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Special Edition Magazine, Fall 2019: Sustainability

How to Afford the SDGs

The track record of two large multilateral institutions shows that investments aimed at achieving the Sustainable Development Goals can bring major benefits to society as well as adequate risk-adjusted returns to investors. And the success of this model suggests how to increase private SDG-linked investment.

PARIS – In September 2015, world leaders committed to achieving 17 Sustainable Development Goals by 2030. Back then, the United Nations Conference on Trade and Development (UNCTAD) estimated that attaining the SDGs would require about $2.5 trillion per year of additional investment in developing countries alone. A recent International Monetary Fund study produced a similar estimate of the extra annual spending needed between now and 2030: some $500 billion in low-income countries and $2.1 trillion in emerging-market economies.

Is this a lot or a little? Can the world really afford to deliver on its commitment to meet the SDGs?

If developing economies have to find all this money themselves, these amounts are very large – especially for low-income countries, where the investment gaps are equivalent to about 15% of GDP on average. Even for emerging-market economies, where the gaps represent about 4% of GDP, this is a substantial sum.

Development aid from rich countries will not fill much of the gap. According to the OECD, total official development assistance (ODA) is about $150 billion per year – an order of magnitude smaller than the estimated SDG investment gap. Even if all advanced economies fulfilled their obligation to direct 0.7% of their Gross National Income toward ODA (currently, only five of them do), this would yield only $360 billion per year.

This does not mean that the world is doomed to miss the SDG targets; but it does need to find other sources of investment. The obvious place to look is the private sector. According to UNCTAD’s latest World Investment Report, capital flows to developing and transition countries dwarf ODA. In 2018, foreign direct investment in these economies totaled about $800 billion, portfolio and other investments a further $700 billion, and remittances $530 billion.

But probably only a small proportion of these flows is directed toward achieving the SDGs. Despite much excitement about the growth of impact investment, it has yet to achieve meaningful scale. The Global Impact Investment Network estimates that impact investors currently manage only about $500 billion in assets, or just 0.6% of the global total. These numbers are especially disappointing given the low interest rates in many rich countries and the expected rapid future growth in pension assets as populations continue to age.

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It is possible, of course, that impact investing – and, more generally, investment aimed at achieving the SDGs – brings major benefits to society but does not provide adequate risk-adjusted returns to investors. But the track record of two large institutions suggests otherwise. Both the International Finance Corporation (IFC, a member of the World Bank Group) and the European Bank for Reconstruction and Development (EBRD, a standalone multilateral development bank) co-invest with the private sector on market terms, pursue development and transition impact, and still turn a substantial profit. The IFC and EBRD combined invest about $30 billion per year of their own and mobilized capital, so they clearly cannot bridge the SDG investment gap by themselves. But they do prove the feasibility – in fact, the undoubted success – of their investment strategy.

At the same time, however, the IFC and EBRD differ from private-sector investors in three key respects, highlighting the main challenges facing private SDG-linked investment. First, the two institutions have the skills and global experience to design projects that promote sustainable development while also being profitable. Second, their scale and reputation help to persuade recipient countries to remove barriers to profitable investment in sustainable development, such as phasing out energy subsidies and removing obstacles to gender-equal access to labor markets. Finally, the IFC and EBRD enjoy “privileged creditor” status, and thus face much lower expropriation risks than private investors.

Interestingly, these considerations resonate strongly with the main themes emphasized in the recent G20 Eminent Persons Group report on “Making the Global Financial System Work for All.” In it, the Group calls for global development to be refocused on helping countries “strengthen governance capacity and human capital, as the foundation for an attractive investment climate, job creation, and social stability.”

Better governance will give private-sector investors the same level of property-rights protection as the IFC or EBRD, while stronger human capital will enable recipient countries to prepare projects themselves, without relying on multilateral investors or their consultants. And countries with good governance and the right skills will be both willing and able to implement a pro-development reform agenda.

Improving governance and human capital is difficult and takes time. But progress in both areas is essential to unlocking the private investment the world needs to achieve the SDGs.;