The ambitious Sustainable Development Goals (SDGs), a set of 17 universal goals adopted by the world’s governments in 2015 to build a better future for all, provide a global framework for addressing the most urgent social, environmental and development challenges facing governments. They represent a pathway to inclusive growth, a north star that should guide our actions to bring about positive change in a capitalist system that has often seemed to benefit a few at the expense of the many. In their ambition, scope and vision, they constitute the world’s hardest to-do list.
But it’s a list governments and development organizations cannot check off on their own. As distasteful as it may seem to some, we need the private sector, its resources and ability to innovate, to achieve the SDGs. The challenge is to make capitalism more impactful – to add another dimension to the sort of thinking that prioritizes profitability to the exclusion of everything else. The solution lies in mainstreaming the principles of shared value, which involves creating not only economic value, but also value for society in addressing its needs and challenges.
Sir Ronald Cohen, chairman of the Global Steering Group for Impact Investment, has argued that when a business is genuinely impact conscious, it is more appealing to consumers and investors, better-positioned to tap into latent demand, and less likely to be taxed by governments to offset the harm it might otherwise cause. This in turn can boost profits and lower long-term financial risk.
Today we would be hard pressed to find a boardroom where impact is not being discussed. This has led to large investor groups comprised of asset managers, pension funds and insurance companies that have read the tea leaves and are actively responding to a shift in values among their clients, savers, employees and investees. They include capitalist behemoths such as banking major HSBC, which issued a US $1 billion SDG Bond in 2017, and PIMCO, a leading American investment manager with US $2 trillion in assets that is actively encouraging issuers to identify SDGs. Credit Suisse, one of the world’s leading private banks, has a dedicated practice for impact finance and has put together products such as the Fair Agriculture Fund, which provides working capital to fair trade cooperatives in developing countries.
Impact financing approaches offer examples that place impact at the core. These could take the form of guarantees, social impact bonds, social insurance and impact investments that address specific market failure, generate momentum to enhance government resources, and reduce risk. Since 2010, many social sector organizations have started to integrate impact objectives and measurement into their way of thinking. Through Social Impact Bonds (SIBs) and Development Impact Bonds (DIBs) they are scaling their activities beyond what they can achieve through grant funding alone, and learning to operate within an outcomes-based framework. Examples closer to home include US $1 billion India Impact Finance Fund jointly being incubated by Social Finance India and UNDP SDG Impact Finance, with the aim to provide equity funding to high impact financial intermediaries.
Successfully crowding in impact finance for development must also cater to the requirements of providers of capital – the limited partner, the investor and fund manager who are willing and open to making substantial investments, provided there is a broad alignment between risk, return and impact.
Global financial institutions have been among the first to state their intentions to align with impact products and the SDGs. This has partially been the result of pressure from their customers who constitute an increasingly younger, more aware demographic. These institutions are now more open than ever to deploying substantial investment capital provided there is a broad alignment between risk, return and impact. This is a huge opportunity for intermediaries in this space who now need to come together and design instruments that can catalyze much needed financing towards priority areas.
However, in middle income countries across the Asia-Pacific region, particularly India with 60-plus active impact investment funds, there is a highly fragmented and disconnected approach to SDG Finance. Thus, SDG finance delivery is inefficient due to both a duplication of resources and a lack of focus on priority goals. This results in multiple innovative instruments competing for the same pool of capital, higher transaction costs, lower success rates and a focus on splitting the pie rather than enhancing it. This is where organizations like UNDP can play a meaningful role in bringing together like-minded capital providers, policymakers, financial institutions and aid agencies to jointly co-create SDG aligned innovative financial instruments that provide an avenue to successfully deploy impact finance at scale.
The writer is advisor, Social Impact Investment, UNDP-UNSIF