The West African Republic of Ghana has an ambitious sustainable development agenda. It includes programmes to eliminate poverty and hunger, expand high school education and health care, and provide clean water and decent housing for everyone. But achieving these SDGs may be wishful thinking if the government cannot persuade foreign investors to help finance the plan.
Ghana is eager to tap into the growing demand for investment strategies that generate social and environmental benefits alongside financial returns. Sustainable investing is one of the hottest trends in finance, but very little of the money is making it to the countries that need it the most. While unlocking capital for emerging and developing economies is crucial to achieving the Sustainable Development Goals, many barriers are hampering these financial flows.
Prominent on the list is an exaggerated perception of risk, said Xavier Pierluca, managing partner at Enabling Qapital, a Swiss investment firm focused on emerging markets.
"Generally speaking, there’s a perception of risk that is much higher than the risk itself,’’ he said. “It is actually in many cases less risky to invest in an SME (small to mid-sized enterprise) in Ghana with a local shareholder than investing in a bond or a listed equity stock on your stock market here (in Switzerland).”
Pierluca was part of a panel discussion, organized by the SDG Lab during the 2021 edition of Building Bridges Week in Geneva, on how to drive more capital to emerging markets. Much of the conversation revolved around Ghana as it is the focus of a pilot of the Pipeline Builder, an initiative to connect investors with opportunities in emerging markets and developing countries.
Building SDG pipelines
Launched in late 2019, the Pipeline Builder is a partnership between the SDG Lab and the Ground Up Project, a Swiss-based impact finance advisor. The aim of Pipeline Builder is twofold: One, to provide investors with a roadmap for turning country-level SDG priorities into investable opportunities that align countries’ specific development goals; two, to provide investors with real SDG-aligned investment opportunities more efficiently. Using a network of emerging market-based intermediaries, the Pipeline Builder can access opportunities on a global scale, which allows investors to build diversified portfolios of direct and fund investments in emerging markets at a lower cost and with potentially less risk.
Panel participants said investors often stop listening and their eyes glaze over when the talk turns to low-income countries. One reason for that attitude is performance pressure, which can make asset managers reluctant to tie up money in regions where investments tend to be illiquid and unlikely to generate short-term returns. But sustainable finance also lacks leadership, Pierluca said, with investors tending to follow the pack rather than taking risks in uncharted territory.
“We need to play on that herd mentality,” said Agi Veres, the UN Development Programme (UNDP)’s deputy director for Europe and Central Asia. “We need to get a first set of investors that will bridge that barrier.”
Panelists stressed the need to educate investors about market conditions in developing countries. UNDP is working to transform national SDG priorities into investor roadmaps. In April 2021, the organization introduced a platform that gives investors access to the market analysis underpinning the roadmaps. Ground Up leveraged the tool to identify US $55 million worth of small business investments in Ghana in the six months to September 2021.
Ghana: Ripe for SDG investment
As a destination for investors, Ghana ticks several boxes. It has a stable democracy, a pro-business stance, a fast-growing economy and a stated desire to prioritize attracting investment over development assistance. However, its fiscal position has worsened during the COVID-19 pandemic, with a sharp increase in public sector debt as global demand fell for oil and cocoa, two top exports.
The government is offering hefty incentives to investors committed to the sustainable development of the local economy, said Yofi Grant, chief executive of the Ghana Investment Promotion Centre. Many developing countries “feel that they are denied revenue capital because they have to give all these big incentives to investors,” he said. The two sides need to be aligned, “both the indigenous economy, the local economy, and the foreign direct investor.”
Ghana was one of the first countries to integrate the SDGs into its budget process. It needs US $522 billion to achieve the goals over the next 10 years, President Nana Akufo-Addo said in a video message to Building Bridges delegates.* After factoring in domestic revenue and development aid, that leaves a US $431 billion gap.
“Clearly this requires a much more private sector-focused approach, moving away from a [public] funding model more to a financing model,’’ said Charles Abani, the UN’s Resident Coordinator in Ghana, who joined the panel remotely from the capital Accra.
Many countries are in similar straits. Even before the pandemic upended the global economy, developing economies were facing an estimated shortfall of US $2.5 trillion in financing to keep them on track to achieve the 2030 Agenda. Reallocating a sliver of the total assets held by banks, institutional investors, or asset managers would be sufficient to fill the gap.
As simple as that sounds, structural issues can make it a tall order. Developing countries often lack institutions that can channel capital to profitable small and mid-sized businesses. The backbone of economic activity in Ghana as in many countries, SMEs play a crucial role in furthering growth and innovation. But they struggle to obtain affordable capital to grow because of factors including inadequate financial markets.
“There’s a need for financial intermediaries, people who will actually manage the aggregated capital and ensure that it goes into real businesses that are on a daily basis working towards achieving the SDGs,” said Jerry Parkes, chief executive of Injaro Investments, a fund manager working with small farmers in West Africa.
Given the many constraints, it is unrealistic to expect investors will dive into developing countries in the absence of initiatives like the Pipeline Builder that work closely with governments, Pierluca said. He predicted that investment products combining public and private finance, known as blended finance, would dominate for the next 10 to 15 years.
“If we rely only on mainstream finance,’’ he said, “it’s going to be a long way before we can achieve the SDGs.’’