Impact investment to close the SDG funding gap
A look at the current state of development funding shows a stark contrast between the price tag to eliminate poverty and protect the planet by 2030, and the actual financial resources that are available.
The United Nations Conference on Trade and Development (UNCTAD) says achieving the Sustainable Development Goals (SDGs) will take between US$5 to $7 trillion, with an investment gap in developing countries of about $2.5 trillion. At the same time, the most recent OECD DAC report shows that in 2016 the total official development assistance reached a peak of $142.6 billion, which is one order of magnitude smaller than the needs.
Who is going to cover these gaps and how? The days of “funding” (out of a moral imperative) are over; instead, “financing” is seeing good investments for your money, while contributing to positive development.
Under the new Development Agenda, it is the actual governments that hold a significant share of the resources needed to achieve the SDGs. The World Bank estimated that between 50 and 80 percent of what’s required will come from domestic resources.
Private funding and private capital hold another great potential for growth – it is estimated that only about 10 percent of the current infrastructure investments come from the private sector. A recent report by the Business & Sustainable Development Commission estimates that achieving the SDGs could open up $12 trillion of market opportunities in food and agriculture, cities, energy and materials, and health and well-being alone and create 380 million new jobs by 2030.
So we know the SDGs make business sense. The question is: how do we combine social good with profit?
At UNDP, we can mobilize our wide range of partners, deep understanding of country contexts, technical expertise, and impartiality to help governments design interesting funding options to achieve their priorities and broker clever partnerships, such as with the private sector.
Take social impact investment. It frames a social or economic problem as a matter of financial efficiency, putting a price tag on development challenges such as unemployment or public administration efficiency. The financial gains that would result from addressing the problem are presented as an investment opportunity for the private sector, guaranteed and repaid with a premium by the government with potential support from donors. Such approaches have been piloted in several high income countries, and we believe they have potential in middle income countries.
While impact investment is gaining more and more popularity in OECD/DAC countries, investors are more cautious about putting their money in riskier developing markets. In these settings, Official Development Assistance (ODA) can provide seed money to protect, encourage or “de-risk” investment.
UNDP brings to the table the methodology to monetize both problems and potential solutions, measure impact, and ensure quality for strong programmes, while playing a strong convening role. We can design a package of projects that tackles social problems in a way that makes business sense to investors.
For example, UNDP in Serbia is working on the country’s first ever social impact bond, addressing youth unemployment, which costs the country over $1.6 billion per year - the estimated costs of various unemployment-related social benefits and lost income taxes, wages, and productivity.
The funding situation here in Europe and Central Asia, a region of middle-income countries with less traditional donor funding, lends itself very well to more sophisticated, alternative financing models, such as social impact bonds.
There are always risks with any new approaches. But given the unprecedented ambitions and opportunities presented by the SDGs, we strongly believe that piloting, adjusting, and reiterating these new types of partnerships is the way forward and that we at the UNDP have an important role to play in brokering development partnerships.