This needs to be the ‘decade of action’ if we are to achieve the Sustainable Development Goals in 2030. Because of COVID-19, however, we’re off to a bad starting that respect. The pandemic and the measures taken to combat it have severe negative effects on sustainability. For one, it is leading to an increase in the number of people in extreme poverty, reverting a decade-long trend of decreasing poverty. There is evidence already that achieving the SDGs will take much longer. In contrast to the Global Financial Crisis in 2008/09 – which was mostly a crisis of the Western economies – the current crisis has thrown more emerging countries than ever after WWII into recession.
Even before the crisis, it proved difficult to fund the SDGs: tax income, as main source for financing sustainable development in most countries, was stagnating and public debts were increasing. It is not hard to imagine the severe impact of the pandemic on sustainable development.
Whereas developed economies issued large fiscal packages amounting to 20-30% of GDP in combination with accommodative monetary policies to mitigate the effects, most emerging economies could only spend a fraction of this.
Widening funding gap
And it even got worse. Because of the deteriorated economic outlook, the flow of private capital to emerging economies largely dried up. The OECD report estimates that in total USD 700 billion lower inflows in 2020, compared with 2019: a much larger effect than during the global financial crisis. As a result, the SDG funding gap increased from USD 2.5 trillion to USD 4.2 trillion now.
From a global perspective, this development of private capital flows is at least remarkable. First, never before in history was there more private capital searching for yield: in the current low interest rate environment, any asset class with a more favourable risk-return profile becomes relatively more attractive.
Second, sustainable investing, impact investing, ESG investing – whatever the name – was growing stronger than the market as a whole. And where can you make more impact than in emerging markets? This might prove that a lot what is called impact investing isn’t really about impact… This raises the question whether a lot of this so-called impact investing really was about impact. Why else withdraw, at a time when a lot of impact can be made?
So, how can we direct more capital towards the SDGs? As the OECD report states, shifting only 1% of the trillions of investment capital could fill the growing gap. This has largely to come from developed countries, since 80% of the global funds are in the hands of the population of rich Western, industrialised countries – in our hands.
Of course, above all the SDGs are a public policy agenda, and achieving them depends for a large part on proper governance, a stable macroeconomic environment to enable building infrastructure and investing in education and health.
This will surely help to attract private investors, as always. But most importantly, attracting investors starts with the creation of mechanisms for transparency and accountability of private sustainable finance and investment. If it can be made very clear, in a common language, how investments contribute to the SDGs, clients will better understand what the impact of their investments is. In addition, disclosure of the detrimental effects of investments, and hence their obstruction of reaching the SDGs, will also help to direct finance to a more sustainable way.
But in the end, it is also a moral appeal to investors in developed countries. Investing should be about more than just making money with money for the sake of money. To us, investing is the conscious art of getting a private return on positive societal impact. This is the only way that the financial sector can play a positive role in helping to solve the challenges we face.
We should rock the investment world to make everyone aware of the obligation that comes along with capital. It is the only way to escape the scissor effect of sustainable investing for the SDGs.
Read Hans’ previous column ‘Stop covering up!’