$2.5tn shortfall for sustainable development in developing countries, by Paul Hohnen
A step change is needed in the amount of private finance available for sustainable development. The bad news is the financial sector is still headed in the wrong direction.
At the level of international agenda-setting for the rest of the century, 2015 is shaping up to be a big year. Possibly the defining one. That is why this month’s UN Conference on Trade and Development (UNCTAD) World Investment Forum was so important, because it addressed the fundamental questions “what would it cost to become sustainable?”, “do we have the money?” and “how can we mobilise it?”
The timing and focus of the Forum were largely aimed at giving momentum to preparations for three landmark UN conferences to be held next year. These will have the respective tasks of finding inter-governmental agreement on three core elements of any successful transition to sustainable development.
In Addis Ababa in July, a package of finance and investment policies and measures will be assembled for developing countries with the aim of showing them that the sustainability agenda has something to offer and allowing them to take action.
Second, a framework of specific global Sustainable Development Goals (SDGs) and targets for the period 2015-2030 that will build on the expiring UN Millennium Development Goals will be set in New York, in September.
And finally, the long overdue legally binding climate accord aiming to prevent dangerous climate change will be negotiated in Paris, in December.
While it was not a decision-making event, the 2014 World Investment Forum was ground-breaking at a number of important levels.
Unusually for many UN conferences, the 3,000 plus participants from developed and developing countries included not only representatives of governments and governmental agencies but also, crucially, participants from private sector financial organisations, as well as non-profits active in the finance and investment space.
Finally the money (or at least some of it) was around the table. Too few governmental conferences involve the financial community. The Forum offered a glimpse of a possible new format for co-designing sustainability solutions.
Significant, also, was the recognition in all conversations of the need to fund sustainability. Here, the UNCTAD secretariat took the lead by focusing a major part of its annual World Investment Report (pdf) on “investing in the SDGs” and by proposing an action plan.
According to the report, while global foreign direct investment finally increased again in 2013 (by about 9% on 2012), with developing countries getting more than half of total flows, there is an estimated gap of around $2.5tn annually between what developing countries receive now and what they would need to make the transition to sustainable development. To achieve increased global investment of this magnitude, a step change is necessary in the levels of both public and private finance.
In discussions, governmental and private sector participants seemed to agree on a number of points.
First, that to unlock the capital needed, a major policy and regulatory re-set is required on all sides. Second, public finance alone is insufficient; massively expanded private financial flows (at least double the current growth rate) would be vital. Third, the private sector was already active in experimenting with sustainable investments. These had potential to be taken to scale.
On this last point, particular attention was drawn to the various innovative partnerships such as the Sustainable Stock Exchanges Initiative, the Principles for Responsible Investment, and the UNEP Finance Initiative, all of which involved attempts to embed environmental, social and governance (ESG) considerations into routine investment decisions.
On these, some cautions were expressed about the risks of financial sector ‘greenwash’ and the need for better impact indicators, but on the whole they were seen as moving in the right direction.
There was also recognition that there was a new level of engagement on the part of the private sector in efforts to create more sustainable markets. This is being reflected in initiatives such as the Global Commission on the Economy and Climate, the UNEP Inquiry into the Design of Sustainable Financial Markets and contributions by individual firms, such as Aviva Investors.
Not all was harmonious however. There was some pretty blunt talking from the financial sector that must have made governments uncomfortable at points. In addition to the usual calls for a more transparent, stable and positive investment regime (in both developed and developing countries), some investors questioned the financial literacy of both legislators and regulators. If the current financial system was not fit for purpose, who would correct it and how?
Noting that the greater part of the financial sector was currently moving in the wrong direction (the shift towards short-term investing, persistent failure to integrate ESG issues and large scale tax evasion were among the challenges mentioned), many argued that there was an urgent need to build capacity to understand and shape the regulatory environment more effectively.
This is essential to creating the profound policy shifts needed, for example, to remove subsidies to fossil fuels, introduce a carbon price and generally help markets to invest in sustainable growth. If private finance is to be successfully leveraged for sustainable development, government economic and trade policies need to be more clearly oriented towards sustainability, more internally (and internationally) consistent and integrated, and more transparent.
Judging from the conversations at the WIF, the bad news is that we’re still heading, rapidly, in the wrong direction. The good news is that there are more finance and investment experts than ever willing to help in crafting a turn-around.
Paul Hohnen is Senior International Associate with ACCSR, Associate Fellow of Chatham House, and a member of the Ethical Corporation advisory board. Paul has been a diplomat, director of Greenpeace International and a director of the Global Reporting Initiative. Paul Hohnen was a participant of the 2014 World Investment Forum and chaired the session on Leveraging Private Finance.