Multilateral development banks are being urged to release data on lending in the Global South to help investors gain a better view.
Renewed calls for data from the Global Emerging Markets Risk Database (GEMs) to be made transparent have been welcomed by industry bodies, including the World Resources Institute (WRI) and Convergence Blended Finance.
Making that data more accessible would be key in achieving UN Sustainable Development Goals (SDGs), with the WRI saying that it could be “jet fuel” for sustainable investors.
The GEMs holds the equivalent of three decades of loan performance and default data from multilateral development banks (MDBs). However, that data is only available to a consortium of 24 MDBs, including the World Bank and the European Investment Bank. There have been long-running calls to make it more widely available to close the gap between the perceived and actual risk of investing in emerging markets.
Last week, bank executives revived these calls in a Bloomberg article, arguing that access to the data would enable them to base their risk calculations on historic record, rather than proxy and perception.
Speaking to ESG Investor, Chris Clubb, Managing Director at Convergence Blended Finance, said that borrowers located in emerging markets tended to pay an interest rate premium.
“This premium is because the data and information they have available for developed countries is a lot better,” he explained. “The difference between perceived risk and actual risk in developed markets is much narrower than in emerging markets, so borrowers in the latter need to pay a lot more because of that.”
GEMs data on lending to sovereign borrowers also shows that defaults and losses from loans are close to zero, giving a different picture to comparable datasets from rating agencies such as Fitch and Moody’s.
“On data from the private sector side there’s a big difference there too,” said Clubb, adding that private sector single B-rated borrowers’ experience of MDBs in Africa and parts of Southeast Asia was typically much better than data from the likes of Moody’s or Fitch suggests.
“These datasets lead to the similar conclusion that the actual risk of historically lending to these markets and borrowers has been lower than one would expect,” he explained. “Although much of Moody’s or Fitch’s data is behind a paywall, you can use yearly public updates on defaults and losses and compare it against lending data released by the GEMs.”
The need to release GEMs data has been under discussion since 2015, when the UN adopted its SDGs and the Paris Agreement was signed.
“These two elements serve as North Stars for the sustainable development community,” said Clubb. “They both declared that we need to do a much better job of mobilising private sector expertise and investment.” Discussion are ongoing, but there are no tangible changes yet, he insisted.
Valerie Rouxel-Laxton, Senior Associate at the World Resources Institute’s Finance Centre, stressed that the perception of risk was particularly important in the areas of climate and SDG finance.
“Opening up or making GEMs data more accessible would be one factor to understand those risks more fully, but it isn’t a magic wand to unlock everything,” she said. “Overall investing in emerging markets is more complex.”
Although having the discussion back on the table is positive, there are also nuances to opening up the GEMs database, Rouxel-Laxton explained. “It’s a really big step forward for those multilaterals, and it depends on whether they can find a mutually beneficial way forward to share the appropriate level of information about emerging markets that is contained in there.”
In 2023, a paper, co-author by Laxton and collaborators from the Center for Global Development identified GEMs access as the kind of action that an “ideal” bank focused on mobilising private sector support should pursue.
“The consortium is committed to the goal of making the data accessible to investors and the broader public,” a spokesperson for the EIB, which co-founded the GEMs in 2009, recently told Bloomberg. “GEMs recovery statistics in particular are well on track for publication by the end of March, which will be an important step forward.”