Getting this done won’t be easy. The committed and highly creative developers of today’s small-scale and broadly differing activities are going to have to share one another’s best approaches and move toward defined project criteria and robust and consistent legal frameworks in order to facilitate the needed aggregation. Bankers - whether in the public or private sectors - will be essential to making investable deals out of these often-disparate activities. But taken together, these steps have the potential to establish a viable framework and the trust required for the international finance community to step up their social impact investments and allow funds to flow to critical social, economic and environmental projects around the world.
The Problem: Public Credit Alone Can’t Meet The Biggest Challenges
The two most important tools required to tackle the many critical issues facing the global community are the technical capacity to design effective solutions for environmental and social problems, and equally important, the money to pay for them.
IBRD: Efficient Leverage Of Global Public Credit
From its establishment early in the process of institutionalization of savings in developed countries, the International Bank for Reconstruction and Development’s (IBRD) capital structure and business model have offered brilliant solutions to the challenge of leveraging global public credit to mobilize savings for public purposes. The IBRD capital structure, coupled with conservative financial management, has enabled it to offer a triple-A, fixed-income investment opportunity even though (1) only a handful of its members carry that rating themselves, (2) its loan assets are obligations of unrated or much less highly rated emerging market countries, and (3) IBRD leverages more than three times its paid-in capital and retained earnings. The contingent obligation on the books of IBRD’s owners—its “callable capital”—has never been drawn, even through successive emerging market and global financial crises.
A key point for the present discussion is that IBRD’s triple-A-rated bonds go into the high-grade, liquid part of institutional investors’ portfolios—the asset class for which investors expect the lowest return, given the high credit rating, relatively low price volatility, and good liquidity of the instruments comprising it.
IBRD’s public-sector equity (provided by members with no expectation of returns) and low borrowing costs give it a weighted average cost of capital that has enabled it over most of its history to lend to members at “concessional” rates far below market. Even so, the interest margin it has maintained on its loans, together with returns on its reserves, have been sufficient to fund the world’s preeminent development resource management capacity (country teams and the teams orchestrating solutions to GPGs—the signature business of the institution) and an extensive consultancy across every major development-related discipline that it offers essentially for free to members. Moreover, after funding its share of World Bank Group knowledge and development resource management work, IBRD generates a profit that, even after additions to reserves, enables its owners to direct a dividend to the aid agency, the International Development Association (IDA), that they asked IBRD to administer since 1960.
The principal constraint on the financial side, of course, is that political as well as fiscal and macroeconomic realities make it nearly impossible for direct, unlevered government money sourced from taxes and government borrowing to provide resources at the scale required. This problem has become more evident over the past several decades for two major reasons: the international community has come to appreciate the full cost of dealing with issues such as climate change and government resources have been stretched in response to developments such as aging populations and the need for basic infrastructure to improve the standard of living in emerging market countries.
At the same time, it has been challenging for the international community to develop the consensus needed to repurpose the World Bank Group and similar institutions and broaden their respective franchises to address issues beyond economic development and poverty alleviation in developing countries. The World Bank and other institutions are already moving in this direction: they created the Climate Investment Funds (“CIF”) – and notably among them the Clean Technology Fund (“CTF”) - which are up-and-running and achieving their goal to catalyze additional investments by the World Bank and other multilateral development banks in climate-related initiatives. The “green bonds” issued by the European Investment Bank and IBRD that were pioneered late in the last decade are all examples of innovative finance mechanisms directed toward a specific set of global priorities. It is important to keep in mind, however, that even if a consensus were reached on repurposing these institutions, the scale of sovereign capital investment required to fully address the broader set of global priorities would be infeasible even in the most financially efficient of these public institutions.
Global Savings: The Resource, Its Potential and Constraints
Given these circumstances, the challenge is to develop ways to access at scale the much larger pools of public- and private-sector savings that have accumulated and become extensively institutionalized in many countries since World War II. Institutional investors (pension funds, insurance companies, mutual funds, endowments/foundations, and sovereign wealth funds) now hold roughly $100 trillion in assets, managed for various beneficiaries that are the ultimate owners of these pools of resources.  This is a vast pool of assets that could be redirected to key global challenges and critical investment needs. To do that, however, would require restructuring their financing to meet the needs of the institutions managing these savings.
A surprisingly large amount of this $100 trillion is managed pursuant to relatively consistent fiduciary standards and a more-or-less common investment approach. These strategies are grounded in the obligation of institutional investors to serve the financial objectives of their beneficiaries, and they are broadly informed by the tenets of modern portfolio theory (“MPT”), in which practitioners diversify holdings across assets to optimize return for a given level of portfolio volatility and risk. MPT and its variants, despite a number of criticisms, remains core to the investment process for most institutions managing shares of the pool of global savings.
Within this fiduciary and theoretical framework, institutions typically manage their investments on a portfolio basis in order to achieve long-term savings objectives or fund long-term liabilities (as in the case of pension funds and insurance companies). Within the portfolio, most continue to make allocations to “asset classes,” each of which has a characteristic risk and return profile. Historically, these have been variations (e.g., public and private equity, investment-grade and non-investment-grade debt) on equity and debt. In many cases, investors seek exposure to the average performance of the asset class as a whole. Other investors attempt to select the best-performing individual investments within the asset class or engage third-party specialists to make the investment selection for them.  These asset allocations and investment decisions also take into account the appropriate time horizon and degree of tolerance for price volatility and principal loss given the objectives of the investment within the portfolio as a whole.
Similarly, within this asset-management framework, institutional investors face predictable challenges when considering using these funds for social impact, or global public goods such as climate change mitigation or adaptation, sustainable agriculture and forestry, marine conservation and the like. The key issue, of course, is a relatively common assessment that these investments yield lower returns for a given level of risk, and thus may be inconsistent with institutions’ fiduciary obligations to beneficiaries.  This concern, ironically, sometimes is exacerbated by public discourse in which institutional investors can feel pressured to make these investments, notwithstanding this potential issue of fiduciary responsibility. 
The table below is a summary of total-portfolio asset allocations, variations of which are typical in the portfolios of institutionally managed savings pools. It is intended to be broadly illustrative, not precise or exhaustive. There are categories of savings not included, and within each there are many individual institutions whose allocations and return expectations will diverge—often substantially—from those shown here. It is based on my experience and observation, validated with reference to many sources.
Institutional Investors’ Allocations And Return Expectations
The good news is that liquid fixed income, which is the asset class with the lowest expected return and thereby producing the lowest cost of capital for borrowers, is also one of the largest. Worldwide, the bond market totals roughly $100 trillion in outstanding securities, with new-issue long-term debt volumes in the neighborhood $5 trillion per annum.
The bad news is that a relatively small proportion of the financing for GPGs has been drawn from investors’ high-grade fixed-income allocations, and much of that has come from bond issues by international institutions such as IBRD and the regional development banks. These institutions have allocated only a modest proportion of their own long-term lending to fund these major global priorities given their historic focus on national development programs.
To date, most of the financing of renewable energy, energy efficiency, sustainable forestry and agriculture, and other sectors that address global concerns has produced assets that draw investment from the illiquid private equity or “real assets” parts of investors’ portfolios. As evident in the foregoing table, these represent a relatively small part of the portfolios; moreover, given the illiquidity and other characteristics of the risk profile, investors’ return expectations are relatively high. Therefore, the question facing the international community is how to attract large-scale, low-cost, long-term financing into these sectors.
The allocation that competes in scale (though with a much higher expected return) with high-grade fixed income is, of course, public equity, i.e., the broadly distributed stocks of major private-sector companies for which there is a continuous two-way market on established exchanges or over-the-counter. Institutional asset owners can influence management decisions by these companies through their decisions to purchase, hold or sell these companies’ securities and by exercising their rights as shareholders to participate in governance. Increasingly, asset owners and the investment managers they hire are doing both as they make investment and divestment decisions based on risks related to climate change, quality of corporate governance and the like. This can and does alter corporate behavior, but it is not a substitute for measures that need to be taken to dramatically increase the flow of new, low-cost financing into priority GPG-related activities.
Tapping The High-Grade Fixed-Income Resource: Quality And Liquidity Needed
What will encourage investors to put a material part of their high-grade fixed-income (HGFI) portfolios in GPG assets? We need financial instruments with three characteristics: credit quality, liquidity, and competitive return.
The source for each periodic payment and for redemption at maturity must meet minimum standards of reliability to achieve an investment-grade (Moody’s Baa3/ S&P and Fitch BBB-, or better) credit rating from major rating agencies. There are two essential foundations of credit quality:
Economics of the business. The business or activity itself has to generate a cash flow, covering both interest and principal, predictable and reliable enough to warrant investment-grade rating. A single project can achieve this on its own, or the same outcome can be achieved through a diversified portfolio of a number of projects of varying creditworthiness.
Enforceability of the obligation. The legal arrangements surrounding the activity and the financing, and the legal system and political economy in which they are grounded, must provide a reliably enforceable obligation in favor of investors.
When in doubt, credit enhancement will have to be applied from a public or private source.
Investors have to anticipate that there are likely to be reliable offers for their holdings at a narrow spread to the price at which the same position then could be bought—in short, on a tight bid-offer spread. Given the scale of institutional investors’ holdings, moreover, this bid-offer spread has to work for trades of, say, $5 million or more.  This level of liquidity or better is routinely achieved in conventional bond issues by governments and their agencies, IBRD and other MDBs, and major corporate borrowers. It is provided by entities with capital committed to market-making in these instruments—typically, the investment banks that underwrite and distribute securities in the high-grade fixed-income market.
Most institutions will want to see a financial return for an investment within a given credit risk and liquidity that is as good or better than others available.
Virtually without exception, instruments that meet these three criteria are offered or guaranteed by entities such as developed country governments, supranational institutions, and major corporations that themselves carry investment-grade credit ratings. Typically, they are issued in large transactions (say, $300 million or more) originating in established global financial centers.
Quality And Liquidity In GPG Finance: Pooling And Securitization
The challenge is that most of the important work currently being done to provide financing for GPGs is local, relatively small-scale, and idiosyncratic. This is probably unavoidable given widely varying demographics, economies and ecosystems. One solution is to assure a minimum degree of consistency that will enable the resulting diversified assets to be aggregated (“pooled”) and turned into relatively high-quality, easily tradable bonds, with any required application of public credit enhancement occurring in the most efficient manner to reach investment grade.
The basic mechanism for delivering these solutions—pooling and securitization—is certainly not novel and in certain sectors supports a major financial industry.  But despite extensive discussion, pooling and securitization have not developed to the extent needed to support large-scale investment in key areas of global concern, including sustainable energy, energy efficiency and infrastructure development. To do this would require credible sponsorship and consistency of approach across projects and sectors, as well as countries, that could permit pooling projects into the kind of large-scale, high-grade, liquid financial instruments that command the highest prices from investors and achieve the lowest cost of capital for these crucial undertakings.  In addition, these characteristics have to be met while providing certainty for project developers that this form of long-term financing will be available to justify the risk they take and the cost they incur in the development stage. 
Achieving this goal is simply not possible for all of the myriad activities supporting delivery of GPGs. But it certainly can be achieved in important areas if the international community is willing to coalesce around a few of the more promising, scalable approaches to tackling significant global challenges. And if it also adopts simple, standardized implementation and legal arrangements and diversifies projects globally, as well (across both developed and developing countries), pooling and securitization could be accomplished with the creditworthiness, size, and liquidity necessary to dramatically reduce the cost of capital for these activities.
For this to occur the following conditions are required:
Agreement on HPAs: Broad international agreement on a limited number of high-priority activities (HPAs) that would benefit from pooling and securitization. The criteria for inclusion on this list are straightforward: An HPA must (a) have the potential for major positive impact in a high-priority area; (b) generate cash flow to service debt or cost avoidance that can enable the funds thus freed-up to be directed to service debt; and (c) be susceptible to a standardized approach across jurisdictions. Some examples are urban conversion to LED street lighting, distributed generation of renewable energy, bio-shield restoration, and multi-peril/multi-jurisdiction catastrophe risk insurance.
Defined project criteria: Each HPA needs a set of minimum criteria to create a “conforming” project that can be pooled with others and securitized. Part of the objective in limiting the HPA universe to high-impact activities that are susceptible to standardization is to minimize the impact of idiosyncratic local approaches to essentially similar challenges. This ex ante classification of activities should make it possible to develop in each activity or category a small number of essential criteria for pooling, while allowing significant variation across jurisdictions in all other aspects of projects.
Minimum legal standards: Similarly, for each participating jurisdiction there will need to be a set of minimum legal standards to ensure enforceability of each project’s obligations to investors in the pool. Meeting these standards ex ante would qualify a national or subnational jurisdiction to originate HPA projects for pooling and securitization.
Established issuing vehicle: Each HPA needs an established vehicle to act as an issuer of the fixed income instruments created from the aggregated and securitized projects while meeting the requirements of items 2 and 3 just above. In most cases, an HPA vehicle would outsource project and jurisdiction validation functions (tasks 2 and 3) as well as the execution of financing and other aspects of financial management. In addition, each HPA vehicle could provide modest intermediation services, maintaining sufficient liquidity derived from borrowings to accommodate timing differences between receipt of HPA project revenues, interest and principal payments on HPA vehicle bonds. To the extent that project-related cash flows may not be sufficiently reliable to warrant investment-grade credit rating, an HPA vehicle could be an appropriate and efficient recipient of bilateral or multilateral public credit, for example, in the form of guarantees, participation in financings, hedging facilities, or capital contributions.  
Obviously, the devil is in the details in the foregoing approach, and the details are highly dependent on the specifics of the activities being financed, the characteristics of the institutions undertaking them, forms of available credit enhancement (to the extent necessary), and the complexity of the governance arrangements which, if not handled well, can vastly and unnecessarily increase administrative costs. Simplicity is key.
Having said this, we still are entitled to ask why so little of this work is getting done. The answer in part market dynamics: For the investment banks that traditionally would have undertaken it, the sheer efficiency of modern capital markets means that the fees available for designing, underwriting and distributing an HGFI instrument from multiple disparate initiatives are so small that the “heavy lift” required isn’t worth the cost. And, as noted above, the MDBs and other public institutions, with few exceptions, have found it difficult to adapt their existing business models (originating projects for financing on their own balance sheets) to include development of off-balance-sheet transactions that would attract major allocations from institutional investors.
All of this creates a need - and an opportunity - for other parties to advance the product development costs to “housebreak” key environmentally and socially important initiatives for inclusion in investors’ HGFI portfolio allocations.
In conclusion, there is an urgent need - and an opportunity - for the international community to come together to make financing GPGs a compelling investment for the managers of the global savings pool. These investments can work both for the immediate beneficiaries of that savings pool and for the long-term environmental and social sustainability essential to the future of humanity. The money is there. Now is the time for the public and private sectors to do the heavy lifting and reach agreement on a consistent framework and workable vehicles that can aggregate the highest-priority activities into diversified pools offering investors truly competitive, risk-adjusted returns.
 Traditional commercial bank lending has never been a great source for low-cost, long-term financing needed to finance GPGs. Although total assets in the global banking system are immense—roughly US$80 trillion based on BIS statistics—most of that is sourced from deposits and other short-term liabilities, and the term transformation that banks provide necessarily comes at a significant cost. That said, commercial banks play an important role in the early stages of project financing and, of course, in the underwriting and distribution process that facilitates access to the long-term investment discussed in the text.
 In the interest of completeness, it is worth noting that the highly-correlated behavior of traditional asset classes during the recent financial crisis and its aftermath is leading some investors to seek to better-diversify their portfolios by allocating to “factors” – e.g., macroeconomic performance and its constituents, real interest rates, currency exchange rates, credit, commodity prices etc. It remains to be seen to what extent this approach gains traction.
 Not surprisingly, an industry of sorts has grown up around the issue described in the text, with nongovernmental organizations (NGOs), academics, consultancies, and “sustainable” asset managers striving to demonstrate that some sacrifice of conventional risk-adjusted return is warranted in return for achieving broader public goods. These public goods—so the arguments often go—serve to reduce risks to institutional investors’ beneficiaries in other ways, a risk reduction that should be valued (“priced”) and taken into account in asset allocation and investment selection.
 In this context, it is worth recalling the difficult experience of some institutional investors, for example, when authorities in jurisdictions sponsoring investment funds have sought to pursue local economic development objectives by directing fund investments into favored businesses or other activities. Well-intentioned special pleading of this kind can give way to wholesale departure from sound investment practice as authorities find it difficult to say “yes” to one or several ostensibly salutary purposes while saying “no” to others.
 Bid-offer spreads in the institutional-scale market (for example, a plain-vanilla 5-year bond) can be in the neighborhood of 5 basis points (.05%) for a $5 million ticket in high-grade corporate debt, to well under one basis point (that is, less than .01%) for tickets in the tens of millions in “on-the-run” U.S. Treasuries. It is important to note, of course, that compared with government-bonds, liquidity in other sectors of the fixed-income market can vary widely—it is especially name-specific and tiered by credit rating, and it can improve or deteriorate with much greater sensitivity to overall market conditions. It also is significantly more exposed to the impact of declining balance sheet commitments by traditional market makers in the current climate of uncertainty around the structure and regulatory capital requirements in the banking sector.
 Variations on the pooling/securitization theme include mortgage-backed securities, asset- backed securities, and their collateralized debt obligation variants, as well as covered bonds (issued as plain-vanilla debt, carrying the credit of an issuing institution, but with backing as well from a specified pool of assets held by the institution).
 Pooling and securitizing assets has been employed widely and often without creating the “plain-vanilla” investment grade instruments that enable financing at the lowest cost. In the United States, for example, conventional mortgage-backed securities, carrying federal agency guarantees, nevertheless require market participants to undertake complex modeling to allow for prepayment risk and disparate cash-flow patterns among the mortgages in a pool.
 A recent effort by individual renewable energy developers in vehicles known as “yieldcos” should be distinguished from the approach discussed in the text. Yieldcos offers dividend-paying equity investments in pools of projects and more explicitly the prospect of rising yields and prices as project development continued. Experience with these instruments has been difficult, and, in any event, they never sought to access the liquid, high-grade fixed-income allocations in investors’ portfolios. [cite to the CPI/Rockefeller report “Beyond YieldCos”, June 2016]
 An example of a vehicle of this kind is the International Finance Facility for Immunisation (“IFFIm”), which pools and securitizes future aid commitments of up to 20 years from several countries to support issuance of high-grade bonds in the international capital markets. IFFIm is organized as a UK charitable corporation. It outsources to the GAVI Alliance (formerly the Global Alliance for Vaccines and Immunisation) the delivery of vaccination services, and outsources to IBRD implementation of its bond issue program, liquidity management, accounting, and other financial services.
 An alternative approach to pooling and securitizing GPG-related financing is to establish a separate “special-purpose vehicle” for each transaction. This has been the approach in, for example, in a “multi-cat” parametric catastrophe risk bond issue arranged by the World Bank Treasury.