Many developing countries are missing out on the surge in sustainable investing. Besides holding back collective progress on the SDGs, this is compounding the challenge by increasing global inequality. Sharing insight from his 32-year career at the United Nations, former Assistant Secretary-General John Hendra discusses some of the barriers to mobilizing capital for the places that need it most and explains how initiatives like the Pipeline Builder can help overcome them.
To discover more avenues to help advance sustainable finance visit the website of the upcoming Building Bridges Week.
Developing countries faced significant challenges to securing finance for the SDGs before the pandemic. Now higher borrowing costs, slower growth and rising prices are making it even tougher. How can they carry out costly sustainable development agendas in this context?
It is indeed much tougher for developing countries, especially low-income ones. The unprecedented impact of the Covid-19 pandemic has depleted fiscal space in many countries. This has been exacerbated by surging inflationary pressures and the knock-on effects of the war in Ukraine, which has set off additional food, fertilizer, finance and energy shocks. To be able to carry out national sustainable development agendas, developing countries need to do what they can to create fiscal space through improved revenue mobilization, spending efficiency and debt management. If developing countries can improve policy and, importantly, develop sound investment project pipelines, and if advanced economies can provide greater political and financial support, it should be possible to again move the SDGs forward. That said, greater multilateral cooperation is much needed now on debt service relief, debt restructuring and enhanced financial resilience as sustainable development will be difficult without more sustainable public debt.
The 2030 Agenda calls on governments, civil society, the private sector and the UN system and other actors to work together to achieve the SDGs. This is also the ambition and concept behind SDG Lab and Building Bridges but such efforts remain the exception in finance. What can be done to foster more collaboration in financing the transition to sustainability?
Since 2015, the global movement for sustainable development has galvanized convergence on the kind of change that is needed to reach the SDGs – from civil society organizations and government to business, the global financial sector and international financial institutions. The universally agreed SDG framework of goals, targets and indicators has also been a welcome cross-cutting enabler in breaking down traditional silos separating the public and private sectors.
But against the headwinds of today’s crises, much greater action, and collaboration, is needed to unlock transformative change at country-level – to bring together the necessary capacity, expertise and financing needed to drive progress at scale through end-to-end investment opportunities and solutions tailored to national needs and priorities. Such an approach should see climate action less as a response to a global agreement and more as a driver of national development efforts to secure greater sustainability, resilience and equity. It would place greater focus on supporting national roadmaps to bring about key transitions – such as in food systems, energy and connectivity in a more integrated fashion despite today’s pressures. To do so, it’s critical to better understand the needs of governments and partners – as well as to be able to better match demand and supply when it comes to private capital for impactful investments that go beyond short-term political cycles and small pilot projects.
The Pipeline Builder strives to connect investors with SDG-aligned opportunities in developing countries through a network of financial intermediaries. What makes this project a compelling proposition and why is it needed?
The Pipeline Builder (PB) is quite compelling as it helps fill the critical need I mentioned for intermediation and matchmaking by serving as a bridge between a country’s SDG plan and impact investors. Guided by a country’s SDG roadmap, the PB leverages existing local and international networks - including governments, accelerators, trade associations, universities, the UN, impact entrepreneurial networks – to originate and screen a range of SMEs working in priority SDG sectors. With this knowledge and leveraging of local impact, a specific investment is presented to relevant investors in a given country. Through intermediation, the PB can act as a buyside or sell side advisor to companies or investors. In short, the PB’s approach is to systematize the sourcing of SDG-focused investment opportunities – and linking them to a country’s SDG plan, as it has successfully done in Ghana. Such an approach ensures more scalable deal-sourcing that matches a country’s SDG priorities and lowers the opportunity costs and risks for investors. In my view, the PB really fills a niche. The SDG Lab and its partners’ development of the Pipeline Builder was perceptive, accurate and timely; we urgently need many more PB initiatives around the world now.
Traditional assumptions about how to deliver development have changed considerably during your career at the United Nations. How do you see the future of sustainable development? What is needed to change the narrative from one of development assistance to investment opportunity?
Here, two things. First, I think establishing enabling environments for SDG financing are critical; if countries don’t know how to best plan and budget for the SDGs, it will be difficult to achieve them. Fortunately, through Integrated National Financing Frameworks (INFFs), the UN is helping countries define how they will finance and implement their sustainable development strategies, based on SDG roadmaps along with commitments like Nationally Determined Contributions on climate action, relying on the full range of public and private financing sources. These INFFs include diagnostics to identify sources of financing, a strategy to ensure that financing is being effectively used, ongoing governance and monitoring work streams to make sure the financing strategy is being followed and that it is reviewed and revised periodically to reflect changing realities.
Currently, through the UN’s Joint SDG Fund, a global pooled fund that catalyzes systemic transitions in integrated policy and in financing at country level to accelerate the SDGs (and which I serve as a Senior Advisor to), the UN is supporting INFF work in 80 countries. These programmes often identify gaps that cannot be filled with public money, turning then to critical partnerships with the private sector.
And this leads to my second point – the importance of blended finance to the new narrative of investment opportunity. Blended finance is used when there are projects that have commercial potential, but are not in a place where they are viable enough, in terms of size, rate of return, or other factors, to be supported by the private sector alone. In these cases, strategic use of public, concessional finance is blended with the private sector to derisk the investment opportunities and bring in additional financing to eventually make progress toward the SDGs through these investments. The Joint SDG Fund’s INFF programmes are also supporting this work – through analyses and diagnostics these programmes are helping countries identify how they can blend finance and who they can partner with to close their SDG financing gaps. In today’s new narrative, public finance, including development assistance, has acritical role to play in helping leverage and catalyze private finance needed to help secure sustainable development.
While more and more finance is focused on sustainability, the flows are still not enough to achieve the SDGs by the 2030 deadline. How can sustainable investing make a bigger impact?
While tapping into much greater volumes of capital will be fundamental to financing national SDG needs, it is not, however, straightforward, nor an easy feat given the risk involved. This is where blended finance comes in. Derisking on the front end – that is, taking on a share of the risk and remaining engaged for the duration – allows more investment to be attracted and enables a greater number of investors to participate. Moreover, a relatively modest investment – in collaboration with development banks, other partners and increasingly the UN – can attract many times its initial value from private sector financing. With pro bono advisory support from investors, philanthropists, banks, DFIs and foundations, and in just two years, the Joint SDG Fund has helped catalyze US$1.7 billion in additional resources for the SDGs. While but a small fraction of what’s needed, it is a good example of bringing innovative financial instruments and policy changes to communities most left behind, where financial markets are not yet fully developed and which require additional technical support and risk assurance for local and global players to invest in. In short, if sustainable investing is to have greater impact, we need sound investment project pipelines and financing solutions, supported by dynamic financial intermediation and clear diagnostics and budgeting frameworks.
We know the world’s biggest problems can’t be solved without international cooperation. How can we make multilateralism more inclusive and engaging to deliver a sustainable future? What are the most urgent measures?
This is a very big question! Let me offer three quick responses.
First, as indicated earlier, current levels of sovereign debt are of real concern and there is a pressing need both for debt relief to highly indebted developing countries and more long-term measures to guarantee debt sustainability.
Second, it is critical to make the key multilateral organizations we have now work as effectively as possible. One lesson of the pandemic is the absolute indispensability of the World Health Organization (WHO). Yet, it has been starved of core funding these past several years so that it’s now seriously overdependent on voluntary earmarked funding – despite its critical normative role. This is why the historic decision taken by the World Health Assembly in May 2022 to increase WHO’s regular (assessed) budget from 16 percent of its resource base today to50 percent by 2030 is such a critical step forward. It would be important to see the same thing happen with other key UN normative functions such as human rights and gender equality.
Third, these are incredibly polarized times when critical multilateral institutions, such as the UN Security Council, are completely paralyzed. Hence, in this environment I think it’s important that multilateralism is “inclusive” of practical agreements that can help deliver a sustainable future. For example, while it would have been great if all countries could have signed the Global Methane Pledge at COP26,the fact that 100 countries did will enable methane emissions to be cut by 30percent by 2030.
The two years ahead will be critical for a more inclusive multilateralism. Of particular importance will be next year’s SDG Summit, and then the Summit of the Future in 2024, both of which, in the words of the UN Secretary-General, share the objective of creating “conditions for a sustainable, equitable and inclusive future.”