Gates Foundation, Open Society Foundations, and The Rockefeller Foundation Announce New Recipients of Multilateral Development Banks Challenge Fund
NEW YORK | June 20, 2023 ― Ahead of the New Financial Pact Summit, chaired by Emmanuel Macron, President of the French Republic, and Narendra Modi, Prime Minister of India, the Bill & Melinda Gates Foundation, Open Society Foundations, and The Rockefeller Foundation announced USD 2,781,783 in funding from the $5.25 million Multilateral Development Banks Challenge Fund (“the Fund”): Albert Ludwig University of Freiburg, Caribbean Development Bank, FSD Africa, IDB Invest, Risk Control Limited, and University of Leeds. The six grantees, which were selected to help increase efficiency and innovation in the world’s development finance system, advance the Fund’s overarching goal of accelerating investment for the United Nations’ Sustainable Development Goals (SDGs) and Paris Climate Agreement.
The Fund, which is administered by New Venture Fund, was announced in October 2022 to help multilateral development banks’ (MDBs) unlock tens of billions of dollars in new development finance with little to no cost to shareholders and while safeguarding their financial integrity. Aligning assistance around the recommendations in the G20 Independent Review of MDBs’ Capital Adequacy Framework (CAF) report, its three areas of focus are 1) developing a better understanding of MDBs’ specific features to support better informed discussions about MDB’s risk management and shareholders’ risk appetite; 2) promoting financial innovation and the development of new instruments, with an emphasis on risk transfers and securitization as a means to catalyze private investment; and 3) improving transparency and access to information.
The latest round of projects will help accelerate the design and implementation of new ideas for MDB innovation and finance research to promote ways in which MDB’s unique resources can be maximized. With grants ranging from $140,000 to $750,000:
- Albert Ludwig University of Freiburg, a public research university located in Freiburg im Breisgau, Baden-Württemberg, Germany, will develop a new methodology for assessing concentration risk tailored to MDBs’ portfolio. This aims to provide an alternative to the leading methodology currently in use (e.g. in S&P supranational ratings), which was designed for commercial entities, usually holding much larger portfolios, and can be considered overly conservative when applied to MDBs portfolios that are structurally concentrated but also have other specific features.
- Caribbean Development Bank (CBD), a regional financial institution, will explore new balance sheet solutions that would enable it to better cushion disaster-related shocks and to provide financing tailored to its members’ needs and challenges. The work on Climate Resilient Debt Instruments has to date predominantly focused on private sector creditors. This project will build the evidence base for consideration of the introduction of climate-contingent loans into MDBs’ activities, accounting for MDB specific features and considering what additional support may be required to enable the implementation of such mechanisms at scale. A holistic balance sheet approach will consider innovation on both sides of the balance sheet, developing a framework replicable by other development banks. Lazard Frères has been retained as financial advisor to CDB to implement this project.
- FSD Africa, which is incorporated as a non-profit company limited by guarantee in Kenya and funded by the UK Government’s UK aid, will explore the potential for local currency solutions for MDB portfolio transfers, combining the objective of freeing up MDB capital with that of deepening domestic capital markets in smaller emerging markets, thus providing institutional investors, such as pension funds, in these markets greater opportunity to diversify and invest in highly rated assets. The proposal will focus on supporting priority longer-term investment needs, such as investments that assuage climate risk, or other priority sectors, such as renewable energy, infrastructure, and urban development, including housing.
- IDB Invest, in order to further build the MDB asset class and to support capital optimization efforts, will structure its first securitization comprising development related assets originated by the institution. The transaction will allow IDB Invest to increase its lending in the region and support the economic development of its member countries through Paris aligned private sector investments. The project will be designed with an eye toward scaling up the MDB investor base while exploring options for standardization and collaboration between MDBs.
- Risk Control Limited, a UK-based firm specializing in developing and implementing risk management assessments for international institutions, will launch two projects. The first project will produce comprehensive analysis to support MDB’s efforts to develop markets in their own risk transfer mechanisms, creating a set of technical and analytical tools for Balance Sheet Optimization. The second project will aim to benchmark capital adequacy across MDBs to increase transparency for their shareholders, boards, and management, while providing metrics of credit standing that are alternatives to agency ratings.
- University of Leeds, a public research university in Leeds, West Yorkshire, UK, and the University of Hertfordshire, a public research university in Hatfield, Hertfordshire, UK will be investigating MDBs local currency practices, evaluating the scale of the risks and their determinants, and assessing current risk management frameworks, while testing whether the premise that these risks are currently overestimated by limiting the lending capacity of MDBs.
The six new grantees join the first recipients of funding, ODI and Publish What You Fund, which are working to rapidly develop research to improve understanding of MDBs’ callable capital and a system to track and boost MDB mobilization...