Advancing the Sustainable Development Agenda through Social Finance

Authors

• Smruti Govan

  Former Associate, BSR

• Paula Pelaez

  Former Manager, BSR

• Jessica Davis Pluess

  Former Manager, BSR

Last Monday, the UN General Assembly adopted a sweeping action plan for the Sustainable Development Goals (SDGs). Refined by delegates in Addis Ababa July 13-16 during the Third International Conference for Financing Development, this ambitious action plan lays out how to finance the world’s new sustainable development agenda, which will be finalized in New York in September, replacing the Millennium Development Goals. For the first time at such a high level, the plan recognizes that development realistically cannot be financed if the private sector does not play its part.

Private companies have a key role in supporting the sustainable development agenda by boosting economies, financing development, creating jobs, promoting innovation, and integrating business methods and practices to bolster existing development processes.  They are also integral to building climate resilience and inclusive prosperity, two of our most pressing global issues. 

According to the UN Conference on Trade and Development, the global investment needed in SDG sectors amounts to approximately US$5-7 trillion per year.  Despite current contributions from governments and the private sector, there remains an investment gap of US$1.9-$3.1 trillion per year for the SDGs in developing countries, which includes the cost of climate change adaptation and mitigation, infrastructure development, and other pressing challenges. 

The document urges greater private-sector direct investment in key sectors such as energy and infrastructure, stresses the importance of long-term capital flows and investments in local capacity, and calls for the adoption of sustainable business principles, as promoted by the UN Global Compact. It also encourages private companies to engage in impact investing and increase their funding for infrastructure.

Investors and companies can support the sustainable development agenda through social finance, which refers to any investment activity generating both profits and social and environmental benefits.

In the past year, BSR, in partnership with BNY Mellon, has conducted extensive research on social finance, including an assessment of barriers to entry for investors such as lack of track record of performance and weak enabling environment, and the conditions needed to overcome those barriers. Our work reveals that catalyzing financial capital flows toward social and environmental goals requires five conditions:

1. Accessibility:  Simple and scalable financial products and project pipelines that offer attractive risk-adjusted returns and show clear impact can attract investors and scale private-sector investment within the development agenda. For example, green bonds, which are structured as traditional bonds and use proceeds to advance climate change adaptation and mitigation projects, are popular among investors because of the ease of comparability across credit ratings and their market rate returns. 
2. Measurement: When private-sector investments demonstrate both positive financial and social/environmental impacts, they should be able to prove it through verifiable evidence, which will attract additional social finance investors.  That evidence needs to take into account both financial and non-financial metrics to measure social/environmental impacts. The Global Impact Investing Rating System is a good example of attempts to standardize non-financial metrics. And Bloomberg’s Carbon Risk Valuation tool evaluates financial risk from exposure to high-carbon assets. 
3. Transparency: Private companies and investors should promote consistent and material disclosure of environmental, social, and governance management and the performance of their social finance investments.  They should also document best practices, which will promote public understanding of what works and what doesn’t.  One positive development is increased corporate disclosure of environmental and social risks and opportunities, as a result of shareholder resolutions, reporting methods promoted by organizations such as CDP, and disclosure requirements from stock exchanges such as the Johannesburg Stock Exchange.  
4. Collaboration: By bringing together the expertise of a diverse range of partners, including civil society organizations, governments, and multilateral institutions, companies can drive greater innovation, test new products, and mitigate business risk.  For example, the recently announced Sustainable Development Investment partnership aims to mobilize US$100 billion toward infrastructure projects in developing countries. The partnership uses development aid to lower the risk profile of investments, thereby incentivizing greater private investment. 
5. Systemic Change: Companies should align internal and external incentives with long-term value, which includes promoting good governance, to encourage uptake of social finance within the business and among other companies. This can influence investment decision-making and, in turn, drive investment flows toward the SDGs.  Positive developments in this area include Unilever, which has ended quarterly reporting and the Focusing Capital on the Long Term initiative, led by McKinsey & Co. and the Canadian Pension plan Investment Board, which has developed practical structures, metrics, and approaches for longer-term investment.

Leaders within the private sector like the ones highlighted above are already creating innovative instruments and models to finance the SDGs, and we invite more investors to follow suit. By engaging in activities that promote conditions for scaling social finance, business can realize triple-bottom-line gains while supporting the broader global development agenda.