Adam Fishman writes on the International Institute for Sustainable Development’s SDG Knowledge Hub website about recent developments in financing sustainable development.
Blended Finance and Private Sector Contributions to the SDGs
How will we finance sustainable development? In last week’s SDG Knowledge Weekly, we saw the possibilities that blockchain technology holds for development finance. This week’s brief considers where and how private sector actors can contribute to SDG achievement, including through blended finance.
Blended finance is the use of public or philanthropic investment to attract commercial finance from the private sector, particularly to fund activities in developing countries. The private sector contains many types of entities: small and medium-sized enterprises (SMEs), multinational corporations (MNCs), institutional investors, individuals, and everything in between. A working paper by Convergence and the Business & Sustainable Development Commission’s Blended Finance Task Force tackles a subset of the question posed in its title, ‘Who is the private sector?’ The paper focuses on six types of institutional investors: pension funds; insurance companies; sovereign wealth funds; commercial and investment banks; private equity firms; and asset/wealth managers. The authors then consider how to mobilize capital from such institutional investors, through blended finance. Recommendations address: 1) engagement, 2) designing appropriate products and scaling successful solutions, 3) building off development finance institutions (DFIs) capabilities and experience, and 4) disseminating return and impact data.
Also from the Blended Finance Task Force, in partnership with the Business & Sustainable Development Commission and SYSTEMIQ, comes ‘Better Finance, Better World.’ This consultation paper says that institutional investors can leverage the current low-interest rate environment to use blended finance in a manner that de-risks investment in emerging markets infrastructure. The paper also notes the central role of multilateral development banks (MDBs) and DFIs, but calls on both to increase their mobilization ratios. The paper highlights that MDBs currently mobilize less than US$1 of private capital per dollar invested. A write-up of the two papers on ImpactAlpha by Convergence’s Justice Durland looks at “ways to get the private sector to start paying attention” to the SDGs. Coverage of the second paper is also available on Public Finance International.
Eurodad’s Polly Meeks authored a piece, also on Public Finance International, asking whether blended finance is “a silver bullet or a double-edged sword” and noting the opportunity costs of blended finance. The article responds to the Organisation for Economic Co-operation and Development’s (OECD’s) ‘Private Finance for Sustainable Development’ conference, hosted on 29 January 2018, in Paris, France. The event, covered by Devex’s Molly Anders, launched an OECD report titled, ‘Making Blended Finance Work for the Sustainable Development Goals.’ The report notes blended finance’s potential for delivering the US$2.5 trillion annual investment needed to achieve the SDGs. It highlights that donor governments and other development actors are increasingly using blended finance, but acknowledges that “a critical first step” is simply agreeing on a common definition.
Lastly on blended finance, the Brookings Institution’s Emily Gustafsson-Wright asks, ‘Is paying for results with blended finance ready to take off?’ The post, featured on Brookings’ Education Plus Development blog, quotes Davos attendees’ remarks on the potential for innovative financing models, and evaluates the extent to which blended finance has been used to achieve sustainable development outcomes. Gustafsson-Wright looks at a range of case studies, including payment by results, social and development impact bonds, and other efforts by bilateral and multilateral donors. She concludes that there is indeed something to be said for blended finance, whose elements can enable more effective investment in prevention, incentivize collaboration, build a culture of monitoring and evaluation, and empower countries to accelerate progress towards the SDGs.
Blended finance is not the only way for the private sector to support the SDGs. Thomson Reuters delves into other roles for private companies in article titled, ‘Can you use the SDGs as an investment tool?’ The post discusses opportunities to use environmental social and governance (ESG) metrics as a basis to develop investment strategies in manner that is consistent with, or centered around, the SDGs. The piece references a prior webinar and summary report on how the SDGs can serve as “a new tool for putting value on values.”
GreenBiz Group’s Anya Khalamayzer also looks at ESG opportunities aligned with the SDGs, through the lens of retirement and pension funds. The post highlights an aspirational goal by the World Business Council for Sustainable Development (WBCSD) to move US$10 billion in retirement assets under management of its member companies into ESG-themed retirement benefit accounts by 2020. Last week, together with the Committee of Sponsoring Organizations of the Treadway Commission (COSO), WBCSD also launched draft guidance on applying Enterprise Risk Management (ERM) to ESG-related risks.
Private sector engagement with the SDGs featured broadly at GreenBiz 18, GreenBiz Group’s annual conference, which convened from 6-8 February 2018, in Phoenix, Arizona. Sessions on Materiality and Metrics discussed three types of contributions to the 2030 Agenda: “the potential of business to realize the SDGs;” navigating the reporting landscape; and SDG achievement through improved soil health. A WBCSD-moderated GreenBiz tutorial highlights what businesses can do with respect to the SDGs, covering employment opportunities, technological innovation, and, as discussed above, finance.
Also on measuring business contributions, the SDG Compass has been updated with new indicators, according to the Global Reporting Initiative. SDG Compass is a joint product of GRI, WBCSD and UN Global Compact that provides guidance to companies on aligning strategies and measuring contributions to the SDGs.
A UBS white paper titled, ‘Partnerships for the Goals,’ explores opportunities for wealth managers to collaborate with MDBs, financial services firms, UBS’s clientele, and social enterprises, in order to mobilize the estimated US$5-7 trillion of annual investment needed to meet the SDGs. The paper calls on wealth managers to take action in five areas: 1) working more closely with MDBs, 2) standardizing sustainable and impact investing conventions, 3) working together to “fashion new solutions that fill gaps in the SDG-funding instrument landscape,” 4) focusing on outcomes and impacts, in partnership with philanthropic clients, and 5) working with social entrepreneurs and introducing them to their stakeholders.
An upcoming SDG Knowledge Weekly brief will explore the role of public finance in making the SDGs a reality, as the international community gears up for meetings on tax collaboration, infrastructure, and follow-up to the Addis Ababa Action Agenda on FFD.