BLACKROCK Inc CEO Larry Fink told world leaders that the World Bank and the International Monetary Fund (IMF) are obsolete and need a complete overhaul if they are to mobilize the trillions of dollars of investment needed to bring sustainability in the developing world.

Specifically, he called for “rethinking” their role as financiers – instead of lending money themselves to promote development and economic stability, the World Bank and IMF would be more helpful in the transition to clean energy as insurers that reduce risk for private investors. .

Fink commented in prepared remarks at the Venice International Climate Conference, as part of the Group of 20 weekend meetings in Italy.

“There is private capital that can be mobilized for emerging markets, but we need to rethink how international financial institutions can support large-scale low-carbon investments,” he said of the two. organizations created 77 years ago at the end of World War II.

“We need a financing system that does not revolve around bank balance sheets.

An IMF official declined to comment and the World Bank did not immediately respond to a request for comment.

Fink, arguably the world’s most powerful investor with around $ 9 trillion (RM 37.68 trillion) under management at New York-based BlackRock, used his speech extensively to highlight what he considers as flaws or risks in the approaches that many countries adopt to achieve net-zero emissions.

He pointed to the unintended consequences of climate-related regulations on state-owned enterprises and the potential of “politically untenable” US $ 100 (RM418.70) a barrel of oil if demand for fossil fuels does not slow quickly enough.

BlackRock has made a big bet on sustainable investing over the past two years and is expected to benefit as more capital flows into environmentally friendly solutions.

The financing challenge, according to Fink, is to create “sustainable, long-term returns” in developing economies for private investors who shudder at the prospect of large losses or savage volatility. Its solution, using as a model a tool for combating the crisis developed by the US Treasury, makes the World Bank and / or the IMF “first loss” guarantors.

In 2009, when the world was reeling from the near collapse of the financial system, the Treasury pushed investors into buying portfolios of toxic assets by offering them insurance against initial losses. As the economy recovered, participants in the public-private investment program made money and the government collected $ 3.9 billion (RM16.33 billion) in interest on its 18, $ 6 billion (RM77.88 billion).

“We need global solutions and international organizations willing to mitigate the risks of investing in emerging markets,” Fink said in his speech.

“We need more solutions like those used in mortgage backed securities where a certain degree of loss is absorbed before it affects private investors.”

There is precedent for similar arrangements. In 2015, the World Bank’s International Development Association provided a policy-based guarantee, or PBG, securing 40% of a US $ 1 billion (RM 4.19 billion) bond issue by Ghana. .

As a result, the debt received a higher credit rating and Ghana was able to lengthen its maturity and lower the interest rate. The other beneficiaries of PBG in the same framework are Albania, Angola and Pakistan.

BlackRock has also incorporated a similar guarantee function into the climate finance partnership it has formed with France, Germany and Japan and two philanthropic organizations. This effort has so far raised more than US $ 250 million (RM 1.05 billion) to invest in reducing carbon emissions in emerging markets.

“As excited as I am about this partnership, we need solutions on a much bigger scale,” Fink said in Venice.

According to the International Energy Agency, investments in clean energy in emerging markets are expected to reach at least US $ 1 trillion (RM 4.19 trillion) per year by 2030, up from US $ 150 million. dollars (RM 628.05 million) per year today, for the world to reach a goal of net zero emissions by mid-century.

The World Bank and the IMF were founded in 1944 during the so-called Bretton Woods Conference which created the post-war monetary system.

Banks, once a major source of funding for sovereign borrowers in emerging markets, have reduced subprime lending since the 2008 financial crisis. Much of this credit capacity is now in the hands of asset managers such as BlackRock and Pacific Investment Management Co.

While Fink has shared his concept of first loss with G-20 leaders, including French President Emmanuel Macron and Italian Prime Minister Mario Draghi, according to people familiar with the talks, some stakeholders may be less receptive.

World Bank President David Malpass slammed the private sector for failing to do its ‘fair share’ of debt relief for poor countries and has restricted the use of PBGs since taking office in 2019 .

Often the interests of public financiers and private creditors are at odds. One group has a mandate to help nations in need, the other a fiduciary obligation to be repaid.

BlackRock is among the creditors who felt burnt when Argentina, operating under an IMF bailout package, defaulted on its external debt in early 2020 and ultimately restructured its bonds to 55 cents US ( 2.30 RM) for one US dollar (4.19 RM).

Fink, speaking last November, said it would take “a long time” for the private sector to feel comfortable investing in Argentina again.

In his speech in Venice, Fink also told executives that investors needed a more cohesive set of rules on climate-related disclosures and warned that the regulatory focus on listed companies may have unintended consequences.

“One of the negative effects this has is to create a massive incentive for state-owned companies to get rid of dirty assets,” he said.

“Divestment, whether done independently or mandated by a court, could bring a sole proprietorship closer to net zero, but it does nothing to bring the world closer to net zero.”

Royal Dutch Shell Plc, the oil and gas giant, was ordered by a Dutch court in May to cut its carbon emissions harder and faster than expected. The company, which was already selling assets, is now considering further divestments.

At the same time, there has been little progress on reducing the consumption of fossil fuels beyond electric vehicles. In most industries, the “green premium”, or the cost of a sustainable alternative to hydrocarbons, remains too high.

Fink raised the possibility that rising demand and shrinking supply could push oil prices up to US $ 100 (RM418.70) or even US $ 120 (502.44) a barrel.

“While some see higher prices as a way to restrict demand, rising costs in the energy sector will only sow greater economic inequality and a world of ‘have and have not’,” he said. he declared. – Bloomberg

Erik Schatzker writes for Bloomberg. The opinions expressed here are those of the author.