Small and Medium Enterprises (SMEs) are key to achieving the Sustainable Development Goals (SDGs) in developing countries. Investing in their ability to contribute to the SDGs is key to our future. The Pipeline Builder, a financial intermediary designed and managed by Ground_Up Project and SDG Lab at UN Geneva, combines expertise in development, finance and public policy with fresh approaches to drive greater private-sector participation in the SDGs in emerging markets. Brindusa Burrows, founder and CEO of Ground_Up, explains how and why it works.
What was the motivation for the Pipeline Builder?
Despite growing signals that we are on the brink of a global social, environmental, and economic crisis, most private investments still consider the SDG dimension as a “nice to have”. In emerging markets, where the SDGs are critically needed, SMEs must have access to better financial resources to succeed. The Pipeline Builder project seeks to speed up the flow of capital to these markets with an approach that we believe is more fit for purpose. Our approach rests on empowering asset managers in emerging markets who invest in sectors that are critical to the SDGs in each country, to accelerate what they are already doing and to access new capital for the SMEs they support.
Investors speak of the need for SDG investment pipelines. It isn’t that there aren’t opportunities in emerging markets, but under current risk-return expectations they may not be a good fit. For example, they might be in markets that are considered unstable, or perhaps unattractive because they are too small or unproven from an SDG point of view or the investing incentives may be skewed. The Pipeline Builder seeks to match SDG investment opportunities with potential private sector investors, many of whom have little experience of emerging markets.
Where is the need for the Pipeline Builder at the country level?
We simply cannot afford to not invest in the SDGs in emerging markets. In the short run, it is a matter of competition for returns and backing those small and medium-sized companies that already do good business by doing good for people and the planet. In the long run, addressing the SDGs, where they are sorely needed, will bring stability and create the thriving sustainable world that we want to live in.
We focus on micro, small and medium-sized enterprises. Attracting investment is hardest for this segment, but we believe it’s where most of the innovation and opportunities to address the SDGs in emerging markets can be found. Domestic private investors and asset managers are an important part of our mission. With their deep knowledge of the local market, they bring a wealth of experience and different perspectives on risk. They can also mobilize domestic capital, which is crucial to attracting international capital into the SDGs.
What sets the Pipeline Builder apart from similar intermediaries?
Sourcing SDG investment pipelines at the country level begins with addressing the risk perception. This requires engagement and a concerted effort between local private finance organizations, the government, and the UN development system, among others. The Pipeline Builder approach in each country has been since the beginning to tap into trusted and transparent relations within these three spheres. Recently, we have also opened a professional platform where deals can be listed privately by domestic entrepreneurs and asset managers, and they are evaluated and made available to corresponding investors, by invitation only.
What is different about the Pipeline Builder is that we set it up to be an intermediary that combines expertise in the SDGs with private investment professional expertise. Our goal is to get to know and understand domestic financing institutions, providing an outlet for domestic asset managers to present their existing investments and co-investments to international investors. We get guidance from governments and the UN to match these pipelines with the most pressing SDG needs, as identified by the countries themselves.
We have been piloting this approach in Ghana for the past 18 months. We identified a pipeline of opportunities from domestic investors of approximately USD 39 million in direct opportunities, and we are currently working with Ghanaian financial institutions to design a USD 250 million national ‘Fund of Funds’ to aggregate the local SDG SME investment opportunities through a larger vehicle that can attract domestic and international capital towards existing domestic funds.
What is the role of the SDG Lab at UN Geneva?
SDG Lab has been an essential partner from the start. Three years ago, the Lab hosted a series of roundtables in Geneva where public and private finance representatives unanimously said investment pipelines were a critical issue. We created the Pipeline Builder together to respond to this demand. The SDG Lab has incubated the project with financing from the Swiss Agency for Development Cooperation.
The SDGs are an agenda for governments, the UN, and the private sector to work together, and the SDG Lab created the space for the Pipeline Builder to emerge as a public-private partnership. The SDG Lab team has made critical connections with UN Resident Coordinators who coordinate UN support to countries in implementing the 2030 Agenda. The Lab also helped leverage its broader network to facilitate introductions with government officials at the highest levels, looking to understand country needs and where the Pipeline Builder expertise might be able to help. Lastly, the Lab helped amplify the need for a Pipeline Builder at different international for a, from the Building Bridges sustainable finance conference to UN high-level meetings.
Why is private finance important for the SDGs?
Achieving the SDGs requires a change in how we think about investing capital into emerging economies and how we work with emerging economies partners. Today, most funding for climate action and other pressing environmental and social needs still comes from the public sector. Growth in private-sector funding for the SDGs has occurred mainly through impact investing, which targets local solutions and innovations.
According to the best available estimates, the current level of private financing – impact investment, bonds, and all other existing instruments is well short of SDG estimated needs post-pandemic, which have been revised upward to USD 4.3 trillion a year. To put this into perspective, the size of global equity capital markets was USD 124.4 trillion in 2021. It is not desirable, not equitable, and not sustainable in the long term to continue to grow capital markets without fully integrating the SDG imperatives. You can see the urgency in accelerating private financing flows towards the SDGs.
What’s next for the Pipeline Builder?
We are examining the Ghana pilot together with our partners and our Advisory Board to draw lessons for next steps, while we continue to support Ghanaian parties engaged in both the existing deal platform and the Fund of Funds design. The Pipeline Builder can operate only based on demand from emerging markets, from the ground up if you’ll allow me the expression. There are several discussions ongoing in several sub-Saharan African countries that are ready and eager to attract international investment into priority SDGs. We can also assist private financing institutions looking to engage with the SDGs in emerging markets via larger-scale aggregated portfolios.
Why is the Building Bridges sustainable finance conference an important initiative?
The Building Bridges initiative is a helpful venue to present the innovative SDG investment pipeline building approach. The ethos of the conference of bridging across sectors and value chains enables us to bring our concrete work in the emerging markets closer to a broader group of Swiss-based and international investors.
At this year’s Building Bridges Week, coming up in early October, we will be hosting a workshop where we will help to demystify risk and present our pilot approach to identifying SDG-aligned SME investment opportunities in Ghana. Additional partners in the workshop are the Swiss Embassy in Nairobi and the Network of Financial Centers for Sustainability. We are offering the stage to entrepreneurs, asset managers, investment promotion representatives, UN resident coordinators and agencies from several African markets to engage in a frank and direct conversation with the Swiss finance community so that we can collectively raise our perception of the SDG opportunities that need to take off without delay.