PARIS — A number of factors, including the growing interest of private capital in sustainable investing and the Sustainable Development Goals, seem poised to push the development finance industry to change this year, experts tell Devex.
Growing corporate interest in sustainability investing, a mounting demand for transparency and a sense of urgency around achieving the SDGs are all spurring some interesting conversations, and potential changes in development finance.
“The private sector is now leading and the public sector is not getting its act together.”— Haje Schutte, head of the financing for sustainable development division, OECD
Many of the challenges are known, but the solutions are not always available. There is often competition among development finance institutions, where cooperation and openness could better build markets and mobilize capital. A growing number of small funds drawing institutional capital into emerging markets and development-oriented investments need to be scaled. Those were all sentiments expressed by experts gathered at the OECD Private Finance for Sustainable Development conference this week.
While the narrative around development finance finally seems to be moving beyond “billions to trillions,” the need to rapidly scale the amount of finance in development will require changes — aggregated funds that allow investors to deploy large quantities of capital, more data, and greater standardization. The experts laid out a number of issues to watch in the industry this year.
Private sector on the rise
As private sector interest grows in sustainable investing and environmental social governance investing, it is increasingly asking for guidance and standards, but the public sector is falling short.
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“The private sector is now leading and the public sector is not getting its act together,” said Haje Schutte, the head of the financing for sustainable development division at the Organisation for Economic Co-operation and Development. “The private sector is shifting to sustainability and somehow the public space, policymaking, governance is dysfunctional and not setting up frameworks, or setting the right incentives.”
That interest in what investments are achieving beyond just a risk and return presents an opportunity for MDBs and DFIs, but they are not taking advantage of that opportunity and are failing to mobilize that capital as quickly as they could, Chris Clubb, Convergence’s managing director in Europe, told Devex.
Most of the ESG investments and impact investments made today go into developed markets, and multilateral development banks and DFIs should be arranging and originating deals that can appeal to those investors and draw them into emerging markets, he said.
But the problem doesn’t lay with the management of those institutions, Clubb said, noting that OECD Development Assistance Committee members own the majority of DFIs and they should “come together to say ‘you need to be mobilizers.’”
The mandates of the institutions, and the internal incentives structures need to be changed in order to incentivize mobilization, he said. That sentiment was echoed by several other experts Devex spoke with.
There seems to be a growing demand — from civil society and private finance — for more transparency about development finance: how DFIs invest their money and what results they achieve.
Data and information are the foundation for decision-making and while there is robust data on official development assistance, there is little public data about development finance. That data can help build the public trust, allowing better decision-making and potential for private finance to come into new markets, OECD’s Schutte said.
While donors and DFIs talk about mobilizing capital and building markets, their unwillingness to release data has the opposite effect, one asset manager told Devex. If they would make that data available, then more asset managers could prove a business case to their investors — including the much sought after institutional investors — for investing in emerging markets, which would help speed and scale transactions, the asset manager said.
“They talk about mobilization but they don’t walk the talk,” the asset manager said. “The incentives haven’t changed at the deal structure level.”
With the growing push for transparency, more DFIs are coming to the table and willing to collaborate with a new Publish What You Fund’s DFI Transparency Initiative, said Gary Forster, CEO at Publish What You Fund.
“DFIs are definitely aware of the need, and on board with the process of getting into the detail of transparency as it pertains to their public and private investments,” he said.
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“That need is evident both from government stakeholders here who are struggling to maintain oversight of their own investments in concessionality and the impact, it's clear in the private investors who are saying: ‘Look we can reduce the cost of doing business, we can bring more capital we can better calculate risk if we had more information about what the multilaterals and bilaterals are doing.’”
But getting more transparency is not necessarily easy for DFIs, which often say that the private sector requires that they sign agreements agreeing not to release data, Schutte said.
Alignment and harmonization
Most capital invested today is not aligned with the SDGs, so the development finance community should focus on getting resources to the areas that will spur progress and create impact — a process that will likely require some harmonization of definitions and metrics, development finance experts said.
While the latest OECD data indicates that there was more private capital mobilized in 2018 than in 2017 – $11 billion more – the way those resources were allocated was not necessarily aligned with SDG objectives, said Jorge Moreira da Silva, director of the OECD Development Cooperation Directorate. Only 5.5% of that capital went to least developed countries and less than 6% went to social sectors, he said.
“While we see volumes growing, inconsistencies are emerging, and it is important to get that right,” da Silva said.
So what emerges is a reality where the problem isn’t a lack of resources, but a need for work on policies and the creation of an enabling environment so funding can be aligned with the SDGs, he said.
That alignment is also going to require the harmonization of definitions of impact or sustainability, and greater agreement on how to measure those factors in an investment context, Sonja Gibbs, managing director of global policy initiatives at the Institute of International Finance, told Devex.
Once you have that common framework, then the information can be used by regulators, pension funds, asset managers, and others who can use it to quantify and manage risk, she said.
“If you’re a trillion-dollar asset manager and your clients want you to invest responsibly, how do you do it if you don’t have confidence in how investments are reporting ESG,” Gibbs said.
The Global Impact Investing Network has seen this growing demand for impact measurement and management from mainstream financial institutions, said Amit Bouri, The Global Impact Investing Network’s CEO. GIIN is working with DFIs to agree on common metrics and aims, in partnership with the Impact Management Project, to help meet this demand for simpler, more uniform ways of measuring impact, he said.
Aligning the growing private sector interest with the SDGs will also require more intermediaries to connect projects to potential investment capital, a former International Finance Corporation executive told Devex.
“There is a danger that people’s hopes from both sides, both the capital side and the development side will be dashed because despite the intent being much clearer than it used to be, the mechanisms to transmit capital into impactful investments in the developing world are lacking,” he said.
The traditional intermediaries have been bilateral and multilateral aid agencies, but none of them are filling the gap, in part because teams lack the right skills and because they are often focused on other issues or geographies where the use of private capital might not be the solution, the executive said.
“There should be room for a strategy to also include maximization of private finance in countries that are not fragile, both low income and middle income, and that hasn’t been made a priority,” he said. “There’s quite a lot of talk about it but it hasn’t been made a strategic priority by traditional development institutions.”
Editor’s note: OECD facilitated Devex's travel for this reporting. However, Devex maintains full editorial control of the content.