Episode 07: World Bank: Mobilizing Capital Markets for Sustainable Finance

TRANSCRIPT

Heike Reichelt:  If you think about it, the next generation of portfolio managers might just wonder why our generation didn’t automatically already ask, “How are you going to be using the funds, and what are your environmental, social and governance policies?”

Michael Torrance: Welcome to “Sustainability Leaders.” I am Michael Torrance, Chief Sustainability Officer with BMO Financial Group. On this show, we will talk with leading sustainability practitioners from the corporate, investor, academic and NGO communities to explore how this rapidly evolving field of sustainability is impacting global investment, business practices and our world.

Legal disclaimer: The views expressed here are those of the participants, and not those of Bank of Montreal, its affiliates or subsidiaries.

Manju Seal: Today’s topic is the World Bank and how they have been driving innovations and sustainable development through the financial sector for 75 years. Personally, I find their work very exciting. It’s supranational, with 189 member countries, 12,000 projects and offices in over 130 locations. The World Bank Group is a unique global partnership working towards sustainable solutions that reduce poverty and build shared prosperity in developing countries. Our guest today is Heike Reichelt, the head of investor relations and new product development at the World Bank. I asked Heike how she came to be at the World Bank in 2000 and how her role has evolved into what she does today.

Heike Reichelt:  Well, as with many things in life, how I got to the World Bank was a coincidence, or maybe you could say it was meant to be, however you want to look at it. I was working at a German government agency, and I started working there first on project finance, telecommunications projects in Asia, and then I moved onto capital markets, and it was that time that I was approached by someone asking whether I wanted to apply for a new position that was being set up in the World Bank treasury that was dedicated to investor relations. So until then, the function of engaging with investors and communicating with investors was done by others. It wasn’t a special, dedicated position, so they were setting up a new position, and I applied, and I got the job. And at the time, the job was quite different from what it is today. The focus was really on communicating to investors what the financial terms of the debt products were, so talking to them about the coupon, the maturity, the currency and also about the credit of the World Bank. There was not a lot of conversation about what was done with the money. There was not a lot of conversation around the purpose of the World Bank, but that has really completely changed now. The conversations that we have with investors now are really focused on the purpose of the World Bank, what we do with the money we raise in the capital markets and how we do that.

Manju Seal: What are some of the early influences in your life that inspired you to work in the world of the development finance?

Heike Reichelt:  So that’s a very interesting question, and, of course, it’s hard to say, but if I look back, maybe being born in Africa had something to do with it. Maybe having lived in Africa as a child also had something to do with it. I’m also not the first person in my family to work in development finance, but if I think back to what I chose to do … As a teenager, for example, I volunteered at my local hospital, so I guess doing things that have a social purpose and finance were kind of sprinkled throughout my life. I worked in banks after graduating from high school, for example, and then I studied finance and international management, and as I was interviewing with companies, I realized that the ones that really sounded more interesting were organizations that worked for a certain purpose, which I think is how I ended up with a German government agency. And so I think that everything in life prepares you for something, and as I was asked to apply for a position at the World Bank, of course, I was happy and honored to have had that opportunity, and, well, yes. Here I am 20 years later working on sustainable finance.

Manju Seal: First, I asked Heike to describe the purpose of the World Bank, and we began a discussion on defining sustainable investment.

Heike Reichelt:  So the World Bank raises funds in the capital markets and uses those funds for sustainable development. We’re owned by 189 countries. Those are our shareholders, and the mandate of the World Bank, the sole purpose of the World Bank is to eradicate extreme poverty and boost shared prosperity in member countries. So we work on a variety of projects and programs, working together with countries to help them reach their development targets, and we fund projects in many different areas, like education or health, or work with governments to transform the transportation sector so that it can become more efficient and cause less pollution, for example. So it’s really a broad area of sectors. We have over 10,000 colleagues around the world. Most are based here at headquarters in Washington, D.C., but also in countries all around the world working with our member countries with the governments to help them achieve their development goals.

Manju Seal: How big is your funding program, and what instruments are most commonly issued to raise capital?

Heike Reichelt:  The World Bank funds itself in the capital markets, as I mentioned, and we have a funding program of about $50 billion, and we raise that through more than 500 individual transactions every year. The transactions range from smaller sizes of around $1 million equivalent to larger sizes of 4 billion or more. We issue bonds in more than 25 different currencies and different maturities and structures as well. It’s really based on investor requests and investor demand.

Manju Seal: Which brings me to my next question: Can you shed some light on the types of buyers of your paper or your issuances?

Heike Reichelt:  So the World Bank is rated triple A. That’s the highest credit rating that an organization can get, so investors who buy our products are really looking for a safe product and a liquid product, something that they can trade in the capital markets. So, buyers tend to be organizations such as central banks, pension funds, asset managers, also insurance companies, corporates, bank treasuries and also retail investors, so individual investors who are looking to find a safe bond investment for their savings.

Manju Seal: And the World Bank is also known for issuing sustainable development bonds, so I’m curious. How does World Bank define today’s rising interest and discussion around sustainable finance as well as sustainable development? Is there a difference between the two, or is that World Bank’s definition?

Heike Reichelt:  Well, sustainable development is really at the core of what we do. As I mentioned, our mission is to eradicate extreme poverty and boost shared prosperity, and everything that the World Bank does is aligned with the Sustainable Development Goals, and I would define sustainable development as financing projects and programs that meet the needs of today’s generation without compromising the needs of future generations. And as I mentioned, we finance projects in different sectors, like education, health, projects that protect the environment, and the way it is financed is through bonds in the capital markets, which investors who are interested in sustainable finance can buy.

Manju Seal: How are projects selected by the World Bank, and how are they monitored for impact?

Heike Reichelt:  I often think that when investors buy World Bank bonds, they’re basically taking advantage of the World Bank as a platform, and we are the ones who identify projects, work with the countries to implement the projects and then report back. So the investors themselves don’t have to have this type of expertise. It’s like they delegate that to the World Bank, and for every single project that we finance, it goes through what we call a project cycle. So we have a Country Partnership Framework. We work together with, in the case of the World Bank, with middle-income countries, and we lay out the country partnership strategy. We identify sectors and projects that we plan to finance. Then there are various assessments that are done, appraisals, negotiations, and the project then goes to the board for approval, and then it starts with implementation, and the World Bank provides support. And then towards the end, there’s a completion and evaluation, so it goes through several steps, and there are milestones that are checked along the way to make sure that things are on track, and if they’re not on track, that they can be adjusted accordingly so that the project can achieve its intended goals. And so this is … When investors are following an ESG investment approach, these are the types of things that they look for in issuers to make sure that there’s a certain amount of rigor in projects that are financed.

Manju Seal: So in your role as the head of investor relations for World Bank, what are some predominant, sustainable investment styles you’re observing today in the socially responsible investing market, which has really grown quite a bit in the last 10, 15 years?

Heike Reichelt:  Yes. It really has, and I think it’s an evolution, and I like to talk about the ABCs of SRI, ESG and impact. It’s an easy way to remember the differences, although investment styles are fluid, and often investors use all of these styles. But if you think traditionally back to SRI, socially responsible investing, typically that meant avoiding certain sectors in the equity space. For example, avoiding alcohol, tobacco or gambling, and so, that would be the A. The B would be benefit and benefitting stakeholders or benefitting shareholders. So more recently, a lot of emphasis is placed on assessing ESG risks, environmental, social and governance risks; so recognizing that if you invest in a product, either a bond issued by an organization, a company or equity stock of a corporate, you find that if you assess environmental, social and governance risks, you get a better understanding of the value of your investment, and you can find ways to reduce risks and seek out opportunities that benefit, so that’s the B, your shareholders and your stakeholders. And then the C is impact, and this is something that I think has increased recently, that investors are realizing that they can have strategies that focus on exclusion lists or not or look at best-in-class approaches. They can focus on environmental, social and governance risks, and they can also find opportunities that contribute beyond their portfolio towards society, and that’s really where green bonds, or labeled bonds, come in. So the credit rating, the financial risk is the same as other products by the issuer, but there’s additional information on the types of things that the investor is supporting to contribute more broadly to society. And many investors, as I said, are in the A, B and C categories in the approaches that they take.

Manju Seal: No. Yeah. That’s a very helpful mnemonic to remember, definitely, for especially if you are beginning to be more involved in the various SRIs, strategies and products. So recently we are seeing a lot of discussion about transition bonds, both from Europe as well as Canada. What is World Bank’s view about transition bonds, and do you think World Bank would ever consider issuing one?

Heike Reichelt:  So I couldn’t tell you what the World Bank view is. I can tell you what my own, personal view is, and there has been a lot of discussion about this in the sustainable investment community, banks, issuers as well as investors. And some like the idea of having another label that describes the purpose of a product, and others would like to keep it simple, just keep it green bonds, and if you look at the green bond principles, it’s all about transparency. And if the issuer is looking to support activities that help with the transition to a low-carbon economy, one could say that, strictly speaking, it could comply with, or it could be in line with, the expectations set out by green bond principles. However, others might say that that’s not green, and they wouldn’t want it. So at the end of the day, what really matters, is that issuers are transparent with investors and describe to them what their approach is, however they label it. In our case, we’ve decided from a strategic perspective that everything that we finance, we could label as Sustainable Development Bonds, and then we could consider that we have this subcategory of green bonds that we introduced a little over 10 years ago to raise awareness for the types of projects and programs that we’re financing to help mitigate climate change and help countries adapt to the effects of it. But as I said, some investors do like the specificity of a product and its label and would like to see different labels, and others would like to sort of keep things simple, just with one label, and the same is true for other labels, like blue bonds, for example. One could say that the projects and programs that blue bonds support are also subcategories of green bonds, and then others would say that they’d like to support issuers that are communicating how they’re specifically focusing on those areas. So there’s different views in the market, and my opinion is that conversation and more information and communication is good, and if you want to have a label to express that, then that’s fine.

Manju Seal: One thing that jumps out when talking about the World Bank is how innovative they are and have been over the decades. Heike and I talked about how capital markets are starting to assess risks that are not priced into the market and how the World Bank has innovated to meet this growing trend. Would you be able to share some instances of innovative financing that are examples of large-scale movement of capital, given that World Bank engages with over, or rather close to, 200 countries?

Heike Reichelt:  Sure, so we, as I mentioned earlier, we can be considered as a platform for investors. So if investors are interested in supporting sustainable-development projects, let’s say transportation projects or health projects or the revamping of the education sector in a country, they can buy World Bank bonds at scale, and we then use those funds to finance these types of projects. So I think the way that the World Bank was set up as this platform and other multilateral-development banks as well is a very efficient way to raise capital at scale and use it for development. Now, obviously we are constrained by the amount of capital that we have, and we need to protect our triple A and how much we can do, so there are other ways that people are thinking of raising financing to support development. You asked about innovation, and, yes, the World Bank is known for innovation. Did you know that we did the first cross currency swap in 1981?

Manju Seal: That’s impressive.

Heike Reichelt:  In 1981, the World Bank did the first cross currency swap, and now the swap market is huge. In 1989, the World Bank did the first-ever global bond, and now it’s completely normal for everybody to issue global bonds. I don’t know if the green bond is an innovation in that category, but a little over 10 years ago, we issued the green bond, which, as I said, has really catalyzed a change in the capital markets. And also, more recently, we issued a bond on blockchain, and blockchain and other similar technologies are really going to revolutionize the capital markets and provide ways of increased transparency that I think will also change how investors integrate environmental, social and governance criteria in their investment approaches.

Manju Seal: The other phrase we hear a lot about, especially through UN and a lot of the other folks that are participating in raising capital is, “Sustainable infrastructure.” Would you help our listeners understand what that means?

Heike Reichelt:  I think it’s sustainable and resilient infrastructure is a word now, resilient towards anticipated changes in climate, and sustainable is in a way that is protecting the environment in the best possible way. So one project example I can mention is a sustainable transportation project in Colombia that the World Bank financed. It’s a bus rapid-transport system that was introduced in various cities in Colombia to replace a very chaotic and actually dangerous system that was contributing to high pollution in cities. So the World Bank worked with the government and with other stakeholders in the various cities to introduce a bus rapid-transport system that connected communities living in the outskirts of the city to jobs in the city in a sustainable way. It reduced travel time. It reduced traffic fatalities and reduced pollution, so it’s quite a holistic way of looking at changing the transportation sector in various cities. And I know that the projects were considered models, and I actually went to see those projects and interviewed with stakeholders, and they mentioned that it had been used as a model even for some countries in Europe, who were coming to see how it worked and how it was introduced into the communities and how it really changed the landscape in those cities.

Manju Seal: In the topic around reducing poverty, there is obviously now a big linkage with climate change. How does World Bank view the issue of climate change today as it stands, and what are some of the impacts you are seeing of climate change as you are also working towards alleviating poverty?

Heike Reichelt:  I think it’s a very good question, and climate change has been a focus of the World Bank for decades, actually, because the effects of climate change are noticed by everybody. We can notice that weather patterns are becoming more extreme, and weather is more volatile. But if you think about the ones who suffer most, it’s populations in countries that are affected by extreme drought or flooding, food price increases, and these are large communities that are very poor, and so, rapid food price increases affects them very much. And we’re seeing in some countries, flooding causes climate refugees, and so whole groups of populations move because the place where they lived becomes uninhabitable, and whether it’s because of flooding or drought, they look for other areas where they can have a better life. So really, climate change is very, very closely linked to poverty, and that’s why it’s a big focus for the World Bank and for our projects and programs, and not just working to mitigate climate change but really helping countries finance resilient infrastructure, so infrastructure that can withstand more extreme weather conditions or more flooding so that roads or buildings aren’t washed away by stronger storms.

Manju Seal: I believe your role is very influential in influencing market participants in how they engage with sustainable finance or how they think about sustainability. What are some ways that you try to bring some of those issues to light and change investor behavior or issuer behavior?

Heike Reichelt:  I really think that the interest is coming from the investors themselves, and it’s about information, engagement. We have seen such a positive response in bonds that we’ve been issuing to raise awareness for certain Sustainable Development Goals, for example. Investors are keen to find out how they can contribute, and they’re doing it in a financial product that’s just like other financial products that they have in terms of the risk reward, but in addition to that, with World Bank bonds, they can make a contribution towards a better society. And I think that with information and transparency, investors can just make better decisions, and there is this huge challenge looming, which is that the financial system is set up on a very sort of strict risk-reward system, but only risks that are priced in, and we have so many external costs that are not priced in. So it’s difficult in the existing financial system for investors to make, in quotation marks, “The right decision,” even from a price perspective because a lot of the risks are not priced in. So it’s a matter of uncovering those risks because once others become aware of them, once perceptions change, that’s when prices change, but it’s this sort of internalizing external costs, I think, is something that the financial system will grapple with going forward for quite some time.

Manju Seal: You bring a very good point about not pricing in all the risks. So, climate risk is one that we often hear about these days. Are there other risks that you’re thinking of which are not priced in today?

Heike Reichelt:  Climate risk is a big one because people can see the effects in their backyard, I say, right? We can all see it, but sometimes people say that social risks are more local. I disagree. I think social risks are global, and if we can work in ways to alleviate inequalities to give hope and chance and access to education to sort of broader groups of the population, I think that would solve many problems that we see in the world today.

Manju Seal: Let’s also talk about Sustainable Development Goals because that is quite central to a lot of the work that you do today at World Bank. Can you share with our listeners what they are and why World Bank thinks they’re important?

Heike Reichelt:  Sure, so the Sustainable Development Goals are 17 goals that the international community agreed to in 2015 with specific targets and metrics, and they’re quite broad. Investors are using them as a framework, and there are, like I said, 17 goals. The 17th one is about partnerships, but the goals focus on things like climate action, gender equality, good health and well-being, equitable social services, sustainable transport, no poverty and no hunger, so really it’s a broad range of social issues that the international community defined as important to create better societies, better societies for all. So each country has certain targets, and they are measured against those targets, and investors are looking at them as a framework, and there are publications that show how countries are making progress in the various areas, and countries communicate with investors about how they are working to achieve those goals. And a big one is climate, climate action, that’s actually … And climate is in many of the other goals, so all of the goals, you could say, are interrelated. For example, Life Below Water or Life on Land is very connected to climate action, as is sustainable cities and some of the other goals, like clean water and sanitation or renewable energy.

Manju Seal: Since the Sustainable Development Goals were announced in 2015, and in 4 years, we have really seen a huge change in the dialogue, where even investors are more aware of these goals, and they are building products around it, what are some things that World Bank is doing in terms of making products available to your investors around SDGs?

Heike Reichelt:  So our mandate is aligned, and our twin goals are aligned with the Sustainable Development Goals, and investors are looking at their portfolios and integrating approaches that focus on the Sustainable Development Goals. So as we engage with investors, we focus on certain types of SDGs that are of interest to the investors, and since our projects and programs support all the goals, we can select projects that fit with the Sustainable Development Goal that investor would like to focus on. So as I mentioned, they’re interrelated, and we’re using this as an engagement tool to help investors understand how we use the funds, how we work with countries and also the types of things that countries are doing. And then there are products that are structured, and I mentioned earlier that we have bonds that are linked to equity NDCs, and in one specific case, we worked with a bank to develop a product where the coupon performance, the return was linked to an equity index with companies that were analyzed by a third party based on how their products and their business support certain Sustainable Development Goals, so that’s a way to raise awareness for them.

Manju Seal: In what ways do you think corporations and financial industry could engage in achieving the SDGs? Are there pathways that you might want to recommend?

Heike Reichelt:  Yeah. What I see that corporates are doing is a lot around education. So we recently visited one of our partners in London, and in their lobby, they have the Sustainable Development Goals displayed, and then they pick certain ones to inform their staff about. For example, on that day, it was how to reduce pollution and ways that staff can do that. I think that in looking at their business processes, there’s a lot of ways that … Especially companies in the industrial sector can change the way they do business to help achieve the Sustainable Development Goals. And I’m thinking of sectors like the apparel sector and water use, thinking of ways to just make the production process more efficient, to use less water. So I think there’s many ways they can do it, either in how they do what they do or doing things differently or change what they do, and education, transparency.

Manju Seal: I want to thank Heike for all her valuable insights she has shared today, and we leave our interview with her inspirational answer to my last question in just a second. Thank you, Heike, for having a deep and meaningful dialogue with me and for demystifying the World Bank for our listeners. I hope you leave this conversation as inspired as I am by all of the work that the World Bank does to make our society and our world a better place. When we talk about solving global issues, many of these are, in some ways, so complex and, in some ways, unattainable, or it seems unattainable whether we will actually be able to reduce poverty completely or whether we will be able to have gender equality truly. For example, one of the statistics we know from World Economic Forum is that it would take about 108 years to get to gender equality at the rate at which we are going today. So in that paradigm, what keeps you going? How do you seek inspiration and continue to do the work that you do?

Heike Reichelt:  I think being … I don’t want to use the word happy, but just recognizing incremental progress. So we can look back and say, “Things are still not good, but if you look back in history, there’s definitely more progress, and we should push,” and there are people who do it in more radical ways, but I think we should just recognize incremental progress. And in the case of climate change, we could say that we’re definitely moving too slowly, and it’s frustrating to think back how long we’ve known. Since the Industrial Revolution, we’ve known that carbon is bad for the atmosphere, so it just makes you wonder, “How could we get to where we are today? Why do we have to wait until we see it in our backyard to raise the alarm bells?” And still we struggle to change the system. We struggle to change how the world of finance works and can just change things incrementally. I guess just trying to recognize that a lot of progress has been made in many areas, even though there’s still a long way to go and try to see the glass half full, rather than half empty.

Michael Torrance: Thanks for listening to “Sustainability Leaders.” This podcast is presented by BMO Financial Group. To access all the resources we discussed in today’s episode and to see our other podcasts, visit us at bmo.com/sustainabilityleaders. You can listen and subscribe free to our show on Apple Podcasts or your favorite podcast provider, and we’ll greatly appreciate a rating and review and any feedback that you might have. Our show and resources are produced with support from BMO’s marketing team and Puddle Creative. Until next time, I’m Michael Torrance. Have a great week.

Legal disclaimer: The views expressed here are those of the participants and not those of Bank of Montreal, its affiliates or subsidiaries. This is not intended to serve as a complete analysis of every material fact regarding any company, industry, strategy or security. This presentation may contain forward-looking statements. Investors are cautioned not to place undue reliance on such statements, as actual results could vary. This presentation is for general-information purposes only and does not constitute investment, legal or tax advice and is not intended as an endorsement of any specific investment product or service. Individual investors should consult with an investment, tax and/or legal professional about their personal situation. Past performance is not indicative of future results.