The announcement by JPMorgan Chase & Co. last month that it would be setting up a new development finance institution to expand its development-oriented investment banking activities is an important step forward for development finance.
The investment bank’s leadership is very welcome. And the challenge is huge. As is often quoted, the financing gap to achieve the Sustainable Development Goals is estimated at about $3 trillion a year. We can only bridge that by mobilizing private capital. I know from personal experience that JPMorgan is very well placed to lead those efforts.
The announcement is particularly welcome at a time when the appetite for impact investing and putting funds behind the SDGs is increasing so rapidly. Impact investing is becoming more complex, with increased opportunities to access new sources, and blend different types, of capital. JPMorgan has said that it hopes that by standardizing what represents development finance for a private sector bank, more money will flow to development finance.
Unlike existing government-funded development finance institutions, JPMorgan does not appear to be focusing on investing from its own balance sheet. Instead, it is using its considerable financial muscle to mobilize other capital. There is nothing wrong with that and indeed the market badly needs strong intermediaries committed to impact and willing to dedicate resources to make often-complex transactions happen.
However, as JPMorgan’s new institution develops its plans, it should push itself to go beyond its existing business and ask tough questions about what is eligible as a DFI transaction. Here are three additional questions:
1. How does the new development finance institution increase capital in the toughest markets?
JPMorgan is already operating in 82 out of the 144 countries eligible to borrow from the World Bank. What does the new entity mean for investment into the countries which are most challenging to invest in, for example countries where businesses are trying to overcome the challenges brought about by fragility and conflict?
The real test will be whether this new initiative increases capital flows to the toughest markets, and not just a broader set of emerging markets.
2. Is the development finance institution being selective enough in excluding industries?
JPMorgan’s list of excluded sectors captures all the obvious ones. But JPMorgan continues to include controversial areas such as oil and gas, extractive industries, non-coal thermal power and captive coal.
How should JPMorgan think about these industries? Should it exclude investment in them altogether or should it drive them towards cleaner and more efficient technology? Reconciling, for example, the climate emergency with the need to provide access to reliable power to the 600 million Africans who currently live without it, is a critical issue for development finance today and one where JPMorgan could play a leadership role.
3. How does the development finance institution build understanding of development impact?
The bank has announced that it will use the International Finance Corp.’s anticipated ‘Impact Measurement and Monitoring’ system to estimate the expected development impact of its investments. Potential investments will be characterized with a development rating ranging from ‘none’ to ‘very high.’ Only transactions with no impact at all are excluded.
It’s great news that JPMorgan will be applying an existing methodology and this level of rigor in estimating expected development impact. But while considering potential impact is vital, it is not enough on its own. Monitoring and understanding actual impact achieved also has value. And clarifying whether / what transactions will be turned down based on this scoring will help increase the transparency of this area of work.
Ultimately the success of this initiative will have to be judged by how additional it is to the market. Will it just be a new way to describe activity that the investment bank is already planning? Or can it find new and innovative ways to direct more capital towards critical development issues?
No firm is better positioned to drive the field of development finance forward than JPMorgan. And never has there been a more important time to focus resources on achieving the Sustainable Development Goals. I wish them every success.
Nick O’Donohoe is chief executive officer of the CDC Group, the U.K.’s development finance institution, and was global head of research at JPMorgan.