Attracting private capital is a critical complement to government financing if the 17 Global Goals for Sustainable Development that the United Nations identified are to be met. For that to happen, it is important to redefine how corporations can work sustainable development into their strategies, say experts from the International Finance Corporation (IFC) and Wharton’s Zicklin Center for Business Ethics. The IFC is an arm of the World Bank Group that helps leverage private capital for development efforts, such as in “ending extreme poverty and boosting shared prosperity.” The Zicklin Center and the World Bank Group are partners in Ideas for Action, a joint program to connect young leaders with sustainable development goals. Nena Stoiljkovic, IFC’s vice president for Asia and Pacific, and Djordjija Petkoski, senior fellow at the Zicklin Center and a lecturer in Wharton’s legal studies and business ethics department, spoke recently with Knowledge@Wharton about how public-private partnerships can help reduce poverty, especially in the Asia Pacific region. Below is an edited version of their discussion.
Knowledge@Wharton: When we had our last conversation, we had talked about how blended finance was emerging as a substitute for aid in helping achieve the U.N. 2030 Agenda for Sustainable Development. In your role in the Asia Pacific region, how do you see blended finance working in that part of the world to solve difficult challenges like extreme poverty?
Nena Stoiljkovic: It was a bit of a pioneering approach to launch a new set of financial instruments to help bring the private sector into the projects that otherwise would not have happened. At the time, donors were also interested in returnable instruments rather than grants, because most of their governments were facing tight budgetary constraints.
You can understand the issues of inclusion and remote areas, even of middle-income countries: the need for people to get access to finance, basic services, health, education and water. We are definitely not there in terms of full access to all of these services and of developed infrastructure. We have a threat of climate change, which in Asia is very prominent. I can go on and on about development challenges.
The trillions of dollars needed for projects to deliver services and infrastructure [can be raised] only if the private sector engages, especially institutional investors. They will not [invest] if we do not de-risk those projects. Blended finance will be one way to bridge that gap.
Knowledge@Wharton: What are some of the more challenging situations you have dealt with?
Stoiljkovic: The exciting opportunities are, for example, in countries like Indonesia and Vietnam, which are moving from predominantly state-owned enterprises into a proper private sector. China has practically eliminated poverty for 800 million people in only 40 years through reforms, proper policies and regulatory changes. It still has about 70 or 80 million poor people, and we are trying to find solutions for them. In India, technology is being used to solve some of the health and education issues [where] traditional service providers are not able to reach the poor.
“The exciting opportunities are, for example, in countries like Indonesia and Vietnam, which are moving from predominantly state-owned enterprises into a proper private sector.” –Nena Stoiljkovic
Knowledge@Wharton: Djordjija, how does that compare with the rest of the world from the perspective of the World Bank and other institutions?
Djordjija Petkoski: Blended finance creates space for the private sector to be more aggressively engaged. At the same time, it has created some challenges for the private sector to revisit the very concept of corporate strategy, because now you have a broader space for engagement. We need not just access to money, but also to new opportunities to redefine how corporations engage. Asia is where most of these innovative ideas are coming from. From the perspective of the joint program between the Zicklin Center and the World Bank Group for young people and innovative ideas, I can see that many new ideas in that space are coming from Africa as well.
Knowledge@Wharton: Nena, how is climate change becoming increasingly important in IFC’s list of priorities?
Stoiljkovic: We started thinking about climate change maybe earlier than the rest of the world, in a prominent way. More than 10 years ago, we set up a “climate department” to define “green” or climate-friendly. We were able to offer certain solutions or ideas to our clients on how they can green their buildings, or how they could have less CO2 emissions and be climate-smart.
In the meantime, the world has realized that if we do not do something about the global warming, we will have many more people falling into poverty. Another threat is from climate events, especially in Asia, given how many people live in coastal areas. Combining those two, IFC has set targets for itself. We want a third of our overall business across multiple sectors to be climate-oriented.
We have been able to influence other multilateral development banks to adopt a common methodology on what is climate-friendly and how to measure it. At the One Planet Summit in Paris, we released a report covering 21 emerging markets, where we identified $23 trillion worth of opportunities for climate-smart investments. We see the greatest opportunities in renewable energy; green cities, where much of urban transport can become green; green buildings; green bonds to stimulate financing for green projects; and green, climate-smart agriculture.
Knowledge@Wharton: In places like Africa, there have been tremendous climate-based challenges, the most recent example being the devastating disaster caused by Cyclone Idai. What role do these extreme weather events have in pushing people into poverty?
Petkoski: First, many countries cannot be prepared for what is coming. While we are good at organizing big, global events and [spreading] global awareness, a big challenge is in how you move from something that is global to country-based. It is not just about governments but also, for example, big multinational companies operating there and how they engage with local companies.
If [development issues] become part of the corporate strategy relating to supply chains, then they become automatically connected with the local communities because they are, in one way or another, part of those supply chains. That is where we need to do much more.
We recently had the CEO of Firmenich (a Swiss fragrances and flavors company) visiting the World Bank and Wharton. He said that after the summit in France, he came back to his office, gathered all his top managers and said, “Listen, these are the targets for our company. We are not going to wait for some global body to decide on that.” He said the first shock was everybody thought it was impossible. Yes, it is impossible if you want to do that in an incremental way, but not if you redefine the corporate strategy that gets the smartest people – these entrepreneurs – to think another way. He said they achieved the goals they had set for the next two years.
[It is important] that everybody in that supply chain addresses the issues of climate change. Unless we have local buy-in, and unless those people are equipped properly to deal with these issues, we will continue [to have] conversations and doubts instead of solving real-life problems.
Stoiljkovic: I see a great opportunity, especially in emerging markets including Africa and Asia, where a lot of infrastructure still has to be built. With all this knowledge, new technology and an understanding of climate-change impact, we have the opportunity to build a resilient infrastructure. It is much harder when you have it already in place, such as in some of the developed countries, to upgrade it and make it resilient. Now that we are investing trillions of dollars in infrastructure in emerging markets, let us build it right. This is where institutions like ours can help clients and investors design their projects so that they are climate-resilient.
“Now that we are investing trillions of dollars in infrastructure in emerging markets, let us build it right.” –Nena Stoiljkovic
Knowledge@Wharton: How do you see the role of technology and innovation in helping to bring about these kinds of resilient solutions?
Stoiljkovic: In general, I see technology as one of the main ways to leapfrog or solve the intractable problems that traditional ways have not been able to solve. For example, in agri-insurance, farmers in many countries face unpredictability of weather and losses. By linking weather predictions over mobile phones to agri-insurance, we can improve the productivity of farmers.
Knowledge@Wharton: You mentioned the funding gap and that trillions of dollars of investment are needed to implement some of these solutions, especially to mitigate the impact of climate change. What role is the IFC playing in mobilizing private sources of capital?
Stoiljkovic: Mobilization of private financing comes at the end of the spectrum. We need to have projects suited for private-sector participation before we can mobilize financing. If you go to the beginning of that spectrum, we need to create a market. We need to create bankable or sustainable projects. The IFC could influence governments to make regulatory changes related to climate change, and on how the new projects will be built.
After some of the sectors start changing based on these regulations, we may still have enough risk to prevent the private sector from participating. This is where we bring blended finance to de-risk those projects, and try to attract private-sector companies to those new countries, new sectors and new projects. When we have all of that, we can talk about mobilization of financing.
The IFC has supported banks and financial institutions across the world to issue the first green bond of its kind. Now we are helping companies in specific sectors to raise such funds. We just designed a green bond for a Filipino company that is investing in renewable energy in Vietnam, for example. We have also helped set up the world’s largest green bond fund [for emerging markets] of $2 billion with the French asset management company Amundi, which will buy bonds issued by other banks. We have also invested some donor funds into that fund to educate banks on how to issue bonds. Of that $2 billion, the IFC will invest $325 million to buy green bonds.
Petkoski: Having a better exposure to real-life problems that need to be addressed is a missing link, because many opportunities are not obvious. Three years ago, one of the winning proposals in the Ideas for Action program was in micro-insurance, and it came from Wharton. We need alternative sources of idea-generation, but the financiers and the investors have to be more educated.
Stoiljkovic: Trillions actually sit with institutional investors, but then they have a certain risk appetite. The challenge for developing communities is to bring those trillions that sit with pension funds and the insurance companies for some of the financing. Connecting the two is the way we will implement the SDGs.
Knowledge@Wharton: In addition to climate change, the other important goals for the World Bank Group are to reduce extreme poverty from 11% to 3% of the world population by 2030, and increase incomes for the bottom 40% in every country. Could you speak about what IFC is doing to support these goals and share examples of projects that have had significant impact?
Stoiljkovic: I can visualize the world in terms of very poor countries [that are also] fragile and conflict-affected. In 2030, more than half of the world’s poverty will be in those types of countries. When we talk about boosting the incomes of the bottom 40%, we are talking more about middle-income countries. We see a lot more opportunities for the private sector in supporting investments in middle-income countries. The IFC has a big role in those middle-income countries in manufacturing, services, infrastructure financing, agri-business, health and education. Those will help create jobs, and we will improve that.
The problem is really with poverty in the poorest countries. I do not think IFC alone can make a real difference if we do not work with governments and with the World Bank on regulatory and policy changes that will open up sectors to private participation. This is hard work. It is a multi-year effort, but we are now adjusting ourselves to increase our ability to create markets in those countries. The private sector will be needed to create those jobs, and for people to maintain jobs and not go back to fragility.
Knowledge@Wharton: Can you give any examples from Asia that have had significant impact?
Stoiljkovic: In Myanmar, for example, we have been able to design sectors from scratch, because the World Bank, the IFC and the Asian Development Bank entered the country after many years of not being present there.
We had two joint implementation plans. One was in energy, and another was on financial inclusion. We practically designed them and worked with the government on regulatory changes to create a market for energy in Myanmar and improve access to finance through the work we did with local banks. We were also able to bring banks from Cambodia and other countries into Myanmar.
We are trying to do something similar in Nepal, where we have been working on bankable, commercially viable, large hydropower projects. We recently took the first of its kind to [our] board. However, it took seven years of joint work of the World Bank, IFC and the government, and finding the right partner – from Korea – to invest in it. It has a lot of blended finance; it is the first of its kind, and we hope it will open the market.
Knowledge@Wharton: Djordjija, you have been leading the Ideas for Action program, which is designed to come up with creative and innovative solutions. Can you give any examples of projects?
“Unless we have local buy-in, and unless those people are equipped properly to deal with these issues, we will continue [to have] conversations and doubts instead of solving real-life problems.” –Djordjija Petkoski
Petkoski: I want to make a comment about fragile states. We are obsessed with building institutions – which has to be done, but it will take generations to make them function. We have to combine that with putting in place good regulations, which are implementable. While it will take time to create those institutions, [we have to find ways to] utilize the power and creativity of people who can function beyond the constraints of institutions.
Among the fragile states, the Democratic Republic of the Congo has tremendous challenges. Last year, we had the largest number of proposals coming from the Democratic Republic of the Congo than from any other country. You have to have a minister of development who says, “I’ll put that on my priority list.” You then need a decentralized approach where young people organize themselves, and create and communicate ideas. The creativity of ideas also is about how you can implement ideas with limited institutional support.
We have many successful examples. One is from Uganda of solar-based lighting, bringing it to houses without access to electricity, which makes a fundamental difference. This is an opportunity for girls to feel more comfortable to study and to go to school. On a larger scale, a new industry developed around sanitation and water. It is not about fixing toilets, but bigger than that. It is about girls feeling comfortable to go to high schools, because there are toilets. One question is whether you can use the outcome of the use of the toilets as organic fertilizer. (The Bill & Melinda Gates Foundation is working with Firmenich on innovations to address toilet odors.)
Knowledge@Wharton: Where does gender equality figure in IFC’s strategies for Asia? Also, what is being done to encourage women entrepreneurs, especially at the bottom of the pyramid?
Stoiljkovic: We segment the opportunities with women in several categories. We look at women as employees, a as leaders, as entrepreneurs, and as consumers. For each of these segments, we have solutions. When we talk about women as employees, we try to work with our clients to help them address any issues preventing women from working there. It goes from separate restrooms for women to childcare options, for example.
In our Banking on Women program, where we identify women as entrepreneurs, we have educated many banks around the world on how to offer to women customers specifically designed products and how to incentivize them – for that segment to grow. Women as consumers represent untapped market potential, such as in insurance, which smart companies should be exploring.
Knowledge@Wharton: Djordjija, this also plays into one other initiative that you are actively involved in, which is SDGs and Her (an online competition for women entrepreneurs to showcase how they are supporting the SDGs through their business operations). How do you think initiatives like that can complement other efforts?
Petkoski: The SDGs and Her initiative focuses on women micro-entrepreneurs. It aims to encourage young women around the world to build on the knowledge and understanding of local needs.
Knowledge@Wharton: Any concluding comments?
Stoiljkovic: There is no way that we will implement the SDGs in 11 years – by 2030 – if we don’t work together as partners. There is a role for each – the private sector, for governments, for multilateral development institutions, for academia, for the young generation, students, women, and men – to make all of that happen.
Petkoski: Young people are leaders now – not future leaders. So, the more space we create for them, the better education we provide for them to start taking their responsibility – not only on the individual level, but also a “generational responsibility.” The young generation has to take responsibility for all that they can contribute in a more creative and impactful way than my generation did.