ADB Insight Episode 16: Annual Meeting 2024 - Building a Bridge to an Inclusive Future

Video | 26 April 2024

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In a curtain raiser to the 2024 Annual Meeting, ADB President Masatsugu Asakawa, European Bank for Reconstruction and Development President Odile Renaud-Basso and Georgia Finance Minister Lasha Khutsishvili share their insights on what it will take to build a sustainable, inclusive future.

Moderated by international journalist Nisha Pillai, the panel discussion focuses on the economic landscape, regional cooperation, and how multilateral development banks and countries can collaborate more effectively despite the uncertainties and risks posed by climate change, deglobalization, and geopolitical tensions.

Transcript

Nisha Pillai: Hello, and welcome to ADB Insight. The world finds itself right now at the crossroads of growth. Decades of hard-fought for prosperity should be pointing towards a positive and inclusive future for all of us. But with deglobalization and geopolitical tensions on the rise, plus the climate clock ticking, risks and uncertainties abound. So what will it take to bridge us to the future we all hope for?

I’m Nisha Pillai and it’s my pleasure to be joined today by our esteemed panelists – the President of the European Bank for Reconstruction and Development (EBRD),  Odile Renaud-Basso;  the Finance Minister of Georgia, His Excellency Lasha Khutsishvili; and our host, the President of the Asian Development Bank (ADB), Masatsugu Asakawa.

Now let's start with an economic overview. President Masa, I'm going to start with you, if you don't mind. We are living through turbulent times, aren't we? There is so much uncertainty around geopolitics, over trade relationships. What does all this mean for the economic prospects of the Asia-Pacific region, which after all, has been the engine of global growth for so long?

Masatsugu Asakawa: Let me start by talking briefly about the economic outlook in the region. The economies of so-called developing Asia are estimated to have grown at 5.0% last year, 2023, up from 4.3% in the previous year, 2022. And this growth momentum is expected to be sustained at around 4.9% this year and next year. On the other hand, inflation has been contained well. Actually, the inflation rate itself dropped from 4.4% in 2022, to 3.3% in 2023.

This robust growth comes from a couple of factors: First, relatively strong domestic demand. Second, a recovery of export performance thanks to the favorable semiconductor cycle. Third, very strong remittance inflow to the region. Fourth, a recovery of tourism as more and more tourists are coming back. And fifth, recovery of the Chinese economy. And talking of the Chinese economy a bit, China only grew by 3.0% in 2022, but it rebounded to 5.2% growth in 2023, after they exited from a very strict zero-Corona policy.

So looking ahead, the Asia and Pacific economy appears to be very resilient, although they are facing a tremendous amount of uncertainties and challenges. I would like to list four challenges. One is, as you mentioned, Nisha, ongoing geopolitical conflicts in Middle East and others. Second, the possibility of very unstable global financial markets due to the monetary policy orientation in advanced economies, especially in the US. Third, the food security issue. While the food price in general has been declining after its peak in 2022, the rice price has been rising. I was shocked to know that the rice price actually soared more than 40% last year, 2023, which eroded substantially the purchasing power of poor families in our region. In order to deal with this food security issue, ADB announced two years ago a $14 billion comprehensive financial package, mainly investment in the agriculture sector in our region to make it more resilient vis-à-vis any kind of external shocks. And fourth the downside risk we are facing is the climate change crisis. And actually, it's an uncomfortable truth that the Asia and Pacific region is accountable for more than 50% of CO2 gas emissions, but at the same time it is also true that this region is one of the most vulnerable regions, area vis-à-vis natural disasters. Everybody saw what happened in Pakistan two years ago, right? So I always say, our fight against climate change will be won or lost in Asia and the Pacific.

Nisha Pillai: Wow, I'm going to pick up on that a little later President Masa, what ADB is doing in the fight against climate change. So, Odile Renaud-Basso, the EBRD, the European Bank for Reconstruction and Development, you have such a broad remit, don't you, not just in the post-communist countries and Central and Eastern Europe, but also the southern Mediterranean, in Central Asia, and now in North Africa. Could you give us a quick economic snapshot of your three main client countries, Ukraine, Turkey, and Egypt, which for various different reasons are all suffering from significant economic crises?

Odile Renaud-Basso: So, yes, a very different situation. Ukraine, the country is under war, under the Russian attack started in February 2022. So, in 2022, a huge economic recession, minus 30% of GDP, because part of the country is really in a war zone when activity is very, very limited. But the positive news in this very difficult environment is that the economy stabilized in 2023, mainly, thanks to huge budget support under the remit of the International Monetary Fund (IMF) program. It's even positive growth by at least 5% in 2023. So this rebound is a positive sign because it helps the country sustain economic activities, companies continue to invest. It shows that the situation is improving, but of course, it's very fragile. It's very much dependent on external support, and because the budget deficit represents around 50% of the budget, it’s a huge, a very exceptional and difficult situation. But I hope the forecast for 2024 is still positive growth of 5% and inflation has been kept under control. So 2022, big inflation, sort of monetary financing for the war effort, and then this came down and came back under control in 2023.

Turkey's completely a different situation. They had years of very unorthodox economic policy, with a decrease of interest rates, a very high level of inflation, a bit of overheating, but still amazing resilience from the Turkish private sector and from the Turkish economy. And then a few months ago, they really reverted the economic macroeconomic course, tightening monetary policy, which has been raising very substantially rates, and inflation remains at a high level, but I think it will progressively slow down. And to be fair, I think that the resilience of the Turkish economy is quite amazing and the capacity of the private sector, banking sector, to adjust to the situation. So, we continue to support them despite this economic situation and I think it was the right decision to take.

Egypt is in a different situation. It has been quite impacted by an increase of energy, food prices. Economic growth has been slow, there are huge financing needs. So the situation was a lack of foreign currency, slowing down investment, the growth was very much dependent on public sector investment, which is needed because the demographic dynamics are very strong, but the private sector dynamic is not so good. The good news for Egypt is that they reached an agreement with the International Monetary Fund (IMF), they got wide support from some Gulf countries, from the European Union (EU), and so forth. This gives them some margin of maneuver in terms of access to foreign currency, level of reserve. So I think they will stay on track in the framework of this program.

Nisha Pillai: Okay, good to hear that. So it sounds like you're positive about all three of these big client countries for EBRD.

Finance Minister Lasha, let's turn to Georgia now, the economy has been on a real roller coaster, with being very badly hit during COVID and then buoyed by a surge of migrants coming in after the Russian war in Ukraine started. What's the situation now? Is it stabilizing? What do you see as the main economic challenges and opportunities?

Lasha Khutsishvili: You very well summarized the recent economic challenges, which comes from the pandemic, of course, and from the Russian invasion in Ukrainian and ongoing war. But besides that, in the last decade, Georgia was facing four times economic shocks. And so it was to mention that all the time the country's economy showed quite strong resilience to the shocks. What is important is that the policies we are performing and the structural reforms, which we are doing, and new policies, it shows quite a good basis for the economic recovery we have.

There are several reasons why we had the quite strong economic recovery process in the country. Among them is the quite strong recovery of the tourism sector, which was and still is quite a big part of our economy. So before COVID, it was up to 12% of our GDP. Of course, the foreign direct investment that increased for the last three-year period was very significant and, in general, so the attractive business climate is one of the important factors. Capital and human inflows also have its share in our growth and, in general, quite strong demand. So as a result of these factors, in 2021 and 2022, Georgia had two-digit economic growth -- 10.6% in 2021, and 11% in 2022. This growth momentum continued last year as we had 7.5% growth, which is much higher than average growth. And this growth is going to continue this year for the last two-month period. So our growth was at 7.7%.

So besides the defects, we see that we had quite strong fiscal consolidation measures, and we have quite strong reforms in public finance management, which plays its role, stabilizing the economy. So the budget deficit, which was about 9%, it declined up to 2.5%. And the debt level, which was around 61%, declined more than 20 percentage point below 40%. So one of the main challenges during this period, which was inflation, also stabilized and for the last 12 months average inflation in Georgia was 0.7%.

One of the most heated components also was the current account deficit during the Covid period. And so we see that last year, it was at 4.2%, which is a historically best performance. So, as of today, we can say that macroeconomic stability reached the country macroeconomic stability, and we will continue on the same track. So despite all these challenges, which the country was facing during the crisis, so we see that the economy showed quite strong resilience. And now Georgia is preparing its economy and its systems for EU integration, and at the same time keeping strategic cooperation within the region.

Nisha Pillai: So it sounds like the very strong growth has been an opportunity to really get your economic house in order. Thank you very much, FM Lasha.

So let's turn our attention now to another theme, what's called MDB evolution, the way multilateral development banks are changing to address the pressing needs of today, including the climate crisis, geopolitical tensions, and the redrawing of trade ties. Now, multilateral development banks play a key role in meeting these challenges. But are they really doing enough? MDBs are under pressure to evolve, to fundamentally change the way they operate. So let's take a closer look at that now.

Odile Renaud-Basso: So we really embraced this agenda of better, bigger, and more effective MDBs which is a bit driving the direction. And we worked on the side of how to unlock capacity to invest more. And, in particular, because we are big investors, the largest investor in Ukraine, it represents specific risk, and you need to have capital to be able to sustain investment in such an environment. So we worked a lot on how to optimize our capital. And there was a report which has driven the agenda, which is called the capital adequacy framework report, done under the auspices of the G20, which gave some direction on how to leverage and so forth. We also benefited from capital support from our shareholders in the form of a capital increase. That gives us the capacity to continue to invest in Ukraine in this very uncertain environment and challenging environment, while also supporting all our countries of operation. So that's for the size.

For the priorities, I think climate is for us a key priority. Fifty percent of our investment must be in the climate sector. And we look at all investment we do under the lens of the Paris Alignment. So we need to check that all investment we are doing is consistent, compatible with the Paris Agreement. We are focusing mainly on the private sector as a bank. So 70% of our financing is in the private sector. And we really try to help our clients to address this agenda -- to decarbonize, to improve energy efficiency, etc. And in a way, the energy crisis that has hit quite a lot of countries in the context of the war has also been an accelerator for energy efficiency, for the development of renewables.

Nisha Pillai: So picking up on what we just heard from President Odile, President Masa, you said earlier, I'm going to quote, our fight against climate change will be won or lost in the Asia-Pacific. So what is ADB doing to address this challenge? I should just say, what are you doing differently now?

Masatsugu Asakawa: Well, as Odile mentioned, under the MDB evolution agenda, MDBs are now asked to deal with global public goods. For example, the climate change issue, and also global health issues, and so on.

In my view, this agenda of MDB evolution can be broken down into three sub-agendas. First, what we should focus on? Second, how much more should we finance? Third, how we should work. On the first sub-agenda, what we should focus on, climate change is one good example. So let's take up the climate change issue as an example. ADB has been very proactive to address climate change issues from the very early days. Just before the UN Climate Change Conference in Glasgow (COP26) in 2022, we elevated our ambition to $100 billion of cumulative climate financing from 2019 to 2030. And also we indicated our intention that one-third of our $100 billion target, which means $34 billion, should be invested in adaptation. So adaptation should not be forgotten.

Nisha Pillai: Because that's particularly important in Asia.

Masatsugu Asakawa: Exactly. And I'm very happy to report to you that last year, in 2023, we delivered $9.8 billion in climate financing, which was a record high, with $5.5 billion in mitigation and $4.3 billion in adaptation.

The second thing I'd like to mention briefly is that we have been working on a couple of climate-related financing schemes. One of them is called IF-CAP, or the Innovative Finance Facility for Climate in Asia and the Pacific. IF-CAP is a very innovative financing instrument to expand ADB’s climate investments by utilizing guarantees provided by bilateral donors, which means that for every one dollar of ADB sovereign operations that is guaranteed by any donors, we can expand climate investments accordingly. But the beauty of this mechanism is that it's not really a conventional one dollar in, one dollar out financial modality. Whenever $1 is guaranteed, under our simulation, we can expand for the leverage.

Nisha Pillai: The leverage effect.

Masatsugu Asakawa: Exactly, for $4 or even $5 of climate financing, because of the leverage effect you just mentioned, Nisha.

I do hope that this innovative financing scheme will greatly contribute to achieving our ambition of the $100 billion target by 2030. That's the first sub-agenda.

The second sub-agenda is how much more we should finance. On this point I’d like to congratulate Odile for your successful capital increase exercise at EBRD. But at ADB, there has been no discussion about a possible capital increase among our shareholders. So what we did last year was we went through a so-called capital adequacy framework (CAF) review. And the purpose of the CAF review was to expand our lending capacity in general by optimizing the prudential level of capitalization, which simply means, we looked at our methodology of risk management, and found that our methodology was a bit too conservative compared with our peer institutions like EBRD. So we decided to align our methodology to those of EBRD and IADB and as a result of this review, we ended up unlocking an additional $100 billion, once again, of additional lending capacity for the next 10 years, which means $10 billion per year, 40% more than the current level. So I would say our CAF review was really successful.

And finally, on the third sub-agenda, how we should work, let me just briefly mention that last year, we embarked on a very substantial, a huge, organizational restructuring called the New Operating Model (NOM). And the purpose of the NOM is very simple – to break down the silos we are seeing in many places in our organization, like silos between sovereign and non-sovereign operations, silos between operations departments and non-operations department, and so on. And also, in order to make our private climate investments more effective, and also to make mobilization of private sector capital more efficient. And also, we're sending more and more staff from headquarters to resident missions in order to be closer to the clients.

Nisha Pillai: Yes, that's a really important point. So one of the places they may be moving to is Georgia, because Georgia is of course a client of both EBRD and ADB. So if I could ask you, Finance Minister Lasha, what do you think countries like Georgia can do to work more effectively with MDBs? And what do you think that MDBs themselves should be doing more of, or less of?

Lasha Khutsishvili: Well, the fact that Georgia has very good cooperation with the EBRD and the ADB, and generally with all MDBs which cover the region, is a huge opportunity for Georgia itself to have a well-diversified portfolio and also to benefit from the quite different financial instruments which MDBs are providing to the country. So financial cooperation, and the cooperation with the MDBs, is important not only from the financial perspective, but the expertise which is provided by the MDBs during very complex infrastructure projects or institutional reforms are also very important for countries like Georgia.

So we have quite good experience working together on the same projects as several MDBs, like EBRD and ADB are financing very important highway projects in Georgia, in Kvesheti–Kobi which is more than a 400 million euros project and which is very important from a logistical perspective. So this is the opportunity to benefit from the synergy of the different international financial institutions (IFIs) together. So Georgia is benefiting much from this kind of cooperation. And I can say that also it should be important for MDBs to have clients like Georgia, because we see what are the main challenges of the MDBs and what are the challenges of MDBs by their operation, and what is the regional context of it.

Nisha Pillai: So what would you like to see them doing more of?

Lasha Khutsishvili: Today it’s what is visible. And so most of the developing countries are facing the issue of high indebtedness. And at the same time, a huge need of investing in infrastructure and other projects, but with a quite shrunk fiscal space. So that's something after the Covid period, Covid pandemic, every country, developing country was facing.

So, in this process, I think that the MDBs’ role is very important to introduce different financial instruments to answer these challenges. One of them might be local currency borrowing, which we have good experience with the EBRD. But this practice is something that we should continue. The debt issue is quite important for many countries. Some of them managed to recover from the Covid period, some of them couldn't, but for the long-term period, this is something that should be addressed together with the MDBs and the client. So this is an opportunity because local currency borrowing will unlock much more opportunity to financing with the limited fiscal space. I think that all the MDBs will address this issue and that will be the opportunity to even strengthen our cooperation. And it's also important that with this instrument it's a good chance to reform and to develop the local currency markets as well.

Nisha Pillai: Yes, and I understand that both EBRD and ADB have been recently involved in issuing local-currency bonds in Georgian lari, so that process is now underway, as it were. I wonder if we could move on to another theme, which I believe is very close to your heart, Finance Minister Lasha – you mentioned the highways – and that is regional cooperation and connectivity. It seems to be one of the economic pillars in Georgia -- building regional cooperation and connectivity. Why is that? Why is it so important to you?

Lasha Khutsishvili: So you know Georgia is positioning itself as a crossroad to Europe and Asia. And so, one of the pillars of our economic policies is also to strengthen our transit potential in the country. So the highways where we are investing billions of dollars through the IFIs’ assistance, also the railway, also the new ports in the country, all of these infrastructure projects serve the purpose to increase the transit potential in the country. And that's part of the many initiatives which serves regional cooperation like the Middle Corridor, Silk Road, and other initiatives, which main purpose is to increase regional cooperation.

So the country is benefiting much from these kinds of initiatives. And we think that we will continue to invest in these kinds of projects. I will say that one of the main and one of the important projects, which is the flagship project between Georgia and EU cooperation, is the Black Sea electricity cable, which is already the flagship project under the EU investment plan. And this kind of project serves the purpose that we will have direct connectivity to the European Union and it's a huge opportunity for the country to export renewable energy to the European Union because if you will see the structure of electricity generation in Georgia, more than 80% of the electricity generation is green and renewable, mainly coming from hydro and wind.

Nisha Pillai: So Georgia is clearly very optimistic about the potential for exploiting its strategic position right there between Asia and Europe, but these projects could cost a lot of money and there's a lot of engineering challenge as well, for instance, with deep sea cable. So I wonder if I could ask you, President Odile, what's your perspective? What's the EBRD’s perspective on the potential for the Middle Corridor?

Odile Renaud-Basso: We have worked a lot on this issue, because we made this study on the Middle Corridor with EU financing. What we believe, that with the geopolitical challenge, with the situation with Russia, trade between Asia and Europe needs alternative infrastructure, and the Middle Corridor is the best, the most effective connectivity channel. So we are really looking at that and investing and because we are working also in Central Asia, Kazakhstan, and other Central Asian countries, we are investing in some projects which are related to the Middle Corridor. I think our study shows that the overall amount of investment needed would be around 18.5 billion euros, but of course, it's not all urgent, and it could be phased and prioritized. But we are working on that in different countries. And it's important to have this global view so as to ensure that the dots are connected.

One important dimension also is connectivity. Improving connectivity is not only about infrastructure, roads, railways, ports, digital infrastructure, but also about processes -- customs processes, digitalization of customs, and so forth, facilitating transit across countries. And so these are things which are not so costly, but are also very important in improving the connectivity and the smooth transit of goods across different countries. So this is clearly a priority for investment for us. And, and we believe that part of it should be done with public sector investment. But we also are keen to explore the feasibility of public-private partnerships (PPPs), bringing in private investors in order to alleviate the burden on public finance.

Nisha Pillai: Thank you so much Odile. President Masa, can we just step back for a minute and look at the bigger picture here? We're talking about bolstering trade through Georgia, from Asia to Europe. But do you see that there's maybe further benefits from regional cooperation at a time when protectionism is on the rise? Could it support efforts to stabilize globalization?

Masatsugu Asakawa: Yes, very important points, I think. It has been sometimes said that COVID-19 and also a couple of geopolitical conflicts in the Middle East and others have halted the trend of globalization. They say our world will end up with serious segmentation in our society and economy and so on.

Personally, I don't buy this kind of argument at all. If anything, COVID-19, for example, the pandemic, reminded us how deeply our world is interconnected. So, diversification in order to reduce concentration costs may take place, it is taking place, but purely segmentation can’t be a solution. So, I do believe that globalization will come back. Then, what we should do is to recognize the benefit arising from free trade and the free movement of capital, through which especially our region has benefited for years.

A couple of important points here. First, we should fight against any form of protectionism. We should promote open trade, free trade, not only bilaterally but also multilaterally. Second, we should really deepen cooperation efforts. I do believe that as long as any region is open and transparent it will not compete with globalization. It would complement globalization. For example, we could promote a more diversified regional supply chain to complement our global supply chain. We could consider enhancing regional financial cooperation to prepare for a future currency contingency, for example the Chiang Mai Initiative of ASEAN+3 countries. Or, we could enhance regional cooperation in international taxation in the context of the base erosion profit shifting (BEPS) initiative, which has been agreed to by almost 140 countries and jurisdictions a couple of years ago. Thirdly, and finally, I do think that we should also take care of the negative aspects of globalization, namely, global value chain-related emissions that have grown very rapidly, even more rapidly than all the other sources of emissions. So these global value chains increasing contribution to global emissions really highlights the urgent need to decarbonize our global value chains and regional value chains.

Nisha Pillai: Absolutely. Thank you very much, President Masa. Finance Minister Lasha, if I may ask you, Georgia is for the first time hosting the ADB Annual Meeting. It has the theme, Bridge to the Future. What does that mean for you? What does it mean for Georgia to be a bridge to the future.

Lasha Khutsishvili: So there were several reasons why we chose this slogan Bridge to the Future. The first thing is that we position ourselves as the bridge between the Europe and Asia. Also,we are hosting this very important event at a very crucial time for Georgia, as an EU candidate country. And also, we all are recovering from the COVID pandemic and we all are dealing with the regional crisis. And last but not least, Georgia is an ancient country with an ancient history, with a very modern society and very bright, young generation, which also highlights the fact that the country is going forward.

Nisha Pillai: And the ambitions of the country. Thank you so much, Finance Minister Lasha. President Odile, so talking of ambitions, multilateral development banks have very ambitious agendas. EBRD is no exception. Where would you like to see EBRD, let's say by 2030.

Odile Renaud-Basso: I would like to see EBRD being successful in investing in the countries in which we operate. Probably with a higher level of investment, but also having an impact on the green transition, on digitalization, on inclusion, on governance, and also the quality of governance, which is a very important condition to improve the private sector environment and attract business. So I think that in a way, if in 2030 we are less needed in some countries, it could be very good news. But another challenge we have for 2030, I hope we will be in the middle or very well advanced in the reconstruction of Ukraine, and that the country will be in peace and reconstructed. And we will start to invest in Sub-Saharan African countries and that we will be successful there and really helping this region which is facing a number of challenges.

Nisha Pillai: Big agenda there, clearly. Present Masa, where would you like to see ADB by 2030? Crystallize it for us. What does it mean to be a bridge to the future for ADB?

Masatsugu Asakawa: I think for MDBs to be a good bridge to the future, I think three factors are very important: first is appropriate climate action; second is mobilization of private sector capital; a third one is to enhance regional cooperation to complement globalization as we discussed. And especially if these three factors are combined together, I think MDBs could be a very powerful tool to address the challenges we are currently facing.

Quite recently, I visited the Lao People’s Democratic Republic, where we provided financing to build a large-scale wind farm project, a 600 megawatt wind farm. And first of all, we could mobilize a huge amount of private financing for this project. ADB provided just $100 million, which attracted $600 million from private sector investment. So altogether, this project has become a $1 billion project and this wind farm will become the largest wind farm in Southeast Asia. In this project, these three factors are beautifully combined all together. And so I felt this project is very attractive and I hope that this kind of innovative project will be replicated in other countries in the region and also other regions in the world.

And finally, Lasha, thank you very much for hosting our ADB Annual Meeting this year to discuss Bridge to the Future. I really looking forward to seeing many people in Tblisi.

Lasha Khutsishvili: Thank you.

Nisha Pillai: Indeed, I would like to wish you all a very impactful and insightful ADB Annual Meeting too, in Tblisi, coming up. We've had such a rich discussion here. I'd like to thank you all very much for sparing your time for us, Your Excellency, Finance Minister Lasha Khutsishvili; President Odile Renaud-Basso; and, of course, our host, President Asakawa. Thank you for joining us on ADB Insight from me, Nisha Pillai. Thank you to you all for joining us, from me and the team, I should say, the ADB Insight team, we've been so pleased to have your company. See you again soon.

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