Greetings from New York, where I have just returned after a week of intense debates at the spring meetings of the IMF and World Bank. One hot topic was whether higher interest rates will strain the global financial system in the months ahead (to which I would say: “yes!”)
However, another point which has received less attention is how rising rates might hurt poor countries’ access to climate transition funds. In recent years, the UN and others have urged big asset managers to fund climate transition projects in poor countries. But at a side meeting of the UN’s Global Investors for Sustainable Development Alliance, that I moderated on Friday, groups such as CDPQ and Nordea explained that asset managers will not do this without de-risking mechanisms (both for credit and currency risk), investor access to credit data and shovel-ready projects. This has generally been missing until now.
The good news is that efforts are accelerating to fix that. But the bad news is that the real window of opportunity might have been missed. During the era of quantitative easing, western asset managers were eager to find alternative investment assets to boost returns; but now they can get good returns on other assets. It is thus tragic that reforms did not materialise during QE.
Can the bank or UN counter this? See our exclusive conversation with Axel van Trotsenburg, the newly promoted senior managing director of the World Bank, for some perspectives on this. And then check out below the latest twist in the battle around carbon offsets. As ever, let us know your views at [email protected]. (Gillian Tett)
World Bank’s van Trotsenburg: critics (partly) wrong
Last week in Washington, there were dozens of high-profile financial luminaries on the stage. But one figure was keeping a very low profile: Ajay Banga, the former chief executive of Mastercard and nominee for the next World Bank president, following the quasi-ousting of David Malpass.
Banga will undoubtedly go public with his plans if (or when) his nomination is secured. But in the meantime, Moral Money discussed the challenges he would face with van Trotsenburg, a longstanding bank leader, who was recently promoted to senior managing director.
Outside the bank, critics sometimes blame van Trotsenburg and Malpass for the bank’s reluctance to take a riskier approach to climate finance; they are perceived to have blocked innovation because they wanted to protect the AAA credit rating. However, van Trotsenburg told Moral Money that this criticism missed the mark.
“There has been a bit of politicisation, which is not helpful for the cause of development,” he said, arguing that much of the criticism of Malpass erupted because he was appointed by Republican former US president Donald Trump. “I have worked with seven presidents and I can say that David [Malpass] is probably one of the most decent and modest guys I have known.”
Moreover, van Trotsenburg insisted that although “we hear people saying that the bank is not doing anything [on climate], it is just not true.” To back this up, he has been circulating a punchy presentation which shows that around 60 per cent of the bank’s loans are currently linked to “global public goods”, including climate action, and the bank’s overall lending jumped during Malpass’s tenure, from about $40bn a year to more than $70bn.
So why all this criticism? Van Trotsenburg views it as a smokescreen for the fact that rich countries’ aid to poor countries has been flat — if not dwindling — in recent years. “In the developed countries more could be done [to provide aid and climate financing to developing countries]. But not enough people talk about this and often people say that the World Bank is not doing enough. But the World Bank has doubled climate financing over the last four years.”
Moreover, this resource constraint means that if the developed world puts pressure on the bank to expand climate financing — or create blended finance projects — without raising donations, the bank may be forced to cut concessional loans to poor countries. Van Trotsenburg dislikes this idea, since he fears it would move money from fragile nations to middle-income countries. “We should have a principle that at no stage, the low-income countries should be penalised [by] redistributing those grants to middle-income countries.”
This implies that there needs to be an honest discussion about whether the bank’s shareholders will back a general capital increase and whether the bank can raise leverage. After all, nothing can occur without shareholder approval. “The discussion we need to have is, does the membership want to be ambitious?” he said, “I think we should be hugely ambitious but it is the board that decides on the level of ambitions and by extension how much we can lend each year.”
This debate started at the spring meetings last week in Washington and will accelerate in the autumn meetings, scheduled to take place in Marrakesh. But insofar as blended finance is on the table, “we also need to ask what kinds of de-risking there [are],” van Trotsenburg said. “Is it just socialising the losses of private investors? Everybody in the private sector would like to have a little benefit [via de-risking] and I have no problems with that. But we should also not be naive.”
In practice, a general capital increase seems extremely unlikely to happen this year — and even less likely in 2024, given the US presidential election. Hence, Banga’s challenge. But van Trotsenburg has now worked for seven presidents — of whom he reckons three have really made their mark — and said the key trait needed in a new president is to have a clear plan for reform. “You have to be visionary,” he told the GISD meeting on Friday. All eyes are on Banga to see if he can deliver that. (Gillian Tett)
How to hedge the growing risk of carbon offset duds
Every time a damning investigation into a carbon offset project is released, companies who have vacuumed these credits up in a bid to reach net zero have to start shopping around again — or risk being accused of greenwashing.
Forest fires, political turmoil or sheer incompetence can all slash the value or credibility of an offset, which is meant to be linked to the removal or avoidance of one tonne of carbon.
Verra, the largest issuer of voluntary credits, said last month it had put dozens of projects on hold following quality complaints.
One of these projects in northern Kenya is under review after the non-profit Survival International alleged in March that the project, premised on changes to grazing practices, was unlikely to cut carbon emissions and had not obtained proper consent from pastoralist communities.
The Northern Kenya Grassland Carbon Project has sold large batches of offsets to US companies including the software group Salesforce and Meta, Facebook’s owner, in recent years, the report said. The offset project strenuously denied the allegations in a blog post. Meta said it had a thorough due diligence process for offsets. “As the voluntary carbon market evolves, we support ongoing reviews to strengthen projects,” it added. Salesforce did not respond to a request for comment.
For companies that have made public net zero commitments, prevention could be better than a cure. While most credits bought are linked to individual projects, exchange platforms like Xpansiv offer “bundled” carbon credits that pool offsets from different projects, diluting the risk to the buyer.
New York-based start-up Oneshot.earth is preparing to launch a new pooling platform. Instead of selling carbon credits directly, it plans to issue ETF-style shares equivalent to one tonne of carbon removed or avoided.
“All they [companies who buy offsets] hear is negativity,” co-founder Thomas Annicq told Moral Money. “To become active buyers they first need to hire a bunch of scientists or specialist lawyers, which is no way for a market to operate.”
But, according to Trove Research, a data firm focused on climate policy and carbon markets, buyers have responded to growing scrutiny of offset projects by getting more closely involved with individual projects — not less. Prices of bundled offsets have fallen much faster in the past six months than the price of those linked to individual projects, it said.
Guy Turner, Trove’s founder, told Moral Money that the wind could be blowing against companies trying to turn carbon into a fungible commodity similar to wheat or petrol. Buyers are asking for as much information as possible about individual projects, at least “while industry sorts out the quality issue”. He argues this trend could last a while.
“Transparency will always be important,” Turner said. “To commoditise a project as tangible as one that builds schools and protects forests is, to me, an oversimplification of what buyers want.”
Simon Counsell, the independent researcher behind the investigation into the Kenyan project, told Moral Money he anticipated that companies that used projects to compensate for emissions could in the future take legal action against those that failed to deliver.
“Some companies have spent tens of millions of dollars on these offsets and are now beginning to realise they are basically worthless,” Counsell said. “So the question people are starting to ask is: who is responsible for this?” (Kenza Bryan)
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Hippolyte Fofack, chief economist at the African Export-Import Bank, argues for a scale-up of nature-based financial instruments to address the twin crises facing Africa: unsustainable debt levels and climate change.
