Opinion: Aligning public and private finance with the SDGs — a three-step approach

Back in 2015, the international community committed to achieving the Sustainable Development Goals by 2030. But with this ambitious agenda came the realization that meeting the SDGs within this time frame would require filling an estimated annual financing gap of $2.5 trillion in developing countries alone. The Addis Ababa Action Agenda subsequently called upon a broader mobilization of resources, including private ones.

Five years on, progress remains slow and uneven.

Three critical questions emerge from this context: How can we drive more resources toward the goals? How can we make sure they are going where they are needed most? And are they being used in the most effective way?

To guide the answers to those questions, we propose a three-step approach: mobilization, alignment, and impact.

Mobilizing additional financial resources for sustainable development requires mechanisms to decrease investment risks and encourage commercial finance providers, typically through various forms of blended finance.

The Blended Finance Principles provide best practices to push private capital into SDG-aligned projects, programs, and markets.

Blended finance instruments — most commonly guarantees and direct investment — have proven increasingly effective, mobilizing $205.2 billion in private capital for development from 2012-18. Although the amount has been growing over time, with almost $50 billion in 2018, the mobilized private finance is not enough to bridge the SDG financing gap. To fill this gap, mobilization must increase by a factor of 12 over the next decade, and governments will not be able to fund this through taxation or issuing debt alone.

The real challenge is to align the trillions invested daily in capital markets with the SDGs. This includes resources from institutional investors, banks, and retail investors, as well as remittances, foreign direct investment, and private philanthropy. The Organisation for Economic Co-operation and Development’s forthcoming “Global Outlook” for 2021 will assess how this finance is being aligned — or not — with the SDGs and will identify the costs of misalignment as well as the potential areas for improving alignment in support of the 2030 Agenda.

However, in both the public and private sectors, many financial flows are misaligned — and even incompatible — with the SDGs.

In the private sector, despite claims of focusing on social and environmental impacts, few investors are transparent when it comes to monitoring and tracking their contributions. Many funds claim to be investing in the SDGs but do not release their data and methodology, possibly due to commercial confidentiality. This reduces scrutiny as well as transparency, with potentially damaging effects to the sustainable development agenda.

But misalignment is not restricted to the private sector. Although official development finance is typically the first to venture into uncharted territory, there are inconsistencies in the system.

For example, ODF continues to finance fossil fuel-based energy supply and generation, at an average volume of $3.9 billion annually for the 2016-17 period. Considering the critical objectives of both the Paris Agreement on climate change and the 2030 Agenda, investment in fossil fuel activities is an ineffective use of development finance, locking countries into outdated energy systems and industries. Sustainable alternatives to fossil fuels are now widely available and affordable, and development finance should not be employed for activities that undermine sustainable development.

Equally challenging is measuring and managing impact. The Global Sustainable Investment Alliance reports that there are over $30.7 trillion in assets under management currently targeting sustainable development.

If these numbers are accurate, why is the SDG gap so big?

One issue is that we are not currently able to consistently track whether these financial flows are actually directed to the SDGs. Nor are we able to measure the impact of private finance on sustainable development. This is especially the case in low-income countries, as data collection and analysis require considerable resources.

With growing risks of “SDG washing” — when businesses and investors point out the ways in which they align with the SDGs without disclosing how they make a meaningful contribution to the achievement of the goals — public and private actors need to agree on common frameworks and standards to define sustainable investment as well as to manage and measure its impact.

To build consensus on standards for managing and measuring positive and negative impacts, OECD is part of the Impact Management Project’s Structured Network with the U.N. Development Programme, the Sustainability Accounting Standards Board, the Global Reporting Initiative, the International Finance Corporation, the Global Impact Investing Network, and other stakeholders.

The framework will help measure impact performance and integrate impact into investment decision-making by using the financial accounting conceptual framework as a basis.

The greatest potential we have of achieving the SDGs is by aligning public and private resources with them. All actors that finance sustainable development must agree on a common framework around alignment and redefine business as usual in the context of sustainable development.

Focusing on scaling solutions to these challenges and looking at what aligning finance with the SDGs really means, the OECD’s 2020 Private Finance for Sustainable Development Conference took place on Jan. 29. A recording is available here.

Editor’s Note: This story was updated to clarify the relationship between OECD and the Impact Management Project’s Structured Network.