$2.5 trillion is a talismanic number. It represents that amount of opportunity for the ASEAN economic community, for cities, for exports in the ocean economy, for hydrogen, for embedded insurance, annual investment in energy infrastructure, JPMorgan’s 10-year climate investment plan, dry powder in the private equity industry, and even grocers that are the first to the future.
But the major voodoo for this number is that it has become famous for representing the financing gap to accomplish the 17 Sustainable Development Goals, which were officially adopted by the United Nations on 1 January 2016.
A 2018 UN report, Local insights, global ambition, noted that achieving the SDGs would require funding at a level of $3.3 trillion-$4.5 trillion per year. It also noted a funding gap for developing countries of $2.5 trillion per year. The need is there.
Even though this report noted the challenges in raising this amount of money, it struck an optimistic tone, saying: “The SDGs are more than just an aspirational framework for
governments – they are a roadmap for business opportunities for securing trillions in financing.”
It also stated: “In addition to increasing public-private partnerships, there are various other financial opportunities waiting to be ‘unlocked’ and explored.”
The following paragraph in the report illustrates a certain naivete about this supposedly enormous opportunity by inferring that the growth of sustainable and impact investing could bring billions, if not trillions, of dollars to the table. It also has its own reality check in noting that “official development finance interventions mobilised $36.4 billion from the private sector between 2012 and 2014”.
Need, hope and reality
Need does not immediately translate into opportunity. Hope does not change reality. Rather, it is dangerous.
For example, in its 2017 report Better business, better world, the Business and Sustainable Development Commission asserted – without any real evidence – that the SDGs “open the 60 biggest market ‘hot spots’ worth up to $12 trillion a year in business savings and revenue in the four examined economic systems alone by 2030”.
Seven years away from 2030, there is no evidence the business community is seeing an opportunity of this size.
Another example of wishful (if well-intentioned) thinking is a 2021 report from the OECD. This stated that shifting 1.1 percent of the total financial assets held by banks, institutional investors or asset managers ($4.2 trillion) “would be enough to fill the growing financing for sustainable development gap”.
“These new actors hold financial assets valued at more than $378.9 trillion that have grown at 5.9 percent year-on-year since 2012,” the OECD added.
This, however, is an irrelevant number. Just because the money is there doesn’t mean any of it, no matter how small of a percentage of the total, is easily and readily available for financing the SDGs.
Reality has now set in. In a 2023 report, the OECD notes that due to covid-19, the financing gap has risen by 56 percent to a non-talismanic $3.9 trillion. It notes that, while 80 percent of global finance is held in high-income countries, less than 3 percent of sustainable investments (whatever that means) are made in low-income countries.
“Just because the money is there doesn’t mean any of it, no matter how small of a percentage it is of the total, is easily and readily available for financing the SDGs”
Here is the proposed solution to the problem: “To fix the system, high-income countries need to (1) help break down the barriers that block access to financing in developing countries and (2) align financing at home to improve needs-based allocation and tackle ‘SDG washing’.
“High-income countries should advocate for 1 percent of global financing to go towards investments that achieve highest returns for the SDGs, namely in developing countries.”
This is wishful thinking, not solid analysis. How meaningful are these high-level estimates of needs and gaps and opportunities when measured in trillions of dollars? Even if these numbers were somewhat accurate, they ignore the inconvenient truth that this money needs to be invested in specific opportunities.
This is where the constraints come in. Neither companies or investors can “invest in the SDGs” unless these investments are adequately structured and make economic sense. The OECD’s call for high-income countries to advocate for that 1 percent misrepresents and oversimplifies the complexity and scale of the existing challenge.
Governments can’t just tell private capital how its money should be invested. Rather, governments and private capital should work together to identify existing opportunities, and structure projects and financing in such way that money goes to where it is needed at a return acceptable to private capital.
In a notable example, a group of like-minded governments has been trying to do just that through the Just Energy Transition Partnerships and, more recently, through the Forest and Climate Leaders Partnership, aiming to mobilise public and private funding for energy transition and nature-based solutions for climate challenge.
From the first days of the SDGs, blended finance (a combination of public and private capital) using concessionary capital as needed to achieve the required risk/return profile of underlying projects, has been recognised as having an essential role to play in unlocking otherwise unavailable capital.
The critical role of blended finance is well understood and documented in the UN’s 2018 report.
The problem, as both BlackRock and the OECD have noted, is that there simply isn’t enough “cheap” public capital that could be provided by Development Finance Institutions and multilateral development banks (MDBs), bilateral donors/governments and private foundations to mobilise the needed amount of private capital.
Governments are the largest providers of concessionary capital, and it is not unlimited. So to enable such blended finance facilities they would need to revise how to use what they have. This could mean change in policies and processes driving allocation, distribution and accounting of the Official Development Assistance flows.
This is a hard, but essential task if we are to address the private capital mobilisation conundrum.
A July 2023 report, Strengthening multilateral development banks: The triple agenda, by an independent expert group commissioned by the Indian G20 Presidency, acknowledged the existence of this immense funding gap and of various associated challenges, and put forward a combination of measures aiming to change this status quo.
“Governments are the largest providers of concessionary capital, and it is not unlimited”
One of the proposed measures is a massive capital increase to MDBs, which need to first “transform themselves” in order to help finance the transformation necessary to achieve the SDGs.
Such a capital increase should be conditional on the MDBs first putting in place a comprehensive framework comprising a set of co-ordinated measures including, but not limited to, the blended finance mechanisms enabled by existing and new additional sources of concessionary capital to drastically scale up private capital mobilisation.
If this sequence is not followed and the capital increase is offered first, institutional inertia, power of habit, and the complexity of the challenge will likely put the private capital mobilisation agenda on the backburner.
The unfortunate consequence of this would be to preserve the existing status quo where private capital is seen as a marginal player afterthought within the structure of global financial architecture.
It would also jeopardise the ability to achieve objectives of a few global initiatives, including the flagship G7-led Partnership for Global Infrastructure and Investment, which aims to attract major private investors to better respond to the global demand for high-quality infrastructure financing in low- and middle-income countries across a variety of regions and geographies.
Even assuming that the necessary amount of blended financial capital is made available in such a way as to meet a variety of risk/return profiles ranging across different categories of institutional investors, it is not clear how much of it could be quickly deployed.
Much of the money needed for the SDGs is for infrastructure and one of the key issues holding infrastructure investments back is a lack of investable projects. While this is well understood and much work has been done to address this issue, the problem remains unsolved.
Daniel Zelikow and Fuat Savas of JPMorgan have written about the challenges of infrastructure finance, and highlighted the experience of the Global Infrastructure Facility (GIF) established in 2014 by the G20 and housed by the World Bank, which combines delivery of funding and technical assistance.
Pilot phase of the GIF has shown some promising results, and there is hope, that if scaled and adequately resourced, it could become an important part of the solution.
Lack of institutional capacity
But this gets us to an even deeper underlying problem – the lack of institutional capacity in many developing countries to work with public and private capital and establish fit-for-purpose partnerships to mobilise required funding.
Many of these countries have weak macro-fiscal and legal frameworks and lack the strategic and project planning, engineering and financial structuring skills to attract and retain global private capital.
Even worse, some of these countries are deeply flawed in terms of good country governance as defined by the UN Human Rights Office of the High Commissioner in terms of democratic institutions, public service delivery, rule of law and anti-corruption.
According to Freedom House, only 84 of 195 countries are rated as Free, with 54 as Partly Free and 57 as Not Free. Every single year for the past 17 years there has been more declines than increases in these ratings.
In this context, it is important to acknowledge that private capital is not and should not be seen as a panacea for every possible situation. Expectations and criteria for its mobilisation and deployment should be clearly defined and aligned with the strategies and parameters driving allocation of the ODA, with the two complementing and leveraging each other in the most effective way.
“We need to accept the brutal fact that there are many countries in which it will be virtually impossible to develop investable projects involving private capital”
It’s time to get serious about funding for the SDGs. Let’s stop throwing around meaningless talismanic numbers ($2.5 trillion needed from private capital) and superficial arguments about the seeming ease of getting this money (it’s only X percent of total private capital!).
Instead, we need to build from the ground up by generating a much larger pipeline of investable projects, effectively using available concessionary capital to design financing mechanisms suitable for different categories of projects and investors.
We need to reform the MDBs so that they can become an effective conduit connecting private capital domiciled in developed economies to investment opportunities in emerging markets. We need to implement country-level reforms to strengthen institutional capacity and unlock capital flows.
Finally, we need to accept the brutal fact that there are many countries in which it will be virtually impossible to develop investable projects involving private capital. This will only happen if and when their governance improves. Until then, the limited amount of capital needs to be invested where it can make the most difference for achieving the SDGs.
This will not happen given the current global financial architecture for development funding, which largely dates back to the Second World War. Massive structural changes are needed. This raises the question of which institution or group of institutions will have the desire, proper incentives, capacity and institutional legitimacy to effectively lead this change.
Robert G Eccles is a visiting professor of management practice at Saïd Business School, Oxford University, and the founding chairman of the Sustainability Accounting Standards Board.