TACOMA, Washington — On Jan. 21, 2020, J.P. Morgan announced the launch of the J.P. Morgan Development Finance Institution ( JPM DFI), the first such endeavor for a commercial entity. The JPM DFI specializes in development financing in emerging markets, operating under the same standards as development banks while remaining a commercial institution. This arrangement entails some deviations from standard DFIs. For example, the J.P. Morgan DFI primarily acts as an intermediary between contractors and investors rather than financing all deals itself. Regardless, the JPM DFI is expected to personally finance more than $100 billion annually for existing and prospective clients. Through this new institution, J.P. Morgan hopes that the DFI’s success in the development finance sector will attract additional investors and enrich the sector with private capital.
Development finance can be loosely defined as investing capital into projects that support development and quality of life in developing countries. In line with the guidelines of the U.N. Sustainable Development Goals (SDGs), these sectors include infrastructure, agriculture, health, education, job creation, economic growth and gender equality. Part of J.P. Morgan’s intentions for the DFI is to decrease the $2.5 trillion annual funding gap required to achieve the SDGs by 2030 through the mobilization of the private capital sector.
The JPM DFI certainly has a strong starting point with access to J.P. Morgan’s already-established work in emerging markets, business networks spanning more than 100 countries, $485 billion in deposits and more than $26 trillion in assets under custody. In addition to facilitating the sector and closing the SDG funding gap, the JPM DFI intends to standardize the development finance framework in the areas of impact measurement, deal origination, distribution and knowledge contribution in order to mainstream the sector.
The J.P. Morgan DFI exists as the only commercial bank that evaluates the development impact of its projects. It assesses transactions with a methodology similar to the International Finance Corporation’s Anticipated Impact Measurement & Monitoring (AIMM) framework. This imposes an additional five-step vetting process on top of J.P. Morgan’s existing risk criteria to evaluate the suitability of a proposed development project.
- Exclusions Filter: The filter follows the criteria established by other leading DFIs, such as excluding deals related to munitions, slavery, illegal trafficking and logging, coal mining and tobacco.
- Counterparty Filter: Suitable counterparties must be eligible to borrow from the World Bank and the transaction must positively impact a World Bank-eligible nation.
- Product Filter: The transaction must have a development impact by facilitating new financing or assisting in risk management.
- Development Intensity Assessment: Depending on the entity of the client, a six-step assessment determines the rating of the project’s development intensity and subsequent potential for impact. This includes consulting the relevant sector indicators, obtaining nation data and comparing with other World Bank nation statistics to determine the final rating of low, moderate, high or very high.
- Mapping to SDGs: This cross-checks with sector-specific SDGs to measure alignment and specific impact.
Following the assessment and commencement of the vetted transaction, the JPM DFI expects the investor to monitor the project’s evaluation, as indeed the JPM DFI does for the $100 billion that it finances. Additionally, the J.P. Morgan DFI commits to transparent, regular reporting of its activities and impact as an example to other DFIs.
The 2020 Review
The JPM DFI announced its first deal in July 2020, about six months after its launch. The deal involved a $250 million, five-year green bond for Georgia Global Utilities, and put the DFI on the map as an official development financing institution. The JPM DFI further secured the Asian Development Bank, the German Investment and Development Corp (DEG) and the Dutch FMO development bank as investors. The increasingly negative impact of COVID-19 on developing countries has also spurred borrowing in health and economic sectors, which falls under the DFI’s jurisdiction. According to reports, the JPM DFI is on track to achieve its target financing goal of $100 billion for its first year of operation.
There has been a mixed response to the J.P. Morgan DFI. Detractors point out that the DFI’s balancing objectives of developmental impact and commercial profit may compromise the prior for the sake of the latter and further result in avoiding the risky markets that the DFI is intended to target. As this comprises the first commercial DFI endeavor, it is unknown how effective it will prove or how it will ensure that financed projects meet their objectives post-financing.
While these concerns represent valid critiques, supporters are optimistic about J.P. Morgan’s capacity to mobilize the private sector, reach the riskiest markets mainstream development financing and close the SDG funding gap. This is especially important as COVID-19 damages investment in emerging markets and hampers SDG progress. The private sector may be the key to spurring desperately needed growth in developing countries and the JPM DFI’s applied expertise may be just the push that the development financing sector needs. Overall, the J.P. Morgan DFI shows a commitment to reducing global poverty.
– Andria Pressel