Shanghai-based New Development Bank (NDB) was established in what its CFO Leslie Maasdorp called a “very decisive year” for climate change and sustainable finance. In September 2015, the United Nations General Assembly adopted the Sustainable Development Goals—a set of 17 interlinked objectives meant to be “a shared blueprint for peace and prosperity for people and the planet”—to be reached by 2030. In December 2015, the Paris Climate Agreement, aimed at reducing carbon emission worldwide, was adopted by 196 parties at the UN Climate Change Conference in France.

This brought to the fore the immediate need to bridge the huge gap for infrastructure financing worldwide, particularly for projects that would enable economies to fulfill sustainability and climate-related goals.

Simultaneously, the largest emerging economies known collectively as BRICS—Brazil, Russia, India, China, and South Africa—were exploring new ways of mobilising resources for infrastructure and sustainable development projects. This led to the establishment of the NDB by these countries as an institution dedicated to leveraging capital for buildout in emerging markets and developing countries (EMDC).

Maasdorp described the bank’s seminal mission saying: “That was the platform on which the New Development Bank was created. We were really created as sustainable finance became mainstream. For that reason, the bank has in its DNA everything about sustainability. If you look at our strategy today, we have a 40% target for climate finance. Almost half of all of our exposures goes towards climate mitigation and climate adaptation.

“So, the first reason for the formation of the bank was to give expression to the emerging markets. The second one was really to explore the possibilities for further reform of the MDB [multilateral development bank] system. For example, we put great emphasis on local currency financing, meaning developing local capital markets. And then finally, creating the conditions for infrastructure that are focused on reducing carbon emissions, meaning sustainable infrastructure.”

Massive infra requirements demand new financial instruments

With ambitious climate and sustainability goals, the demand for infrastructure financing worldwide outpaces the lending capacity of development banks, calling for new ways of financing and mobilising capital from governments and the private sector.

Maasdorp explained: “We are also living through a period now of looking and exploring ways, the scope for further innovation, new financial instruments, and doing business differently so we can free up more capital and lend more. Because multilateral banks are highly-rated institutions, we have the lowest cost of capital.”

One strategy pursued by NDB is to mobilise financing in the local currencies of its member countries to mitigate foreign exchange risks and mismatches between assets and liabilities. Many of the development and climate-related projects in EMDC such as solar and wind power collect revenues in local currencies. The bank targets to have at least 30% of its infrastructure financing come from local currency markets.

Maasdorp said: “We have the dollar as the principal anchor currency. However, it is not always the most efficient way to conduct your infrastructure investment.

“If you borrow in dollars and the [local] currency depreciates, you have to pay back significantly more. There is a mismatch between the asset and liability. It is in our interest, therefore, to promote a more efficient form of financing where we both raise and lend in local currency.”

China, with its $18 trillion-strong bond market, has sufficient depth to raise funds for infrastructure. Capital markets in South Africa, Brazil and India are also large enough to finance projects in local currencies.

Maasdorp pointed out: “And by deepening local currency financing, we are strengthening the financial and capital markets of each of our member countries. As you know, a country cannot develop and become a modern, sophisticated economy without developed financial markets.”

To date, NDB has raised and invested around $35 billion, including co-financing, for around a hundred projects across its five founding countries, with India and China being the largest borrowers. These include the Mumbai Metro in India as well as renewable energy projects in China. The bank is now also building a pipeline of projects in its new member countries Bangladesh and Egypt.

China rapidly develops green finance industry

China, as the world’s largest emitter of greenhouse gas, is now rapidly developing its green finance industry to fund emissions-reduction projects.

Due to the emission intensity of its economy, China has no prospects of reaching carbon neutrality by 2050 in line with the Paris Climate Agreement. It has so far committed to peak emission by 2030 and carbon neutrality by 2060, a decade off target.

There has been an acceleration of green finance in China’s capital market in the past eight years as the government lays down the framework for sustainable finance.

Maasdorp observed: “I’ve seen the emergence of more leadership coming from the policy makers, especially the People’s Bank of China (PBoC), over this period. In 2016, for instance, PBoC released green bond guidelines which enabled NBD to issue its first bond as a green bond.”

For Maasdorp, China has a huge role to play in green finance as it produces as much as 28% of the global carbon emissions from its powerful manufacturing base.

He said: “For the world to reach the Paris target, China has to reach its targets. So, the country is on the most rapid acceleration of implementing strategies, putting in place new policies, designing new industrial strategies to create the new industries, whether it’s the electrical vehicle industry, energy efficiency, or carbon capture and storage. China’s already doing a lot, but it has a huge responsibility to provide further climate leadership.”

NDB to pursue balanced membership expansion

Expected to grow to nine members by January 2024, NDB will still be smaller than other development banks, and has a long way to go. All of its constituents are borrowing members from emerging and developing countries.

Maasdorp explained NDB’s strategy, saying: “Our aim is to expand in a balanced manner, meaning we will also bring in highly-rated countries. But this is a development financial institution, therefore, we will also bring in countries where the creditworthiness is very low because the development needs typically in those countries have the highest rate. You have large countries in Africa, for example, with credit ratings that are very much lower than the weighted average rating of our current shareholders. But there’s huge demand for infrastructure in those countries. So, as we embark on the membership expansion drive, we will seek to do it in a balanced way so that we can preserve the very high creditworthiness of our institution.”

NDB currently has an AA+ rating from credit rating agency S&P Global Ratings, and an AA rating from Fitch Ratings, enabling it to raise funding at the lowest possible rates and lend at competitive rates. Maasdorp said: “So, we will do this in a manner to ensure that we can pass on that benefit to the new countries that could join.”

Moving forward, NDB aims to have more co-financing with other MDB both in financing tie-ups and use of technology to anticipate infrastructure needs in the coming decades. Maasdorp commented: “Multilateral banks are partners in this endeavour. We aim to do more co-financing with these institutions. The size of the infrastructure gap is so large that we have to work together. The number one challenge for NDB today and for all the other multilateral banks, is to more successfully crowd in and mobilise institutional investor capital.”

Argentina, Egypt, Ethiopia, Iran, Saudi Arabia, and the United Arab Emirates have all been invited to join BRICS, according to South African President Cyril Ramaphosa, who attended a three-day BRICS conference in Johannesburg at the end of August. Their accession will take effect on 1 January 2024. More than 40 countries have expressed interest in joining BRICS, with 22 countries formally requesting membership.