This op-ed was originally published on NextBillion.
In 2009, developed countries committed to mobilizing US $100 billion per year for climate action in developing countries by 2020.
They failed.
Today, a massive climate and Sustainable Development Goal (SDG) financing gap still persists — and even after the SDGs and Paris Agreement laid out a critical role for the private sector in 2016, the subsequent years have brought only modest increases in private investment mobilization. As of 2020, the annual SDG financing gap for developing countries stood at $4.2 trillion — up from $2.5 trillion pre-pandemic. Private capital is crucial to closing this gap, but only 4% of the $410 trillion in global private assets is invested in developing countries (excluding China). And the $240 billion invested by public development finance annually only mobilizes an average of $44 billion in private investment each year, which amounts to just 1% of the climate and SDG investment needs in these countries. Yet while there have been many calls to action among both public and private stakeholders to increase investment into the SDGs, they have lacked a strategy and blueprint for getting there.
This lack of progress reveals a key challenge in development finance: Public and private investments in emerging markets and developing economies (EMDEs) are too often fragmented, crowding each other out instead of reinforcing each other. A deeper collaboration is needed — one that recognizes the limits of public investment and the increasing appetite among private investors to engage in fast-growing EMDEs, especially in impact investing, ESG and other purpose-driven investing sectors.
Over the last year, Convergence and USAID worked with over 100 stakeholders — including private investor groups managing a combined $130 trillion in assets under management, as well as donor governments and philanthropic foundations — to find a solution to significantly increase sustainable investment. Through extensive workshops and knowledge exchanges, plus Convergence’s more than 15 years of evidence and our databank of 750+ blended finance transactions that have demonstrated the most effective approaches and structures, we collectively agreed on an action plan to increase investment from $240 billion to $530 billion annually. In one year. With no additional public sector resources needed.
The Action Plan for Climate and SDG Investment Mobilization lays out how a small amount of public and philanthropic funding can become a catalyst for system-wide change by increasing the number of investable climate and SDG projects in EMDEs, while boosting the supply of capital invested in those projects. Through five integrated pillars, it provides a blueprint for how current development finance and assistance resources can be redeployed more effectively, more than doubling total climate and SDG investment into developing economies. The key elements of this blueprint are outlined below.
Increase the supply of flexible catalytic funding by crowding in a larger universe of resources and innovation.
Catalytic funding is the most important ingredient in efforts to significantly increase climate and SDG investment, due to its ability to de-risk investment opportunities and create assets that meet the risk and return requirements of investors with fiduciary duties, like large pension funds. Private investors may be interested in investments with SDG and climate impact, but the real or perceived risks in EMDEs often prevent them from investing. Redirecting $13-15 billion per year from donor governments and philanthropic foundations into catalytic funding could ultimately lead to the mobilization of $286 billion in private capital — equivalent to seven times the current annual amounts mobilized by the entire development and climate finance systems. There is clear interest in this option among private investors: Some have organized themselves into groups, such as the Global Investors for Sustainable Development Alliance, and made calls to action stating that they have the funds to invest, so long as the development finance community and others create investment assets that meet their fiduciary obligations.
Make multilateral development banks (MDBs) and development finance institutions (DFIs) catalysts of mobilization.
MDBs and DFIs have been investing in development for more than half a century, yet their commitments only constitute around 3.5% of the annual climate and SDG investment needs in EMDEs. Plus, their business models have remained largely unchanged since their inception — even though global and EMDE financial systems have changed considerably. Despite having a valuable set of relationships, capacities and comparative advantages, MDBs and DFIs too often operate within their own silos, reflecting the central role public capital has traditionally played in the development finance landscape. We need to move away from the past era of public sector dominance towards a modern model that reflects the much broader universe of investment actors working today. To that end, MDBs and DFIs should adjust their priorities and their Key Performance Indicators related to governance, to prioritize deeper integration with private investors and help mitigate the risks that are preventing the private sector from investing in the first place.
Maximize the investable pipeline through more integrated development and climate finance systems.
Providers of catalytic capital, like donors and philanthropic foundations, should prioritize creating investment assets that are standardized, publicly listed and traded. This would open up EMDE investment opportunities to virtually all investors — and over time, it would boost the transparency and supply of capital, thereby decreasing the cost of capital through increased competition among funders.
Provide investors with access to the best investment data and mobilization resources.
Greater availability, transparency and credibility in investment data is needed, so investors can better analyze investment opportunities and benchmark their risk in less familiar markets. While some centralized databases do exist, data sharing has not been systematic or reliable. To address this, the Action Plan recommends the establishment of a centralized, curated online investment mobilization hub, to increase investor knowledge and access to data on investing in EMDEs.
Empower local capital markets and financial intermediaries in EMDEs.
Global private assets invested in EMDEs are a growing source of capital, currently estimated at $17 trillion (not including China). However, many climate and SDG projects seek investments of less than $5 million, making them too small for global investors, but just right for local investors. Sourcing more capital from EMDEs into both local development projects and the broader global economy will require a targeted campaign to improve and expand local capital markets, along with efforts to empower financial intermediaries by increasing their available risk capital and providing significantly higher amounts of financing in local currencies.
Ultimately, this Action Plan aims to harness new resources, actors and innovations to change the status quo in development finance. By adopting a more catalytic approach, grounded in blended finance principles already practiced by donor governments and philanthropic foundations, public and philanthropic resources can mobilize significantly greater sums of private investment focused on the world’s most pressing challenges. This strategy would not eliminate all of the risk (real or perceived) of investing in EMDEs, but it would help manage that risk and scale investment flows more effectively. And whatever the extent of these risks, the risk of inaction is far greater.
