The World Bank’s Board should close the ‘Private Sector Lab’
This “Lab” holds dangerous conflicts of interest and will not give the kind of advice that the Bank needs
The World Bank has announced the creation of a “Private Sector Lab” (PSL). The Bank’s October 2023 Development Committee Report on “Ending Poverty on a Livable Planet” states the purpose of the PSL is [1] “… to identify actionable solutions to increase private investment in developing countries. A key aim is to identify ways to improve the availability of appropriate risk-return investments, which can be facilitated through blended finance and other means to credit-enhance or de-risk investments.”
World Bank Group President Ajay Banga’s recently stated his ambition for the PSL is to ” … focus on scaling transition finance in renewable energy… {fn: https://economictimes.indiatimes.com/news/india/world-bank-chief-banga-us-treasury-secretary-yellen-hail-gujarats-education-control-and-command-centre/articleshow/101802172.cms} in the context of, as Banga continued: “the whole World Bank evolution roadmap”, which emphasizes private finance. Banga noted possible changes in private finance as “… the World Bank taking a first-loss positions in projects, de-risking projects by putting them on the International Finance Corp’s balance sheet in the early stages and later transferring them to private sector investors.”
This post, the second in a series on the role of the World Bank through 2030, argues that the composition of the PSL creates conflicts of interest; that those conflicts will divert the Bank’s portfolio from its goal of highest development impact; that the fossil fuel orientations of the companies represented on the PSL are incompatible with the Bank’s global goals; and that, in some cases, advice from PSL members may weaken the Bank’s independence in fiscal policy and debt management in client nations; and that the likely conflicts cannot be resolved and hence one must ask why the PSL is needed at all.
The conflicts of interest
Fifteen of the 16 PSL are leaders of major financial institutions (Ogunbiyi is the exception) managing wealth in securities trading, banking, and insurance. A rough estimate of assets among the 15 is about 16 US$ trillion, diversified across countries, sectors, and instruments. Such wealth, its origins in finance, and its global scope create a core conflict between the class interests (capital) of the PSL and the public goods interests (notably climate change adaptation and mitigation, pandemic preparation, energy access) of the WBG[2]. This core conflict has potentially toxic effects on the Bank’s risk profile, its role in fighting climate change, and its independent agency in assisting debt-stressed countries.
The Bank’s risk profile. The first specific conflict is this “Lab” reflects a misunderstanding of the Bank’s risk profile. The WBG’s chief risk is not that it will lose money–it is that the WBG will not be effective. Again, this comes from the Bank’s new President, who seems to view risk in purely financial terms–will the lender get paid ?– and not in development effectiveness terms–will operations financed with WB and partner resources achieve their objectives ? The backgrounds of the bankers in this Lab[3] are similar: invest in things that give competitive returns without much attention to what the investments do. This is not what the Bank should be doing.
Fossil fuel investments. All the 15 have substantial direct and indirect investments in businesses that generate GHGs directly (Scope 1 emissions) and indirectly (Scope 2 investments).
Some examples are as follows.
BlackRock (“https://www.blackrock.com/corporate/newsroom/setting-the-record-straight/energy-investing) has fossil fuel holdings including directly through publicly-listed energy firms and indirectly through BlackRock/iShares, which cover some 390 US-listed ETFs. BlackRock’s corporate view exemplifies the core conflict between the “fiduciary duty” [4] of private financial firms and the GPG objectives of the WBG: “Our consideration of the risks and opportunities of a transition to a low-carbon economy is in the interest of realizing the best long-term financial results for our clients and entirely consistent with our fiduciary duty.” (https://www.blackrock.com/corporate/newsroom/setting-the-record-straight/energy-investing).
Prudential’s US subsidiary has now about 9% of its AUM (https://www.ceres.org/resources/reports/changing-climate-insurance-industry: page 16} in fossil fuels. Prudential’s corporate ESG does seem to reflect a serious commitment to decarbonization (https://www.prudentialplc.com/~/media/Files/P/Prudential-V13/reports/2022/esg-report-2022).
TEMASEK, the sovereign wealth fund (SWF) of Singapore, does not seem to have major Scope 1 investments and its principal Scope 2 holding is Singapore Airlines. TEMASEK has issued a credible statement on its “Pathways to Net Zero”: (i) “investing in climate-aligned opportunities; (ii) enabling carbon negative solutions; and encouraging decarbonization efforts in business” (https://www.temasek.com.sg/en/sustainability/sustainability-in-our-investments#catalysing-climate-action).
Brookfield Corporation, a Canadian investment fund, has important holdings in fossil fuels (https://peclimaterisks.org/brookfield-emissions/. Brookfield’s own sustainability report (“https://www.brookfield.com/responsibility/2022-sustainability-report) declares the firm’s modest progress toward net zero in 2050. It has been credibly argued that Brookfield is not disclosing fully its Scope 1 and Scope 2 emissions [5].
AXA, a French insurance company ( “https://en.wikipedia.org/wiki/Axa”) presents its GHG in adequate detail (“https://www.axa-im.com/document/6099/view”) and its planned phase out of coal and other fossil fuel holdings does seem credible [6].
The companies behind the PSL members have made public declarations about decarbonizing their portfolios with the goal of net-zero by 2050. (Independent analysts and shareholders’ groups contest the timing and impact of the steps taken to decarbonize; an example concerning HSBC can be found at https://www.thebureauinvestigates.com/stories/2024-01-19/hsbc-helped-oil-and-gas-industry-raise-47bn-despite-net-zero-pledge/). Such declarations about the timing to net-zero (e.g., the BlackRock document cited above) are noble, yet superficial and BlackRock seems to be backing away from its own statement. The various PSL portfolios rest on the fiduciary duty argument––that investment managers have obligations to their shareholders which is senior to their obligations to a livable planet. This argument is valid from the corporate finance sense, but not in the WBG sense. Bank shareholders are quite different–the return they want, and the capital they seek to preserve, are global public goods, not individual growth portfolios, retirement funds or private planes to attend COP jamborees. The risk in allowing this group of 16 to advise the WBG is that the Bank’s objective will be diverted from global public goods to an arbitrary sum of private goods whose values aligned are with those of the PSL portfolios.
Emerging market investments. A second immediate conflict of interest is that many institutions behind the PSL members hold emerging market commitments as equity, as individual loans, or as varying types of funds. Because the Bank is often involved in EMD workouts and advises on the macro and business climates where it does not provide explicit or implicit support to the restructuring instruments, such information, even if it is already public, about the Bank’s potential role in each country can be valuable to many of the 16 by confirming the Bank’s intentions about a given situation. [7] A few examples follow.
Macquarie, an Australian bank, holds some AUS$240 billion of its total assets of AUS$892 billion in various credit instruments including EMD; Its EMD ETF has significant holdings on debt issued by Chile, Indonesia, Cote d’Ivoire, and the Dominican Republic.
Mitsubishi Financial Group has various instruments which reflect significant EM commitments, do not appear to include distressed debt (https://www.mufg.jp/english/ir/fixed_income/index.html).
TEMASEK has significant fixed income holdings (https://www.fullertonfund.com/literature/fullerton-fund/?_sft_registered=singapore
One conflict between the EM portfolios of the 16 and the work of the Bank might occur through private exchanges among PSL members and Bank officials regarding the Debt Sustainability Framework (DSF). The DSF is managed by the Bank and the Fund and is ” … designed to guide the borrowing decisions of low-income countries in a way that matches their financing needs with their ability to repay now and in the future” (https://www.imf.org/en/About/Factsheets/Sheets/2023/imf-world-bank-debt-sustainability-framework-for-low-income-countries)--in other words, the DSF is a form of credit rating. In theory the DSF is public and provides no private information to anyone. Yet many assumptions go into the DSFs and there is always a negotiation among officials of the country, of the Fund, of the Bank, and of other multi-lateral development banks about the details of those assumptions. Those assumptions and the compromises made during negotiations are not public. The risk posed by the access of PSL members to information inside the Bank (and the Fund), that such information will inevitably affect PSL recommendations[8]. That such private exchanges are inevitable does not mean they should be institutionalized.
Can the conflicts of interest be resolved ?
The PSL members could recuse themselves from any direct or indirect role in the project or advisory cycles of the Bank. They could agree not to seek private information from Bank staff, particularly on investment climates or debt profiles in client nations. One hopes that PSL members have already done that in writing. Despite such (at this point, purely hypothetical) recusal, whatever the PSL members may have promised on being admitted into the Bank’s confidence, having been so admitted, they now can steer the Bank in the directions of their class and personal interests. It is not enough to say that they are above such manipulation.
A second way to resolve such conflicts might be to make PSL deliberations public and to issue public reports stating specifically what they have advised. This is very unlikely to happen. Even were such a report to be issued, there is no mechanism to enforce whatever was agreed.
Why have a PSL at all ?
Is the PSL valuable in that its members add skills to those of Bank staff in corporate financial management, identification of potential high-return projects, and in project management to achieve those potentially high returns ?
At the corporate financial level, IBRD staff now manage more than US$225 billion in loan commitments (https://thedocs.worldbank.org/en/doc/16796f0d7a20087d312ec8634ace777c-0040012022/original/IBRD-Financial-Statements-June-2022.pdf). They have done so for 75 years without catastrophe. They have prepared, appraised, supervised, and evaluated some US$800 billion in operations over many decades, generally in more trying circumstances than those found on Wall Street. Bank staff have academic and practical qualifications that are at least equal to, and often better than, those of the 16[9].
The Banks’ recent record in IFC projects in low-income countries (LICs) is not good. Charles Kenny (https://www.cgdev.org/blog/has-ida-psw-increased-ifc-investments-ida-countries) has reviewed written on a sample of such IFC-funded projects. He found that a dedicated “private sector window” (PSW) had not “stopped a slide in IFC commitments to the world’s poorest and most fragile countries”; that IFC disbursements of its new commitments have fallen; that “IFC’s projects in those countries are performing worse than ever”; and that IFC projects in those countries have less satisfactory performance than IDA-funded operations.
Kenny’s findings, derived from WBG data, imply a good deal about the PSL. They suggest that additional money for “scaling-up” will not be disbursed. Hence, If the value added of the PSL is really to scale-up, what is the point if new funds remain unused ? Kenny’s findings also signify that, where IFC/PSW money has been disbursed, it has been less effective than IDA operations in the same low-income, often fragile, nations.
Can skills from the PSL improve operational performance ? Some indication can be derived from Three Cairns Group (3CG). The 3CG is a foreign-limited liability company (https://www.nycompanyregistry.com/companies/three-cairns-group-llc) providing, inter alia, investment services related to philanthropy in the areas of clean energy and climate. Its job is to “pinpoint the precise gaps that arise at the crossroads of climate, finance, and people”.
The philanthropic performance of the Three Cairns Group (3CG) suggests that an “added skills” argument does not justify the PSL. The financial statements (https://projects.propublica.org/nonprofits/organizations/475548408 of 3CG’s philanthropic wing, known as the Three Cairns Foundation, show that it began with an endowment of about US$20 million in 2015, reported no financials for 2016-18[10], increased its endowment to about US$60 million in 2019, and expanded further to roughly US$89.9 million by December, 2022. In the reporting period 202222 3CG reported disbursements of US$ 5.0 million in one contribution to the Stichting Foundation[11] the goal of which was to “Provide early-stage catalytic funding to support and grow the pipeline of bankable sustainable energy projects in Africa, to achieve emissions reduction, expand access to renewable energy, and create job opportunities in emerging economies”. No report on the grant’s impact is available. With such a limited record of making grants, what advice can 3CG people provide the World Bank about improving operational performance generally in LICs and specifically in decarbonization ?
Low-income countries do need external assistance in the green transition
The LICS do need external assistance to the green transition, but it is unlikely to be in the form provided by PSL members, who are seeking public subsidies to private investments while often managing companies that are making slow progress toward global decarbonization commitments. The Bank’s Board should recognize these facts and demand that the PSL be disbanded. If the Board does need advice in helping to mobilize concessional finance for the green transition in LICs, such counsel could come from countries, notably China, which are doing the most to scale-up investments in renewables and in adaptation to climate change.
Members of the PSL
Shriti Vadera (PPE, Oxford), CEO of Prudential, company assets estimated at US$166 billion
Mark Carney (DPhil Econ, Oxford), Chairman of Brookfield Corporation, company assets estimated at US$533 billion
Thomas Buberl (PhD Econ, St Gallen), CEO of AXA, company assets estimated at US$990 billion
Larry Fink (MBA, UCLA), CEO of BlackRock, company assets estimated at US$10 trillion
Noel Quinn (CPA, Birmingham Polytechnic), CEO of HSBC, company assets estimated at US$3.0 trillion
Shemara Wikramanayake (Law, UNSW), CEO of Macquarie, company assets estimated at US$575 billion
Hironori Kamezawa (Msc Math, NA), CEO of Mitsubishi Financial, company assets estimated at US$3.1 trillion
Hendrik du Toit (NA, Cambridge), CEO of Ninety_One, company assets estimated at US$162 billion
Jessica Tan (MSc Engineering, MIT), ex-CEO of Ping An Insurance, company assets estimated at US$1.6 trillion
Feike Sijbesma (MSc Molecular biology+MBA, Utrecht;Erasmus), ex-CEO of DSM, assets NA
Sim Tshabalala (Master of Laws, Notre Dame), CEO of Standard Bank, company assets estimated at US$143 billion
Bill Winters (MBA, Wharton), CEO of Standard Chartered, company assets estimated at US$819 billion
Damilola Ogunbiyi (MSc Construction engineering, Brighton), CEO of UN-Energy, assets NA
Natarajan Chandrasekaran (MSc Electrical engineering, National Institute of Technology), CEO of Tata, company assets estimated at US$70 billion
Dilhan Pillay Sandrasegara (Master of Laws, Cambridge), CEO of Temasek, company assets estimated at US$516 billion
Mark Gallogly (MBA, Columbia Business), co-founder of Three Cairns Foundation, assets estimated at US$90 million
Notes: There are 4 women and 12 men; no current or former elected officials; one scientist (Sijbesma), three engineers (Tan, Ogunbiyi in construction, Chandrasekaran in IT). Ogunbiyi served as a lower cabinet official and Carney was Governor of the BoE from 2013 to 2020. Gallogly seems to be the only one with a personal foundation. Ages from 47 to 71. Three members from Africa, 3 from North America, 4 Europeans, 5 from East Asia or South Asia, with one Australian, and none from Latin America or Eastern Europe.
[1] In World Bank : “Ending Poverty on a Livable Planet: Report to Governors on World Bank Evolution “ (DC2023-0004 September 28, 2023): p. 7.o
[2] “Livable Planet”, p. 2.
[3] Ogunbiyi leads the UN program known as UN-Energy while the others are all in private business. When I refer to the 15, I exclude Ogunbiyi because her background and current work are so different.
[4] BlackRock’s corporate story is that it is preserving and expanding the wealth of small investors. Yet, if BlackRock really does manage 390 ETFs, then it should be possible to achieve a universe of risk-adjusted portfolios with zero exposure to fossil fuels.
[5] https://www.netzeroinvestor.net/news-and-views/briefs/mark-carneys-850bnn-brookfield-feels-the-cop-heat-over-emissions arguing that Brookfield’s stated 2022 emissions of 12 mmt CO2 eq excludes emissions from its Oaktree Capital Management asset whose portfolio is said to generate more than 150 mmt CO2 eq.
[6] The podcast at https://www.axa-im.com/our-policies-and-reports is worthwhile. AXA staff on the podcast note a high barrier to decarbonization given that there may be as much as US$1 trillion in coal investments tied up in Asia alone.
[7] A 2024 example is Ghana. (Ghana, 2024, https://www.worldbank.org/en/news/statement/2024/01/18/world-bank-group-statement-on-debt-restructuring-agreement-for-ghana).
[8] This is an instance where one has a small drop of sympathy for AB because it is guaranteed that he gets many “My authorities are concerned …” calls from Board members about DSFs and their implications.
[9] The exceptional PSL member is Mark Carney, former governor of the BoE.
[10] The financials of the Three Cairns Foundation, in addition to missing the years 2016-18, contain the unacceptable statement that “Officer compensation may be included in charitable disbursements”.
[11] With another disbursement of US$0.5 million to a US NGO, about which we have no information.