As the finance industry faces mounting pressure to play its part in fighting the climate crisis in the developing world, bankers point to a significant hurdle—one the World Bank and other public sector financiers have yet to remove.
The problem, they say, is data.
Executives from banks, including Citigroup Inc., say they could offer better rates and access to some of the world’s most debt-stressed countries if the World Bank Group’s International Finance Corp., the European Investment Bank and a group of multilateral development banks grant them access to their data on $1.5 trillion in emerging market debt.
The Global Emerging Markets Risk Database, or GEMs, contains three decades of loan performance and default data from multilateral development banks. Commercial bankers contend that access would enable them to base their risk calculations on historic record, rather than proxy and perception. This, in turn, could allow them to charge less to lend and possibly offer financing in places and for projects they would otherwise avoid.
Currently, the data is only available to the consortium’s 24 member institutions, and despite pressure from the G20 and promises to reform, they’ve refused to share.
“I bet that we are calculating more risk than we need to, but we still don’t have the GEMs data to prove it,” said Jay Collins, vice chairman of banking and public sector at Citigroup.
The MDBs have been promising to make the data available, and investors are tired of waiting. Asking MDBs to disclose the GEMs data is “like asking a turkey to vote for Christmas,” said Hubert Danso, chief executive and chairman of Africa Investor. “They’ve got all the nice answers and reasons why it can’t happen at the administrative level,” he said, but it’s ultimately an “antagonistic stance” that “undermines the private sector’s ability to be a much bigger contributor.”
The growing debt crisis in emerging markets has brought the issue to the fore. Almost 40 poorer countries are in or at high risk of debt distress, according to the World Bank. One in every four is effectively priced out of international capital markets.
What’s more, many of those countries are extremely vulnerable to climate change. Of the roughly $2 trillion a year they’ll need in climate finance by 2030, up to 90% will have to come from the private sector, the IMF estimates —but that money is getting harder to access and increasingly expensive to borrow.
The GEMS data could show that investing in many of those places isn’t as risky as the commercial banks currently assume, said Christopher Marks, head of growth markets, innovative finance and portfolio solutions for Europe, the Middle East and Africa at Mitsubishi UFJ Financial Group Inc. That in turn “will lower the cost of financing and allow us to argue with the rating agencies that some of our private sector-financed activities could be rated more highly,” he said.
A spokesperson for the EIB, which founded GEMs in 2009 along with the IFC, said the consortium is “committed to the goal” of making the data accessible to investors and the broader public. GEMs recovery statistics in particular are “well on track” for publication by the end of March, which will be an “important step forward,” the spokesperson said.
Debate over the role of international development banks has become central to global efforts on climate. The way commercial banks see it, MDBs are supposed to lend in markets that the private sector considers too risky; for their part, the MDBs are expected to be prudent with the public’s money.
As a result, the two are often competing in medium-risk markets, with the public institutions at an advantage because of their historical data, the commercial banks say. That means public funds are being spent in countries and on technologies that private funds could take on at the expense of the places and products that they can’t.
“Public development financing should focus on jurisdictions, technologies and sectors where there is genuine financial additionality,” said MUFG’s Marks. “Too much public development money still flows into middle-income countries rather than focusing principally on more vulnerable jurisdictions.”
The EIB said it focuses on sectors and policy areas that are sometimes “not well served” by the market, and aims to lend alongside private sector investors, crowding them in, not out. A spokesperson for the IFC said it’s “vital that we remain engaged in middle-income countries.” That’s because it’s here where most of the extreme poor live and the IFC can help create jobs, economic growth and improve living conditions, the spokesperson said.
Making the GEMS data more readily available isn’t as simple as handing out logins and passwords, the EIB spokesperson said. The consortium’s steering committee says it wants to turn GEMs into a stand-alone entity, a move recommended by a G20 expert panel in 2022. That would ensure improved data governance and quality control. but it requires better collaboration among stakeholders, the panel said. Cleaning, standardizing and ensuring the accuracy of data across such a large group of institutions is, ultimately, a mammoth task.
Newly installed World Bank President Ajay Banga, former chief executive officer of Mastercard Inc., has made improving collaboration with the private sector a core priority. He said in October that the group planned to start granting access to the GEMs data “in a matter of months.”
Citigroup’s Collins said that if Banga can deliver, it would be a “huge step forward” and finally “put this issue to rest.”
After all, for all the shared panels and public statements, it’s progress on tangible tasks like GEMs transparency that showcases true intent. “It’s a question of commitment to the reforms senior policymakers have advocated for years,” Marks said. “Are these institutions willing to compromise a little bit of their existing business model to achieve that?”