Serena Grover explores the importance of aligning private capital with public good to achieve the United Nations Sustainable Development Goals.
With only a decade remaining to accelerate progress for the United Nations Sustainable Development Goals (SDGs), member states recognised the shortfall in financing global efforts, and called for a Decade of Action in 2019. Little did we know the COVID-19 pandemic would have a cataclysmic effect on the path towards the SDGs.
The SDGs were established in 2015 by all UN member states to ensure a concerted effort in ending poverty, protecting the planet and ensuring global peace and prosperity by 2030. These 17 goals recognise that ending global poverty must be coupled with strategies to foster economic growth and address a range of social needs.
The ‘unprecedented’ shock
The pandemic has had a devastating impact on all 17 of the global goals, reversing the progress made in multiple cases. Preexisting inequalities have been exacerbated, with disproportionate effects on poor and vulnerable communities, resulting in higher fatality rates, increased unemployment, and threats to economic security. This has positioned the SDGs and Paris Climate Agreement as the ‘North Star’ in governments’ agendas for the recovery. However, not only has the pandemic bolstered the need for the SDGs, but it has augmented the finance gap required to achieve them. Continuous lockdowns and large stimulus packages have snowballed government deficits, to date adding $19.5 trillion to global debt.
The capacity of public funds to finance the SDGs has diminished.
Addis Ababa Action Agenda
Nevertheless, the world was off-track to achieve the SDGs before the pandemic hit. The Addis Ababa Action Agenda (AAAA) in 2015, outlined the blueprint for implementing the SDGs, by providing a global framework that aligns all financing flows and policies with economic, social and environmental priorities. It recognised the need for changes in decision-making across all five stakeholder groups: customers; employees; investors, suppliers and vendors; communities; and governments, as it was clear public finance alone would be far from sufficient. The AAAA was able to officially acknowledge the necessity of private capital in achieving improvements across global social and environmental indicators. Unfortunately, even before the pandemic the innovative financial techniques were not fully equipped by the governments of UN member states and there remained an extensive scope for policy frameworks to facilitate these. Projections released in 2019 showed many unpromising results for the SDGs, with for example 6% of the global population predicted to still be living in extreme poverty by 2030.
Given the pandemic has veered the achievement of the SDGs off course even more significantly, it is vital the Addis Ababa agenda and private finance is fully embraced.
The ‘new’ buzz phrase within the financial sector – impact investing – proves a useful instrument to align private capital with public incentives. Impact investors expect to earn a financial return on capital invested, whilst tackling social and environmental challenges. It is however differentiated from Environmental, Social and Governance (ESG) investing due to the commitment to measure and report against the intended impact. Standardised metrics are used to distinguish the effect of such investments on local communities and return rates are set according to the level of alleviation of the social or environmental issue. Impact investing instruments cover various asset classes, including fixed income, venture capital, private equity, and green, social and development bonds. Many actors across the financial sector are committing to outcomeoriented finance, with asset managers such as BlackRock, foundations such as The Ford Foundation and Development Finance Institutions e.g., African Development Bank, being exemplary in paving the way forwards. However, a key question remains – how can we, as individuals, play our part in progressing sustainable finance?
The Power of Pensions
Amongst numerous forms of private investment, pension funds have the potential to be pivotal within the impact movement. Around 20% of the world’s total investment assets are held in pension funds, amounting to $32.3 trillion within OECD countries in 2020. Considering the finance deficit to reach the SDGs is estimated to be $30 trillion by 2030, this demonstrates the colossal capacity of pensions to close this gap. Most people lack awareness about where their pensions are being invested, with the classic principalagent problem existing between individuals who may prefer to align their pensions with the SDGs, and pension fund managers who in some cases simply seek the highest return rates. Even today a vast number of pension funds are allocated towards companies whose activities range from nuclear arms to deforestation to exploitation, without the individual’s knowledge. Campaigns such as MakeMyMoneyMatter urge individuals to become more aware of the allocation of their pension funds and encourage fund managers to support impactful projects e.g., social housing or wind farms. Further support for these types of projects will in turn reap higher rates of return on the pension fund, whilst being beneficial to society.
Building Back Better
Achieving the SDGs requires a global effort, with a combination of public funding, private investment and philanthropy. Although some international institutions are starting to pave the way in reaching the required funds to achieve the SDGs, a multilateral approach from all five stakeholder groups is required. Our multifaceted role as individuals, ranging from being consumers to investors to future pensioners, means we can take responsibility at all points of decision-making in order to recover from the pandemic in an impactful manner and achieve the SDGs by 2030.