JPMorgan’s DFI on driving private capital into emerging markets

With around 40,000 visitors, quiet areas are hard to find at the COP27 conference in Sharm El-Sheikh. So, when Euromoney sits down with Daniel Zelikow, global head of public sector and chairman of JPMorgan Development Finance Institution’s governing board, in a beachfront hotel lobby, the stillness of our surroundings is a relief.

The last time Zelikow was in the Egyptian city was during the 1980s, when the Sinai region was still under Israeli control.

“We stayed in tents pitched by Bedouins, who also went spear-fishing to grill something for us to eat for dinner while we went diving along the coast,” recalls Zelikow, who this time landed in the city the night before.

Zelikow started his career as an academic economist, spent a decade working for the US Treasury, including as chief economic adviser to Albania after the fall of communism. This is his second stretch at JPMorgan.

Zelikow is gearing up for a 48-hour stint at the UN Climate Change Conference to talk about JPMorgan’s private-sector development finance initiative and share the US bank’s perspective on how the DFI model can drive private capital into emerging markets and contribute to regional progress on the UN's Sustainable Development Goals (SDGs).

One of the focal points at this year’s COP is the missed $100 billion a year commitment made over 20 years ago in Copenhagen to mobilise public-sector finance towards developing countries.

For Zelikow, public finance should be spent on project development, so that more bankable assets become available in emerging markets for private-sector players to invest in.

“We need to move beyond the idea that only way to achieve appropriate levels of climate adaptation or mitigation is by transferring money from the rich public sector to the poorer public sector,” he explains.

The JPMorgan Development Finance Institution was set up in January 2020 with twin goals of scaling up the bank’s involvement in sustainable finance and becoming more commercially effective. It started with a memorandum of understanding with the International Finance Corporation to apply its methodologies together with feedback from other multilateral development banks to assess the likely impact of some of its emerging market-focused products and services.

For a bank such as JPMorgan, the scale is large. The DFI represents roughly $1.5 trillion of JPMorgan's $2.5 trillion 2030 commitment. The team has already identified a number of current transactions that fit its methodology and count towards the objective of getting private capital into emerging markets.

In 2021, the DFI assessed 631 corporate and investment banking transactions with a total anticipated development impact value of $124 billon. These transactions included cross-currency swaps and interest rate derivatives, bonds, equities, commodity futures, loans and M&A advisory.

In May 2021, JPMorgan acted as sole global coordinator and joint bookrunner, development finance and green structuring agent for the inaugural $500 million bond issuance of Pakistan Water and Power Development Authority.

“Transactions handled by our DFI have to go toward an activity that supports one of more of the UN SDGs,” says Zelikow. "For the time being, we’re not prioritising one SDG over another."

JPM DFI works with issuer clients to link equity or debt capital raising with measurable and quantifiable development impacts to attract SDG-hungry investors.

“If we standardize the methodology and make 'development impact' an investible asset class, asset managers can create products that may appeal to their own clients, drawing money toward financing development that is now sitting on the side-lines,” Zelikow adds.

The point, he says, isn’t to minimise the role of public finance in sustainability, but rather to rethink the operational value of these institutions.

“There are some things that public money and institutions are better-equipped to support in order to foster low-carbon development, including project development” says Zelikow.

The financial and human resources of MDBs are best spent advising governments on project identification, prioritization and designing concessions with efficient risk-sharing structures.

“By contrast with private firms, institutions like multilateral development banks are usually well-positioned as trusted advisers with the government shareholders that own them,” he adds.

But multilateral institutions remain instrumental in reducing some of the target risks in emerging markets, making the overall investment ecosystem more palatable to developed-market participants.

The private sector struggles to effectively calibrate all types of policy and political risks. With on-the-ground expertise, the public-sector development institutions and banks also have better understanding of local dynamics, something which the banking sector isn’t always able to access.

There is also an integrity issue with situations like this, however. The size of JPMorgan’s capital commitment to development finance is welcome, especially in a sector where current institutions are struggling to galvanise private capital to cover the $5 trillion to $7 trillion cost of implementing the SDGs.

But it is a fine line between JPMorgan’s bank-friendly approach to emerging-market development finance, and so-called 'development washing'.

The DFI sits within JPMorgan’s corporate investment bank; it is a commercial endeavour, one that happens to advance the SDG agenda in emerging markets. Could that lead to conflict between the bank’s broad commercial interests and specific development goals?

The US bank says it is prepared for that challenge, having made the methodology public and open to reviews from peers. It sticks to the World Bank’s list of eligible borrowing countries and only conducts financial transactions that bring new capital to the asset class.

What remains to be seen is if this approach to development finance gains traction in the market.

“We are now aiming to socialize this methodology across the capital markets ecosystem,” Zelikow says, "so that issuers and investors alike have greater transparency as to the definitions, reporting and evaluation standards that are essential for the emergence of an investible asset class."