Can private finance be relied on to deliver the SDGs?

Photo by Jeffrey Blum on Unsplash

By Laurie Macfarlane

This blog is a follow up to the event ‘The SDGs as an asset class? Getting serious about green finance for development’. The event is part of IIPP’s ‘Walking the talk: Getting serious about the UN Sustainable Development Goals’ series. The recording of the event will be released soon.

Delivering the UN Sustainable Development Goals (SDGs) will require investing in a vast scale to put the global economy on a more sustainable and inclusive path. According to the UN, additional funding of $4.5 trillion per year is needed to achieve the SDGs globally. A key question is: who will fund this great transformation?

This was the focus of the third webinar in IIPP’s ‘Walking the talk: Getting serious about the UN Sustainable Development’ event series.

One answer that is becoming increasingly influential is that private finance can do the job for us. According to this thinking, the profit motive of firms can be harnessed to achieve environmental and social goals. In recent years financial institutions have been keen to present themselves as the saviours of the planet.

At COP26 it was reported that the Glasgow Financial Alliance on Net Zero (GFANZ) — a group of 450 private financial institutions — have up to $130 trillion in funding ready “at their disposal” to tackle the climate crisis. If this was true, this would be more than enough to cover the current finance gap. But in reality it was a significant misrepresentation: the $130 trillion number refers to total assets currently under management, not funds ready to be committed.

But many believe there are far more fundamental problems with this idea than mere number trickery. In the webinar discussion Fathimath Musthaq, Assistant Professor in Political Science at Reed College, explained that this way of tackling the SDGs assumes there is a “congruence between private sector interests and the provision of accessible social goods”. But this often isn’t the case: private finance aims to achieve high returns, whereas accessible social goods require widespread affordable access. As a result, there is a “fundamental tension between accessibility and revenue generation”.

This problem can be seen in the recent trend towards infrastructure and nature being turned into an ‘asset class’. In order for private finance to be able to invest in something, it must generate cash flows to satisfy returns for investors. As Musthaq explained, this means that fees or charges must be attached to use which in turn rations access to the service — an outcome that is at odds with the idea of accessible social goods. This can be a particular problem in poorer countries, where many people can’t afford such fees.

If private finance can’t be relied on to justly fund the SDGs, then who can? As Dharshan Wignarajah, Director of Climate Finance at the Climate Policy Initiative (CPI) noted, there have already been a host of international pledges aimed at helping developing countries achieve the SDGs. In 2009, higher-income countries pledged to provide climate finance of $100 billion a year to lower-income countries by 2020. However, this target was not met, and most of the support that has been provided is in the form of loans that must be repaid with interest rather than grants. In addition, Official Development Assistance, or government aid, already provides around $150 billion of funding per year, Wignarajah noted.

However, this support pales in comparison to the annual $4.5 trillion funding gap that needs to be filled. According to Wignarajah, the solution is to mobilise domestic public and private resources, with the state in the driving seat. But at the moment, this doesn’t appear to be happening. “Do we have the balance right between the public and the private right? It does seem at the moment that we look to the private sector to solve things which frankly the public sector should do.”

“There is a global public good element to many of the SDGs, which are very challenging to bring into the logic of the traditional financial sector”, he went on to say.

However, for countries in the global south, using fiscal policy to deliver on the SDGs poses a number of challenges. As Wignarajah explained, many face significant debt overhangs that are exacerbated by an international trade and monetary system that is rigged against them, which acts as a significant constraint on fiscal space.

Samantha Power, Sustainable Finance Specialist at The World Bank, highlighted how innovative financing instruments that share risks and rewards between investors and governments can help to overcome this problem. One of these are so-called ‘debt for nature swaps’. These are financial transactions where a portion of a developing nation’s foreign debt is forgiven in exchange for local investments in environmental conservation measures. Power cited a recent debt-for-nature swap signed between The Nature Conservancy (TNC), an environmental organisation, and Belize, which reduced the country’s external debt by 10 percent of GDP in exchange for the country investing more in local conservation projects.

Power also highlighted the potential for ‘Sovereign sustainability-linked bonds’, where investor coupons are tied to an issuer’s sustainability key performance indicators (KPI). If the government achieves that target, it can pay a lower rate of interest on the bonds, therefore providing a degree of risk sharing. Chile recently became the first country in the world to embrace such an approach. It issued a bond linked to two KPIs: one relating to the target for reducing greenhouse gas emissions, and another for increasing renewable energy generation.

Fundamentally however, it remains difficult to see how the SDGs will be achieved as long as such vast inequalities in wealth and power remain between the global north and the global south. As Wignarajah noted, overcoming this will require a fundamental “redistribution of global wealth” that far exceeds the current commitments.