Jane: [00:00:00] Hello and a very warm welcome to the LSEG Sustainable Growth podcast, where we talk to leading experts about a wide range of topics covering sustainability, finance and business. I'm your host, Jane Goodland, and this week I talk to Alfonso Garcia Mora, who is the vice president for Europe, Latin America and the Caribbean at the International Finance Corporation. The IFC, which is the World Bank's private sector arm. The IFC advances economic development in developing countries by encouraging the growth of the private sector to create jobs and build a more sustainable and inclusive economy. So let's hear more from Alfonso. Welcome to the podcast Alfonso. It's so good to have you with us. And I know you're a very busy man, so thanks again for giving us sometime today. I'm really looking forward to our conversation.
Alfonso: [00:00:49] Thank you for inviting me.
Jane: [00:00:51] So let's start from the very beginning. Really, the IFC was established 60 years ago. So it's having a birthday, a big birthday, in fact, and it's the largest global development institution focussed on the private sector in emerging markets. Help us to understand a bit more about the vision and the strategic priorities of the organisation.
Alfonso: [00:01:12] Yeah. Thank you for inviting me to this podcast. It's really a big pleasure to be here with you. So as you said, IFC is, as we call it, the private sector arm of the World Bank Group. So, the World Bank Group was created in Bretton Woods after the Second World War and a few years later, the creation of the IBRD. But at that time, it was the institution of the World Bank that was created first, the World Bank decided to go ahead with a specific institution focussed on lending and investing in the private sector. That's how the International Finance Corporation, the IFC, was created. As of today, IFC has a 4500 people in addition to the 15,000 that the World Bank has. And it is distributed all over the world. So in all the countries in offices where they get in touch with private sector participants, trying to see where there are opportunities to help them grow in, to help them develop. We invest in all sectors that you can imagine, from manufacturing to agribusiness to energy, to finance, to transport, health, whatever you want to think about, but only focus on private sector companies. So what we try to do is to help them grow in and to mobilise other investors globally that are interested in investing in emerging markets, in developing countries, but that maybe do not have the capacity to do the due diligence to have the analysis done, etc..
Alfonso: [00:02:41] So whenever we find an opportunity for investment or for lending, we normally try to minimise the ticket that we take as IFC and we try to share this investment with other participants and therefore to bring them to these countries. So in that sense, our objective is double, for on the one hand is to help the country, but also to help other investors to understand these countries and these sectors and these companies. We do approximately $60 billion a year. 70 this year. And this is distributed across regions and across and across countries and across sectors. There are three conditions that are very important in all our investments. And one of them is to have a development impact. So we have a methodology that tries to assess ex-ante what is the development impact that we believe we will have with this investment, either because we create a market, because we create jobs, because we help them going into different into sectors or into areas where they have an impact, etc.. And we establish and we give a rating to every single investment operation that we do to assess if the development impact is really worth it or not.
Alfonso: [00:03:50] The second one is additionality, which means that we need to bring additionality. So we need to do something that others are not doing. So why is IFC there and not a lender or private sector lender? Well, there needs to be something that we are bringing to the market to this borrower that others are not doing yet. And therefore there is a role for IFC to play here. So the additionality is a very important and strong issue for us because it helps us as well. Additionality does not need to be only financial additionality. It can also be non-financial additionality, which means that we provide advice or the services that we help them with, the ENS standards, etc., etc.. And the third component or the third factor and that defines that characterise our investments is that they need to be financially sustainable. So basically we need to operate at market terms. We don't operate below market. We have to lend or invest at market terms because I have seen it to be a sustainable institution. It's not an institution that gets a budget support, if you wish, from our countries, from our membership every year.
Jane: [00:04:58] That's really helpful framing, actually, and certainly something that I don't think I was fully aware of is these kind of three lenses. So development, impact, additionality and financial sustainability. Okay. That makes sense. And particularly I think the additionality point is most interesting in a way, because I guess I'm curious to kind of say, well, I guess why isn't the private sector on its own, right, kind of doing these investments? And why does it need IFC? But perhaps we can get into that when we see some of the examples of, of, of kind of what the investments are. But perhaps you can take us on a bit of a journey to expand on actually how the capital is mobilised. So you've talked about loans and obviously syndication of loans being one of the kind of tools in your toolbox. But that's not the only way that you mobilise capital, right? So tell us a bit more about kind of the different instruments that are available and that you're utilising.
Alfonso: [00:05:57] Yeah. So that's a great question because it's actually at the core of our new strategy and what our president has been pushing since he became president of the World Bank Group, which is no matter how much we do, no matter how much we invest, it will not be enough. It will never be enough to achieve the goals and the gaps that we have in the world. So somehow we need to bring others into the development agenda. We need to help them coming into these countries. We need to help mobilising them there, that liquidity to solve the problems that we have in these countries. So that's a very different perspective, because now the idea is not only to maximise our investments or to find places where we can invest. It is also to find opportunities where we can bring others. And as you said, it could be through syndication, syndicating loans, for instance. We do all the I mean, the big thing here is that since we have presence in all these countries, pick up a country in the middle of Central America or in Africa, with probably an investor sitting in London, does not have an office that does not have a team, does not have the resources to do a proper due diligence. IFC is there. So IFC is structured the operation, the transaction.
Alfonso: [00:07:12] We do the due diligence. We do the integrity, due diligence. We do the environmental, the social safeguards due diligence. And we create the opportunity. And then we go back to London and we tell our pool of investors, potential syndicates, and we tell them we have prepared this transaction on energy, renewable energy in Guatemala to say an example. Are you interested in investing? These are the characteristics. These are the conditions etc. and they might for them will be easier for from that perspective to decide. Syndication is therefore one. A second one could be by being an anchor investor, which is something that we are doing more and more, especially in markets where you have capital markets developed to some extent. So where you can really play the role of an anchor investor. And this is very important because it can in a way, it brings to or it has two impacts. One is the transaction on its own and the second is the development of capital markets. So by using by bringing these transactions into the capital markets, we try to deepen capital markets. And by being an anchor investor in a way we are signalling to the market, hey, we are a mobiliser. We are investing, we are issuing this company is issuing this bond.
Alfonso: [00:08:26] We are taking whatever 30% of the issuance, and they are bringing this transaction to the market to get another 70%. And IFC will be the anchor investor of this transaction. So in a way, it's a stamp of a quality, but at least of confidence that IFC is there to support it. So this is a second way that we have found as quite relevant. Third one could be for instance, BPB's private public partnerships, by helping countries to find ways in which they can finance critical infrastructure that they have and infrastructure needs that they have through a combination of public and private resources. So we help, in this case, governments to structure, to design transactions and to go into the market with a competitive tenders for private investors to come in and invest in those BPBs. This is very important because as you as you well know, BPBs can be I mean there is a lot of work that needs to be done. There is a lot of confidence that needs to be related to this BPB and to the way that it's structured. So these are three examples to give you a sense of how do we mobilise capital and how to try to maximise what we call PCM private capital mobilisation, which is, as I said before, at the core of our objectives.
Jane: [00:09:47] It makes perfect sense in terms of, it's not just you guys doing the investment, it's about kind of building those broader capital markets and bringing often overseas investors Does into those development opportunities. And I think we talk on this show about kind of some of the challenges of investing in emerging markets and investors will kind of often talk about some of the challenges that they face about getting comfortable with, say, some of the perceived risk profiles of investing in those types of projects. So I think this is a really good example of where an organisation like IFC can play that kind of critical role to get others comfortable and to do joint investments. Now, I know that one of the strategic priorities for IFC, based on its current strategy, is around the kind of the development and investment opportunities around climate, and particularly around decarbonisation and adaptation. I'm curious to know what those investments look like in practice is that kind of renewables projects, is it kind of access to electrification, or is it something different in terms of about kind of more around building kind of resilience in communities around climate finance? Or is it everything to do with climate? How on earth do you prioritise what you're going to invest in and try to mobilise capital around?
Alfonso: [00:11:10] So I think, I mean, you mentioned many of the angles that we tried to do know for what we are trying to do, but definitely there is a mitigation agenda related to the sources of energy and related to clean energy related to how we can, I would say, optimise the energy mix that a country can have in a way that is also financially sustainable and financially feasible. So one of the key things that we, for instance, have seen in the last 15 years, for instance, is the price and the use of solar energy. 15 years ago it was actually quite expensive to do photovoltaic or solar energy. Today it is much cheaper than, if not all, most of the energy sources. So this is a clear way or a clear example of how to align a renewable energy or clean energy together with something or a source of energy that is feasible from a financial perspective also for countries. So there is clearly an agenda on renewable energy that we have been pushing that we have been working on. But you mentioned the second one that I believe is critical, which is all related to adaptation. So no matter what we believe it will happen or how many degrees we will be above what it is sustainable from a climate perspective or sustainability perspective. But there is a climate change and that is happening and that is having an effect and impact on the market. And it will have an impact, and it is having an impact on many different sectors.
Alfonso: [00:12:37] So adaptation to what is coming or to what is happening is super important. And it means working on agribusiness, irrigation, different ways, for instance, of establishing irrigation. It means construction because there are many different ways that you can actually construct in different ways in which you can adapt to whatever the climate conditions are in different countries and different parts of the world. It is transport. It is how you build up infrastructure, sustainable infrastructure to make sure that if a hurricane comes or a floods come, or a drought or whatever, you have a sustainable infrastructure and therefore you need to rebuild what you have already built in the past because it's very costly and resources are limited. So I think that the adaptation agenda is an agenda that is growing significantly. It is not an easy agenda to sell to the private sector, because it is not easy for a private company to decide to invest in something and that it will happen or not, but that we have may have a significant impact in the future. And they need to invest today. So that's something that we are also trying to do from I would say a leadership perspective. But the third part, and that you also mentioned is all related to sustainability, related to blue economy, related to the green economy related to the biodiversity, etc.. I think that there is a space there that is very, very important because our objective is to make sure or trying to make all these investments sustainable. So basically, there are linked to the sustainability of what we want to do, what we want to achieve and at the same time financially feasible.
Alfonso: [00:14:12] So it is super important to have both things at the same time. You cannot actually go with one if you don't have the other. There is no free money in the world to actually subsidise or to spend on something that does not get a return that is needed. I always say the same thing at the end of the day, it is my deposits, or your deposits, or my pension, or your pension, the one that will be mobilised to invest in these things. And as a pensioner, you want to have a return when you retire. Therefore, it is very important that whatever you do, it has a return that is comparable to other asset allocations. And here is, for instance, where one of the things that I believe because how do we try to square this circle and the needs are huge. We know that there is a huge gap in terms of climate finance in the world. We estimate around 2 trillion a year. But there is enough money in the world. There is enough liquidity in the world. The issue is, how can we channel part of that liquidity into these objectives, into these areas? And here is where, for instance, what we were discussing, things or issues like taxonomies are critical because we need to speak the same language in order to mobilise capital with or to towards achieving the same objectives.
Jane: [00:15:25] So you've mentioned the T word. Let's go on to that which is taxonomies. And I'm curious from your perspective why taxonomies matter so much when we're talking about, let's say, climate finance or any sort of sustainable finance in emerging markets. But first, maybe just to clarify, when you're talking about taxonomies, what do you mean? And then come on to tell me why it's so important.
Alfonso: [00:15:49] Very good. So let's start with the context. And the context is we have unpredictable regulation, different regulations in countries we have volatilities. We have a lack of clear definitions of what we mean. If they ask you and me, what do we understand by sustainability? Well, probably you and me, we have the same definition or we end up having the same definition. But there will be many potential answers to the same question. So we need to create a common language. So, something that for regulators or financial institutions and for investors, we understand the same things when we speak about green, when we speak about sustainability, when we speak about blue assets, etc.. That's the first, I would say, objective of a taxonomy, which is to create a common language so that when an investor decides that I'm going to put my money into this fund and the asset managers of this fund, where they are going to invest is something that is actually resonates with what the investor was thinking, that they or the saver, what they wanted to invest in. So they need to speak the same language and the same that the regulator is actually thinking when they talk about this. So common language is a critical first objective I would say. And you may think well but that's not such difficult information. Well that's super difficult. And it is super difficult because we have more than 50 taxonomies in the world. And therefore it is very important that actually these taxonomies and different countries and the different stakeholders in each of these countries speak the same.
Alfonso: [00:17:19] The second one is transparency. We have a problem with transparency, because if we start by acknowledging that we have different definitions or different understandings, and then it is obvious that the transparency will not be there or the transparency will be understood in a different way. So the only way to really enhance transparency, or the assumption is to have a common language so that we can then go to the second step, which is okay. And now let's make it transparent. Let's make sure that we speak the same, the same thing. And it can be verified not by the market and by the different stakeholders. The third one is to enhance a risk assessment and disclosure practices so that if we again, if we start from the idea that we have a common language, we enhance transparency, then it should not be difficult to have a disclosure. Practices that are easy, that are standard in a way, and that therefore everybody can see what any player is doing in the in the world. So I think that these are three critical objectives, if I may, of a taxonomy. What do we achieve by having these three aspects in taxonomy? I think that credibility and transparency and therefore confidence, trust in the market. Whenever you or I decide to invest into a green fund, ESG fund or whatever, we know where we are investing. We know where this money is going to, what type of assets. And it doesn't matter if you invest in UK and I invest in the US or in Spain or in Costa Rica, it will be the same.
Alfonso: [00:18:49] Second one to facilitate cross-border investments. And this is very important for emerging markets and developing countries. Why? Because there are not so many opportunities in many of these countries and it's very important that they attract cross-border investments and cross-border capital. And for that, they need to have taxonomies. That resonates well with the origin of the capital where the capital is coming. So for again, for an asset manager sitting in London, when they decide to invest in a Central American country, they don't need to actually do a PhD on taxonomy or how this country defines whatever. They have a taxonomy. The taxonomy has been cleared by whoever, and therefore they are reassured that they are investing in what they were aiming to do. So the last one is in that I think is also important in terms of impact that it has to have these taxonomies is to help banks and financial intermediaries to offer products that are aligned with what the demand wants, what investors want. So by having taxonomies, it is much easier for a bank, the supplier, in a way of a product to decide, okay, I'm going to launch this one, or I'm going to launch this product that is aligned with a green whatever deposit, a green bond or a green fund. And I can do that and I can name it like that, because I have a taxonomy that helps me to identify that this is a fund that is aligned with this criterion.
Jane: [00:20:13] So as you mentioned yourself, there's over 50 kind of taxonomies out there in this part of the market. But you're the International Finance Corporation. So what taxonomy do you use or do you spend a lot of your time doing kind of interpretation about, you know, what does this taxonomy mean versus that one? But when you're mobilising capital yourselves and bringing other investors with you, what's your taxonomy that you go to?
Alfonso: [00:20:39] We created in for instance, the green bonds in back in 2013, we issued the first global US dollar benchmark green bond. And for that we created what we call the guidelines for the green bonds that then were used by many other players and by many other countries and many other institutions. Same thing in 2020, 2022, we created the guidelines for Blue Finance, which we actually developed in the guidelines to define what a blue bond or a blue loan will be. Meaning, we identify the assets that a bank or an institution could invest in to label the financing that they get to invest in those assets as blue. We brought it to ICMA to be verified by International Capital Markets Association, so that it was in a way reviewed by someone that is independent completely. We have done exactly the same with the biodiversity bonds in 2023. We launched the Biodiversity Finance Reference Guide, which was a new guidelines to identify when a bond or a loan could be categorised as biodiversity bond or as biodiversity loan. So and again standardising and defining what are the assets that you can invest and how do you do that in a way that can be standardised and recognised by different players. So that's what we try to do. So we try to but we don't we don't make it mandatory to anybody to follow ours.
Alfonso: [00:22:17] What we try is to set some sort of a standard, some sort of guidelines that help countries to do their things. But, you know, even if you have 50 different taxonomies and we created we are the secretariat of what we call the Sustainable banking and Finance Network as BFN, which actually brings together more than I think it is 70 countries in the world, emerging markets, 100 regulators and lots of banks, etc. to share practices on taxonomies and standards, etc. so this is very important because what we try is to help in defining the taxonomies and thinking on one issue that is critical. Even if we have taxonomies that might differ and that happens. And that's normal because, you know, in some countries they believe that I don't know, transitional energy or transitional sources of energy should be considered as sustainable. Others do not think that should be the case. That's okay. That that's something that, you know, every country has the prerogative to decide how to identify a taxonomy, but it is very important that we make it transparently and that we actually create some sort of interoperability so that even if there are differences in the taxonomies, those differences are very clearly identified and therefore help and does not pose a barrier to the two capital flows. No.
Jane: [00:23:37] Comes back down to transparency once again, it seems to always be the answer is going back to transparency, just really helping to help kind of capital markets work efficiently. I wanted to also kind of focus on the opportunity, I guess, for innovation that might come from taxonomies and particular opportunities for new asset classes to spring up. And you kind of just mentioned a couple of areas which are more kind of novel in their kind of development and blue finance and biodiversity funding, etc.. So could taxonomies do taxonomies provide a stimulus for new asset classes and new instruments, do you think?
Alfonso: [00:24:18] I do believe so. I honestly and I believe so because, you know, the guidelines for blue finance, we started in 2020. I was vice president in Asia at that time in IFC. And you realised that actually pollution, marine plastics, etc. is a big problem in Southeast Asia, Southeast Asia and water management etc. and yes, you could have used sustainable taxonomies if you wish, or green taxonomies to tackle that problem. Now, a problem that the society feels very attached and feels very, very close to because they see it everywhere. But we thought, okay, maybe if you create a product and speaking with some buts that targets clearly the blue economy. Clearly those are issues that really matter for many of the investors in the country will help you to mobilise or to attract that interest, and therefore those savings from many people that would like to actually invest in something to solve that problem in the country. So that's how the blue finance guidelines started. And you know, in conversations with many banks at that time in Southeast Asia, but recently in Eastern Europe as well, they normally say no. But, you know, I cannot issue a blue bond because I don't have enough assets. And I didn't invest on many assets that are actually blue. And I told them, well, let me give me a try.
Alfonso: [00:25:38] Let my team come to your bank, sit with your credit officers and let's analyse what you have on your balance sheet. If we find enough potential borrowers subject to a blue asset or blue finance, then we will go ahead. This happened with Bank of Transylvania in Romania recently and they issue the first blue bond. And it was fantastic because they realised that actually, in terms of water management, water usage, river tourism, sustainable tourism, there are many things that actually are related to the blue economy, fisheries, etc. it's just a question of identifying and I believe that, you know, there is a risk of fragmentation and you say no, blue, green, sustainable doesn't fragment too much the market. Yes, that's a risk. That's why transparency again is critical. And what do we want to achieve. But the risk of fragmentation, the trade off or the positive of that is the opportunity of identification, of finding a way in which you can really target your savings or your investments into something that really that you care about. And I believe that, you know, given the situation of the, the liquidity and the and the capital markets in the world, people really like more and more to have a say on where you invest and for what?
Jane: [00:26:53] Brilliant. I think, Alfonso, I don't think there's a better place that we could finish this chat, because I think it ends on a really positive note about the opportunity that is really out there for everyday investors to be able to channel their investments through the institutions that they're part of into development in some of these economies and, and why taxonomies actually do matter, after all, and they're not just a clunky bit of market infrastructure. So thank you for bringing all of that to life. And I've certainly learned a lot more about the IFC's work. And I think it's fascinating. And the role that you play is really incredible. So thank you for that. And thanks so much for finding the time and coming on the show.
Alfonso: [00:27:31] Thank you so much. It has been a pleasure. Thank you.
Jane: [00:27:34] So I hope you enjoyed that episode with Alfonso. And if you did, then please don't forget to follow us and rate us on Spotify, Apple Podcasts, or any other platform you use. If you've got questions, comments, or someone you want us to talk to, then do get in touch by email at FMT@lseg.com. That's all from me but watch out for the next episode very soon.
