Reporting on the Sustainable Development Goals—Challenges for OECD Countries. Part 4: Finance
By Mark Halle, May 18, 2016
In part four of a blog series on the challenges that OECD countries face in reporting on their progress towards the Sustainable Development Goals, Mark Halle discusses how to generate sufficient public and private investment.
Implementing the 2030 Agenda will require investment on a massive scale. Estimates of the sums needed for “Transforming our World” vary, but generally hover in the low trillions of US dollars annually through 2030. While these figures frighten and impress, even the highest estimates amount to only one or two percent of global capital stocks. So the issue is not absolute availability of financial resources in the economy, but very much how they are used.
Official development assistance (ODA) amounts to some US$131 billion a year, and increasing proportions of that are spent on refugee care in OECD countries. Even if SDG target 17.2 were reached and 0.7 percent of gross developed country national income were available as ODA (welcome as this would be), it would still not make much of a dent in the totals needed. Where, then, will we find the money needed to implement the 2030 Agenda?
The SDGs are not terribly clear on this question. Target 17.3 suggests that financial resources for developing countries should be mobilized “from multiple sources”, hardly a roadmap that can easily be followed. Developing countries are encouraged to mobilize domestic resources, for example through tax reform, and the richer countries are encouraged to address the debt burden of the poorer ones. All of these are good ideas but will not come close to generating the resources required to implement the agenda.
What is required instead is a realignment of private investment behind actions that advance the SDGs and achieve their targets, but how will that alignment take place? Private or corporate investment decisions tend not to respond to government admonition and, while capital owners may fully support the intentions behind the 2030 Agenda, they do not particularly regard it as their responsibility to attain the goals directly. What, then, will it take to align financial and capital markets to the imperatives of sustainable development?
In the end, it will take a substantial alignment between the interests of investors and the needs of sustainable development such that the behaviour that rewards investors is the same as the behaviour that advances sustainable development. But how do we get there?
With public sector funding an increasingly rare commodity, it is vital that what there is be well spent. Direct expenditure of the public budget on the creation of such public goods as health, education and social services—often priorities for which private investment is not readily available beyond the needs of the elite—remains a priority. Beyond such direct deployment of the public purse, there are two fundamental priorities for public sector action. First, it should focus strongly on “pursuing policy coherence and an enabling environment for sustainable development” (para 63 of the 2030 Agenda). We need an enabling policy, regulatory and institutional framework that will align the interest of investors with the needs of the real economy, and in particular with the SDGs and their targets. This framework must eliminate the perverse incentives that reward unsustainable development and instead reward behaviour that delivers on the 2030 Agenda.
The bad news is that such perverse incentives pervade our economy, from the massive waste of public money on ill-considered subsidies or low-priority projects that benefit particular constituents, to the corporate practices that reward short-term profit seeking or favour investments disconnected from the generation of real goods and services.
The good news is that we now have a very precise idea of the reforms that would help bring about a favorable alignment between investment and sustainable development—covering everything from monetary policy to standards, disclosure and governance, and aimed not only at banking but also at pension funds, insurances, bond and stock markets. The United Nations Environment Programme's Inquiry into the Design of a Sustainable Financial System is brimming with examples of the sorts of reforms now underway and that would need to go to scale.
Second, the limited public funds available for the 2030 Agenda should be used to “catalyze additional resource mobilization from other sources, public and private”. The best way to do this is to use public funds to “de-risk” necessary green investments. Investment is still not flowing in adequate proportions to projects that would advance sustainable development in part because these projects are perceived to carry a level of risk greater than conventional projects. If we are to accelerate the transition to sustainable forms of development, a good use of public funds would be to lower the risk attendant on sustainable projects to the point that they become attractive to private capital. Good examples, from countries as diverse as Bangladesh and the United States, include favorable financing terms for green projects like renewable energy or waste management.
All of this is well known. And yet it is the implementation of this sort of reform that would do more than any other action to advance the implementation of the 2030 Agenda. Those most capable of acting on these reforms are the countries—like Switzerland and the other OECD countries—that are home to major financial and capital market actors: banks, insurances, pension funds, etc. They tend to be the rule-makers in finance. Given that it is the gift of these countries to act on finance sector reform, and that such reform represents the single most powerful means to create the kind of enabling policy framework that SDG implementation needs, it should also be central to their regular reporting on their efforts to advance this universal agenda. Civil society should ensure that this is the case.