Sustainable development funding is broken. Here's how to fix it

The 2030 Agenda for Sustainable Development and the Sustainable Development Goals (SDGs) represent an urgent call for action to end poverty and reduce inequality, while protecting our planet, tackling climate change and spurring economic growth. Yet the OECD has recently published a study revealing that the world is very far from achieving these aims. Today, one in seven people in the OECD area still live in poverty.

At the heart of the problem is a $2.5 trillion annual funding gap, a significant lack of investments dedicated to sustainability, linked to a low level of private sector participation. Aid flows and other sources of public capital will not suffice to close the SDG funding gap.

The barriers hindering private-sector participation have been the main topic of debate among development finance experts ever since the adoption of the Billions to Trillions vision in 2015, implying a change of mindset from “billions” in official development assistance (ODA) to “trillions” in investments of all kinds: public, private, national, global.

However, four years later, we note that "billions to trillions" is broken: latest figures even signal a decline in SDG investments. The UN Department of Economic and Social Affairs just flagged that ODA in 2018 went down by 2.7% in real terms from 2017; humanitarian aid fell by 8%. Foreign direct investment (FDI), the largest contributor to developing countries, has dropped 40% since the launch of the Billions to Trillions agenda. The investments are nowhere needed to attain the SDGs, and the gap is growing bigger.

Countries that need the greatest amount of development finance are often those that have domestic financial resource constraints and underdeveloped markets. The Agenda 2030 affirmed they would “not be left behind”, yet recent data shows precisely those countries are experiencing the widest SDG financing shortfall.

The Devex article “Doubt on World Bank ‘billions to trillions’ agenda” refers to findings that private finance is not being catalysed in Low-Income Countries (LICs). Earlier this year, the OECD called for “time to rethink”, underlining how the lack of sustainability investments is nowhere more evident than in LICs, while also showing that finance for early stage firms and infrastructure projects remains scarce at best.

These trends call into question the credibility of the entire development finance community.

Yes, efforts have been made in the past years – practices like blended finance have been adopted, combining public to private finance to unlock and mobilise more capital, while increasing domestic resource mobilization. In principle, public donors welcomed this as a way to make aid budgets go further, and the private sector – reluctant to invest in risky projects in developing countries – could benefit from new opportunities. Nevertheless, the results fall short of the promises made.

The Global Future Council on Development Finance, a group of 23 development finance experts convened by the World Economic Forum, now suggests a new approach to address the widening SDG financing gap: “From Funding to Financing”.

The council’s main recommendation is a pivot in the way countries approach funding sustainable development. Governments should move away from a “funding” approach, relying mainly on ODA and public flows, to a “financing” paradigm for development, allowing a holistic consideration and mobilization of all public, private, domestic and international financing sources.

So far, development financing followed merely a project-by-project methodology, directing funds to specific projects through risk-mitigation systems that combined public and private capital – a closed system, where all actors focused their attention on “good” projects and moved to the next ones.

This transactional system has proven unfit to achieve the SDGs. A much broader view must be embraced: a focus on holistic financing plans, where countries play a key role in catalysing change.

In fact, barriers that must be addressed to unblock capital for sustainable development are not just financial. They are mainly systemic and behavioural, and the actors best suited to overcome them are countries and their national-level institutions:

• Systemic. Related to the regulatory framework: through improved regulations and policies, countries can create enabling environments that successfully mobilise private capital towards sustainable development. The rule of law and functioning market systems create the right conditions for capital to naturally flow. Governments shall not look for private investors for each project, but create an environment that automatically attracts capital for development.

• Behavioural. Related to stakeholders’ capacity/skills: Beyond the creation of a conducive investment environment, the council stresses the need for “Investable governance” – the capacity of government entities, advisers and local institutions to develop strategic financing plans for their SDGs.

1. Establish national sustainable priorities and plans: Governments are the drivers of a country’s agenda, setting goals and priorities. They need to align the national agenda with the SDGs. The UN voluntary national review process is one mechanism to support them in this and to identify new opportunities.

2. Create a national “strategic financing plan” for the SDGs: This requires countries to undertake a strategic assessment of their development needs, and allocate the right type of capital to fund the prioritized needs.

3. Link national allocation processes to the SDGs: Countries must strategically mobilise private capital by aligning the allocation processes to the SDGs in all sectors – including infrastructure, health, education, energy, etc. This requires a critical collaboration effort. Governments around the world must collaborate with businesses to identify opportunities to mobilise private capital and close the gaps.

The UN General Assembly 2019 is around the corner, where we will take stock once more on how far we have come towards achieving the SDGs. We already know the answer: We are far from on track. In some areas, we are even going into the wrong direction. Equality within planetary boundaries won’t be reached by 2030, if we don’t speed up. And the “sleeping trillions” have not been woken up. We will hear this over and over again in the coming weeks.

The Global Future Council’s recommendations are fundamental to make change happen, but they may not materialise, if we don’t inspire change. We know what people need to be convinced and act: practical examples – best practices. That’s why UN organizations like UNICEF are getting involved in the innovative and blended financing space, putting investable cases out there.

Right now for instance, UNICEF is the lead agency supporting the Tajik government’s objective to achieve the 11 child-related SDGs, estimated to require roughly $10.5 billion. This is done through a three-phased approach which includes developing a single, national programme framework inclusive of SDG targets and indicators; undertaking a comprehensive costing exercise for the programme through 2030; and agreeing on a financing plan with various partners to ensure implementation of the programme is fiscally viable. Key for success: The Government is committed to this process and, based upon a clear roadmap, will work with its partners, both public and private, to fund and finance it.

Another exciting example under development is the “Common Bid for Connectivity”, aiming at increasing digital access for young people also in the hardest to reach areas. The idea is that pooling demand for connectivity (through projectconnect.world) will allow UNICEF and ITU to establish a fair public market for “gigabytes”, where public financing and grants through a catalytic fund can de-risk and front-load investment from industry. Market commitments and other tools can lower risks, and financing flows (from provider revenue) can be monitored in real time using blockchain technology.

Regarding SDG 6 to ensure Water, Sanitation and Hygiene for all, UNICEF is building blended finance portfolios for more sustainable infrastructure investments, including clean energy interventions. UNICEF here identifies impact investing opportunities in fragile contexts, where water infrastructure development could bring modest profits to impact investors, while reducing the costs of long-term humanitarian aid – thus bridging the humanitarian-development continuum in a win-win situation.

Ultimately, the whole development finance community must embrace a broader approach to finance the Agenda 2030. Among many private stakeholders, there is still a tendency to associate the SDGs with green infrastructure and clean energy. But there are many other investment opportunities across all sectors. Governments must move away from the closed-system transactional approach, to a wider consideration of all the sources of capital that can be mobilised towards sustainable development. They must create enabling environments for investments to thrive, while strategically allocating public capital only where private capital cannot be mobilised.

All of us need to commit and collaborate now.