Gavin Power is an executive vice president and chief of sustainable development and international affairs at Pacific Investment Management Company (PIMCO). Prior to joining PIMCO, he was deputy executive director of the United Nations Global Compact, which advances sustainability and responsible investment in more than 160 countries. He was also a co-founder and board member of the Principles for Responsible Investment, launched in 2006, and has held senior positions at Ketchum and Levi Strauss, as well as working as a financial journalist for the San Francisco Chronicle. He is on the board of the Pacific Institute, an environmental research and advocacy organisation, and is a member of the UN Development Programme’s SDG Impact Committee.
Introduction
In the seven years since the launch of the Sustainable Development Goals (SDGs), we have witnessed a profound trend: the convergence between the worlds of development finance and private finance. Where once these two spheres stood apart – in philosophy, policy and parlance – today there is growing recognition that, even if their core missions fundamentally differ, each needs the other in order to deliver on their strategies and aims.
Beginning with the commercial sector, private sector finance and investment have ‘switched on’ to the sustainable development agenda, including the imperative of climate action. Thinking back to the months prior to the official adoption of the SDGs, this represents a remarkable arc. At the time, the following questions were being asked: Will the private sector really care? Will mainstream investors make the leap from the risk-management paradigm of ‘environmental, social and governance (ESG) investing’ to the outcomes-based philosophy of impact investing? And how helpful will the 17 goals and 169 targets be?
Thus far, the answers to these questions have been hugely encouraging. As the United Nations-supported Principles for Responsible Investment (PRI) state: ‘The SDGs set the global goals for society and all its stakeholders, including investors. A substantial and growing number of investors, including PRI signatories, are now looking beyond how the outside world impacts their portfolios, and seeking to understand and shape their portfolios’ outcomes in the world.’1 This uptake is reflected in several globally significant new initiatives, surveyed below.
At the same time, the traditional development community – including UN agencies, multilateral development banks (MDBs), national development finance institutions, and development non-governmental organisations – increasingly recognises the importance of ‘crowding in’ private sector capital in order to achieve greater scale and impact. As a recent journal article observes: ‘It is acknowledged that MDBs do not have sufficient capital to fulfil the SDGs without private capital investment and this funding gap is characterised as "from billions to trillion". To bridge this gap, the UN further confirmed its development commitment in 2015, asking major MDBs through the Addis Ababa Action Agenda to find ways to mobilise long-term capital into infrastructure and Green Finance.’2
This public development finance imperative – that is, mobilising greater amounts of private sector capital – is reflected in the expansive activities of the private sector lending arms of major development banks, including the International Finance Corporation, IDB Invest and the African Development Bank. At the same time, agencies such as the UN Development Programme (UNDP) have launched investor-oriented platforms, including the 2021 rollout of the SDG Investor Platform, which contains country maps to help institutional investors find compelling investment opportunities, especially in developing countries and emerging markets.3
Even so, these positive breakthroughs are accompanied by a host of challenges and bottlenecks. The COVID-19 pandemic dealt a major blow to many economies and has magnified the SDG investment gap. At the same time, a number of systemic hurdles and market-based problems must be urgently addressed if there is to be any hope of fulfilling the huge potential of public– private investment collaboration.
This article begins with a tour of three ‘tailwind’ developments that are serving to positively advance the broad UN 2030 Agenda, before turning to three ‘headwind’ issues that – in the view of this author – require remedial action.
The tailwinds
Investment community initiatives
The first tailwind relates to the international investment community. Over the past three years, several globally significant initiatives have been launched aimed at organising interests and helping channel private capital and investment towards the SDGs, including climate action.
In late 2019, the UN Secretary-General officially launched the Global Investors for Sustainable Development (GISD) Alliance, with the objective of mobilising long-term finance, identifying and launching innovative financing facilities, and enhancing the sustainable development impact of private investment.4 While GISD consists of just 30 significant global financial institutions – asset managers, asset owners and commercial banks – it has produced and is currently developing a number of important outputs designed to help investors and lenders create SDG-aligned strategies. These include establishing a definition of ‘sustainable development investing’, developing a ‘model mandate’ with the International Corporate Governance Network to provide guidance on contractual relationships between asset owners and asset managers in relation to SDG investing, and launching (likely in 2022) a blended finance platform to direct investment towards sustainable, climate-resilient infrastructure projects.
Another UN-originated effort involves mobilising corporate chief financial officers (CFOs) towards SDG investment and finance. Indeed, the UN Global Compact’s new CFO Coalition for the SDGs has ambitious and potentially world-changing goals: mobilising 1,000 CFOs committed to implementing strategies and business plans that will direct corporate investment into critical SDG sectors.5
The merit of the CFO Coalition lies in its recognition that corporate finance chiefs have largely sat on the sidelines of the sustainability movement, despite being stewards of trillions of dollars of corporate finance. In September 2021, a group of CFOs from 60 supporting companies pledged to invest an initial US$ 500 billion towards the SDGs over the next five years. When one contemplates the notion of 1,000 CFOs making similar commitments, it is clear this movement holds enormous promise.
A third breakthrough effort relates to climate action. The Glasgow Financial Alliance for Net Zero (GFANZ) – launched in April 2021 by UN Climate Envoy Mark Carney – brings together banks, insurers and other asset owners representing more than US$ 130 trillion in private capital.6 At COP26, GFANZ members committed to achieving net-zero greenhouse gas emissions by 2050 and 50% reductions compared to pre-industrial levels by 2030. While critics question the achievability of these goals, the general direction of travel is undeniably encouraging.
Sustainability-aligned financial instruments
A second tailwind relates to the rapidly growing market in sustainability-aligned financial instruments, particularly SDG-oriented bonds. In order to finance their sustainability commitments, increasing numbers of sovereigns and corporates (as well as development banks and other actors) are turning to public markets via the issuance of sustainable, social, green and (increasingly) sustainability-linked bonds. In 2021, total issuance exceeded US$ 1 trillion, with Pacific Investment Management Company (PIMCO) forecasting that the entire sustainable debt market could reach US$ 10–20 trillion during the next five years.
While corporations lead the market in terms of issuance, it is anticipated that growing numbers of UN Member States will issue SDG-oriented bonds over the coming months and years, thereby expanding the market beyond the issuance of sovereign green bonds, which are already well established. These SDG bonds will likely encompass financing needs related to, among other areas, housing, health care, education, and food and agriculture.
Global policy space
The third tailwind relates to the global policy space surrounding sustainable investment. In addition to the European Union (EU)’s sweeping Sustainable Finance Action Plan, we now have the G20’s Sustainable Finance Roadmap, released at the G20 ministerial meeting in October 2021. As the G20 asserts: ‘The main purpose of the Roadmap and an important goal of the SFWG [Sustainable Finance Working Group] is to advance international work to help scale up private and public sustainable finance and in so doing, accelerate the implementation of the Paris Agreement and 2030 Agenda.’7
The Roadmap and its related action areas focus on a range of critical themes, including aligning investments towards sustainability goals, encouraging more consistent and meaningful sustainability disclosure (by the private sector in particular), assessing and managing climate risks, and encouraging MDBs to crowd in more private sector finance.
Taken together, the G20 themes and action areas are likely to provide policy lift to the global sustainable investing movement, in so doing creating new policy incentives and pathways for partnership and collaboration.
stewards of trillions of dollars of corporate finance. In September 2021, a group of CFOs from 60 supporting companies pledged to invest an initial US$ 500 billion towards the SDGs over the next five years. When one contemplates the notion of 1,000 CFOs making similar commitments, it is clear this movement holds enormous promise.
A third breakthrough effort relates to climate action. The Glasgow Financial Alliance for Net Zero (GFANZ) – launched in April 2021 by UN Climate Envoy Mark Carney – brings together banks, insurers and other asset owners representing more than US$ 130 trillion in private capital.6 At COP26, GFANZ members committed to achieving net-zero greenhouse gas emissions by 2050 and 50% reductions compared to pre-industrial levels by 2030. While critics question the achievability of these goals, the general direction of travel is undeniably encouraging.
Sustainability-aligned financial instruments
A second tailwind relates to the rapidly growing market in sustainability-aligned financial instruments, particularly SDG-oriented bonds. In order to finance their sustainability commitments, increasing numbers of sovereigns and corporates (as well as development banks and other actors) are turning to public markets via the issuance of sustainable, social, green and (increasingly) sustainability-linked bonds. In 2021, total issuance exceeded US$ 1 trillion, with Pacific Investment Management Company (PIMCO) forecasting that the entire sustainable debt market could reach US$ 10–20 trillion during the next five years.
While corporations lead the market in terms of issuance, it is anticipated that growing numbers of UN Member States will issue SDG-oriented bonds over the coming months and years, thereby expanding the market beyond the issuance of sovereign green bonds, which are already well established. These SDG bonds will likely encompass financing needs related to, among other areas, housing, health care, education, and food and agriculture.
Global policy space
The third tailwind relates to the global policy space surrounding sustainable investment. In addition to the European Union (EU)’s sweeping Sustainable Finance Action Plan, we now have the G20’s Sustainable Finance Roadmap, released at the G20 ministerial meeting in October 2021. As the G20 asserts: ‘The main purpose of the Roadmap and an important goal of the SFWG [Sustainable Finance Working Group] is to advance international work to help scale up private and public sustainable finance and in so doing, accelerate the implementation of the Paris Agreement and 2030 Agenda.’7
The Roadmap and its related action areas focus on a range of critical themes, including aligning investments towards sustainability goals, encouraging more consistent and meaningful sustainability disclosure (by the private sector in particular), assessing and managing climate risks, and encouraging MDBs to crowd in more private sector finance.
Taken together, the G20 themes and action areas are likely to provide policy lift to the global sustainable investing movement, in so doing creating new policy incentives and pathways for partnership and collaboration.
The headwinds
We now turn to the headwinds holding back or disrupting progress in relation to financing sustainable development objectives.
Policy and market failure
The first headwind relates to what we at PIMCO have called a systemic policy and market failure with respect to unlocking private sustainable development investing at scale. Specifically, the national SDG strategies and documents (including the voluntary national reviews and integrated national financing frameworks), nationally determined contributions (NDCs) and related Member State plans simply do not contain enough relevant and meaningful information for institutional investors to act upon.
By and large, these plans and strategies are written for public policy and development audiences and – despite frequently stressing the importance of private sector finance – contain little or no pertinent information when it comes to concrete investment opportunities or other specifics required by investors. Nor do they refer investors to other sources for this information.
This is glaringly revealed in a recent report entitled ‘Mind the Gap’ by UK insurance company and GISD member Aviva plc. In examining the climate financing needs of 126 developing countries in relation to their NDCs, the study estimates their aggregate financing needs to be in the region of US$ 7.8–13.6 trillion between now and 2030. Such financing needs open up potentially vast opportunities for climate-oriented investors, including GFANZ members and PRI signatories.
However, as the report observes: ‘It is especially important to note that, while some NDCs were constructed based on concrete pipelines of projects and costing estimates, many were built thematically around sectoral targets. This may reflect a lack of resources and technical skills on the ground among the government entities and project developers responsible for designing the projects and policies needed to achieve the country’s NDC commitments. The natural follow-up step to developing an NDC document is to create an investment plan for capital mobilisation and implementation of the NDC. A harmonised approach and standardised methodology would need to be established so countries can follow the same processes, and measure and report impact.’8
In other words, what investors require are better ‘roadmaps for investment’. This issue has been raised within GISD discussions, and indeed the new UNDP SDG Investor Platform mentioned above is helpful in this regard. However, much more can and should be done. Under the auspices of the UN Financing for Development track, a special effort could be launched to bring Member States together with private finance to discuss how best to develop plans that are more investor relevant.
Questionable legitimacy of investments and strategies
The second headwind relates to concerns over the legitimacy of sustainable investing and ESG strategies and funds offered by the international investment community. To provide context, the global ESG investing market is now estimated at more than US$ 30 trillion in assets under management, with Bloomberg Intelligence estimating the market could hit US$ 50 trillion by 2025. While many of these ESG funds and investment strategies are making real and good-faith efforts
with respect to sustainability criteria, accusations of greenwashing and rainbow-washing (think the SDG colour wheel) are widespread.
A warning shot was fired on 10 February 2022 when Morningstar, the largest fund-research firm, stripped one in five funds (over 1,200) of their ESG label for failing to properly consider environmental, social and governance factors in the investment process. For some the action represented a necessary shake-up of the breakneck ESG investing space, while for others it only elevated concerns around insincere – and illegitimate – sustainable investing strategies. Reflecting such concerns, in February 2022 the EU announced plans to work on a legal definition of ‘greenwashing’.
The broader implication is clear: as more and more investors move into the sustainable development investing space, it will be crucial for all parties – regulators, fund managers, asset owners and other stakeholders – to ensure that sustainable investing strategies are true to form and include credible impact assessments and reporting methodologies.
Lack of investment to low-income countries
The third headwind relates to the dearth of portfolio investment flowing to low-income countries, especially the 46 least developed countries (LDCs), where SDG needs and deficits are acute. According to an Organisation for Economic Co-operation and Development survey conducted in 2018, only 8% of the total assets of 36 pension funds were allocated to developing countries, and only 2% of the assets of insurance companies. It is very possible that due to the COVID-19 pandemic and a general retreat for emerging-market investments, these percentages have now fallen even lower.9
How best to address this investment imbalance – between developed economies and established emerging-market countries on the one hand, and developing countries (including LDCs) on the other – remains a vexing problem with no magic bullet. One promising pathway is blended finance, including the first-loss guarantees and other de-risking tools and facilities called for by the G20 Roadmap. Relatedly, GISD has initiated a special workstream focused on blended finance and partnering with MDBs.
The global credit rating agencies are also being drawn into this discussion, based on a fairly widespread belief (at least in the developing world) that they are assigning unfair ratings to less developed countries, thereby hampering their attempts to attract foreign capital.
Conclusion
In adopting and launching the SDGs in 2015, UN Member States made clear that the 17 goals are global – applying to developed and developing countries – and that no one should be left behind. As the international investment community steps up with new commitments and engages with the public sector and the UN system in exciting new ways, we must strive to keep this spirit alive. In the final analysis, healthy societies and healthy markets go hand-in-hand.
Footnotes
Marcel Jeucken, Shelagh Whitley and Nathan Fabian, ‘InvestingWith SDG Outcomes:A Five-Part Framework’, Principles for Responsible Investment, 2020, www.unpri.org/ download?ac=10795.
Christopher A. McHugh,‘Mobilising private funding of development finance’, The Journal of Development Studies 57/12 (2021), pp. 1979–2001, https://doi.org/10.1080/00220388.2021.1945042.
United Nations Development Programme (UNDP),‘SDG Investor Platform’, https://sdginvestorplatform.undp.org/.
Global Investors for Sustainable Development (GISD) Alliance, ‘The GISD Alliance’, www.gisdalliance.org/.
CFO Coalition for the SDGs,‘About the CFO Coalition for the SDGs’, www.cfocoalition.org/about.
Glasgow Financial Alliance for Net Zero (GFANZ),‘About us’, www.gfanzero.com/about/.
G20 Sustainable FinanceWorking Group,‘G20 Sustainable Finance Roadmap’, 7 October 2022, https://g20sfwg.org/wp-content/ uploads/2021/10/G20-Sustainable-Finance-Roadmap.pdf.