutions, giving significant heft to Yellen’s prescriptions for change. She said she wants the multilateral banks to evolve to finance more solutions to pressing global challenges, such as reducing fossil fuel use, especially coal. “Treasury is robustly engaged with the leadership of the World Bank,” Latortue said. The department heads the U.S. administration’s engagement with the multilateral lenders, and the Washington-based World Bank is seen as the most important institution in terms of getting more capital moving to climate finance, given its size and leadership position. Notably, World Bank President David Malpass has been hounded by climate activists calling for his ouster and accusing him of slow-walking reforms — and the calls only grew louder after a gaffe in September where he demurred on whether human activity caused climate change. Though he has so far hung on to his post, he is under a microscope to ensure the bank is moving toward its key shareholders’ demands on climate. Earlier this year, an independent panel of experts commissioned by the Group of 20 major economies issued a report arguing that the banks could take on more risk and use their financing in more innovative ways to lend hundreds of billions more to countries in need. While the extent of their additional lending capacity is up for debate, officials say tens of billions might be doable without hurting the banks’ coveted AAA credit ratings. “We need the MDBs to stretch their balance sheets responsibly. They're a big piece of the equation, and they can also use their balance sheets to help crowd-in private capital,” Latortue said. “The message was unequivocally clear that this is not a passing speech from the U.S., it was not passing commentary from some shareholders.” --— Alexia Latortue, assistant secretary, U.S. Department of Treasury Latortue, whose brief at Treasury focuses on international trade and development, is a veteran of the sector. Her resume is a checklist of key development institutions, including the World Bank, the European Bank for Reconstruction and Development, and the Millennium Challenge Corporation. She also previously was in the Treasury, during the Obama administration, focused on international development policy. Bigger banks in troubled times The banks’ potential role as even larger lenders has come into the spotlight as the global economy teeters toward a possible recession and many lower-income countries are in debt distress or facing the prospect of dire straits. The hope is that the banks — which have the ability to “de-risk” investments, as one way to draw in private capital — can help galvanize the financing needed for lower- and middle-income countries. Private investors want to move away from fossil fuel investments, Latortue said, but “they have to move into something. And that’s where the excitement is — how do we find the real economic opportunities for investments in clean energy.” The U.S. wants to create more “incentives” for countries to borrow for climate finance, she added. This includes the potential of using concessional loans — which are generally reserved for the lowest-income countries — even for middle-income nations. The renewed energy for reform comes as lower-income countries are pushing for more money to help them cope with the fallout from the climate crisis, which they note was caused by the historic emissions of the world’s big economic powerhouses and high-income nations. The fierce debates on so-called loss and damage payments are likely to be the most contentious of the topics on the table in Sharm el-Sheikh. Many lower-income nations are still reeling from the failed promise of $100 billion in annual climate finance made by wealthy nations in 2009 and which may only materialize next year, several years behind schedule. Combining climate with fighting poverty With governments’ aid budgets stagnating, there is a renewed effort to use existing financial institutions such as the World Bank and other lenders to the fullest extent in order to maximize the capital available for countries in need. In an interview with Devex last week, Malpass said he’s embraced the idea of reforms. “We are working with the shareholders on a menu of approaches towards accomplishing that goal,” he said. Malpass deftly avoided answering concretely about whether he will make it to the end of his term in 2024, seeing the reforms through, saying he is “just focused on getting the job done month by month.” One area where Malpass and Latortue seem to agree is that there should not be an argument anymore over whether climate finance is coming at the expense of fighting poverty — the multilateral banks’ traditional raison d'être. “It’s a false debate,” said Latortue, adding that countries need to be “putting to bed this debate of whether climate and development are trade-offs, and actually say that progress on one is not possible without the other.” The moment is a challenging one, with countries potentially losing track of global issues as they focus on crises at home. “We've got to stay outwardly focused,” Latortue said. “Both in advanced countries and in emerging countries, the most vulnerable and the low-income always feel it first and worst. And that needs to be a driver for our actions.” The Biden administration is committing tens of billions to clean energy efforts around the world, and at COP 27, U.S. officials are keen to tout recently passed legislation that includes $369 billion in climate spending. “We will be proud to be able to report back on progress that we've made domestically with the Inflation Reduction Act,” Latortue said of the law, which “really puts wind in our sails to show that we're on track to meeting our own commitments.” At the same time, though, the U.S. is not immune to the pressures around energy at the moment, as it strives to keep gas prices down — which will increase use — and as the president works to appease voters, including by praising its own record on fossil fuels, saying the country is “on track to hit the highest production in our country’s history next year.” Just as the Biden administration struggles to create a smooth transition to cleaner energy at home, including by upskilling workers, Latortue says the U.S. wants to ensure that the green transition in low- and middle-income countries does not hurt their ability to grow and ensures they have electricity and power to run their economies. A recent International Energy Agency report said that due to the global energy crisis, the number of people who live without electricity is set to rise by nearly 20 million in 2022, the first increase since the IEA began tracking the numbers 20 years ago. “It's not just about energy security or clean energy for emerging markets,” she said. “It's still about energy access, and we have to always remember that.”