The indebtedness of corporations makes it very difficult to solve the task of financing those projects that are able to make a significant contribution to energy transition, although joint statements of the G20 member countries mention regularly the need for such actions in their joint declarations. At the same time, it is obvious that no matter what efforts are made to stimulate equity financing, it is debt financing that will remain in the near future the main form of raising funds necessary for the implementation of climate projects, especially in developing countries.
What is the strength and uniqueness of PDBs?
The PDBs family is a very extensive list of multilateral global and regional, as well as national and sub-national development finance institutions. They are distinguished from other financial institutions that also lend to climate projects by five key features.
Firstly, PDBs mandates assume that their activities are not based on profit-making, but on achieving socially significant goals, and that they operate in those business sectors where private capital either does not want to take risks or is severely limited in its capabilities due, for example, to the requirements of the regulator. This is a very important criterion separating PDBs from state-controlled commercial banks. There are about 40 of them in Russia, for example. They have either federal or subject subordination, but all have a banking license and, accordingly, are required to comply with the regulatory requirements of the Bank of Russia, which have yet to be adapted to the climate agenda.
Secondly, the public development bank is an independent legal entity with an independent legal status and, accordingly, a separate budget and balance sheet, which ensure the solution of various long-term tasks, and not the achievement of a one-time goal – as in the case, for example, with SPV.
Thirdly, PDBs use "classic" financial instruments in their operations, assuming the turnover of cash flows. These are loans, loans, much less often – equity financing (equity participation), guarantees, charging a risk premium. These qualities distinguish PDBs from charitable foundations or ODA agencies.
Fourth, the DFIs financial model relies on funding from capital markets, primarily from debt markets, as well as on raising funds from other credit institutions. This is how PDBs differ, for example, from sovereign funds, which more often play the role of financial airbags. However, at the same time, they can periodically receive subsidies/grants from the founders; in particular, they can be capitalized from state (public) budgets. This feature of DFIs largely provides them with high credit ratings and relatively cheap funding.
Finally, fifthly, having operational independence, PDBs, nevertheless, coordinate their development strategy with the founder, that is, with the state, whose representatives, as a rule, participate in the work of the highest body of the development finance institute.
Peking University economists concluded that as of September 1, 2021, there were 527 PDBs/DFIs in the world, including 510 banks/institutions, 4 equity funds and 13 guarantee funds. However, the vast majority of them – almost 400 institutes – are small local/regional PDBs. However, due to their knowledge of local realities, they have the ability to solve effectively local problems with an emphasis on the needs of the local population. These banks, being relatively small, for example, in terms of capital or the amount of assets, can nevertheless be significant for the economies of individual regions and important in terms of ensuring the interests of local societies.
The characteristics of DFIs listed above make them indispensable as "guides" of national climate policies. The specialists of the French Development Agency (Bank) determined the place of PDBs very accurately and figuratively. Better than other financial institutions, DFIs are able to "build bridges" between the state and the private sector; between national, including climate, and international agendas; between "global liquidity" (or the capabilities of global debt markets) and national projects financed by using the resources of these markets; between short- and long term priorities of global and national development. These qualities allowed DFIs to make commitments worth up to $2.2 trillion annually in 2019 and 2020. For comparison: in the same years, eight global multilateral development banks, to which the G20 regularly appeals, increased lending from 140 to 300 billion US dollars per year. Obviously, it is not by chance that 8 new PDBs have been established in the world over the past two years, including in the USA and the UK.
Working on an equal footing and solving tasks that are very similar in meaning and goals, PDBs has long been on the path of consolidating efforts, experience and best practices, and sometimes financial assets, in order to manage the risks of accumulated loan portfolios. So, since 2009 there has been the Long-term Investors Club (LTIC), in 2013 transformed – at the initiative of Vnesheconombank – into a Club of Development Banks of the G20 member countries and named D20-LTIC. In 2011, the International Development Finance Club was established, which in different periods consisted of up to three dozen DFIs representing all continents and groups of countries by level of development.
Finally, in 2019, a cooperation platform called Finance in Common Coalition appears. At the current stage, this is not an association, and not a club with formal membership and legal status. Nevertheless, the Coalition has already attracted the attention of the leaders of the Group of Twenty, who pointed out in the final communique of their meeting in Rome the important role that the Coalition members are called upon to play in the field of financing climate projects and projects aimed at achieving sustainable development goals. Managing Director of the IMF Kristalina Georgieva stated the Fund's interest in establishing close cooperation with the Coalition.
Such attention to the specified PDBs community is not accidental. It is explained by the fact that both at the national (regional) and global levels, its participants see their mission in helping to solve the most urgent and complex problems faced by developed and developing economies in the 21st century. The program document of the Coalition is the "Joint Declaration of all Public Development Banks", adopted on November 12, 2020. This document contains the PDBs "commitments" in such areas as climate and the Paris Agreement, the challenges of energy transition and biodiversity conservation, health issues and investments in social infrastructure, ensuring social inclusion, gender development and digitalization.
The strategy declared by the Coalition is based on the collective development of a methodology for the preparation and implementation of projects that would allow for a clear and strict "alignment" (to align) of investments made by PDBs with the achievement of the SDGs and goals of the Paris Agreement. This is an extremely ambitious task, especially if we do not forget that "alignment" must also be provided with what is commonly called "bankable projects". Among other areas of ensuring "alignments", the Coalition calls the "embedding" of national and regional policies/programs of socio-economic development, again, in the SDGs and goals of the Paris Agreement. It is assumed that trade finance will also be "integrated" into this agenda.
The following methods are designated as means of solving the tasks set:
- adjustment (where necessary) of individual PDBs mandates in a direction that excludes the acceptance of projects that do not meet sustainable and climate development for financing; strict adherence to ESG principles and ESG practices;
- promoting debt policies that prevent the accumulation of "unsustainable debt";
- participation in the development and adoption of measures aimed at strengthening the so-called "global architecture of sustainable development financing" (a category that has not yet received official recognition).
In August 2021, the Government of the Russian Federation approved a Memorandum "On the Financial Policy of the State Development Corporation VEB. RF". Among the principles on which the Corporation's activities are based, this document establishes "partnership", "socially responsible entrepreneurship", "accounting for ESG factors".
In September 2021, with the adoption of the resolution "On the approval of criteria for sustainable development in the Russian Federation", the role of the methodological center in the field of sustainable (green) development was assigned to the VEB.RF.
The Corporation has launched work on the ESG transformation of VEB.RF. It's about making decisions on nine tracks:
- formation of preferential pricing mechanisms for financial instruments of sustainable development,
- development of ESG requirements for VEB.RF clients,
- implementation of ESG principles in project portfolio management,
- issuance of financial instruments for sustainable development,
- increasing the ESG rating of the Corporation,
- implementation of ESG principles in internal corporate processes,
- increasing transparency in the field of non-financial activities,
- assistance to the Government in its normative work, in particular in the field of sustainable development and ESG practices,
- promotion of the ESG agenda of Russia in general and VEB.RF in particular in foreign jurisdictions. At the current stage, it is difficult to guess how long it will take to prepare and launch the relevant processes, which are complex in content and time-consuming in terms of the scale of the necessary work. At the same time, we are talking not only about the Corporation, but also about the MUKA Group, which unites 12 development institutes of the Russian Federation.
Thus, our goal is to increase the Corporation's contribution to the socio-economic development of Russia by almost three times, while the multiplier of co-financing will increase from 2.1 to 3.2 times.
Together with our partners, in particular, in the Project Financing Factory, investments will be directed to industry (5.7 trillion roubles), urban infrastructure (1.8), digitalization projects (1.7), support for SMEs (1.4) and technological development (0.8 trillion roubles). Moreover, although, according to the criteria of the above-mentioned Peking University, we are considered among the "small" public development banks, for the Russian economy, VEB. RF is a significant development financing institution.