chapter iv investing in the sdgs: an action plan for ... · chapter iv investing in the sdgs: an...

CHAPTER Iv

INvESTING IN THE SdGs: An Action Plan for promoting private sector contributions

World Investment Report 2014: Investing in the SDGs: An Action Plan136

A. INTRODUCTION

Table IV.1. Overview of prospective SDG focus areas

• Povertyeradication,buildingsharedprosperityandpromotingequality

• Sustainableagriculture,foodsecurityandnutrition

• Healthandpopulationdynamics

• Educationandlifelonglearning

• Genderequalityandwomen’sempowerment

• Waterandsanitation

• Energy

• Economicgrowth,employmentinfrastructure

• Industrializationandpromotionofequalityamongnations

• Sustainablecitiesandhumansettlements

• Sustainableconsumptionandproduction

• Climatechange

• Conservationandsustainableuseofmarineresources,oceansandseas

• Ecosystemsandbiodiversity

• Meansofimplementation;globalpartnershipforsustainabledevelopment

• Peacefulandinclusivesocieties,ruleoflawandcapableinstitutions

Source:UNOpenWorkingGrouponSustainableDevelopmentGoals,workingdocument,5-9May2014session.

1. The United Nations’ Sustainable Development Goals and implied investment needs

The Sustainable Development Goals (SDGs) that are being formulated by the international community will have very significant implications for investment needs.

Faced with common global economic, socialand environmental challenges, the internationalcommunity is in the process of defining a set ofSustainableDevelopmentGoals(SDGs).TheSDGs,tobeadoptedin2015,aremeanttogalvanizeactionby governments, the private sector, internationalorganizations, non-governmental organizations(NGOs) and other stakeholders worldwide byproviding direction and setting concrete targetsin areas ranging from poverty reduction to foodsecurity, health, education, employment, equality,climate change, ecosystems and biodiversity,amongothers(tableIV.1).

The experience with the Millenium DevelopmentGoals (MDGs),whichwereagreed in2000at theUN Millennium Summit and will expire in 2015,has shown how achievable measurable targetscan help provide direction in a world with manydifferent priorities. They have brought focus tothe work of the development community andhelpedmobilizeinvestmenttoreducepovertyandachievenotable advances in humanwell-being intheworld’spoorestcountries.However,theMDGswere not designed to create a dynamic processof investment in sustainable development andresilience to economic, social or environmentalshocks. They were focused on a relatively

narrow set of fundamental goals – for example,eradicatingextremepovertyandhunger, reducingchild mortality, improving maternal health – inorder to trigger action and spending on targeteddevelopmentprogrammes.

The SDGs are both a logical next step (fromfundamental goals to broad-based sustainabledevelopment) and amore ambitious undertaking.Theyrepresentaconcertedefforttoshifttheglobaleconomy–developedaswellasdeveloping–ontoamoresustainable trajectoryof long-termgrowthand development. The agenda is transformative,as for instance witnessed by the number ofprospectiveSDGsthatarenotprimarilyorientedtospecific economic, social or environmental issuesbutinsteadaimtoputinplacepolicies,institutionsand systems necessary to generate sustainedinvestmentandgrowth.

Where the MDGs required significant financialresources for spending on focused developmentprogrammes, the SDGs will necessitate a majorescalation in the financingeffort for investment inbroad-based economic transformation, in areassuch as basic infrastructure, clean water andsanitation, renewable energy and agriculturalproduction.

TheformulationoftheSDGs–andtheirassociatedinvestment needs – takes place against aseeminglyunfavourablemacroeconomicbackdrop.Developedcountriesareonlybarelyrecoveringfromthe financial crisis, and in many countries publicsectorfinancesareprecarious.Emergingmarkets,whereinvestmentneedsineconomicinfrastructurearegreatest,butwhichalsorepresentnewpotential

CHAPTER Iv InvestingintheSDGs:AnActionPlanforpromotingprivatesectorcontributions 137

sources of finance and investment, are showingsigns of a slowdown in growth. And vulnerableeconomies,suchastheleastdevelopedcountries(LDCs),still rely toasignificantextentonexternalsources of finance, including official developmentassistance (ODA) from donor countries withpressuredbudgets.

2. Private sector contributions to the SDGs

The role of the public sector is fundamental and pivotal. At the same time the contribution of the private sector is indispensable.

Given thebroad scopeof theprospectiveSDGs,privatesectorcontributionscantakemanyforms.Somewillprimarilyplacebehaviouraldemandsonfirmsandinvestors.PrivatesectorgoodgovernanceinrelationtoSDGsiskey,thisincludes,e.g.:

• commitment of the business sector tosustainabledevelopment;

• commitmentspecificallytotheSDGs;

• transparency and accountability in honoringsustainable development in economic, socialandenvironmentalpractices;

• responsibilitytoavoidharm,e.g.environmentalexternalities,evenifsuchharmsarenotstrictlyspeakingprohibited;

• partnership with government on maximizingco-benefitsofinvestment.

Beyondgoodgovernanceaspects,agreatdealoffinancialresourceswillbenecessary.

The investment needs associatedwith the SDGswill require a step-change in the levels of bothpublic and private investment in all countries,and especially in LDCs and other vulnerableeconomies. Public finances, though central andfundamentalto investment inSDGs,cannotalonemeet SDG-implied demands for financing. Thecombinationofhugeinvestmentrequirementsandpressuredpublicbudgets–addedtotheeconomictransformationobjectiveoftheSDGs–meansthattheroleoftheprivatesectorisevenmoreimportantthanbefore.TheprivatesectorcannotsupplantthebigpublicsectorpushneededtomoveinvestmentintheSDGsintherightdirection.Butanassociated

big push in private investment can build on thecomplementarityandpotentialsynergiesinthetwosectorstoacceleratethepaceinrealizingtheSDGsandmeetingcrucialtargets.Inadditiontodomesticprivate investment, private investment flows fromoverseas will be needed in many developingcountries, including foreigndirect investment (FDI)andotherexternalsourcesoffinance.

At first glance, private investors (and othercorporates, such as State-owned firms andsovereign wealth funds; see box IV.1), domesticand foreign, appear to have sufficient funds topotentiallycoversomeofthoseinvestmentneeds.Forinstance,intermsofforeignsources,thecashholdingsoftransnationalcorporations(TNCs)areintheorderof$5trillion;sovereignwealthfund(SWF)assets today exceed $6 trillion; and the holdingsofpensionfundsdomiciledindevelopedcountriesalonehavereached$20trillion.

At thesame time, thereare instancesofgoodwillon the part of the private sector to invest insustainable development; in consequence, thevalueofinvestmentsexplicitlylinkedtosustainabilityobjectives isgrowing.Many “innovativefinancing”initiatives have sprung up, many of which arecollaborativeeffortsbetweenthepublicandprivatesectors, as well as international organizations,foundationsandNGOs.SignatoriesofthePrinciplesforResponsibleInvestment(PRI)haveassetsundermanagement of almost $35 trillion, an indicationthat sustainability principles do not necessarilyimpedetheraisingofprivatefinance.

Thus there appears to be a paradox that has tobe addressed. Enormous investment needs andopportunities are associated with sustainabledevelopment.Privateinvestorsworldwideappeartohavesufficientfundsavailable.Yetthesefundsarenot finding theirway to sustainable-development-orientedprojects,especiallyindevelopingcountries:e.g.onlyabout2percentoftheassetsofpensionfunds and insurers are invested in infrastructure,andFDItoLDCsstandsatameagre2percentofglobalflows.

Themacroeconomic backdrop of this situation isrelated to the processeswhich have led to largesumsof financial capital beingunderutilizedwhilepartsof therealsectorarestarvedof funds (TDR


Figure IV.1. Strategic framework for private investment in the SDGs

MOBILIZATION

Raising �nance and reorienting �nancial markets towards investment in SDGs

IMPACT

Maximizing sustainable development bene�ts,

minimizing risks

LEADERSHIP

Setting guiding principles, galvanizing action, ensuring

policy coherence

CHANNELLING

Promoting and facilitating investment into SDG sectors

Source:UNCTAD.

2009;TDR2011;UNCTAD2011d;Wolf,M.2010);thischapterdealswithsomeofthemicroeconomicaspects of shifting such capital to productiveinvestmentintheSDGs.1

3. The need for a strategic framework for private investment in the SDGs

A strategic framework for private sector investment in SDGs can help structure efforts to mobilize funds, to channel them to SDG sectors, and to maximize impacts and mitigate drawbacks.

SincetheformulationoftheMDGs,manyinitiativesaimed at increasing private financial flows tosustainable development projects in developingcountrieshavesprungup.Theyrangefromimpactinvesting (investments with explicit social andenvironmentalobjectives)tonumerous“innovativefinancing mechanisms” (which may entailpartnerships between public and private actors).These private financing initiatives distinguishthemselves either by the source of finance (e.g.institutionalinvestors,privatefunds,corporations),their issue area (general funds, environmentalinvestors, health-focused investors), the degreeof recognition andpublic support, ormany other

criteria, ranging fromgeographic focus to size toinvestmenthorizon.Allfacespecificchallenges,butbroadlytherearethreecommonchallenges:

• Mobilizing funds for sustainable development – raising resources in financial markets orthrough financial intermediaries that can beinvestedinsustainabledevelopment.

• Channelling funds to sustainable development projects – ensuring that available fundsmake their way to concrete sustainable-development-oriented investment projectson the ground in developing countries, andespeciallyLDCs.

• Maximizing impact and mitigating drawbacks– creating an enabling environment andputting in place appropriate safeguards thatneed to accompany increased private sectorengagement in what are often sensitivesectors.

Theurgencyofsolvingtheproblem,i.e.“resolvingthe paradox”, to increase the private sector’scontributiontoSDGinvestmentisthedrivingforcebehind this chapter. UNCTAD’s objective is toshowhowthecontributionoftheprivatesectortoinvestmentintheSDGscanbeincreasedthrough


Box Iv.1. Investing in Sustainable development: Scope and definitions

Theresearchforthischapterhasbenefitedfromasignificantamountofexistingworkonfinancingfordevelopment,bymanyinternationalandotherstakeholderorganizations.Thescopeoftheseeffortsvariessignificantlyalongthedimensionsofpublicandprivatesourcesoffinance;domesticandinternationalsources;globalanddeveloping-countryfinancingneeds;overallfinancingneedsandcapitalinvestment;directandportfolioinvestment;andoveralldevelopmentfinancingandspecificSDGobjectives.Withinthiscontext,thechapterfocusesonfivedimensions:

• Private investment byfirms, includingcorporateinvestment.Theterm“corporate”ismeanttoinclude(semi-)publicentitiessuchasState-ownedenterprisesandSWFs.Privateindividuals,whomostlyinvestinsustainabledevelopmentthroughfundsordedicatedcorporate-likevehiclesareassuchincluded.Otherprivatesourcesoffinancebyindividuals,suchasremittances,arenotaddressedhere.As much of the data on investment distin-guishes between public and private (rather than corporate) origin, and for ease of exposition, the term “private sector investment” will be used throughout the chapter.

• Domestic and foreign investors.Unlessspecifieddifferently,domesticfirmsare included inthescopeoftheanalysisandrecommendations.TherespectiverolesofdomesticandforeigninvestorsinSDGprojectswillvarybycountry,sectorandindustry.Acrucialaspectofsustainabledevelopmentfinancingandinvestmentwillbelinkagesthatforeigninvestorsestablishwiththelocaleconomy.

• Developing countries.Thefocusofthechapterisondevelopingcountries,withspecificattentiontoweakandvulnerableeconomies(LDCs,landlockeddevelopingcountriesandsmallislanddevelopingStates).However,someofthedatausedaresolelyavailableasglobalestimates(indicated,wherepertinent).

• Capital investment. “Investment”normally refers to“capitalexpenditures” (or“capex”) inaprojector facility.Financingneedsalsoincludeoperatingexpenditures(or“opex”)–forexample,onhealthcare,educationandsocialservices–inadditiontocapitalexpenditures(or“capex”).Whilenotregardedasinvestment,theseex-pendituresarereferredtowheretheyareimportantfromanSDGperspective.Inkeepingwiththisdefinition,thechapterdoesnotexaminecorporatephilanthropicinitiatives,e.g.fundsforemergencyrelief.

• Broad-based sustainable development financing needs. ThechapterexaminesinvestmentinallthreebroadlydefinedpillarsoftheSDGs:economicgrowth,socialinclusionandenvironmentalstewardship.Inmostcases,thesearehardtoseparateinanygivenSDGinvestment.Infrastructureinvestmentswillhaveelementsofallthreeobjectives.Theuseoftheterms“SDGsectors”or“SDGinvestments”inthischaptergenerallyreferstosocialpillarinvestments(e.g.schools,hospitals,socialhousing);environmentalpillarinvestments(e.g.climatechangemitigation,conservation);andeconomicpillarinvestments(e.g.infrastructure,energy,industrialzones,agriculture).

Source:UNCTAD.

aconcerted pushby the internationalcommunity,withinaholisticstrategicframeworkthataddressesall key challenges inmobilizing funds,channelling them tosustainabledevelopmentandmaximizingbeneficial impact(figureIV.1).

Thechapterposesthefollowingquestions:

1. How large is the disparity between availablefinancing and the investment required toachieve the SDGs? What is the potential forthe private sector to fill this gap?What couldbe realistic targets for private investment inSDGs?(SectionB.)

2. Howcanthebasicpolicydilemmasassociatedwith increased private sector investment inSDGsectorsberesolvedthroughgovernmentsproviding leadership in this respect? (SectionC.)

3. What are the main constraints to mobilizing private sector financial resources forinvestment in sustainable development, andhowcantheybesurmounted?(SectionD.)

4. What are themain constraints forchannelling investment into SDG sectors, and how cantheybeovercome?(SectionE.)

5. What are the main challenges for investmentinSDGsectorstohavemaximum impact,andwhat are the key risks involved with privateinvestment in SDG sectors? How can thesechallenges be resolved and risks mitigated?(SectionF.)

Theconcludingsection(sectionG)of thechapterbringskeyfindingstogetherintoanAction Plan for Private Investment in the SDGs that reflects thestructureofthestrategicframework.


B. The INVeSTmeNT GAP AND PRIVATe SeCTOR POTeNTIAl

This section explores the magnitude of totalinvestmentrequiredtomeettheSDGsindevelopingcountries; examineshow these investmentneedscomparetocurrentinvestmentinpertinentsectors(theinvestmentgap);andestablishesthedegreetowhichtheprivatesectorcanmakeacontribution,withspecificattentiontopotentialcontributions invulnerableeconomies.

Private sector contributions often depend onfacilitating investments by the public sector. Forinstance,insomesectors–suchasfoodsecurity,healthorenergysustainability–publiclysupportedR&Dinvestmentsareneededasapreludetolarge-scaleSDG-relatedinvestments.

1. SDG investment gaps and the role of the private sector

The SDGs will have very significant resource implications worldwide. Total investment needs in developing countries alone could be about $3.9 trillion per year. Current investment levels leave a gap of some $2.5 trillion.

This section examines projected investmentneeds in keySDGsectorsover theperiod2015-2030, as well as the current levels of privatesector participation in these sectors. It draws ona wide range of sources and studies conductedby specializedagencies, institutions and researchentities(boxIV.2).

Atthegloballevel,totalinvestmentneedsareintheorderof$5to$7trillionperyear.TotalinvestmentneedsindevelopingcountriesinkeySDGsectorsareestimatedat$3.3to$4.5trillionperyearovertheproposedSDGdeliveryperiod,withamidpointat $3.9 trillion (table IV.2).2 Current investment inthese sectors is around $1.4 trillion, implying anannual investmentgapofbetween$1.9and$3.1trillion.

Economic infrastructure

Total investment in economic infrastructure indeveloping countries – power, transport (roads,railsandports),telecommunicationsandwaterand

sanitation–iscurrentlyunder$1trillionperyearforallsectors,butwillneedtorisetobetween$1.6and$2.5trillionannuallyovertheperiod2015-2030.

Increasesininvestmentofthisscaleareformidable,andmuchoftheadditionalamountneedstocomefromtheprivatesector.Onebasisforgaugingthepotential private sector contribution in meetingthe investment gap in economic infrastructure istocomparethecurrentlevelofthiscontributionindeveloping countries, with what could potentiallybethecase.Forinstance,theprivatesectorsharein infrastructure industries in developed countries(ormoreadvanceddevelopingcountries)givesanindicationofwhatispossibleascountriesclimbthedevelopmentladder.

Apartfromwaterandsanitation,theprivateshareofinvestmentininfrastructureindevelopingcountriesisalreadyquitehigh(30-80percentdependingontheindustry);andifdevelopedcountryparticipationlevels are used as a benchmark, the privatesectorcontributioncouldbemuchhigher.Amongdeveloping countries, private sector participationrangeswidely, implying that there is considerableleewayforgovernmentstoencouragemoreprivatesector involvement,dependingonconditionsanddevelopmentstrategies.

Recenttrendsindevelopingcountrieshave,infact,been towards greater private sector participationin power, telecommunications and transport(Indonesia, Ministry of National DevelopmentPlanning2011;CalderonandServen2010;OECD2012; India,PlanningCommission2011).Even inwater and sanitation, private sector participationcanbeashighas20percent insomecountries.At the same time, although the rate reaches 80per cent in a number of developed countries, itcanbeaslowas20percentinothers,indicatingvaryingpublicpolicypreferencesduetothesocialimportanceofwaterandsanitationinallcountries.Giventhesensitivityofwaterprovisiontothepoorin developing countries, it is likely that the publicsector therewill retain itsprimacy in this industry,althoughagreaterroleforprivatesectorinurbanareasislikely.


Box Iv.2. data, methods and sources used in this section

AsthecontoursofthefutureSDGsarebecomingclearer,manyorganizationsandstakeholdersintheprocesshavedrawnupestimatesoftheadditionalfinancingrequirementsassociatedwiththeeconomic,socialandenvironmentalpillarsofsustainabledevelopment.Suchestimatestakedifferentforms.Theymaybelump-sumfinancingneedsuntil2030orannualrequirements.Theymayaggregateoperationalcostsandcapitalexpenditures.Andtheyareoftenglobalestimates,assomeoftheSDGsareaimedatglobalcommons(e.g.climatechangemitigation).

This section uses data on SDG investment requirements as estimated and published by specialized agencies,institutions and research entities in their respective areas of competence, using ameta-analytic approach. Asmuchaspossible,thesectionaimstoexpressalldata incommonterms:(i)asannualorannualizedinvestmentrequirementsandgaps;(ii)focusingon investment(capitalexpendituresonly);and(iii)primarilynarrowingthescopetoinvestmentindevelopingcountriesonly.AnyestimatesbyUNCTADareasmuchaspossibleconsistentwiththeworkofotheragenciesandinstitutions.Figuresarequotedonaconstantpricebasistoallowcomparisonsbetweencurrentinvestment,futureinvestmentneedsandgaps.Howeveragencies’estimatesusedifferentbaseyearsfortheGDPdeflator,andtheGDPrateassumedalsovaries(usuallybetween4–5percentconstantGDPgrowth).

This section has extensively reviewed many studies and analyses to establish consensus estimates on futureinvestmentrequirements.1Theprincipalsourcesdrawnuponare:

• Infrastructure:McKinsey provided valuable support, including access to theMGI ISS database.McKinsey(2013),Bhattacharyaetal.incollaborationwithG-24(2012),MDBCommitteeonDevelopmentEffectiveness(2011),Fayetal(2011),Airoldietal.(2013),OECD(2006,2007,2012),WEF/PwC(2012).

• ClimateChange:CPIandUNCTADjointlydeterminedtheinvestmentneedsrangesprovidedintableIV.2,in-cludingunpublishedCPIanalysis.Buchneretal.(2013),WorldBank(2010),McKinsey(2009),IEA(2009,2012),UNFCCC(2007),WEF(2013).

• Foodsecurityandagriculture:FAOanalysis,updated jointlybyFAO-UNCTAD;contextandmethodology inSchmidhuberandBruinsma(2011).

• Ecosystems/Biodiversity:HLP(2012)andKettunenetal.(2013).

Further informationandsubsidiarysourcesusedareprovided in table IV.2.Thesesourceswereused to “sensecheck”thenumbersintableIV.2andestimatetheprivateshareofinvestmentineachsector.

Therearenoavailablestudiesonsocialsectors(healthandeducation)conductedonabasiscomparabletotheabovesectors.UNCTADestimatedinvestmentneedsover2015-2030forsocialsectorsusingamethodologycommontostudiesinothersectors,i.e.thesumof:theannualizedinvestmentrequiredtoshiftlow-incomedevelopingcountriesto thenext levelofmiddle incomedevelopingcountries, the investment required toshift this lattergroup to thenextlevel,andsoon.TherawdatarequiredfortheestimationswereprimarilyderivedfromtheWorldBank,WorldDevelopmentIndicatorsDatabase.

The data presented in this chapter, while drawing on and consistent with other organizations, and based onrecognizedmethodologicalprinciples,shouldnonethelessbetreatedonlyasaguidetolikelyinvestment.Inadditiontothemanydataandmethodologicaldifficultiesthatconfrontallagencies,projectionsmanyyearsintothefuturecanneverfullyanticipatethedynamicnatureofclimatechange,populationgrowthandinterestrates–allofwhichwill haveunknown impactson investment anddevelopment needs.2Bearing inmind the above limitations, theestimatesreportedinthissectionprovideordersofmagnitudeofinvestmentrequirements,gapsandprivatesectorparticipation.

Source:UNCTAD.1 Inanumberofcases, thissectiondrawsonestimates for future investment requirementsandgapsnotmade

specificallywithSDGs inmind.Nevertheless, theaimsunderlying theseestimatesarenormally forsustainabledevelopmentpurposesconsistentwith theSDGs (e.g.estimatespertaining toclimatechangemitigationorinfrastructure).ThisapproachhasalsobeentakenbytheUNSystemTaskTeam(UNTT2013)andotherUnitedNationsbodiesaimingtoestimatethefinancingandinvestmentimplicationsoftheSDGs.

2 For instance,aspateofmegaprojects inpowerandroadtransport indevelopingcountriesduring the last fewyearshascausedtheproportionofinfrastructuretoGDPtorisefordevelopingcountriesasawhole.Anumberofstudiesonprojectedinvestmentrequirementsininfrastructure–whichassumeabaselineratioofinfrastructure,normally3-4percent–donotfullyfactorthisdevelopmentin.


Table IV.2. Current investment, investment needs and gaps and private sector participation in key SDG sectors in developing countriesa

2015-2030

Sector Description

Estimatedcurrent

investment

Total investment

required

Investment Gap

Average private sector participation in current

investmentb

(latestavailableyear)

$billion

Annualized$billion(constantprice)

Developingcountries

Developedcountries

A B C = B - A Percent

PowercInvestmentingeneration,transmissionanddistributionofelectricity

~260 630–950 370–690 40–50 80–100

TransportcInvestmentinroads,airports,portsandrail

~300 350–770 50–470 30–40 60–80

TelecommunicationscInvestmentininfrastructure(fixedlines,mobileandinternet)

~160 230–400 70–240 40–80 60–100

Waterandsanitationc Provisionofwaterandsanitationtoindustryandhouseholds

~150 ~410 ~260 0–20 20–80

Foodsecurityandagriculture

Investmentinagriculture,research,ruraldevelopment,safetynets,etc.

~220 ~480 ~260 ~75 ~90

Climatechangemitigation

Investmentinrelevantinfrastructure,renewableenergygeneration,researchanddeploymentofclimate-friendlytechnologies,etc.

170 550–850 380–680 ~40 ~90

Climatechangeadaptation

Investmenttocopewithimpactofclimatechangeinagriculture,infrastructure,watermanagement,coastalzones,etc.

~20 80–120 60–100 0–20 0–20

Eco-systems/biodiversity

Investmentinconservationandsafeguardingecosystems,marineresourcemanagement,sustainableforestry,etc.

70–210d

HealthInfrastructuralinvestment,e.g.newhospitals

~70 ~210 ~140 ~20 ~40

EducationInfrastructuralinvestment,e.g.newschools

~80 ~330 ~250 ~15 0–20

Source: UNCTAD.a Investmentreferstocapitalexpenditure.Operatingexpenditure,thoughsometimesreferredtoas‘investment’isnotincluded.

Themainsourcesused,inadditiontothoseinboxIV.2,include,bysector: Infrastructure:ABDI(2009);Australia,BureauofInfrastructure,TransportandRegionalEconomics(2012);Banerjee(2006);

Bhattacharyay(2012);Australia,ReserveBank(2013);Doshietal.(2007);CalderonandServen(2010);CatoInstitute(2013);USCongress(2008);CopelandandTiemann(2010);Edwards(2013);EPSU(2012);Estache(2010);ETNO(2013);FosterandBriceno-Garmendia(2010);GoldmanSachs(2013);G-30(2013);GunatilakeandCarangal-SanJose(2008);HallandLobina(2010);UKH.M.Treasury(2011,2013);Inderst(2013);Indonesia,MinistryofNationalDevelopmentPlanning(2011);IzaguirreandKulkarni(2011);Lloyd-Owen(2009);McKinsey(2011b);PerrottiandSánchez(2011);Pezon(2009);Pisu(2010);India,PlanningCommission(2011,2012);Rhodes(2013);Rodriguezetal.(2012);Wagenvoortetal.(2010);WorldBank(2013a)andYepes(2008);

Climate Change:AfDBetal.(2012);Buchneretal.(2011,2012)andHelmetal.(2010). Social sectors:Baker(2010);HighLevelTaskForceonInnovativeInternationalFinancingforHealthSystems(2009);Institute

forHealthMetricsandEvaluation(2010,2012);LeadingGrouponInnovativeFinancingtoFundDevelopment(2010);McCoyetal.(2009);TheLancet(2011,2013);WHO(2012)andUNESCO(2012,2013).

b Theprivatesectorshareforeachsectorshowslargevariabilitybetweencountries.c Excludinginvestmentrequiredforclimatechange,whichisincludedinthetotalsforclimatechangemitigationandadaptation.d Investmentrequirementsinecosystems/biodiversityarenotincludedinthetotalsusedintheanalysisinthissection,asthey

overlapwithothersectors.


Food security

Turning to investment in food security and agriculture, current relevant investment is around$220billionperyear.InvestmentneedsinthisarearefertotheFAO’s“zerohungertarget”andprimarilycovers investment in relevant agriculture areassuchas:agriculture-specific infrastructure,naturalresource development, research, and food safetynets,whichareallapartoftherelevantSDGgoals.

On this basis, total investment needs are around$480 billion per year, implying an annual gap ofsome$260billionoverandabovethecurrentlevel.Thecorporatesectorcontributionintheagriculturalsectorasawholeisalreadyhighat75percentindevelopingcountries, and is likely tobehigher inthefuture(asindevelopedcountries).

Social infrastructure

Investment in social infrastructure, such aseducation and health, is a prerequisite foreffective sustainable development, and thereforean important component of the SDGs. Currentlyinvestment in education is about $80 billion peryear in developing countries. In order to movetowards sustainable development in this sectorwouldrequire$330billiontobeinvestedperyear,implyinganannualgapofabout$250billionoverandabovethecurrentlevel.

Investment inhealth is currently about $70billionin developing countries. TheSDGswould requireinvestment of $210 billion per year, implying aninvestmentgapofsome$140billionperyearoverand above the current level. The private sectorinvestmentcontributioninhealthcareindevelopingcountriesasawholeisalreadyveryhigh,andthisis likely to continue, though perhaps less so invulnerable economies. In contrast, the corporatecontribution in both developed and developingcountriesineducationissmalltonegligibleandlikelyto remain thatway.Generally, unlike in economicinfrastructure, private sector contributions toinvestment insocial infrastructurearenot likely toseeamarkedincrease.

For investment in social infrastructure it is alsoespeciallyimportanttotakeintoaccountadditionaloperational expenditures as well as capitalexpenditures (i.e. investment per se). The relative

weight of capital expenditures and operatingexpendituresvariesconsiderablybetweensectors,depending on technology, capital intensity, theimportance of the service component and manyotherfactors.InmeetingSDGobjectives,operatingexpenditures cannot be ignored, especially innew facilities. In the case of health, for example,operating expenditures are high as a share ofannual spending in the sector. After all, investingin new hospitals in a developing country isinsufficienttodeliverhealthservices–thatistosaydoctors,nurses,administrators,etc.areessential.Considerationofoperatingcost is important inallsectors;notallowingforthisaspectcouldseethegainsofinvestmentintheSDGsreversed.

Environmental sustainability

Investment requirements for environmental sustainability objectives are by nature hard toseparatefrominvestmentsineconomicandsocialobjectives.Toavoiddoublecounting,thefiguresforthe investmentgap for economic infrastructure intableIV.2excludeestimatesofadditionalinvestmentrequired for climate change adaptation andmitigation.Thefiguresforsocial infrastructureandagriculture are similarly adjusted (although someoverlapremains).Fromapurelyenvironmentalpointofview,includingstewardshipofglobalcommons,the investment gap is largely captured throughestimatesforclimatechange,especiallymitigation,and under ecosystems/biodiversity (includingforests,oceans,etc.).

Currentinvestmentsforclimatechangemitigation,i.e. to limit the rise in average global warming to2oCelsius,are$170billionindevelopingcountries,butrequirealargeincreaseover2015-2030(tableIV.2).Onlyaminorityshareispresentlycontributedbytheprivatesector–estimatesrangeupto40percentindevelopingcountries.Abiggercontributionispossible,inasmuchastheequivalentcontributionin developed countries is roughly 90 per cent,thoughmuchof this is the result of legislation aswellasincentivesandspecificinitiatives.

The estimated additional investment requiredfor climate change mitigation are not just forinfrastructure, but for all sectors – although thespecificareasforactiondependverymuchonthe


Figure IV.2. example investment needs in vulnerable and excluded groups(Billions of dollars per year)

Source::UNCTAD,WHO(2012),IEA(2009,2011),WorldBankandIEA(2013),Bazilianetal.(2010)andUNESCO(2013).Note: TheseneedsarecalculatedonadifferentbasisfromtableIV.2andthenumbersarenotdirectlycomparable.

typesofpoliciesandlegislationthatareenactedbygovernments (WIR10). In future thesepolicieswillbe informedbytheSDGs, includingthoserelatedto areas such as growth, industrialization andsustainablecities/settlements.Thesizeandpatternoffutureinvestmentinclimatechangeindevelopingcountries(anddevelopedones)dependsverymuchonwhichpolicies are adopted (e.g. feed-in tariffsfor renewable energy, emissions from cars, thedesignofbuildings,etc.),whichiswhytherangeofestimatesiswide.

Investment in climate change adaptation indeveloping countries is currently very small, inthe orderof $20billionper year,but alsoneedto increase substantially, even if mitigation issuccessful (table IV.2). If it is not, with averagetemperatures rising further than anticipated, thenadaptation needs will accelerate exponentially,especiallywith respect to infrastructure in coastalregions, water resource management and theviabilityofecosystems.

The current private sector share of investment inclimatechangeadaptationindevelopingcountriesappears tobenodifferent, at up to20per cent,thanindevelopedones.Inbothcasesconsiderableinventiveness is required to boost corporatecontribution into territory which has traditionally

been seen as the purview of the State, and inwhich–fromaprivatesectorperspective–therisksoutweighthereturns.

Other investment needs: towards inclusiveness and universality

Therearevulnerablecommunitiesinalleconomies.This is perhaps more so in structurally weakeconomiessuchasLDCs,butnumericallygreaterpockets of poverty exist in better off developingcountries(intermsofaverageincomes)suchasinSouthAsia.

Thus, while the estimated investment needsdiscussedinthissectionareintendedtomeettheoverall requirements for sustainable investment inalldevelopingcountries,theymaynotfullyaddressthe specificcircumstanceofmanyof thepoorestcommunities or groups, especially thosewhoareisolated(e.g.inruralareasorinforests)orexcluded(e.g.peoplelivinginslums).

For this reason, a number of prospective SDGs(orspecificelementsofallSDGs)–suchasthosefocusing on energy,water and sanitation, genderand equality – include elements addressing theprerequisites of the otherwise marginalized.Selected examples of potential types of targets

Universal access to clean drinkingwater and sanitation

Universal access to energy

Universal access to schooling

Estimated current investment and private sector participation ($ Billion/year)

10-15

~ 10

Estimated annual investment needs

~ 80

~ 50

~ 30

Private sector participation

>100


Potential private sector contribution to bridging the gap

At current level of participation

At a higher rate of participation

3.9

1.42.5

Total annualinvestment needs

Current annualinvestment

Annual investment

gap

1.8

0.9

Figure IV.3. estimated annual investment needs and potential private sector contribution, 2015–2030

(Trillions of dollars)

Source:UNCTADbasedontableIV.2.Note: Totalsarethemid-pointsofrangeestimates.

arepresented in figure IV.2,withestimatesof theassociatedfinancingrequirements.

Inmostsuchcasestheprivatesectorcontributionin developing countries is low, although it shouldbepossibletoincreaseit(forinstance,inelectricityaccess).However,boostingthissharewillbeeasierin some places (e.g. in urban areas), but difficultinothers (e.g. remote locations,amongvery low-incomegroups,andwherethenumberofindividualsor communities are relatively small or highlydispersed).Theprivatesectorcontributiontogoalsaimed at vulnerable individuals and communitiesthereforeneedstobeconsideredcarefully.

2. exploring private sector potential

At today’s level of private sector participation in SDG investments in developing countries, a funding shortfall of some $1.6 trillion would be left for the public sector (and ODA) to cover.

Theprevioussectionhasestablishedtheorderofmagnitude of the investment gap that has to bebridged in order tomeet the SDGs. Total annualSDG-related investment needs in developingcountriesuntil2030areintherangeof$3.3to$4.5trillion,basedonestimatesforthemostimportantSDG sectors from an investment point of view(figure IV.3). This entails a mid-point estimate of$3.9 trillion per year. Subtracting current annualinvestment of $1.4 trillion leaves a mid-pointestimatedinvestmentgapof$2.5trillion,overandabovecurrent levels.At thecurrentprivatesector

share of investment in SDG areas, the privatesector would cover only $900 billion of this gap,leaving $1.6 trillion to be covered by the publicsector (including ODA). For developing countriesas a group, including fast-growing emergingmarkets, thisscenariocorrespondsapproximatelyto a “business as usual” scenario; i.e. at currentaverage growth rates of private investment, thecurrent private sector share of total investmentneedscouldbecovered.However, increasing theparticipationoftheprivatesectorinSDGfinancingin developing countries could potentially cover alargerpartofthegap,iftherelativeshareofprivatesector investment increased to levelsobserved indevelopedcountries.Itisclearthatinordertoavoidwhat could be unrealistic demands on the publicsector in many developing countries, the SDGsmust be accompanied by strategic initiatives toincreaseprivatesectorparticipation.

The potential for increasing private sectorparticipation is greater in some sectors than inothers (figure IV.4). Infrastructuresectors,suchaspowerandrenewableenergy(underclimatechangemitigation), transport and water and sanitation,are natural candidates for greater private sectorparticipation, under the right conditions and withappropriate safeguards. Other SDG sectors areless likelytogeneratesignificantlyhigheramountsofprivatesectorinterest,eitherbecauseitisdifficultto design risk-return models attractive to privateinvestors (e.g. climate change adaptation), or


Figure IV.4. Potential private-sector contribution to investment gaps at current and high participation levels(Billions of dollars)

0 100 200 300 400 500 600 700

Power

Climate change mitigation

Food Security

Telecommunications

Transport

Ecosystems/biodiversity

Health

Water and sanitation

Climate changeadaptation

Education

Current participation, mid-point

High participation, mid-point

Current participation, range

High participation, range

Source:UNCTAD.Note: Private-sectorcontributiontoinvestmentgapscalculatedusingmid-pointsofrangeestimatesintableIV.2.Thehigher

participationlevelistheaverageprivate-sectorinvestmentsharesobservedindevelopedcountries.Somesectorsdonothavearangeofestimates,hencethemid-pointisthesingleestimatedgap.

becausetheyaremoreintherealmofpublicsectorresponsibilities and consequently highly sensitiveto private sector involvement (e.g. education andhealthcare).

3. Realistic targets for private sector SDG investment in lDCs

The SDGs will necessitate a significant increase in public sector investment and ODA in LDCs. In order to reduce pressure on public funding requirements, a doubling of the growth rate of private investment is desirable.

InvestmentandprivatesectorengagementacrossSDGsectorsarehighlyvariableacrossdevelopingcountries. The extent to which policy action toincrease private sector investment is requiredthereforediffersbycountryandcountrygrouping.EmergingmarketsfaceentirelydifferentconditionstovulnerableeconomiessuchasLDCs,LLDCsandsmall island developing States (SIDS), which arenecessarilyafocusofthepost-2015SDGagenda.

In LDCs, for instance, ODA remains the largestexternalcapitalflow,at$43billion in2012(OECD

2013a), compared to FDI inflows of $28 billionand remittancesof$31billion in2013.Moreover,a significant proportion of ODA is spent ongovernment budget support and goes directly toSDG sectors like education and health.Given itsimportancetowelfaresystemsandpublicservices,ODAwillcontinuetohaveanimportantroletoplayin the future ecology of development finance inLDCsandothervulnerableeconomies;andoftenitwillbeindispensable.

Nevertheless, precisely because the SDGs entailalarge-scaleincreaseinfinancingrequirementsinLDCsandothervulnerableeconomies (relative totheireconomicsizeandfinancingcapacity),policyintervention to boost private investment will alsobe a priority. It is therefore useful to examine thedegree towhichprivatesector investmentshouldbetargetedbysuchpolicyactions.

Extrapolating from the earlier analysis of the totalSDGinvestmentneedfordevelopingcountriesasawhole (at about $3.9 trillionper year), the LDCshareofinvestmentinSDGsectors,basedonthecurrentsizeoftheireconomiesandonthespecificneedsrelatedtovulnerablecommunities,amounts


Figure IV.5. Private sector SDG investment scenarios in lDCs

Source:UNCTADestimates,basedontableIV.2andfigureIV.3.

8%

Implied growth rate Implied increase in of private sector

investmentpublic investment(including ODA)

11%

15% x3

x6

x8

16

60

90

180

240

24

180

150

70

Total annual SDG investment needs in LDCs in 2030

Current investment in SDGs in LDCs

Scenario 3: Private-sector share of investment in SDG sectors rises

to that observed in developedcountries

$ billions

Scenarios for private-sector investment in SDG sectors in LDCs

Scenario 2: Current private-sector share of investment in SDG sectors

in LDCs maintained

Scenario 1: “Do nothing” current growth rate of private-sector

investment maintained

Required public investment and ODA under each scenario

60

tonearly$120billionayearandatotalforthe2015-2030 period of $1.8 trillion. Current investmentsin LDCs in SDG sectors are around $40 billion.3FigureIV.5providesanexampleofatarget-settingscenarioforprivateinvestmentinLDCs.

Totalinvestmentneedsof$1.8trillionwouldimplyatargetin2030,thefinalyearoftheperiod,of$240billion.4 The current growth rate of private sectorinvestment inLDCs,ataround8percent,wouldquadrupleinvestmentby2030,butstillfallshortofthe investment required (Scenario 1). This “doingnothing”scenariothusleavesashortfallthatwouldhave tobefilledbypublicsector funds, includingODA, requiring an eight-fold increase to 2030.Thisscenario,with the limited fundingcapabilitiesof LDC governments and the fact that much ofODA in LDCs is already used to support current (not investment) spending by LDC governments,is therefore not a viable option. Without higherlevels of private sector investment, the financingrequirements associated with the prospectiveSDGs in LDCs will be unrealistic for the publicsectortobear.

One target for the promotion of private sector

investmentinSDGscouldbetocoverthatpartofthetotalinvestmentneedsthatcorrespondstoitscurrentshareofinvestmentinLDCs’SDGsectors(40percent),requiringaprivatesectorinvestmentgrowthrateof11percentperyearbutstillimplyingasix-foldincreaseinpublicsectorinvestmentandODAby 2030 (Scenario 2). A “stretch” target forprivate investment (but one that would reducepublicfundingrequirementstomorerealisticlevels)could be to raise the share of the private sectorinSDG investments to the75percentobservedin developed countries. This would obviouslyrequiretherightpolicysettingbothtoattractsuchinvestmentandtoput inplaceappropriatepublicpolicysafeguards,andwouldimplytheprovisionofrelevanttechnicalassistance.SuchastretchtargetwouldeasethepressureonpublicsectorfundsandODA,butstillimplyalmosttreblingthecurrentlevel.

Public sector funds, and especially ODA, willthereforeremainimportantforSDGinvestmentsinLDCs,includingforleveragingfurtherprivatesectorparticipation.Atthesametime,theprivatesectorcontributionmustalsoriseinordertoachievetheSDGs.


Box Iv.3. External sources of finance and the role of FdI

ExternalsourcesoffinancetodevelopingandtransitioneconomiesincludeFDI,portfolioinvestment,otherinvestmentflows(mostlybankloans),ODAandremittances.Togethertheseflowsamounttoaround$2trillionannually(boxfigureIV.3.1).Afterasharpdropduringtheglobalfinancialcrisistheyreturnedtohighlevelsin2010,althoughtheyhaveseenaslightdeclinesincethen,drivenprimarilybyfluctuatingflowsinbankloansandportfolioinvestment.

Thecompositionofexternalsourcesoffinancediffersbycountries’levelofdevelopment(boxfigureIV.3.2).FDIisanimportantsourceforallgroupsofdevelopingcountries,includingLDCs.ODAaccountsforarelativelylargeshareofexternalfinanceinLDCs,whereasthesecountriesreceivealowamountofportfolioinvestment,reflectingthelackofdevelopedfinancialmarkets.

The components of external finance showdifferent degrees of volatility. FDI has been thelargest and most stable component over thepast decade, and themost resilient to financialand economic crises. It now accounts for justunder half of all net capital flows to developingand transition economies. The relative stabilityandsteadygrowthofFDIarisesprimarilybecauseit is associated with the build-up of productivecapacity in host countries.Direct investors tendto take a long-term interest in assets locatedin host countries, leading to longer gestationperiods for investment decisions, and makingexisting investments more difficult to unwind.FDIthustendstobelesssensitivetoshort-termmacroeconomic, exchange rate or interest ratefluctuations.

/...

Box figure Iv.3.1. External development finance to developing and transition economies, 2007–2013

(Billions of dollars)

- 500

0

500

1 000

1 500

2 000

2 500

2007 2008 2009 2010 2011 2012 2013

FDI Portfolio investment Other investmentODA Remittances

Source:UNCTAD,basedondatafromIMF(forportfolioandotherinvestment),fromtheUNCTADFDI-TNC-GVCInformationSystem(forFDIinflows),fromOECD(forODA)andtheWorldBank(forremittances).

Note: Dataareshown in thestandardbalance-of-paymentspresentation, thusonanetbasis.

Box figure Iv.3.2. Composition of external sources of development finance, 2012

Source:UNCTAD,basedondatafromIMF(forportfolioandotherinvestment), fromtheUNCTADFDI-TNC-GVC InformationSystem(forFDIinflows),fromOECD(forODA)andtheWorldBank(forremittances).

Remittances

Other investment

Portfolio investment

ODA

FDI40%

21%

6% 38%

23% 1%

11%13%

20%26%

Developing andtransition

economies

Least developedcountries


Reaching the “stretch” targetoveraperiodof15years requires a doubling in the current growthrate of private investment. Such an increasehas implications for the components of privateinvestment. For instance, foreign investment,especially FDI, is relatively important in privatesector capital formation in LDCs (box IV.3).WhileFDIamountstolessthan10percentofthevalueof gross fixed capital formation in developingcountries, inLDCsitreachesaround15percent,

withhigherpeaksinparticulargroupsofstructurallyweak economies (for example,more than 23percentinlandlockeddevelopingcountries).AsprivatecapitalformationisaroundhalfofthetotalinLDCson average, foreign investment could thereforeconstitutecloseto30percentofprivateinvestment,potentiallywithhighergrowthpotential.Pursuinga“stretch”targetforprivateinvestmentinLDCsmaythusrequireaparticularfocusontheattractionofexternalsourcesofprivatefinance.

Box Iv.3. External sources of finance and the role of FdI (concluded)

ThenatureofFDIasarelativelystableandlong-terminvestmentinproductiveassetsthusbringsitclosetothetypeofinvestmentrequiredinSDGsectors.Anumberofcaveatsarewarranted,including:

• TherelativeimportanceofFDIislowerinthepoorestcountries;onitsown,FDI(likealltypesofprivatesectorinvestment)willfirstflowtolowerrisk/higherreturnopportunities,bothintermsoflocationandintermsofsec-tor.Thisisanimportantconsiderationinbalancingpublicandprivateinvestmentpolicypriorities.

• FDI flowsdonot always translate into equivalent capital expenditures, especiallywhere they aredrivenbyretainedearningsorbytransactions(suchasmergersandacquisitions(M&As),althoughsomeM&Atransac-tions,suchasbrownfieldinvestmentinagriculturedoresultsinsignificantcapitalexpenditure).

• FDIcancontainshort-term,relativelyvolatilecomponents,suchas“hotmoney”orinvestmentsinrealestate.

Nevertheless,acomparisonwithotherexternalsourcesoffinanceshowsthatFDIwillhaveakeyroletoplay ininvestingintheSDGs.Forexample,ODAispartlyusedfordirectbudgetarysupportinthepoorestcountriesandoncurrentspending inSDGsectors, rather than forcapitalexpenditures.Remittancesarepredominantlyspentonhouseholdconsumption(althoughasmallbutgrowingshareisusedforinvestmententrepreneurialventures).Portfolioinvestmentistypicallyinmoreliquidfinancialassetsratherthaninfixedcapitalandtendstobemorevolatile.Andwithportfolio investment,bank loanshavebeen themostvolatileexternalsourceoffinance fordevelopingeconomiesoverthelastdecade.

Source:UNCTAD.


1. leadership challenges in raising private sector investment in the SDGs

Increasing the involvement of private investors in SDG sectors, many of which are sensitive or involve public services, leads to a number of policy dilemmas. Public and private sector investment are no substitutes, but they can be complementary.

Measures to increase private sector involvementin investment in sustainable development lead toanumberofpolicydilemmaswhichrequirecarefulconsideration.

• Increasing private investment is necessary. But the role of public investment remains fundamental. Increases in private sectorinvestment to help achieve the prospectiveSDGs are necessary, but public sectorinvestment remains vital and central. Thetwo sectors are not substitutes, they arecomplementary. Moreover, the role of thepublicsectorgoesbeyond investmentperse,and includes all the conditions necessary tomeettheSDGchallenge.

• Attracting private investment into SDG sectors entails a conducive investment climate. At the same time, there are risks involved. Private sector engagement in a number ofSDG sectors where a strong public sectorresponsibility exists has traditionally been asensitiveissue.Privatesectorserviceprovisionin healthcare and education, for instance,can have negative effects on standardsunless strong governance and oversightis in place, which in turn requires capableinstitutions and technical competencies.Private sector involvement in essentialinfrastructure industries, such as poweror telecommunications can be sensitive incountries where this implies the transfer ofpublic sector assets to the private sector,requiring appropriate safeguards againstanti-competitive behaviour and for consumerprotection. Private sector operations ininfrastructure such as water and sanitationareparticularlysensitivebecauseof thebasic-needsnatureofthesesectors.

C. INVeSTING IN The SDGs: A CAll FOR leADeRShIP

• Private sector investors require attractive risk-return rates. At the same time, basic-needs services must be accessible and affordable to all. The fundamental hurdle for increasedprivate sector contributions to investment inSDG sectors is the inadequate risk-returnprofile of many such investments. Perceivedriskscanbehighatalllevels,includingcountryand political risks, risks related to themarketand operating environment, down to projectand financial risks. Projects in the poorestcountries,inparticular,canbeeasilydismissedby the private sector as “poor investments”.Many mechanisms exist to share risks orotherwise improve the risk-return profile forprivate sector investors. Increasing investmentreturns, however, cannot lead to the servicesprovided by private investors ultimatelybecoming inaccessible or unaffordable for thepoorest in society. Allowing energy or watersuppliers tocoveronlyeconomicallyattractiveurban areas while ignoring rural needs, or toraise prices of essential services, are not asustainableoutcome.

• The scope of the SDGs is global. But LDCs need a special effort to attract more private investment. From the perspectiveof policymakers at the international level,the problems that the SDGs aim to addressare global issues, although specific targetsmay focus on particularly acute problemsin poor countries. While overall financing fordevelopment needs may be defined globally,with respect to private sector financingcontribution, special efforts are required forLDCsandothervulnerableeconomies.Withouttargetedpolicyinterventionthesecountrieswillnotbeabletoattractresourcesfrominvestorswhich often regard operating conditions andrisksinthoseeconomiesasprohibitive.

2. meeting the leadership challenge: key elements

The process of increasing private investment in SDGs requires leadership at the global level, as well as from national policymakers, to provide guiding


principles, set targets, galvanize action, foster dialogue, and guarantee inclusiveness.

Given the massive financing needs concomitantto theachievementof theSDGs,what isneededisaconcerted push,whichinturnrequiresstrongglobal leadership, (i) providing clear direction andbasicprinciplesofaction,(ii)settingobjectivesandtargets, (iii) buildingstrongand lastingconsensusamong many stakeholders worldwide and (iv)ensuring that theprocess is inclusive,keepingonboardcountriesthatrequiresupportalongtheway(figureIV.6).

Guiding principles for private sector investment in the SDGs

ThemanystakeholdersinvolvedinstimulatingprivateinvestmentinSDGswillhavevaryingperspectivesonhowtoresolvethepolicydilemmasinherent inseekinggreaterprivatesectorparticipationinSDGsectors.Acommonsetofprinciplesforinvestmentin SDGs can help establish a collective sense ofdirectionandpurpose.

The following broad principles could provide aframework.

• Balancing liberalization and regulation.Greaterprivate sector involvement in SDG sectorsis a must where public sector resources areinsufficient (although selective, gradual orsequenced approaches are possible); at thesame time, such increased involvement mustbe accompanied by appropriate regulationsandgovernmentoversight.

• Balancing the need for attractive risk-return rates with the need for accessible and affordable services for all. This requiresgovernments to proactively address marketfailuresinbothrespects.Itmeansplacingclearobligations on investors and extracting firmcommitments, while providing incentives toimprove the risk-return profile of investment.And it implies making incentives or subsidiesconditionalonsocialinclusiveness.

• Balancing a push for private investment funds with the push for public investment. Synergiesbetween public and private funds should befound both at the level of financial resources– e.g. raising private sector funds with publicsectorfundsasbasecapital–andatthepolicylevel,wheregovernmentscanseektoengage

Figure IV.6. Providing leadership to the process of raising private-sector investment in the SDGs: key challenges and policy options

Agree a set of guiding principles for SDG investment policymaking

Increasing private-sector involvement in SDG sectors can lead to policy dilemmas (e.g. public vs private responsibilities, liberalization vs regulation, investment returns vs accessibility and affordability of services); an agreed set of broad policy principles can help provide direction

Need for a clear sense of direction and common policy design criteria

Need for global consensusand an inclusive process,keeping on board countriesthat need support

Need for clear objectives to galvanize global action

Need to manage investmentpolicy interactions

Key challenges Policy options

Set SDG investment targets

Focus targets on areas where private investment is most needed and where increasing such investment is most dependent on action by policymakers and other stakeholders: LDCs

Multi-stakeholder platform and multi-agency technical assistance facility

International discussion on private-sector investment in sustainable development is dispersed among many organizations, institutions and forums, each addressing speci�c areas of interest. There is a need for a common platform to discuss goals, approaches and mechanisms for mobilizing of �nance and channelling investment into sustainable development

Financing solutions and private-sector partnership arrangements are complex, requiring signi�cant technical capabilities and strong institutions. Technical assistance will be needed to avoid leaving behind the most vulnerable countries, where investment in SDGs is most important.

•

•

•

•

Ensure policy coherence and synergies

Manage national and international, investment and related policies, micro- and macro-economic policies •

Source:UNCTAD.


private investors to support programmes ofeconomic or public service reform. Privateand public sector investment should thus becomplementaryandmutuallysupporting.

• Balancing the global scope of the SDGs with the need to make a special effort in LDCs.Special targets and special measures shouldbe adopted for private investment in LDCs.ODA and public funds should be usedwherepossible to leverage further private sectorfinancing. And targeted technical assistanceand capacity-building should be aimed atLDCstohelpattractandmanageinvestment.

Beyond such broad principles, in its InvestmentPolicy Framework for Sustainable Development(IPFSD), an open-source tool for investmentpolicymakers, UNCTAD has included a set ofprinciples specifically focused on investmentpolicies that could inform wider debate onguidingprinciplesforinvestmentintheSDGs.The IPFSDPrinciplesare thedesigncriteria forsoundinvestmentpolicies,atthenationalandinternationallevels,thatcansupportSDGinvestmentpromotionand facilitation objectives while safeguardingpublicinterests.UNCTADhasalreadyprovidedtheinfrastructureforfurtherdiscussionofthePrinciplesthrough its Investment Policy Hub, which allowsstakeholders todiscussandprovide feedbackonanongoingbasis.

SDG investment targets

TherationalebehindtheSDGs,andtheexperiencewith the MDGs, is that targets help providedirection and purpose. Ambitious investmenttargetsare impliedby theprospectiveSDGs.Theinternational community would do well to maketargets explicit and spell out the consequencesfor investment policies and investment promotionat national and international levels. Achievablebut ambitious targets, including for increasingpublicandprivatesector investment inLDCs,arethus a must. Meeting targets to increase privatesector investment in the SDGswill require actionatmany levelsbypolicymakers indevelopedanddevelopingcountries;internationallyininternationalpolicymaking bodies and by the developmentcommunity;andby theprivatesector itself.Suchbroadengagementneedscoordinationandstrongconsensusonacommondirection.

Policy coherence and synergies

Policymaking for investment in SDG sectors,and setting investment targets, needs to takeinto account the broader context that affectsthe sustainable development outcome of suchinvestment. Ensuring coherence and creatingsynergies with a range of other policy areas is akey element of the leadership challenge, at bothnational and global levels. Policy interaction andcoherenceareimportantprincipallyatthreelevels:

• National and international investment policies.Success in attracting and benefiting fromforeigninvestmentforSDGpurposesdependsontheinteractionbetweennationalinvestmentpolicies and international investmentrulemaking. National rules on investor rightsand obligations need to be consistent withcountries’ commitments in internationalinvestment agreements, and these treatiesmust not unduly undermine regulatory spacerequired for sustainable development policies.Inaddition,itisimportanttoensurecoherencebetweendifferent IIAs towhich a country is aparty.

• Investment and other sustainable-development-related policies. AccomplishingSDGs through private investment dependsnot only on investment policy per se (i.e.,entry and establishment rules, treatment andprotection, promotion and facilitation) buton a host of investment-related policy areasincluding tax, trade, competition, technology,and environmental, social and labour marketpolicies. These policy areas interact, and anoverall coherent approach is needed tomakethemconducivetoinvestmentintheSDGsandtoachievesynergies(WIR12,p.108;IPFSD).

• Micro- and macroeconomic policies. Sound macro-economic policies are a keydeterminant for investment, and financialsystems conducive to converting financialcapital into productive capital are importantfacilitators, if not prerequisites, for promotinginvestment in the SDGs. A key part of theleadershipchallengeistopushforandsupportcoordinatedeffortstowardscreatinganoverallmacro-economic climate that provides astable environment for investors, and towards


D. mOBIlIzING FUNDS FOR INVeSTmeNT IN The SDGs

re-orienting the global financial architectureto focus on mobilizing and channelling fundsinto real, productiveassets, especially inSDGsectors (TDR 2009; TDR 2011; UNCTAD2011b,Wolf,M.2010).5

Global multi-stakeholder platform on investing in the SDGs

At present international discussions on privatesector investment in sustainabledevelopmentaredispersed amongmany organizations, institutionsand forums, each addressing specific areas ofinterest. There is a need for a regular body thatprovides a platform for discussion on overallinvestmentgoalsandtargets,sharedmechanismsfor mobilization of finance and channelling ofinvestment intosustainabledevelopmentprojects,andwaysandmeansofmeasuringandmaximizingpositiveimpactwhileminimizingnegativeeffects.

Aglobal multi-stakeholder platform on investing in the SDGs couldfillthatgap,galvanizingpromisinginitiatives to mobilize finance and spreadinggood practices, supporting actions on theground channelling investment to priority areas,

and ensuring a common approach to impactmeasurement.Suchamulti-stakeholderplatformcould have subgroupsby sector, e.g. on energy,agriculture, urban infrastructure, because thecross-sectorspanofinvestmentsissogreat.

Multi-agency technical assistance facility

Finally, many of the solutions discussed in thischapterarecomplex,requiringsignificanttechnicalcapabilities and strong institutions. Since this isseldomthecaseinsomeofthepoorestcountries,which often have relatively weak governancesystems, technical assistance will be required inordertoavoidleavingbehindvulnerablecountrieswhereprogressontheSDGsismostessential.Amulti-agency consortia (a“one-stopshop”forSDGinvestmentsolutions) couldhelptosupportLDCs,advising on, for example, investment guaranteeandinsuranceschemes,theset-upofSDGprojectdevelopmentagenciesthatcanplan,packageandpromote pipelines of bankable projects, designof SDG-oriented incentive schemes, regulatoryframeworks, etc. Coordinated efforts to enhancesynergiesareimperative.

The mobilization of funds for SDG investment occurs within a global financial system with numerous and diverse participants. Efforts to direct more financial flows to SDG sectors need to take into account the different challenges and constraints faced by all actors.

1. Prospective sources of finance

The global financial system, its institutions andactors, canmobilize capital for investment in theSDGs.Theflowoffundsfromsourcestousersofcapitalismediatedalonganinvestmentchainwithmanyactors(figureIV.7),includingownersofcapital,financial intermediaries, markets, and advisors.Constraints tomobilizing funds forSDGfinancingcanbefoundbothatthesystemiclevelandatthelevel of individual actors in the system and theirinteractions.Policyresponseswillthereforeneedtoaddresseachoftheselevels.

Policy measures are also needed more widelyto stimulate economic growth in order to createsupportive conditions for investment and capitalmobilization.Thisrequiresacoherenteconomicanddevelopmentstrategy,addressingmacroeconomicand systemic issues at the global and nationallevels,feedingintoaconduciveinvestmentclimate.In return, if global and national leaders get theirpolicies right, the resulting investment will boostgrowthandmacroeconomicconditions,creatingavirtuouscycle.

Prospective sources of investment finance rangewidely from large institutional investors, such aspensionfunds,totheprivatewealthindustry.Theyincludeprivatesector sourcesaswell aspubliclyownedandbackedfundsandcompanies;domesticand international sources;anddirectand indirectinvestors (figure IV.8 illustrates some potential


Figure IV.7. SDG investment chain and key actors involved

Users of capital forSDG investment

•

Principal institutions

Intermediaries

Advisors

Sources of capital Markets

• Governments• International

organizations anddevelopment banks

• Public and semi-public institutions

• Multinational andlocal �rmsentrepreneurs

• NGOs• Impact investors • ...

• Financial advisors• Wealth managers• Investment consultants

• Rating agencies

Institutional asset managers

• Investment banks andbrokerage �rms

• Equity• Corporate debt• Sovereign debt• Other markets and

�nancial instruments

• Governments (e.g. ODA)• Households/individuals, e.g.:

– Retail investors– High-net-worth individuals– Pensions– Insurance premia

• Firms (e.g. reserves/retainedearnings

• Philanthropic institutionsor foundations

• Other institutions with capitalreserves (e.g. universities)

Asset pools(or primary intermediaries)

Banks Pension fundsInsurance companies Mutual fundsSovereign wealth fundsEndowment fundsPrivate Equity Venture capitalImpact investors

•••••••••• ...

Source:UNCTAD.

corporate sources of finance; others, includingsomenon-traditionalsources,arediscussedinboxIV.4).

Theoverallgapofabout$2.5trillionisdaunting,butnotimpossibletobridge;domesticandinternational

sources of capital are notionally far in excess ofSDGrequirements.However,existingsavingsandassetsofprivatesectoractorsarenotsitting idle;they are already deployed to generate financialreturns.Nevertheless, the relative sizes of privatesectorsourcesoffinancecanhelpsetprioritiesforaction.

AllthesourcesindicatedinfigureIV.8areinvestedglobally, of which a proportion is in developingcountries(includingbydomesticcompanies).InthecaseofTNCs,forexample,athirdofglobalinwardFDI stock in 2013 was invested in developingcountries (and a bigger share of FDI flows).Pensionfunds,insurancecompanies,mutualfundsand sovereign wealth funds, on the other hand,currentlyhavemuchlessinvolvementindevelopingmarkets.Themajorityofbanklendingalsogoestodevelopedmarkets.

EachgroupofinvestorhasadifferentpropensityforinvestmentintheSDGs.

• Banks. Flowsof cross-borderbank lending todevelopingcountrieswereroughly$325billionin 2013, making international bank lendingthe third most important source of foreigncapitalafterFDIandremittances.Thestockofinternational cross-border bank claims on allcountries stood at $31.1 trillion at the end of

Figure IV.8. Relative sizes of selected potential sources of investment, 2012

(Value of assets, stocks and loans in trillions of dollars)

6.3a

25a

26

34

121

SWFs

TNCs

Insurance companies

Pension funds

Bank assets

Source:UNCTADFDI-TNC-GVCInformationSystem,IMF(2014);SWFInstitute,fundrankings;TheCityUK(2013).

Note: Thisfigureisnotexhaustivebutseekstolistsomekeyplayersandsourcesoffinance.Theamountsforassets,stocksandloansindicatedarenotequivalent,insomecases,overlap,andcannotbeadded.

a 2014figure.


2014, ofwhich$8.8 trillion, or 28per cent ofthetotal,wasindevelopingcountries.6

Aswellasanimportantsourceofprojectdebtfinance, banks are in a powerful position tocontribute to the SDGs through, for instance,the implementation of the Equator Principles(EPs),ariskmanagementframeworkthathelpsdetermine, assess andmanage environmentalandsocialriskspecifically in infrastructureandother industrial projects. Currently 78 financialinstitutions in 34 countries have officiallyadopted the EPs, a third of which are indeveloping countries. These institutions coverover70percentofinternationalprojectfinancedebtinemergingmarkets.7

State-owned banks (including developmentbanks), regional development banks andlocal banking institutions (Marois, 2013) allhave particular and significant relevance forinvestment in SDGs. State-owned banks andother financial institutions have always playedan important role in development, targetingspecific sectors, for example, infrastructureand public services, often at preferentialrates. Today State-owned financial institutions(SOFI) account for25per centof total assetsin banking systems around the world; andthe capital available in SOFIs in developingcountries can be used both for investmentin SDGs directly and to leverage funds andinvestment from the private sector (sectionsD.3andE).

• Pension funds. UNCTAD estimates thatpension funds have at least $1.4 trillion ofassetsinvestedindevelopingmarkets;andthevalue of developed-country assets invested intheSouthisgrowinginadditiontothevalueofpension funds based in developing countries(and which are predominantly invested intheir own domestic markets). By 2020, it isestimated that global pension fund assetswillhave grown to more than $56 trillion (PwC2014a). Pension funds are investors withlong-term liabilities able to take on less liquidinvestmentproducts.Inthepasttwodecades,they have begun to recognize infrastructureinvestment as a distinct asset class and

there is the potential for future investment bythem in more illiquid forms of infrastructureinvestment. Current engagement of pensionfunds in infrastructure investment is still small,atanestimatedaverageof2percentofassets(OECD 2013b). However, lessons can bedrawnfromsomecountries,includingAustraliaand Canada, which have been successful inpackaging infrastructure projects specificallyto increase investment by pension funds (inbothcasesinfrastructureinvestmentmakesupsome5percentofpensionfundportfolios).

• Insurance companies. Insurance companiesarecomparable insize topensionandmutualfunds. With similar long-term liabilities aspension funds (in the life insurance industry),insurance companies are also less concernedabout liquidity and have been increasinglyprepared to invest in infrastructure, albeitpredominantly in developed markets. Onestudy suggests that insurance companiescurrently allocate an average of 2 per cent oftheir portfolio to infrastructure, although thisincreases to more than 5 per cent in somecountries (Preqin 2013). While insurancecompanies could provide a source offinance for investment in SDG sectors, theirgreater contribution may come from off-setting investments in areas such as climatechange adaptation against savings fromfewer insurance claims and lower insurancepremiums.8

The growth of parts of the insurance industryis therefore intimately tied to investmentin sustainable development sectors, e.g.investmentinagriculturaltechnologiestoresistclimate change, or flood defences to protecthomes and businesses, can have a positiveimpact on the sustainability of the insurancefund industry. There is a virtuous cycle to beexploredwherebyinsurancefundscanfinancethe type of investment that will reduce futureliabilities to events such as natural disasters.Already,theinsuranceindustryiscommittedtomainstreamingESGgoalsintoitsactivitiesandraising awareness of the impact of new riskson the industry, for example through the UN-backedPrinciplesforSustainableInsurance.


• Transnational corporations (TNCs). With $7.7trillioncurrentlyinvestedbyTNCsindevelopingeconomies, and with some $5 trillion in cashholdings, TNCs offer a significant potentialsource of finance for investment in SDGsectors in developing countries. FDI alreadyrepresents the largest source of externalfinance for developing countries as a whole,and an important source (with ODA andremittances) even in the poorest countries.It is an important source of relatively stabledevelopment capital, partly because investorstypically seek a long-term controlling interestin a project making their participation lessvolatilethanothersources.Inaddition,FDIhastheadvantageofbringingwith itapackageoftechnology, managerial and technical know-how that may be required for the successfulset-up and running of SDG investmentprojects.

• Sovereign wealth funds (SWFs). With 80 percent of SWF assets owned by developingcountries, there is significant potential forSWFs to make a contribution to investmentinSDGsectors in theglobalSouth.However,more than 70 per cent of direct investmentsby SWFs are currently made in developedmarkets (chapter I), and a high proportion oftheirtotalassetsundermanagementmayalsobeinvestedindevelopedmarkets.SWFssharemany similarities with institutional investorssuch as pension funds – several SWFs areconstituted for this purpose, or also havethat function, such as CalPERS and SPU(Truman 2008; Monk 2008). Other SWFs areestablished as strategic investment vehicles(Qatar holdings of the Qatar InvestmentAuthority); asstabilization fundsdisplaying thecharacteristicsofacentralbank(SAMA);orasdevelopmentfunds(Temasek).

Box Iv.4. Selected examples of other sources of capital for investment in the SdGs

Foundations, endowments and family offices.Someestimatesputtotalprivatewealthat$46trillion(TheCityUK2013),albeitathirdofthisfigureisestimatedtobeincorporatedinotherinvestmentvehicles,suchasmutualfunds.Theprivatewealthmanagementoffamilyofficesstandsat$1.2trillionandfoundations/endowmentfundsat$1.3trillionin2011(WEF2011).Fromthissourceofwealthitmaybepossibletomobilizegreaterphilanthropiccontributionstolong-terminvestment,aswellasinvestmentsforsustainabledevelopmentthroughthefundmanagementindustry.In2011theUnitedStatesalonewerehometomorethan80,000foundationswith$662billioninassets,representingover20percentofestimatedglobalfoundationsandendowmentsbyassets,althoughmuchofthiswasallocateddomestically.

Venture capital.Theventurecapitalindustryisestimatedat$42billion(E&Y2013)whichisrelativelysmallcomparedtosomeof thesums investedby institutional investorsbutwhichdiffers inseveral importantrespects. Investorsseekingtoallocatefinancethroughventurecapitaloftentakeanactiveanddirect interest intheir investment. Inaddition,theymightprovidefinancefromthestartorearlystagesofacommercialventureandhavealong-terminvestmenthorizonfortherealizationofareturnontheirinitialcapital.Thismakesventurecapitalmorecharacteristicofadirectinvestorthanashort-termportfolioinvestor.

Impact investment. Sources for impact investment include individuals, foundations,NGOs and capitalmarkets.Impactinvestmentsfundedthroughcapitalmarketsarevaluedatmorethan$36billion(Martin2013).Theimpactinvestment industry has grown in size and scope over the past decade (from theAcumen fund in 2001 to anestimated125 funds supporting impact investment in2010 (SimonandBarmeier2010)).Again,while relativelysmall in comparison to the potential of large institutional investors, impact investments are directly targeted atSDG sectors, such as farming and education.Moreover, their promotion of social and economic developmentoutcomesinexchangeforlowerrisk-adjustedreturnsmakesimpactinvestmentfundsapotentiallyusefulsourceofdevelopmentfinance.

Microfinance. Some studies show thatmicrofinance has had some impact on consumption smoothing duringperiodsofeconomicstressandonconsumptionpatterns.However,otherstudiesalsoindicatethattherehasbeenlimitedimpactonhealthcare,educationandfemaleempowerment(Bauchetetal2011;BatemanandChang2012).Nevertheless,asthemicrofinanceindustryhasmatured,initiativessuchascreditunionshavehadmoresuccess;theencouragementofresponsiblefinancialbehaviourthroughpriorsavingandaffordableloanshasmadevaluablecontributionstoconsumption,healthandeducation.

Source:UNCTAD,basedonsourcesintext.


Despite several reported concerns aboutSWF governance (Bagnall and Truman 2013),SWFs can offer a number of advantages forinvestment in SDG sectors in poor countries,not leastbecausetheirfinance isunleveraged,and their investment outlook is often longterm. For example, 60 per cent of SWFsalready actively invest in infrastructure (Preqin2013);moreover insectorssuchaswaterandenergy, SWFsmay honour the inherent publicnature of these services in a way that privateinvestorsmaynot.ThisisbecausesomeSWFs(and public pension funds) have non-profitdriven obligations, such as social protectionor intergenerational equity; theyalso representa form of “public capital” that could be usedfor the provision of essential services in low-income communities (Lipschutz and Romano2012).

All the institutions and markets described abovefaceobstaclesandincentives,internalandexternal,that shape investment decisions and determinewhether their choices contribute to or hinder

attainment of the SDGs. Policy interventions canthus target specific links in the investment chainand/orspecifictypesof institutionstoensurethatfinancialmarketsandendusersarebettergearedtowardssustainableoutcomesthanispresentlythecase.

2. Challenges to mobilizing funds for SDG investments

Constraints in financial markets hindering the flow of funds to SDG investments include start-up and scaling problems for innovative solutions market failures, lack of transparency on ESG performance and misaligned rewards for market participants.

Thereareanumberofimpedimentsorconstraintstomobilizing funds for investment inSDG-relatedprojects(figureIV.9).

Animportantconstraintliesinstart-up and scaling issues for innovative financing solutions. Tappingthe pool of available global financial resourcesfor SDG investments requires greater provision

Source:UNCTAD.

Figure IV.9. mobilizing funds for SDG investment: key challenges and policy options

Failures in global capital markets


Build or improve pricing mechanisms for externalities

Internalization in investment decisions of externalities e.g. carbon emissions, water use,social impacts

Start-up and scaling issues for new �nancing solutions

Create fertile soil for innovative SDG-�nancing approaches and corporate initiatives

Facilitation and support for SDG dedicated �nancial instruments and impact investing initiatives through incentives and other mechanisms

Expansion or creation of funding mechanisms that use public-sector resources to catalyze mobilization of private-sector resources

“Go-to-market” channels for SDG investment projects in �nancial markets: channels forSDG investment projects to reach fund managers, savers and investors in mature �nancial markets, ranging from securitization to crowd funding

•

•

Promote Sustainable Stock Exchanges

SDG listing requirements, indices for performance measurement and reporting for investors

Lack of transparency on sustainable corporate performance

•

Misaligned investor incentive/pay structures

Introduce �nancial market reforms Reform of pay, performance and reporting structures to favor long-term investmentconducive to SDG realization

Rating methodologies that reward long-term real investment in SDG sectors

•

•

•

•

•

•

•

•


of financial instruments andmechanisms that areattractive for institutions to own or manage. Arangeofinnovativesolutionshasbeguntoemerge,including new financial instruments (e.g. greenbonds) and financing approaches (e.g. futureincome securitization for development finance);newinvestorclassesarealsobecomingimportant(e.g. funds pursuing impact investing). To date,however, these solutions remain relatively smallin scale and limited in scope, or operate on themargins ofcapitalmarkets(figureIV.9,sectionD.3).

Over time, changing the mindset of investorstowards SDG investment is of fundamentalimportance, and a number of further constraintshinder this. First,market failures in global capitalmarkets contribute to a misallocation of capitalin favour of non-sustainable projects/firms andagainstthosethatcouldcontributepositivelytotheSDGs. Failure by markets and holders of capitalto price negative externalities into their capitalallocationdecisions meansthatthecostofcapitalfor investors reflectssolely theprivatecost.Thus,profit-maximizing investors do not take sufficientaccount of environmental and other social costswhen evaluating potential investments becausethese costs do not materially affect their cost ofcapital, earnings or profitability. For instance, theabsence of a material price for carbon impliessocialcostsassociatedwithemissionsarevirtuallyirrelevantforcapitalallocationdecisions.

Second,alack of transparency on ESG performancefurther precludes consideration of such factorsin the investment decisions of investors, financialintermediariesandtheiradvisors(andtheultimatesources of capital, such as households). Thefragmentation of capitalmarkets,while facilitatingthe allocation of capital, has disconnected thesources of capital from end users. For example,householdsdonothavesufficientinformationaboutwhereandhowtheirpensionsareinvestedinordertoevaluatewhetheritisbeinginvestedresponsiblyand,forexample,whetheritisinlinewiththeSDGs.Similarly,assetmanagersandinstitutionalinvestorsdo not have sufficient information tomake betterinformed investment decisions that might alignfirmswiththeSDGs.

Third,therewards that individuals and firms receive in terms of pay, performance and reporting alsoinfluence investment allocations decisions. ThisincludesnotonlyincentivestructuresatTNCsandotherdirectinvestorsinSDG-relevantsectors,butalsoincentivestructuresatfinancial intermediaries(andtheiradvisors)whofundtheseinvestors.Thebroad effects of these incentive structures arethree-fold: (i)anexcessiveshort-termfocuswithininvestmentandportfolioallocationdecisions; (ii)atendency towards passive investment strategiesand herding behaviour in financial markets; and(iii) anemphasisonfinancial returns rather thanaconsideration of broader social or environmentrisk-returntrade-offs.Thesemarketincentivesandtheireffectshaveknock-onconsequencesforrealeconomicactivity.

3. Creating fertile soil for innovative financing approaches

Innovative financial instruments and funding mechanisms to raise resources for investment in SDGs deserve support to achieve scale and scope.

A range of innovative financing solutions tosupportsustainabledevelopmenthaveemergedinrecent years, including new financial instruments,investmentfundsandfinancingapproaches.ThesehavethepotentialtocontributesignificantlytotherealizationoftheSDGs,butneedtobesupported,adaptedtopurposeandscaledupasappropriate.Itisimportanttonotethatmanyofthesesolutionsareledbytheprivatesector,reflectinganincreasingalignmentbetweenUNandinternationalcommunityprioritiesandthoseofthebusinesscommunity(boxIV.5).

Facilitate and support SDG-dedicated financial instruments and impact investment

Financial instruments which raise funds forinvestment in social or environmental programsare proliferating, and include green bonds9 andthe proposed development impact bonds. Theytarget investors that are keen to integrate socialand environmental concerns into their investmentdecisions.Theyareappealingbecausetheyensurea safer return to investors (many are backed by


donors or multilateral banks), but also becausethey are clearly defined sustainable projects orproducts.10 The proceeds are often credited tospecialaccountsthatsupport loandisbursementsfor SDG projects (e.g. development or climatechangeadaptationandmitigationprojects).

These instrumentswere often initially the domainofmultilateraldevelopmentbanks(MDBs)becausethis lent credibility with investors in terms of

classifying which investments were socially andenvironmentally friendly. More recently, however,anumberofTNCshave issuedgreenbonds.Forinstance,EDFEnergyundertooka€1.4billionissueto finance investment in solar andwind energy;11

Toyotaraised$1.75billion for thedevelopmentofhybridvehicles;12andUnilever raised£250millionfor projects that would reduce greenhouse gasemissions,waterusageorwastewithin itssupply

Box Iv.5. Convergence between UN priorities and those of the international business community

In a globe-spanning series of consultations, UN Global Compact participants offered their views on globaldevelopmentprioritiestheyconsidercentraltoanyfuturedevelopmentagenda.TheresultsoftheseconsultationsreflectagrowingunderstandingoftheconvergencebetweentheprioritiesoftheUnitedNationsandthoseoftheinternationalbusinesscommunityonawiderangeofglobalissuesandchallenges.

Box Figure Iv.5.1. Global development Priorities Identified by Businesses

Private Sustainability Finance: from managing risks to embracing new opportunities that create value for business and society.Over thepastdecade,anumberofprinciples-based initiativeshavebeenadopted throughout thefinance-productionvaluechain,fromportfolioinvestors,banksandinsurancecompanies,tofoundationsandTNCsintherealeconomy.Forinstance,ledbyprivateactorsResponsible Private Finance hasalreadyreachedasignificantcriticalmassacrosstheprivatesector.There isnowabroadconsensusthat incorporatingsocial,environmentalandgovernanceconcernsindecision-makingimprovesriskmanagement,avoidsharmfulinvestmentsandmakesbusiness sense. Examples of this trend include initiatives such as the Principles for Responsible Investment,theEquatorPrinciples, thePrinciples forSustainable Insurance, theSustainableStockExchanges initiative andinnovativeapproachestosustainableforeigndirectinvestmentbymultinationals.

Privatesustainabilityfinanceholdsenormouspotentialtocontributetothebroadimplementationeffortsinthepost-2015 future.However,publicaction throughgoodgovernance,conducivepolicies, regulationsand incentives isrequiredtodrivetheinclusionofsustainabilityconsiderationsinprivateinvestmentdecisions.Anditrequiresprivateactiontosignificantlyenhancethescaleandintensityofprivatesustainabilityfinance.

Source:UNGlobalCompact.

Prosperity & Equity

Education

Food & Agriculture

Peace & Stability

Infrastructure & Technology

Good Governance & Human Rights

Water & Sanitation

Energy & Climate

Health

Women’s Empower-

ment & Gender Equality

The Poverty Apex

Human Needs & Capacities

The Resource Triad

Enabling Environment


chain.13While the development of thismarket bycorporateissuersispositive,itscontinuedadvancemaygiverisetotheneedforlabellingorcertificationofinvestments,soinvestorshaveassuranceaboutwhicharegenuinely“green”orhave“socialimpact”.

Impact investing is a phenomenon that reflectsinvestors’desiretogeneratesocietalvalue(social,environmental,cultural)aswellasachievefinancialreturn.Impactinvestmentcanbeavaluablesourceofcapital, especially to finance theneedsof low-income developing countries or for products andservicesaimedatvulnerablecommunities.Thetypesofprojectstargetedcanincludebasicinfrastructuredevelopment, socialandhealthservicesprovisionandeducation–allofwhicharebeingconsideredas SDGs. Impact investors include aid agencies,NGOs, philanthropic foundations and wealthyindividuals,aswellasbanks,institutionalinvestorsandothertypesoffirmsandfunds.Impactinvestingisdefinednotbythetypeof investor,butbytheirmotivesandobjectives.14

A number of financial vehicles have emergedto facilitate impact investing by some suchgroups (others invest directly). Estimated impactinvestments through these funds presently rangefrom $30 to $100 billion, depending on whichsectors and types of activity are defined asconstituting “impact investing”; and similarly theestimatedfutureglobalpotentialofimpactinvestingvariesfromtherelativelymodesttoupto$1trillionintotal(J.P.Morgan2010).Ajointstudyofimpactinvestment by UNCTAD and the United StatesDepartmentofStateobservedin2012thatover90percentofimpactinvestmentfundsarestillinvestedinthedevelopedworld,mostlyinsocialimpactandrenewable energy projects. Among developingcountries,thelargestrecipientofimpactinvestingisLatinAmericaandtheCaribbean,followedbyAfricaandSouthAsia(Addisetal.2013).Akeyobjectiveshould be to direct more impact investment todevelopingcountries,andespeciallyLDCs.

Anumberofconstraintsholdbacktheexpansionof impact investing in developing countries. Keyconstraints related to the mobilization of impactinvestment funds include lack of capital acrossthe risk-return spectrum; lack of a commonunderstanding ofwhat impact investment entails;inadequate ways to measure “impact”; lack of

researchanddataonproductsandperformance;and a lack of investment professionals with therelevant skills. Key demand-related constraints indevelopingcountries are: shortageof high-qualityinvestmentopportunitieswithatrackrecord;andalackofinnovativedealstructurestoaccommodateportfolio investors’ needs. A number of initiativesare underway to address these constraints andexpand impact investment, including the GlobalImpactInvestingNetwork(GIIN),theUnitedStatesStateDepartmentGlobalImpactEconomyForum,Impact Reporting and Investment Standards,Global Impact Investment Ratings System, theUnitedKingdomImpactProgramforsub-SaharanAfrica and South Asia and theG8 Social ImpactInvestingTaskforce.

Expand and create funding mechanisms that use public sector resources to catalyze mobilization of private sector resources

A range of initiatives exist to use the capacity ofthepublicsectortomobilizeprivatefinance.Oftentheseoperateat theproject level (SectionE),butinitiativesalsoexistatamacroleveltoraisefundsfromtheprivatesector, includingthroughfinancialmarkets.

Vertical funds (or financial intermediary funds)are dedicated mechanisms which allow multiplestakeholders (government,civilsociety, individualsand the private sector) to provide funding forpre-specified purposes, often to underfundedsectors such as disease eradication or climatechange. Funds such as theGlobal Fund to FightAIDS, Tuberculosis and Malaria15 or the GlobalEnvironmentFund16havenowreachedasignificantsize. Similar funds could be created in alignmentwithotherspecificSDGfocusareasoftheSDGsingeneral.TheAfricaEnterpriseChallengeFund17 isanotherprominentexampleofafundthathasbeenusedasavehicle toprovidepreferential loans forthepurposeofdevelopinginclusivebusiness.

Matching fundshavebeenusedtoincentivizeprivatesector contributions to development initiatives bymaking a commitment that the public sector willcontribute an equal or proportionate amount. Forexample,undertheGAVIMatchingFund,theUnitedKingdomDepartmentforInternationalDevelopment


and the Bill andMelinda Gates Foundation havepledged about $130 million combined to matchcontributionsfromcorporations,foundations,theircustomers, members, employees and businesspartners.18

Front-loading of aid. In addition to catalyzingadditional contributions, the public sector caninduce private sector actors to use financingmechanisms that change the time profile ofdevelopmentfinancing,throughfront-loadingofaiddisbursements. The International Finance Facilityfor Immunization (IFFIm) issues AAA-rated bondsincapitalmarketswhicharebackedby long-termdonorgovernmentpledges.Assuch,aidflowstodevelopingcountrieswhichwouldnormally occurover a period of 20 years are converted to cashimmediately upon issuance. For investors, thebonds are attractive due to the credit rating, amarket-comparableinterestrateandtheperceived“socially responsible return” on investment. IFFImhas raisedmore than$4.5billion todate throughbondissuancespurchasedbyinstitutionalandretailinvestors in a range of different mature financialmarkets.19

Future-flow securitization. Front-loading of aid isa subset of a broader range of initiatives underthe umbrella of future-flow securitization whichallows developing countries to issue marketablefinancial instruments whose repayments aresecuredagainstarelativelystablerevenuestream.These can be used to attract a broader class ofinvestorsthanwouldotherwisebethecase.Otherprominent examples are diaspora bonds whoseissuance is secured against migrant remittanceflows, and bonds backed by the revenue streamfrom, e.g. natural resources. These instrumentsallow developing countries to access fundingimmediately thatwouldnormallybe receivedoveraprotractedperiod.

Build and support “go-to-market” channels for SDG investment projects in financial markets

A range of options is available, and can beexpanded,tohelpbringconcreteSDGinvestmentprojects of sufficient scale directly to financialmarkets and investors in mature economies,

reducing dependence on donors and increasingtheengagementoftheprivatesector.

Project aggregation and securitization. SDGinvestmentprojectsandSDGsectorsareoftennotwellalignedwiththeneedsofinstitutionalinvestorsin mature financial markets because projects aretoo small and sectors fragmented. For example,renewableenergymarketsaremoredisaggregatedthan traditional energy markets. Institutionalinvestors prefer to invest in assets which havemore scale and marketability than investment inindividual projects provide. As such, aggregatingindividualprojects inapooledportfoliocancreateinvestmentproductsmoreinlinewiththeappetiteof large investors. This can be achieved throughsecuritization of loans tomany individual projectsto create tradable, rated asset backed securities.For instance, a group of insurers and reinsurerswith$3 trillionofassetsundermanagementhaverecentlycalled formorescaleandstandardizationofproductsinlow-carboninvestments.20

Crowd funding. Crowd funding is an internet-based method for raising money, either throughdonationsor investments, froma largenumberofindividualsororganizations.Globallyitisestimatedthatcrowdfundingplatformsraised $2.7billion in2012 and were forecast to increase 81 per centin 2013, to $5.1billion (Massolution2013).Whilecurrentlymoreprevalent indevelopedcountries, ithas the potential to fund SDG-related projects indevelopingcountries.Crowdfundinghasbeenaneffective means for entrepreneurs or businessesin developed countries that do not have accesstomore formalfinancialmarkets. Inasimilarway,crowdfundingcouldhelpdormantentrepreneurialtalentandactivity tocircumvent traditionalcapitalmarkets and obtain finance. For example, since2005thecrowdfundingplatformKivaMicrofundshas facilitated over $560 million in internet-based loans to entrepreneurs and students in 70countries.21

4. Building an SDG-supportive financial system

A financial system supportive of SDG investmentensures that actors in the SDG investment chain(i) receive the right stimuli through prices for


investmentinstrumentsthatinternalizesocialcostsand benefits; (ii) have access to information onthe sustainability performance of investments sothat they can make informed decisions; and (iii)are rewarded throughmechanisms that take intoaccount responsible investment behavior. Theseelements are part of awider context of systemicissues in the global financial architecture,22whichis not functioning optimally for the purposes ofchannelingfundstoproductive,realassets(ratherthanfinancialassets).23

a. Build or improve pricing mechanisms to curb externalities

Effective pricing mechanisms to internalize social and environmental costs are necessary to align market signals with sustainable development goals.

Themosteffectiveandyetmostchallengingwaytoensure that global capital allocationdecisions arealignedwiththeneedsofsustainabledevelopmentwouldbeto“getthepricesright”.Thatis,toensurethatnegative(andpositive)socialandenvironmentalexternalitiesarefactoredintothepricesignalsthatfinancial market participants and direct investorsreceive.

A long-term influence isadherencetoresponsibleinvestmentprincipleswhichhelpsfirmstorecognizeand price-in both the financial costs associatedwith compliance, but also the rewards: i.e. lessrisk, potential efficiency gains, and the positiveexternalitiesarisingfromagoodreputation.

Anumberofenvironmentalexternalitieshavebeentraditionally addressed using tools such as finesor technical standards, but more recently pricingandtaxmethodshavebecomemorecommon.Intheareaofclimatechange, forcarbonemissions,a number of countries have experimented withinnovativeapproachesoverthepasttwodecades.Two principle methods have been explored forestablishing a price for carbon emissions: a capand trade “carbon market” characterized by thetrading of emissions permits; and “carbon taxes”characterizedby a special tax on fossil fuels andothercarbon-intensiveactivities.TheEUEmissionsTradingScheme (ETS)was thefirstmajorcarbonmarket and remains the largest. Carbonmarketsexist in a handful of other developed countries,

andregionalmarketsexistinafewUSstatesandCanadianprovinces.Carbontradingschemesarerarer in developing countries, although there arepilot schemes, suchasonecovering sixChinesecitiesandprovinces.

Complexities associated with carbon markets,andthefailuresofarofsuchmarketstoestablishprices in line with the social costs of emissions,have increasedexperimentationwith taxation.Forinstance,Ireland,SwedenandtheUnitedKingdomareexamplesofcountries thathave implementedsomeformofcarbontaxor“climatelevy”.CarbontaxeshavealsobeenimplementedintheCanadianprovinces of British Columbia and Quebec, andin 2013 aClimateProtectionActwas introducedin the United States Senate proposing a federalcarbontax.Theexperiencewithcarbonpricing isapplicabletoothersectors,appropriatelyadaptedtocontext.

b. Promote Sustainable Stock Exchanges

Sustainable stock exchanges provide listed entities with the incentives and tools to improve transparency on ESG performance, and allow investors to make informed decisions on responsible allocation of capital.

Sustainability reporting initiatives are importantbecause they help to align capitalmarket signalswith sustainable development and thereby tomobilize responsible investment in the SDGs.Sustainability reporting should be a requirementnotonlyforTNCsontheirglobalactivities,butalsofor asset owners and asset managers and otherfinancial intermediaries outlined in figure IV.8 ontheirinvestmentpractices.

Many pension funds around the world do notreportonifandhowtheyincorporatesustainabilityissues into their investment decisions (UNCTAD2011c). Given their direct and indirect influenceover a large share of the global pool of availablefinancialresources,allinstitutionalinvestorsshouldbe required to formally articulate their stance onsustainabledevelopmentissuestoallstakeholders.Suchdisclosurewouldbeinlinewithbestpracticesand the current disclosure practices of funds inotherareas.


Greateraccountabilityandtransparencyoftheentireinvestmentchainisessential,includinginvestmentallocation decisions, proxy voting practicesand advice of asset owners, asset managers,pension funds, insurance companies, investmentconsultantsandinvestmentbanks.Withoutpropermeasurement,verificationandreportingoffinancial,socialandenvironmentalsustainabilityinformation,ultimate sources of capital (especially householdsandgovernments)cannotdeterminehowthefundsthathavebeenentrustedtotheseinstitutionshavebeendeployed.

Stockexchangesandcapitalmarketregulatorsplayan important role in this respect,becauseof theirpositionattheintersectionofinvestors,companiesand government policy. The United NationsSustainable Stock Exchanges (SSE) initiative is apeer-to-peer learning platform for exploring howexchanges can work together with investors,regulators, and companies to enhance corporatetransparency,andultimatelyperformance,onESG(environmental, social and corporate governance)issues and encourage responsible long-termapproaches to investment. Launched by the UNSecretary-Generalin2009,theSSEisco-organizedby UNCTAD, the UN Global Compact, the UN-supported Principles for Responsible Investment,andtheUNEPFinanceInitiative.24

An increasing number of stock exchanges andregulatorshaveintroduced,orareintheprocessofdeveloping,initiativestohelpcompaniesmeettheevolving information needs of investors; navigateincreasinglycomplexdisclosure requirementsandexpectations; manage sustainability performance;and understand and address social andenvironmental risks and opportunities. UNCTADhas provided guidance to help policymakers andstockexchangesinthiseffort.

c. Introduce financial market reforms

Realigning rewards in financial markets to favour investment in SDGs will require action, including reform of pay and performance structures, and innovative rating methodologies.

Reforms at both the regulatory and institutionallevels may lead to more effective alignment of

the systemof rewards to help ensure that globalcapital markets serve the needs of sustainabledevelopment.Thiswouldrequirepolicyactionandcorporate-led initiatives affecting a wide range ofdifferent institutions, markets as well as financialbehaviour.

Reform pay, performance and reporting structures to favour long-term investment conducive to SDG realization

Theperformanceevaluationandrewardstructuresof both institutions and individuals operating infinancialmarketsarenotconduciveto investmentinSDGs.Areasofactionmayinclude:

• Pay and performance structures. Pay andperformancestructuresshouldbealignedwithlong-term sustainable performance objectivesrather than short-term relative performance.For instance, compensation schemes forasset managers, corporate executives and arange of financial market participants couldbe paid out over the period during whichresults are realized, and compensation linkedto sustainable, fundamental drivers of long-term value. Companies need to take actionto minimize the impact of short-termism onthe part of financial intermediaries on theirbusinesses and, more positively, create theconditions that enable these capital sourcesto support and reward action and behaviourby direct investors that contribute to therealizationoftheSDGs.

• Reporting requirements. Reportingrequirements could be revised to reducepressure to make decisions based on short-term financial or investment performance. Reporting structures such as quarterlyearnings guidance can over emphasise thesignificance of short-term measures at theexpense of the longer-term sustainable valuecreation.

Promote rating methodologies that reward long-term investment in SDG sectors

Ratings that incorporate ESG performance helpinvestors make informed decisions for capital


allocation towards SDGs. Existing initiatives andpotentialareasfordevelopmentinclude:

• Non-financial ratings. Rating agencies have acritical influence on asset allocation decisionsby providing an independent assessment ofthe credit risk associated with marketabledebt instruments. Rating agencies’ traditionalmodels are based on an estimation of therelative probability of default only, and hencedo not incorporate social or environmentalrisks and benefits associated with particularinvestments. In order to invest in SDG-beneficial firms and projects, investors needaccess to ratings which assess the relativeESGperformanceof firms.DowJones,MSCIandStandardandPoor’shaveforseveralyearsbeenincorporatingESGcriteriaintospecializedsustainability indicesandratings forsecurities.Standard andPoor’s also announced in 2013that risks from climate change will be anincreasingly important factor in its ratings ofsovereign debt. Greater effort could be takento further integrate sustainability issuesinto both debt and equity ratings. Animportant dimension of sustainabilityratings for equity is that ratings aretypicallypaidforbyinvestors,theusersof the rating. This helps address theconflict of interest inherent within the“issuer pays” model that has plaguedfinancial ratings agencies in the wakeoftheglobalfinancialcrisisandremainscommonfordebtratings.

• Connecting reporting, ratings, integration and capacity-building. Maximizingthecontributionofcorporatesustainability reporting to sustainabledevelopment is a multi-stage process(figure IV.10). Corporate sustainabilityinformation should feed into systemsofanalysis thatcanproduceactionableinformation in the form of corporatesustainability ratings. Such ratings

on corporate debt and equities should beintegrated into thedecision-makingprocessesof key investment stakeholders includingpolicymakers and regulators, portfolioinvestors, TNCs, media and civil society.These investment stakeholders can seek toimplementarangeofincentivesandsanctionsto provide market signals that help to betteralign the outcomes of market mechanismswith the sustainable development policiesof countries. To be truly transformative, thisintegration process needs to align itself withthepolicyobjectivesoftheSDGsandtocreatematerial implications for poor sustainabilityperformance. Finally, sustainability ratingsand standards can also be used as a basisfor capacity-building programmes to assistdeveloping-country TNCs and small andmedium-sized enterprises to adopt bestpractices in theareaofsustainability reportingand management systems. This will providenew information to guide investors andpromoteinvestment.

Figure IV.10. The reporting and ratings chain of action

Reporting

• Standards development and harmonization (regulators)• Requirements and incentives (policy makers)

Ratings

• Methodology development• Compilation and dissemination• Trends analysis

Integration

• Portfolio investors: asset allocation and proxy voting• Governments: incentives and sanctions• Companies: pay incentives and management systems• Media: name and shame• Civil society: engagement and dialogue

Capacity Building

• Implement best practices in sustainability reporting• Adopt sustainable development management systems

Source:UNCTAD.


e. ChANNellING INVeSTmeNT INTO The SDGs

1. Challenges to channelling funds into the SDGs

Key constraints to channelling funds into SDGs include entry barriers, inadequate risk-return ratios for SDG investments, a lack of information, effective packaging and promotion of projects, and a lack of investor expertise.

InvestmentinSDGsectorsisnotsolelyaquestionofavailabilityandmobilizationofcapital,butalsooftheallocationofcapitaltosustainabledevelopmentprojects.Macroeconomicpoliciesimprovingoverallconditions for investment and growth, industrialpolicies establishing or refining a developmentstrategy, and similar policies, can encourageinvestment,publicorprivate,domesticor foreign,intoSDGsectorsorothers.However,whiletheyarenecessaryconditions for investment, theyarenotnecessarilyenough.

Investors face a number of constraints andchallengesinchannellingfundstoSDGprojects:

Entry barriers to SDG investments. Investmentfor sustainable development can be discouragedby an unwelcoming investment climate. Investorsmay face administrative or policy-related hurdlesin somesectors related toSDGswhichareoftensensitive as many constitute a public serviceresponsibility. These sectorsmay even be closedeither toprivate investors ingeneral,or to foreigninvestorsinparticular.

Inadequate risk-return ratios for SDG investment.RisksrelatedtoSDGinvestmentprojectscanoccuratthecountryandpolicylevel(e.g.legalprotectionfor investment);at themarketorsector level (e.g.uncertain demand); and at the project (financial)level. For example, investments in agricultureor infrastructure are subject to uncertainty andconcernsaboutlocaldemandandspendingpowerof the local population; ownership or access tosensitive resources (e.g. land); and the very longpayback periods involved. As a result, investors,especially those not accustomed to investing inSDG sectors in developing countries, demandhigher rates of return for investment in countrieswithgreater(perceivedorreal)risks.

Lack of information, effective packaging and promotion of bankable investment projects in SDG sectors. Investment opportunities in commercialactivities are usually clearly delineated; locationoptionsmaybepre-definedinindustrialzones;theinvestmentprocessandassociatedrulesareclearlyframed;andinvestorsarefamiliarwiththeprocessofappraisingrisksandassessingpotentialfinancialreturnsoninvestment intheirownbusiness.SDGsectors are usually more complex. Investmentprojectssuchasininfrastructure,energyorhealth,may require a process where political prioritiesneed to be defined, regulatory preparation isneeded (e.g. planning permissions and licenses,market rules)andfeasibilitystudiescarriedout. Inaddition,smallerprojectsmaynoteasilyprovidethescalethat large investors,suchaspension funds,require. Therefore, aggregation and packagingcan be necessary.While commercial investmentsareoftenmoreofa“push”nature,whereinvestorsare looking for opportunities, SDG projects maybemoreofa“pull”nature,wherelocalneedsdrivethe shaping of investment opportunities. Effectivepromotion and information provision is thereforeeven more important because investors facegreaterdifficulty inappraisingpotential investmentrisks and returns, due to a lackof historical dataand investment benchmarks to makemeaningfulcomparisonsofperformance.

Lack of investor expertise in SDG sectors. Someof the private sector investors that developingcountries are aiming to attract to large-scaleprojects, such as infrastructure or agriculture,are relatively inexperienced, including privateequityfundsandSWFs.Theseinvestorshavenottraditionally been engaged in direct investmentin these countries (particularly low-incomeeconomies)norinSDGsectors,andtheymaynothavethenecessaryexpertisein-housetoevaluateinvestments, to manage the investment process(and,whereapplicable,tomanageoperations).

These constraints can be addressed throughpublicpolicyresponses,aswellasbyactionsandbehavioural change by corporations themselves(seefigureIV.11).


Figure IV.11. Channelling investment into SDG sectors: key challenges and policy options

•

•


Establish new incentives schemes and a new generation of investment promotion institutions

•

•

•

Lack of information and effective packaging and promotion of SDG investment projects

Lack of investor expertise in SDG sectors

• Entry barriers toSDG investments

Inadequate risk-return ratiosfor SDG investments

Alleviate entry barriers, while safeguarding legitimate public interests

•

Expand use of risk--sharing and mitigation mechanisms for SDG investments

•

•

•

•

Build SDG investment partnerships

• - and host-country investment promotion agencies: home- country

•

Transforming IPAs into SDG investment development agencies, focusing on the preparation and marketing of pipelines of bankable projects in the SDGs.

Redesign of investment incentives, facilitating SDG investment projects, and supporting impact objectives of all investments.

Regional SDG investment compacts: regional cooperation mechanisms to promote investment in SDGs, e.g. regional cross-border infrastructure, regional SDG clusters

Creation of an enabling policy environment for investment in sustainable development (e.g. UNCTAD’s IPFSD), and formulation of national strategies for attracting investment in SDG sectors.

Wider use of PPPs for SDG projects to improve risk-return profiles and address market failures.

Wider availability of investment guarantee and risk insurance facilities to speci�cally support and protect SDG investments.

Public sector and ODA leveraging and blended �nancing: public and donor funds as base capital or junior debt, to share risks or improve risk-return pro�le for private-sector funders.

Advance market commitments and other mechanisms to provide more stable and/or reliable markets for investors.

Partnerships between homepartner to act as business development agency for investment in the SDGs in developing countries.

SVE-TNC-MDB triangular partnerships: global companies and MDBs partner with LDCs and small vulnerable economies, focusing on a key SDG sector or a product key for economic development.

•

Source:UNCTAD.

2. Alleviating entry barriers, while safeguarding public interests

A basic prerequisite for successful promotion of SDG investment is a sound overall policy climate, conducive to attracting investment while safeguarding public interests, especially in sensitive sectors.

Adevelopmentstrategy forattractingandguidingprivateinvestmentintopriorityareasforsustainabledevelopment requires the creation of an enablingpolicy environment. Key determinants for a hostcountry’sattractiveness,suchaspolitical,economicandsocialstability;clear,coherentandtransparentrules on the entry and operational conditions forinvestment;andeffectivebusinessfacilitationareallrelevantforencouraginginvestmentinSDGsectors.The rule of law needs to be respected, togetherwith a credible commitment to transparency,participationandsoundinstitutionsthatarecapable,

efficient and immune to corruption (Sachs 2012).At thesametime,alleviatingpolicyconstraints forprivateinvestmentinSDGsectorsmustnotcomeat the price of compromising legitimate publicinterests concerning the ownership structure andthe regulatory framework for activities related tosustainable development. This calls for a gradualapproachtowardsliberalizationofSDGsectorsandpropersequencing.

The enabling policy framework should clearlystipulate inwhatSDGareasprivate investment ispermittedandunderwhatconditions.WhilemanySDG sectors are open to private investment innumerous countries, important country-specificlimitationspersist.Onecaseinpointisinfrastructure,wherepublicmonopoliesarecommon.25Reducinginvestment barriers can open up new investmentopportunities,butmayrequireagradualapproach,starting with those SDG sectors where privateinvolvement faces fewer political concerns. Host


countriesmayfirstallowserviceandmanagementcontracts and move to PPPs once contractualpartnershavegainedmoreexperience.

Private investment may also be hindered byexclusive rights that governments grant to singleservice providers (e.g. inwater or energy supply)to ensure sufficient revenue for the operatorthrougheconomiesofscale.Suchpoliciesshouldnotentirely impedemarketaccess forsmall-scaleproviders,sincethelattercanbeessentialtofillthegapof serviceprovisionwhere themainoperatorfails to reach thepoorestor isolatedsegmentsofthepopulation(OECD2009).

If concerns exist particularly in respect of foreign participation in SDG sectors, host countries canopt for foreign ownership limitations instead ofcompleteprohibitions.Theycanalsosubjectforeigninvestmenttoanationalbenefittestonacase-by-casebasis, for instance as regards investment incritical infrastructure. Investment contracts (suchas PPPs) between the host country and foreigninvestors,aswellasbusinessconcessionsofferthepossibility to admit foreign investment under thecondition that the investor actively contributes toSDGs.Forinstance,foreigninvestorshavereceivedthe right to exploit natural resources in exchangeforacommitmenttobuildcertaininfrastructureorsocialinstitutions,suchashospitalsorschools.

Withrespecttoforeignparticipation inagriculture,unambiguous land tenure rights, including a landregistry system, are critical not only for attractinginvestors,butalsoforprotectingsmallholdersfromdispossession and for increasing their bargainingpower vis-à-vis foreign investors. Politicaloppositionagainstforeigninvestmentinagriculturecanbealleviatedbypromotingoutgrowerschemes(WIR09, UNCTADandWorldBank2014).

Ininfrastructuresectors,whichareoftenmonopolies,acrucialprerequisiteforliberalizationoropeninguptoprivateorforeigninvestorsistheestablishmentofeffectivecompetitionpoliciesandauthorities.Insuchcases, theestablishmentofan independentregulator can help ensure a level playing field. Asimilarcasecanbemade inothersectors,wherepolicyactioncanhelpavoidacrowdingoutoflocalmicro-andsmallandmedium-sizedfirms(suchas

agricultural smallholders)who form thebackboneoftheeconomyinmostdevelopingcountries.

Other regulatory andpolicy areas are relevant forthecreationofaconduciveinvestmentclimateandfor safeguarding public policy interest. UNCTAD’sInvestment Policy Framework for SustainableDevelopment (IPFSD) has been successful inmovingdiscussionandpolicyinthisdirectionsinceitspublicationin2012.

3. expanding the use of risk-sharing tools for SDG investments

A number of tools, including PPPs, investment insurance, blended financing and advance market commitments, can help improve the risk-return profile of SDG investment projects.

A key means to improve the risk-return profilefor private sector actors is the ability of relevantstakeholders (the public sector, typically home-country governments, development banks orinternational organizations) to share, minimizeor offer alternatives to the risks associated withinvestmentinsustainabledevelopment.

InnovativeriskmanagementtoolscanhelpchannelfinanceandprivateinvestmentinSDGsdependingon the specific requirements of sustainabledevelopmentprojects.

Widen the use of public-private partnerships

The use of PPPs can be critical in channellinginvestment to SDG sectors because they involvethe public and private sectors working together,combiningskillsandresources(financial,managerialandtechnical),andsharingrisks.Manygovernmentsturn to PPPs when the scale and the level ofresources required forprojectsmean theycannotbe undertaken solely through conventional publicexpenditures or procurement. PPPs are typicallyusedforinfrastructureprojects,especiallyforwaterandtransportationprojects(suchasroads,railandsubwaynetworks),butalsoinsocialinfrastructure,healthcareandeducation.26PPPsmayalsoinvolveinternationalsustainabledevelopmentprogrammesand donor funds; for instance, the InternationalFinance Facility for Immunization is a PPP,which


uses the long-term borrowing capacity of donorgovernments, with support of the internationalcapital markets to collect funds and finance theGAVIimmunizationprogrammes.

PPPscanoffervariousmeansforimprovingtherisk-returnprofileofsustainabledevelopmentprojects.Theyofferthepossibilityfortailor-maderisksharingin respect of individual sustainable developmentinvestments. PPPs also allow for cost sharingconcerning the preparation of feasibility studies;risk sharing of the investment operations throughco-investment,guaranteesandinsurances;andanincreaseofinvestorreturnsthrough,forexample,taxcreditsandindustrysupportbyprovidingcapacityforresearchandinnovation.DirectfinancialsupportagreeduponinPPPscanhelptoovercomestart-up barriers for sustainable-development-relatedinvestments.

CautionisneededwhendevelopingPPPsastheycanproverelativelyexpensivemethodsoffinancingandmay increase thecost to thepublic sector ifup-frontinvestmentcostsandsubsequentrevenuestreams (investment returns) are not adequatelyassessed.ThisisespeciallyrelevantforLDCsandsmall vulnerable economies (SVEs) with weakertechnical, institutional and negotiation capacities(Griffithsetal.2014).Examplesofrisksassociatedwith PPPs for governments include high fiscalcommitments and difficulty in the estimation ofthe cost of guarantees (e.g. when governmentsprovideguaranteesondemand,exchangeratesorothercosts).Governmentsshouldcarefullydesigncontractual arrangements, ensure fair risk sharingbetweenthepublicandtheprivatesector,developthecapacitiestomonitorandevaluatepartnerships,andpromotegoodgovernanceinPPPprojects.27

Given the technical complexity of PPP projectsand the institutional and governance capabilitiesrequired on the part of developing countries,wideningtheuseofPPPswillrequire:

• the creation of dedicated units and expertisein public institutions, e.g. in SDG investmentdevelopment agencies or relevant investmentauthorities, or in the context of regional SDGinvestment development compacts wherecostsandknow-howcanbeshared.

• technical assistance from the internationaldevelopment community, e.g. throughdedicated units in international organizations(or inamulti-agencycontext)advisingonPPPprojectset-upandmanagement.

An option that can alleviate risks associatedwithPPPs, further leverageofpublic fundsto increaseprivatesectorcontributions,andbringintechnicalexpertise, are three- or four-way PPP schemeswiththeinvolvementnotonlyoflocalgovernmentsand private sector investors, but alsowith donorcountriesandMDBsaspartners.

Link the availability of guarantee and risk insurance facilities to SDGs

Numerouscountriespromoteoutward investmentby providing investment guarantees that protectinvestors against certain political risks in hostcountries (such as the risk of discrimination,expropriation, transfer restrictions or breachof contract). Granting such guarantees can beconditional on the investment complying withsustainabilitycriteria.Anumberofcountries,suchasAustralia,Austria,Belgium,Japan,theNetherlands,theUnitedKingdomandtheUnitedStatesrequireenvironmental and social impact assessments bedoneforprojectswithpotentiallysignificantadverseimpacts.28

In addition to mechanisms providing insuranceagainst political risks at the country level,mechanisms providing guarantees and riskinsurance offered by multilateral developmentinstitutions also take into account sustainabledevelopmentobjectives.Forinstance,indeterminingwhether to issue a guarantee, the MultilateralInvestmentGuaranteeAgencyevaluatesallprojectsinaccordancewithitsPolicyonEnvironmentalandSocialSustainability,adoptedinOctober2013.29

Public sector and ODA-leveraging and blended financing

National, regional and multilateral developmentbanks, as well as ODA, can represent criticalsourcesoffinancethatcanbeusedasleveragingmechanisms.Inasimilarvein,developmentbankscan play a crowding-in role, enabling private


investment, or providing support for the privatesector in periods of crisis when firms cannotreceive financing from private banks. In additiondevelopment banks have played, and continueto play, a role in socially oriented projects whereprivateinvestmentislacking.

ODAcanplaysimilarroles,especiallyinvulnerableeconomies. For instance, the 2002 MonterreyConsensus already pointed out the need tointensify efforts to promote the use of ODA toleverageadditionalfinancingfordevelopment.ODAcontinuestobeofcriticalimportance,particularlyforLDCs,becausefinancialflowstothesecountriesaresmallandthecapacitytoraisesufficientresourcesdomesticallyislacking.Aidcanactasacatalystforprivateinvestment,andthereisgrowingconsensuson the potential complementarity of public aidand private investment to foster development(UNECOSOC 2013). To date, the share of ODAsupportingprivateinvestmentissmall,butinterestinthismechanismisrisingamongdonorcountriesanddevelopmentfinanceinstitutions;forexample,blended ODA from EU institutions rose from 0.2per cent in 2007 to almost 4 per cent in 2012(EURODAD2014).TheamountofODAdirectedtoprivatesectorblendingmechanismsisexpectedtoincrease.

Public sector and ODA-leveraged and blendedfinancinginvolvesusingpublicanddonorfundsasbasecapital, to share risksor improve risk-returnprofiles for private sector funders. Blending canreducecostsasitinvolvesthecomplementaryuseof grants and non-grant sources such as loansor risk capital to finance investment projects indevelopingcountries.Itcanbeaneffectivetoolforinvestment with long gestation periods and witheconomicandsocialratesofreturnexceedingthepurefinancial rateof return (e.g. in the renewableenergysector).

Cautionmustbeexercisedintheuseofblending,as it involves risks. Where the private fundingcomponent exclusively pursues financial returns,development impact objectives may be blurred.ODAcanalsocrowdoutnon-grantfinance(Griffithset al. 2014). Evaluating blended projects is noteasy and it can be difficult to demonstrate keysuccessfactors,suchasadditionality,transparency

and accountability and to provide evidence ofdevelopmentimpact.

Advance market commitments and other market creation mechanisms

In several SDG sectors, private investment isseverelyconstrainedbytheabsenceofasufficientmarket. For instance, private basic health andeducationservices,butalsoinfrastructureservices,such as privatewater and electricity supply,maynotbeaffordableto largepartsof thepopulation.Examplesofpolicyoptionstohelpcreatemarketsin SDG sectors that can attract private sectorinvestmentinclude:

• Policies aimed at enhancing social inclusiveness and accessibility of basicservices – such as subsidy schemes for thepoorintheformofeducationvouchersorcashgrantsforenergyandwaterdistribution.

• Public procurement policies, through whichgovernmentsat thecentraland local levelcangivepreference to thepurchaseofgoods thathavebeenproducedinanenvironmentallyandsocially-friendly manner. Cities, for example,increasingly have programs relating to thepurchaseof hybrid fleetsor renewablepower,theupgradingofmasstransportationsystems,green city buildings or recycling systems(WIR10).

• Feed-in tariffs for green electricity producedby households or other private sector entitiesthatarenotutilitiesbutthatcansupplyexcessenergytothegrid(WIR10).

• Regional cooperationcanhelpcreatemarkets,especially for cross-border infrastructureprojects, such as roads, electricity or watersupply,byovercomingmarketfragmentation.

Otherconcretemechanismsmayincludeso-calledadvancemarketcommitments.Thesearebindingcontracts typically offered by governments orfinancingentitieswhichcanbeused(i)toguaranteeaviablemarket,e.g.forgoodsthatembodysociallybeneficial technologies for which private demandis inadequate, such as in pharmaceuticals andrenewable energy technologies (UNDESA 2012);(ii) to provide assured funding for the innovation


of socially beneficial technologies, e.g. throughrewards, payments, patent buyouts, even ifthe private demand for the resulting goods isinsufficient; and/or (iii) to act as a consumptionsubsidy when the R&D costs are high and thereturnsuncertain,witharesultofloweringthepriceforconsumers,oftenallowingtheprivatesectortoremaininchargeoftheproduction,marketinganddistribution strategies. Donors guarantee a viablemarket for a known period, which reduces therisksforproducersassociatedwithR&Dspending(i.e.commitmentsactas incentives forproducersto invest inresearch,staff trainingandproductionfacilities). Advance market commitments (UnitedNations I-8Group2009)havebeenusedto raisefinancefordevelopmentofvaccineproductionfordevelopingcountries, for instancebysuccessfullyaccelerating the availability of the pneumococcalvaccineinlow-incomecountries.

4. establishing new incentives schemes and a new generation of investment promotion institutions

Alleviating constraints in the policy frameworkof host countriesmay not be sufficient to triggerprivateinvestmentinSDGs.Potentialinvestorsmaystill hesitate to invest because they consider theoverallrisk-returnratioasunfavourable.Investmentpromotionandfacilitationeffortscanhelpovercomeinvestorreluctance.

a. Transform IPAs into SDG investment development agencies

A new generation of investment promotion requires agencies to target SDG investors and to develop and market pipelines of bankable projects.

Throughtheirinvestmentpromotionandfacilitationpolicies, and especially in the priorities givento investment promotion agencies (IPAs), hostcountries pursue a variety of mostly economicobjectives,abovealljobcreation,exportpromotion,technology dissemination and diffusion, linkageswith local industry and domestic value addedas well as skills development (see figure III.4 inchapter III). Most IPAs, therefore, do not focusspecificallyonSDGinvestmentobjectivesorSDGsectors,althoughtheexistingstrategicprioritiesdo

contributetosustainabledevelopmentthroughthegenerationofincomeandpovertyalleviation.

PursuinginvestmentsinSDGsimplies,(i)targetinginvestorsinsectorsoractivitiesthatareparticularlyconducive to SDGs and (ii) creating and bringingto market a pipeline of pre-packaged bankableprojects.

In pursuing SDG-related investment projects,IPAs face a number of challenges beyond thoseexperiencedinthepromotionofconventionalFDI.Inparticular:

• Abroadeningof the IPAnetworkof in-countrypartnerships. Currently, typical partners ofIPAs include trade promotion organizations,economic development agencies, exportprocessing zones and industrial estates,business development organizations, researchinstitutions and universities. While theserelationships can help promote investment inSDGprojects,thenetworkneedstoexpandtoinclude public sector institutions dealing withpolicies and services related to infrastructure,health, education, energy and ruraldevelopment, as well as local governments,rural extension services, non-profitorganizations, donors and other developmentstakeholders.

• Broadening of contacts with wider groups oftargets and potential investors, including notonly TNCs but also new potential sourcesof finance, such as sovereign wealth funds,pension funds, asset managers, non-profitorganizations,andothers.

• Development of in-house expertise onsustainable development-related investmentprojects, new sectors and possible supportmeasures. IPAs, which traditionally focuson attracting investments in manufacturingand commercial services, need to becomefamiliar with the concept of SDG-relatedinvestment projects, including PPPs. Trainingin international best practice and investmentpromotion techniques could be acquired frominternational organizations and private sectorgroups. For example, in 2013, UNCTADstarted a program that assists IPAs fromdevelopingcountriesinthepromotionofgreenFDI.


TochannelinvestmentintoSDGsectorsthatmaybelessvisibleorattractiveto investors,governments– alone or in the context of regional cooperation– should develop a pipeline of bankable SDG investment projects.

Key characteristics of bankable projects areprioritization,preparationandpackaging:

• Political prioritization involves the identificationof priority projects and the determinationof priority sectors, based on nationaldevelopment objectives and strategies. Theprojectsshouldbepoliticallyfeasiblewithintheeconomicdevelopmentstrategyofthecountry,with a clear political consensus at all levels(national, state and provincial as applicable)and public support. Thus projects should beselected on the basis of a consensus amonggovernment entities on their priorities. Atthis inception stage, policymakers shouldidentifyscalablebusinessmodelsanddevelopstrategies for large-scale roll-outover the longterm.

• Regulatory preparation involves the pre-clearingofregulatoryaspectsandfacilitationofadministrativeproceduresthatmightotherwisedeterinvestors.Examplesincludepre-approvalof market-support mechanisms or targetedfinancial incentives (such fiscal incentivesaiming to reduce thecostofcapital);advanceprocessing of required licenses and permits(e.g. planning permissions); or carrying outenvironmental impact studies prior to invitingbidsfrominvestors.

• Packaging relates to the preparation ofconcrete project proposals that show viabilityfromthestandpointofallrelevantstakeholders,e.g. technical feasibility studies for investors,financial feasibility assessments for banksor environmental impact studies for widerstakeholders. Governments can call uponservice providers (e.g. technical auditors,test and certification organizations) to assistin packaging projects. Packaging may alsoinclude break up or aggregation/bundlingof projects into suitable investment sizes forrelevant target groups. And it will include theproduction of the “prospectus” that can bemarketedtoinvestors.

Public funding needs for feasibility studies andotherprojectpreparationcostscanbesignificant.Theytypicallyaverage5–10percentoftotalprojectcosts,whichcanadduptohundredsofmillionsofdollarsforlargeinfrastructureprojects(WorldBank2013b). To accelerate and increase the supplyof bankable projects at the national and regionallevels, particularly in LDCs, international supportprogrammescouldbeestablishedwiththefinancialsupportofODAandtechnicalassistanceofMDBs.

b. Redesign of investment incentives for SDGs

Reorienting investment incentives towards SDGs implies targeting investments in SDG sectors and making incentives conditional on social and environmental performance.

Designing investment incentives schemes forSDGs implies putting emphasis on the qualityof investments in terms of their mid- and long-term social and environmental effects (tableIV.3). Essentially, incentives would move frompurely “location-focused” (a tool to increase thecompetitiveness of a location) to more “SDG-focused” (a tool to promote investment insustainabledevelopment).

SDG-orientedinvestmentincentivescanbeoftwotypes:

• Incentives targeted specifically at SDGsectors (e.g. those provided for investment inrenewableenergy,infrastructureorhealth).

• Incentives conditional upon social andenvironmental performance of investors(including, for instance, related to policieson social inclusion). Examples includeperformance requirements relating toemployment, training, local sourcingof inputs,R&D,energyefficiencyorlocationoffacilitiesindisadvantagedregions.

Table IV.4contains someexamplesof investmentincentivesrelatedtoenvironmentalsustainability.

In UNCTAD’s most recent survey of IPAs, theseagenciesnotedthatamongSDGsectorsinvestmentincentiveschemesaremostlyprovidedforenergy,R&D and infrastructure development projects. Inadditiontothesesectors,incentivesaresometimes


Table IV.3. Traditional and sustainable development oriented investment incentives

Traditional economic growth oriented investment incentives

Investment incentives that take into account sustainable development considerations

Focusonsectorsimportantforeconomicgrowth,jobcreationandexportgeneration

AdditionalfocusonSDGsectors

Focusonshort-andmedium-termeconomicgains Long-termimplicationsofinvestmentforsustainabledevelopmentconsidered

Cost-benefitanalysisinfavourofeconomicgains Cost-benefitanalysiswithadequateweighttolong-termsocialandenvironmentalcostsofinvestment

Loweringofregulatorystandardsconsideredasapolicyoption

Loweringofregulatorystandardsaspartoftheincentivespackageexcluded

Monitoringprimarilyofeconomicimpactsoftheinvestment Monitoringoftheoverallimpactoftheinvestmentonsustainabledevelopment

Source:UNCTAD.

providedforprojectsacrossnumerousSDGareas,or linked toSDGobjectives throughperformancecriteria.

Inadditiontofinancial,fiscalorregulatoryincentives,governments can facilitate investors by buildingsurrounding enabling infrastructure or by lettingthemuse such infrastructure at lowor zerocost.Forinstance,investmentsinagriculturalproductionrequire good storage and transportation facilities.Investmentsinrenewableenergy(e.g.windorsolarparks)necessitatethebuildingofagridtotransportthe energy to consumers. The construction ofschools and hospitals in rural areas calls foradequateroads,andpublictransportationtomakeeducation and health services easily reachable.There is an important role for domestic, regionaland multilateral development banks in realizingsuchenablingprojects.

A reorientation of investment incentives policies(especially regulatory incentives) towardssustainabledevelopmentcouldalsonecessitateaphasingout of incentives thatmayhavenegativesocialorecologicalsideeffects,inparticularwheresuch incentives result in a “race-to-the-bottom”withregardtosocialorenvironmentalstandardsorinafinanciallyunsustainable“racetothetop”.

Astrongerfocusonsustainabledevelopmentmaycall for a review of existing subsidy programs forentire industries. For example, the World Bankestimates that $1 trillion to $1.2 trillion per yearare currently being spent on environmentallyharmfulsubsidiesforfossilfuels,agriculture,waterand fisheries (World Bank 2012).More generally,

investmentincentivesarecostly.Opportunitycostsmust be carefully considered. Public financialoutlays in case of financial incentives, or missedrevenuesincaseoffiscalincentives,couldbeuseddirectlyforSDGinvestmentprojects.

Investment incentives should also not becomepermanent; the supported projectmust have thepotential to become self-sustainable over time –somethingthatmaybedifficulttoachieveinsomeSDG sectors. This underlines the importanceof monitoring the actual effects of investmentincentives on sustainable development, includingthe possibility of their withdrawal if the impactprovesunsatisfactory.

c. Establish regional SDG investment compacts

Regional SDG investment compacts can help spur private investment in cross-border infrastructure projects and build regional clusters of firms in SDG sectors.

Regionalcooperationcan fosterSDG investment.A key area for such SDG-related cross-bordercooperationisinfrastructuredevelopment.

Existing regional economic cooperation initiativescould evolve towards regional SDG investment compacts. Such compacts could focus onliberalization and facilitation of investment andestablish joint investment promotionmechanismsand institutions. Regional industrial developmentcompacts could include in their scope all policyareasimportantforenablingregionaldevelopment,such as the harmonization,mutual recognition or


Table IV.4. examples of investment incentives linked to environmental sustainability

Country Environmental incentives

Brazil • Initiativeandincentiveprogramsforwind,power,biomassandsmallhydro-subsectors

Canada • Specialtaxcreditsfordevelopmentofnewtechnologiesthataddressissuesofclimatechange,cleanair,andwaterandsoilquality

• NovaScotiaprovidesupto20percentofthedevelopmentcostofoceantechandnon-traditionalenergysources

Germany • Grantprogramsforprojectsrelatedtoenergyefficiency,CO2reductionandrenewableenergyIndonesia • 5-to10-yeartaxbreakinrenewableenergy

Japan • Investmentsinsmartcommunitiesthatuniteinformationnetworks,energysystemsandtrafficsystemsaswellasimprovecomfortandreduceCO2emissions

SouthAfrica • Accelerateddepreciationforinvestmentsinrenewableenergyandbiofuelproduction• Taxbreakforentitiesthatbecomemoreenergy-efficient• Allowanceforexpenditureongreentechnologyandimprovedresourceefficiency

Turkey • Interest-freeloansforrenewableenergyproductionandforprojectstoimproveenergyefficiencyandreduceenvironmentalimpact

UnitedKingdom • Fundingschemesforoff-shorewindfarms

UnitedStates • Guaranteedloanstoeligiblecleanenergyprojectsanddirectloanstomanufacturersofadvancedtechnologyvehiclesandcomponents

• Taxincentivestoimproveenergyefficiencyintheindustrialsector• Incentivesatthestatelevel

Source:UNCTADbasedondeskresearch.30

approximation of regulatory standards and theconsolidationofprivatestandardsonenvironmental,socialandgovernanceissues.

RegionalSDG investmentcompactscouldaim tocreate cross-border clusters through thebuild-upof relevant infrastructure and absorptive capacity.Establishing such compacts implies working inpartnership, between governments of the regionto identify joint investment projects, betweeninvestmentpromotionagenciesforjointpromotionefforts, between governments and internationalorganizationsfortechnicalassistanceandcapacity-building,andbetweenthepublicandprivatesectorfor investment in infrastructure and absorptivecapacity(figureIV.12)(seealsoWIR13).

5. Building SDG investment partnerships

Partnershipsbetweenhomecountriesofinvestors,host countries, TNCs and MDBs can helpovercomeknowledgegapsaswellasgeneratejointinvestmentsinSDGsectors.

Private investors’ lack of awareness of suitablesustainable development projects, and a shortfallinexpertise,canbeovercomethroughknowledge-

sharing mechanisms, networks and multi-stakeholder partnerships.

Multi-stakeholder partnerships can supportinvestmentinSDGsectorsbecausetheyenhancecooperation, understanding and trust betweenkey partners. Partnerships can facilitate andstrengthen expertise, for instance by supportingthedevelopmentofinnovativeandsynergisticwaysto pool resources and talents, and by involvingrelevantstakeholdersthatcanmakeacontributionto sustainable development. Partnerships canhaveanumberofgoals,suchasjointanalysisandresearch, information sharing to identify problemsandsolutions,developmentofguidelines forbestpractices, capacity-building, progress monitoringandimplementation,orpromotionofunderstandingandtrustbetweenstakeholders.Thefollowingaretwo examples of potential partnerships that canraiseinvestorexpertiseinSDGs.

Partnerships between home- and host-country investment promotion agencies.

Cooperation between outward investmentagencies in home countries and IPAs in host


Figure IV.12. Regional SDG Investment Compacts

Source:UNCTAD.

Partnerships between governmentsin regions

Partnerships between thepublic and

private sectors

Partnershipsbetween

governments andinternationalorganizations

Partnerships between trade andinvestment promotion agencies

Integrated investment agreements (liberalization and facilitation)

Joint investment promotion mechanisms and institutions

Joint infrastructuredevelopment

projects

Joint programmes

to build absorptivecapacity

Regional SDGInvestmentCompact

countries could be ad hoc or systematic, andpotentiallyinstitutionalized.IPAsthattargetprojectsrelated to sustainable development could partnerwithoutward investmentagenciesforthreebroadpurposes:

• Information dissemination and marketingof SDG investment opportunities in homecountries.Outward investmentagenciescouldprovidematchingservices,helpingIPAsidentifypotentialinvestorstoapproach.

• Where outward investment agencies provideinvestment incentives and facilitation servicesto their investors for SDG projects, thepartnershipcouldincreasechancesofrealizingtheinvestment.

• Outward investment agencies incentives forSDG investments could be conditional onthe ESG performance of investors, ensuringcontinued involvement of both parties in

the partnership for monitoring and impactassessment.

Through such partnerships outward investmentagencies could evolve into genuine businessdevelopment agencies for investments in SDGsin developing countries, raising awareness ofinvestmentopportunities,helping investorsbridgeknowledgegapsandgainexpertise,andpracticallyfacilitatingtheinvestmentprocess.

SVE-TNC-MDB triangular partnerships

Partnerships between governments of SVEs,private investors (TNCs), and MDBs could befostered with the aim of promoting investmentsin SDG sectors which are of strategic interest toSVEs. Depending on the economy, the strategicsector may be infrastructure, a manufacturingindustryorevenavaluechainsegment.Crucially,in such “triangular” partnerships, stakeholders


would work together to identify the bottlenecksfor private investment, and jointly developpublic-private solutions to develop the strategic sector,bearing in mind wider socioeconomic and long-term ramifications. In particular, the partnershipwouldworktowardsraisinglong-term,soundandsustainableinvestmentinSDGs,butalsopromoteinvestment in surrounding economic and socialinfrastructure, giving support to governmentstowardsasoundmanagementofresourcesthroughcollaborativestakeholderengagement.Inallcases,theSVEgovernmenthastobeinthe“driver’sseat”.

Participating TNCswill typically be players in thesector, with consequent reputational risks if thepartnershipfails.InsomecasetheSVEmaymakeup (or become) an important part of the TNCs’operationsinasector–e.g.asasupplybaseforacommodity– leadingtothefirmhavingastake inawell-runeconomyandlocaldevelopment.TNCsmay also enter the partnership to demonstrategood corporate citizenship. The participation

of MDBs – or equivalent entities – is required tomonitor progress and impact, safeguard againstunwarrantedeconomicdominance,providepolicyadvice,and runcontiguousdevelopmentprojects(e.g.linkagescreatedwithlocalfirms).

Beyond formal partnerships, broad knowledge-sharing platforms can also help. Governments,private and public research institutions, marketintermediaries and development agencies all playa role inproducinganddisseminating informationon investment experience and future projectopportunities.Thiscanbedonethroughplatformsfor knowledge sharing and dissemination.Examples include the Green Growth KnowledgePlatform (GGKP), launched by the Global GreenGrowthInstitute,theOECD,UNEPandtheWorldBank.Investorsthemselvesalsoestablishnetworksthat foster relationships, propose tools, supportadvocacy, allow sharing of experiences, and canleadtonewinvestmentopportunities.

F. eNSURING SUSTAINABle DeVelOPmeNT ImPACT OF INVeSTmeNT IN The SDGs

1. Challenges in managing the impact of private investment in SDG sectors

Key challenges in managing the impact of private investment in SDG sectors include weak absorptive capacity in some developing countries, social and environmental impact risks, the need for stakeholder engagement and effective impact monitoring.

Once investment has been mobilized andchannelled towards SDG sectors, there remainchallengestoovercomeinordertoensurethattheresultantbenefits forsustainabledevelopmentaremaximized,andthepotentialassociateddrawbacksmitigated(figureIV.13).Keychallengesincludethefollowing.

Weak absorptive capacity in developing economies.Developing countries, LDCs in particular, oftensufferfromalackofcapacitytoabsorbthebenefitsof investment. There is a risk that thegains frominvestmentaccrueprimarilytotheinvestorandarenot shared through spillovers and improvement

in local productive capacity. A lack ofmanagerialor technical capabilities among local firms andworkershinderstheextenttowhichtheycanformbusiness linkageswith foreign investors, integratenew technologies, and develop local skills andcapacity.

Risks associated with private investment in SDG sectors. There are challenges associated withgreaterprivatesectorengagementinoftensensitiveSDGsectorsindevelopingcountries.Atagenerallevel,thesocialandenvironmentalimpactsofprivatesector operations need to be addressed acrosstheboard.Butopeningbasic-needssectorssuchaswater andsanitation, healthcareor educationto private investors requires careful preparationand the establishment of appropriate regulatoryframeworkswithinwhichfirmswilloperate.

In addition, where efforts are made specificallyto attract private investment from internationalinvestors, there are risks that part of the positiveimpactofsuchinvestmentforlocaleconomiesdoes


Figure IV.13. maximizing the sustainable development impact of investment and minimizing risks

•


Establish effective regulatory frameworks and standards

• Environmental, labour, social regulations; effective taxation; mainstreaming of SDGs into IIAs; coordination of SDG investment policies at national and international levels.

Need to minimize risks associated with private investment in SDG sectors

Inadequate investment impact measurement andreporting tools

• Weak absorptive capacity in developing countries

Need to engage stakeholders and manageimpact trade-offs

Build productive capacity, entrepreneurship, technology, skills, linkages

• Entrepreneurship development, inclusive �nance initiatives, technology dissemination, business linkages.

• New economic zones for SDG investment, or conversion of existing SEZs and technology zones.

Good governance, capable institutions, stakeholders engagement

• Stakeholder engagement for private investment in sensitive SDG sectors; institutions with the power to act in the interest of stakeholders.

Implement SDG impact assessment systems

• Indicators for measuring (and reporting to stakeholders) the economic, social and environmental performance of SDG investments.

• Corporates to add ESG and SDG dimensions to �nancial reporting to in�uence theirbehaviour on the ground.

•

•

Source:UNCTAD.

notmaterializeorleaksawayasaresultofrelativelylow taxes paid by investors (in caseswhere theyare attractedwith the help of fiscal incentives) orprofits being shiftedout of the countrywithin theinternationalnetworksofTNCs.Thetaxcollectioncapabilitiesofdevelopingcountries,andespeciallyLDCs,maynotbe sufficient to safeguardagainstsuchpractices.

Finally, regulatory options for governments tomitigate risks and safeguard against negativeeffects when attracting private investment intoSDG sectors can be affected by internationalcommitmentsthatreducepolicyspace.

Need to engage stakeholders and manage trade-offs effectively. Attracting needed investmentin agriculture to increase food production mayhave consequences for smallholders or displacelocal populations. Investments in infrastructurecanaffect localcommunities inavarietyofways.Investments in water supply can involve makingtrade-offs between availability and affordability inurbanareasversuswideraccessibility.Healthandeducationinvestments,especiallybyprivatesector

operators,aregenerallysensitiveareasthatrequireengagement with stakeholders and buy-in fromlocal communities. Managing such engagementin the investment process, and managingthe consequences or negative side effects ofinvestments requires adequate consultationprocessesandstronginstitutions.

Inadequate investment impact measurement and reporting tools.Ensuringtheon-the-groundimpactof investment in SDG sectors is fundamentalto justifying continued efforts to attract privateinvestment in them and to enhance governanceof such investment. Many initiatives to mobilizeand channel funds to SDGs are hampered by alack of accurate impact indicators. Even wheremeasurement tools exist at the project level (e.g.fordirectimpactsofindividualinvestmentsontheirimmediate environment), they may be availableat the macro level (e.g. long-term aggregateimpactsofinvestmentsacrossasector).Adequatemeasurementof impact isaprerequisiteformanyupstreaminitiatives.


2. Increasing absorptive capacity

The development of local enterprise and localtechnological capabilities that will enhance theabilityofdomestic firms toengage in andbenefitfromtechnologyandskillsdisseminationisreferredtointhischapterasdomesticabsorptivecapacity.Domesticabsorptivecapacityiscrucialnotonlytoincreasechancesofattractingprivate investment,butalsoinordertomaximizethebenefitsofprivateinvestmentinSDGsectors.Policycanhelpcreatean operating environment that allows local firms,entrepreneursandworkerstorealizethebenefitsofinvestmentinSDGsectors.ThekeyelementsthatenhanceabsorptivecapacitydifferbySDGsector(table IV.5). The development of these absorptivecapacityelementsalsobuildsproductivecapacityinhostcountrieswhichinturnencouragesfurtherinvestment,creatingavirtuouscircle.

a. Key policy areas: entrepreneurship, technology, skills, linkages

A range of policy tools is available to increase absorptive capacity, including the promotion and facilitation of entrepreneurship, support to technology development, human resource and skills development, business development services and promotion of business linkages.

A wide range of policy options exist forgovernmentstoimprovetheabsorptivecapacityoflocaleconomies,inordertomaximizethebenefitsofprivateinvestmententeringSDGsectors.Firstly,thisrevolvesaroundincreasinginvolvementoflocalentrepreneurs; micro, small and medium-sizedfirms;andsmallholders, inthecaseofagriculturalinvestment. Secondly, governments can increasethe domestic skills base not only as an enablerfor private investment, but also to increase thetransfer of benefits to local economies. Thirdly,local enterprise development and upgrading canbe further encouraged through thewidening anddeepeningofSDG-orientedlinkagesprogrammes.Technologydisseminationandknowledgesharingbetweenfirmsiskeytotechnologicaldevelopment,for instanceofnewtechnologiesthatwouldresultingreengrowth.Fosteringlinkagesbetweenfirms,withinandacrossborders,canfacilitatetheprocessof technology dissemination and diffusion, which

in turn can be instrumental in helping developingcountries catch upwith developed countries andshifttowardsmoresustainablegrowthpaths.

Promote entrepreneurship

• Stimulating entrepreneurship, including social entrepreneurship, for sustainable development. Domestic entrepreneurial development canstrengthen participation of local entrepreneurswithin or related to SDG sectors, and fosterinclusiveness(seeUNCTAD’sEntrepreneurshipPolicy Framework31). In particular, throughsocial entrepreneurship, governments cancreate special business incubators for socialenterprises. The criteria for ventures to behosted in such “social business incubators”are that they should have a social impact, besustainable and show potential for growth.These kinds of initiatives are proliferatingworldwide, as social entrepreneurs areidentified as critical change agents who willuseeconomicand technological innovation toachievesocialdevelopmentgoals.32

Table IV.5. Selected ways to raise absorptive capacity in SDG sectors

SDG sector Examples

Infrastructure(50%)

ConstructionandengineeringcapabilitiesoflocalfirmsandworkforceProjectmanagementexpertiseoflocalworkforcePresenceoflocalsuppliersandcontractors

Climatechangeandenvironment(27%)

Entrepreneurshipskills,clustersofrenewableenergyfirmsR&D,scienceandtechnologyparksforlowcarbontechnologyPresenceoflaboratories,researchinstitutes,universities

Foodsecurity(12%)

Clustersofagribusinessprocessingfirms

Localsuppliersofinputs,crops,fertilizers,replacementmachineryLocalworkforceskilledincropproductionandprocessing

Socialsectors(11%)

Localskillsinprovisionofservicese.g.teaching,nursingManagerialcapabilitiestorunschools,hospitals

Local(social)entrepreneurshipskills

Source:UNCTAD.

Note: PercentagesrepresenttheaverageshareofinvestmentneedsidentifiedforeachsectorinsectionB.


• Encourage financial inclusiveness. Initiativesand programmes can be encouraged tofacilitate access to finance for entrepreneursin micro, small and medium-sized firms orwomen-ownedfirms(orfirmsownedbyunder-represented groups). In order to improveaccess to credit by local small and medium-sized enterprises and smallholders, loanscan be provided by public bodies when noother reasonable option exists. They enablelocal actors to make investments of a sizeand kind that the domestic private bankingsector may not support. Financial guaranteesby governments put commercial banks in aposition to grant credits to small customerswithoutafinancialhistoryorcollateral.Policiescan also relax some regulatory requirementsfor providing credits, for instance the “knowyour customer” requirement in financialservices(Tewes-Gradletal.2013).

Boost technology and skills development

• Support science and technology development.Technical support organizations in standards,metrology, quality, testing, R&D, productivityand extension for small and medium-sizedenterprises are necessary to complete andimprove the technology systems with whichfirms operate and grow. Appropriate levelsof intellectual property (IP) protection and aneffective IP rights framework can help givefirms confidence in employing advancedtechnologies and provide incentives forlocal firms to develop or adapt their owntechnologies.

• Develop human resources and skills. Focusontraining and education to raise availability ofrelevant localskills inSDGsectors isacrucialdeterminant to maximize long-term benefitsfrominvestmentinSDGsectors.Countriescanalso adopt a degree of openness in grantingwork permits to skilled foreign workers,to allow for a lack of domestic skills and/or to avail themselves of foreign skills whichcomplement and fertilize local knowledge andexpertise.

• Provide business development services.A range of services can facilitate businessactivity and investment, and generatespillover effects. Such services might includebusiness development services centres andcapacity-building facilities to help local firmsmeet technical standards and improve theirunderstanding of international trade rules andpractices. Increased access could be grantedfor social enterprises, including through socialbusiness incubators, clusters and greentechnologyparks.

• Establish enterprise clustering and networking. Enterprise agglomeration may determine“collective efficiency” that in turn enhancesthe productivity and overall performanceof clustered firms. Both offer opportunitiesto foster competitiveness via learning andupgrading. Other initiatives include thecreation of social entrepreneurship networksand networks of innovative institutions andenterprises to support inclusive innovationinitiatives.

Widen and deepen SDG-oriented linkages programmes

• Stimulate business linkages. Domestic andinternational inter-firm and inter-institutionlinkages can provide local firms with thenecessary externalities to cope with thedual challenge of knowledge creation andupgrading. Policies should be focused onpromoting more inclusive business linkagesmodels,includingsupportforthedevelopmentof local processing units; fostering inclusiverural markets including through pro-poorpublic-private sector partnerships; integratinginclusive business linkages promotioninto national development strategies; andencouragingdomesticandforeigninvestorstodevelopinclusivebusinesslinkages.

• Create pro-poor business linkages opportunities. Private investment in SDGscan create new pro-poor opportunities forlocal suppliers – small farmers, small serviceproviders and local vendors. Potential policyactions to foster pro-poor linkages includedisseminating informationaboutbottomof the


pyramid consumers’ needs; creating sharedsupplier databases; leveraging local logisticsnetworks; introduce market diversificationservices for local suppliers; addressingconstraints related to inadequate physicalinfrastructure through supply collectioncentres, shared premises and internet-basedsolutions; and promoting micro-franchisingschemes,forinstanceinthehealth-caresector,inordertopromoteaccess(tohealthservices),awareness,availabilityandaffordability.

b. SDG incubators and special economic zones

Development of linkages and clusters in incubators or economic zones specifically aimed at stimulating businesses in SDG sectors may be particularly effective.

Theaforementionedrangeofinitiativestomaximizeabsorptive capacity of SDG investment could bemademore (cost-)effective if theyareconductedin one place through the creation of specialeconomic zones (SEZs) or technology zones, ortheconversionofexistingones intoSDG-focusedclusters. These can be used to promote, attract,and retain investment in specific and interrelatedSDGsectorswithapositiveimpactarisingfrom:

• Clusters and networks of closely associatedfirmsandactivitiessupportingthedevelopmentof inclusive spillovers and linkages withinzones,andbeyond.As localfirms’capabilitiesrise, demonstration effects becomeincreasinglyimportant.

• Incubator facilities and processes designedinto zones’ sustainable development supportservices and infrastructure to nurture localbusiness and social firms/entrepreneurs(and assist them in benefitting from the localcluster).

• Zones acting as mechanisms to diffuse responsible practices, including in terms oflabourpractices,environmentalsustainability,33healthandsafety,andgoodgovernance.

AnSDG-focusedzonecouldberural-based,linkedto specific agricultural products, anddesigned tosupport and nurture smallholder farmers, social

entrepreneursfromtheinformalsectorandensuresocialinclusionofdisadvantagedgroups.

InthecontextofSDG-focusedSEZs,policymakersshould consider broadening the availability ofsustainable-development-relatedpolicies, servicesand infrastructure toassistcompanies inmeetingstakeholder demands – for instance, improvedcorporate social responsibility policies andpractices.ThiswouldstrengthentheState’sabilitytopromoteenvironmentalbestpracticesandmeetitsobligationtoprotectthehumanrightsofworkers.Finally, SEZs should improve their reporting tobetter communicate the sustainable developmentservices.

3. establishing effective regulatory frameworks and standards

Increased private sector engagement in often sensitive SDG sectors needs to be accompanied by effective regulation. Particular areas of attention include human health and safety, environmental and social protection, quality and inclusiveness of public services, taxation, and national and international policy coherence.

Reapingthedevelopmentbenefitsfrominvestmentin SDG sectors requires not only an enablingpolicy framework, but also adequate regulationtominimize any risks associatedwith investment(see table IV.6 for examples of regulatory tools).Moreover, investmentpolicyand regulationsmustbeadequatelyenforcedby impartial,capableandefficientpublicinstitutions,whichisasimportantforpolicyeffectivenessaspolicydesignitself.

In regulating investment in SDG sectors, and ininvestmentregulationsgearedtowardssustainabledevelopment in general, protection of humanrights, health and safety standards, social andenvironmental protection and respect of corelabour rights are essential. A number of furtherconsiderationsareespeciallyimportant:

• Safeguarding quality and inclusiveness of public services. Easing constraints for privateinvestors inSDGsmustnotcomeat thepriceofpoorqualityofservices (e.g. inelectricityorwater supply, education and health services).This calls for appropriate standard setting by


hostcountriesconcerningthecontent,quality,inclusiveness and reliability of the services(e.g. programs for school education, hygienicstandardsinhospitals,provisionofcleanwater,uninterrupted electricity supply, compulsorycontracting for essential infrastructureservices),andformonitoringcompliance.Lawson consumer protection further reinforce thepositionofservicerecipients.

• Contractual arrangements between hostcountries and private investors can playa significant role. Through the terms ofconcession agreements, joint ventures orPPPs, host countries can ensure that privateservice providers respect certain qualitystandards in respect of human health,environmental protection, inclusiveness andreliability of supply. This includes a sanctionmechanism if the contractual partners fail toliveuptotheircommitments.

• Balancing the need for fair tax revenues with investment attractiveness. Effective taxpoliciesarecrucialtoensurethattaxrevenuesare sufficient and that they can be usedfor SDGs, such as the financing of public

services, infrastructure development or healthand education services. Taxation is also animportantpolicy tool tocorrectmarket failuresin respect of the SDG impact of investment,e.g. through imposing carbon taxes orproviding tax relief for renewable energies.Introducing an efficient and fair tax system is,however, far fromstraightforward,especially indeveloping countries. A recent report on taxcompliance puts many developing countriesat the bottom in the ranking on tax efficiency(PwC 2014b). Countries should considerhow tobroaden the taxbase, (i) by reviewingincentive schemes for effectiveness, and (ii)by improving tax collection capabilities andcombating tax avoidance. An example ofa successful recent tax reform is Ecuador,which significantly increased its tax collectionrate. These additional revenues were spentfor infrastructure development and othersocial purposes. The country now has thehighest proportion of public investment as ashare of GDP in the region.34 To combat taxavoidance and tax evasion, it is necessary toclose existing loopholes in taxation laws. Inaddition to efforts at the domestic level, thisrequires more international cooperation, asdemonstrated by recent undertakings in theG-20, the OECD and the EU, among others.Developing countries, especially LDCs, willrequire technical assistance to improve taxcollectioncapabilitiesandtodealwithnewandcomplex rules that will emerge from ongoinginternationalinitiatives.

• Ensuring coherence in national and international policymaking. Regulationsneed to cover a broad range of policy areasbeyond investment policies per se, such astaxation,competition,labourmarketregulation,environmentalpoliciesandaccesstoland.Thecoverageofsuchamultitudeofdifferentpolicyareas confirms the need for consistency andcoherence inpolicymakingacrossgovernmentinstitutions.At thedomestic level, thismeans,e.g. coordination at the interministerial leveland between central, regional and localgovernments.

Table IV.6. examples of policy tools to ensure the sustainability of investment

SDG RegulationsEnvironmentalsustainability

Pollutionemissionrules(e.g.carbontaxes)EnvironmentalprotectionzonesRisk-sensitivelandzoningEnvironmentalimpactassessments ofinvestmentsReportingrequirementsonenvironmentalperformanceofinvestmentGoodcorporatecitizenship

Socialsustainability

Labourpolicies andcontractlawHumanrightsLandtenurerightsMigrationpoliciesSafetyregulationsProvisionsonsafelandandhousingforlow-incomecommunitiesProhibitionofdiscriminationReportingrequirementsonsocialperformanceofinvestmentSocialimpactassessments ofinvestments

Source:UNCTAD.


Coherence isalsoan issuefor therelationshipbetweendomestic legislationand internationalagreements in the areas of investment,environmental protection and social rights,among others. Numerous internationalconventionsandnon-bindingprinciplesprovideimportant policy guidance on how to designand improve domestic regulatory frameworks,includingUNCTAD’sIPFSD.

• Making international investment agreements (IIAs) proactive in mobilizing and channelling investment into SDGs. Most IIAs still remainsilent on environmental and social issues.Only recent agreements start dealing withsustainability issues, but primarily from theperspective of maintaining regulatory spacefor environmental and social purposes. IIAscoulddomoreandalsopromoteinvestmentinSDGsinaproactivemanner.Thisincludes,forexample,emphasisingtheimportanceofSDGsas an overarching objective of the agreementor a commitment of contracting parties toparticularlyencourageandfacilitateinvestmentin SDGs. These are issues both for thenegotiation of new IIAs and the renegotiationof existing agreements. Systematic reform, asoutlinedinchapterIIIofthisreport,canhelp.

Finally,while lawsandregulationsarethebasisofinvestorresponsibility,voluntaryCSRinitiativesandstandardshaveproliferatedinrecentyears,andtheyare increasingly influencing corporate practices,behaviourandinvestmentdecisions.Governmentscan build on them to complement the regulatoryframework and maximize the developmentbenefits of investment. A number of areas canbenefit fromtheencouragementofCSRinitiativesand the voluntary dissemination of standards; forexample,theycanbeusedtopromoteresponsibleinvestment and business behaviour (including theavoidanceofcorruptbusinesspractices),andtheycanplayanimportantroleinpromotinglow-carbonandenvironmentallysoundinvestment.

4. Good governance, capable institutions, stakeholder engagement

Good governance and capable institutions are key enablers for the attraction of private investment in general, and in SDG sectors in particular. They are

also needed for effective stakeholder engagement and management of impact trade-offs.

Good governance and capable institutions areessential to promoting investment in SDGs andmaximizing positive impact in a number ofways:(i) to attract investment, (ii) to guarantee inclusivepolicymakingandimpacts,(iii)tomanagesynergiesandtrade-offs.

Attracting investment. Good governance is aprerequisite for attracting investment in general,and in SDG sectors in particular. Investments ininfrastructure, with their long gestation period,are particularly contingent on a stable policyenvironment and capable local institutions.Institutionalcapabilitiesarealsoimportantindealingornegotiatingwith investors,and for theeffectiveimplementationofinvestmentregulation.

Stakeholder engagement. Additionally, investmentin SDG areas affects many stakeholders indifferent ways. Managing differential impacts and“side effects” of SDG investments requires givinga say to affected populations through effectiveconsultative processes. It also requires strongcapabilitiesonthepartofgovernmentstodealwithconsequences, for example to mitigate negativeimpacts on local communities where necessary,while still progressing on investment in targetedSDGobjectives.

Adequate participation of multiple stakeholdersat various levels is needed, as governance ofinvestment in SDGs is important not just at thenationallevelbutalsoattheregionalandlocallevels.Infact,SDGinvestmentsaresubjecttogovernanceatdifferentlevels,e.g.fromlocalmetropolitanareasto national investments to regional infrastructure(such as highways, intercity rail, port-relatedservices for many countries, transnational powersystems).

Synergies and trade-offs.Aholistic,cross-sectoralapproach that creates synergies between thedifferent SDG pillars and deals with trade-offs isimportant to promote sustainable development.Objectives such as economic growth, povertyreduction, social development, equity, andsustainability should be considered together witha long-term outlook to ensure coherence. To do


this, governments can make strategic choicesaboutwhich sectors to build on, and all relevantministriescanbeinvolvedindevelopingafocuseddevelopment agenda grounded on assessmentsof emerging challenges. Integration of budgetsand allocating resources to strategic goals ratherthanindividualministriescanencouragecoherenceacross governments. Integrated decision-makingfor SDGs is also important at sub-national levels(Clark2012).

Promoting SDGs through investment-relatedpolicies may also result in trade-offs betweenpotentially conflicting policy objectives. Forexample, excessive regulation of investor activitycandeterinvestment;fiscalorfinancialinvestmentincentives for the development of one SDG pillarcanreducethebudgetavailableforthepromotionofotherpillars.Also,withinregionsoramongsocialgroups, choices may have to be made when itcomestoprioritizingindividualinvestmentprojects.

At the international policymaking level, synergiesareequallyimportant.Internationalmacroeconomicpolicy setting, and reforms of the internationalfinancial architecture, have a direct bearing onnationaland international investmentpolicies,andonthechancesofsuccessinattractinginvestmentinSDGs.

5. Implementing SDG impact assessment systems

a. Develop a common set of SDG impact indicators

Monitoring of the impact of investment, especially along social and environmental dimensions, is key to effective policy implementation. A set of core quantifiable impact indicators can help.

Monitoring. SDG-related governance requiresmonitoring the impact of investments, includingmeasuring progress against goals. UNCTAD hassuggestedanumberofguidingprinciplesthatarerelevantinthiscontext(IPFSD,WIR12).Investmentpolicies should be based on a set of explicitlyformulatedobjectives related toSDGsand ideallyinclude a number of quantifiable goals for boththe attraction of investment and the impact ofinvestment on SDGs. The objectives should set

clear priorities, a time frame for achieving them,andtheprincipalmeasuresintendedtosupporttheobjectives.

Tomeasure policy effectiveness for the attractionofinvestment,policymakersshoulduseafocusedset of key indicators that are the most directexpression of the core sustainable developmentcontributions of private investments, includingdirect contributions to GDP growth throughadditional value added, capital formation andexport generation; entrepreneurial developmentand development of the formal sector and taxbase; and job creation.Central to this should beindicatorsaddressinglabour,social,environmentalandsustainabilitydevelopmentaspects.

The impact indicator methodology developedfor the G-20 Development Working Group byUNCTAD,incollaborationwithotheragencies,mayprovideguidancetopolicymakersonthechoiceofindicatorsofinvestmentimpactand,byextension,of investmentpolicyeffectiveness (see table IV.7).The indicator framework, which has been testedin a number of developing countries, is meantto serve as a tool that countries can adapt andadoptinaccordancewiththeirnationalsustainabledevelopment priorities and strategies (see alsoIPFSD,WIR12).

SustainabledevelopmentimpactsofinvestmentinSDGscanbecross-cutting.Forinstance,clusterspromotinggreentechnologyentrepreneurshipcanserveaseconomicgrowthpoles,withemploymentgeneration and creation of value added aspositivesideeffects. Investments inenvironmentalprotection schemes can have positive effects onhumanhealthand indirectlyoneconomicgrowth.Such cross-cutting effects should be reflected inimpactmeasurementmethodologies.

Atthemicrolevel(i.e.thesustainabledevelopmentimpact of individual investments), the choice ofindicatorscanbefurtherdetailedandsophisticated,asdataavailability isgreater.Additional indicatorsmight include qualitative measures such as newmanagement practices or techniques transferred,socialbenefitsgeneratedforworkers(healthcare,pensions, insurance), or ancillary benefits notdirectlyrelatedtotheinvestmentprojectobjectives


(recreational facilities, schools and clinics forworkers,familiesorlocalcommunities).

b. Require integrated corporate reporting for SDGs

Impact measurement and reporting by private investors on their social and environmental performance promotes corporate responsibility on the ground and supports mobilization and channelling of investment.

Corporate sustainability reporting is an importantenablerofpoliciestopromotetheSDGs.High-qualitysustainability reporting involves the generation ofinternal company data on sustainability relatedactivitiesandcontrolsystems,facilitatingproactivemanagement, target setting and benchmarking.Publiclyreporteddatacanplayanimportantroleinenablinggovernmentstomonitortheeffectiveness

ofpoliciesandincentivestructures,andoftenserveasaprerequisiteforresourcemobilizationforSDGinvestment.

Theimportanceofsustainabilityreportinghasbeenrecognized throughout the process leading upto the formationof theSDGs. In2013, theHigh-LevelPanelofEminentPersonsonthePost-2015DevelopmentAgendaproposedthat“infuture–atlatest by 2030 – all large businesses should bereportingontheirenvironmentalandsocialimpact–orexplainwhyiftheyarenotdoingso”.(UnitedNations 2013). In 2014, theEuropeanParliamentadoptedadirectivewhichwillrequirethedisclosureof environmental and social information by largepublic-interest companies (500+ employees).Individual UN Member States around the worldhave also taken steps to promote sustainabilityreporting.35Apart from regulatory initiatives, some

Table IV.7. Possible indicators for the definition of investment impact objectives and the measurement of policy effectiveness

Area Indicators Details and examplesEconomicvalueadded

1. Totalvalueadded• Grossoutput(GDPcontribution)ofthenew/additionaleconomicactivityresultingfromtheinvestment(directandinduced)

2. Valueofcapitalformation • Contributiontogrossfixedcapitalformation

3. Totalandnetexportgeneration• Total export generation; net export generation (net of imports) is alsocapturedbythevalueaddedindicator

4. Numberofformalbusinessentities• Numberofbusinesses in thevaluechainsupportedby the investment;this is a proxy for entrepreneurial development and expansion of theformal(tax-paying)economy

5. Totalfiscalrevenues• Totalfiscaltakefromtheeconomicactivityresultingfromtheinvestment,throughallformsoftaxation

Jobcreation 6. Employment(number)• Totalnumberofjobsgeneratedbytheinvestment,bothdirectandinduced(valuechainview),dependentandself-employed

7. Wages • Totalhouseholdincomegenerated,directandinduced

8. Typologiesofemployeeskilllevels• Numberofjobsgenerated,byILOjobtype,asaproxyforjobqualityandtechnologylevels(includingtechnologydissemination)

Sustainabledevelopment

9. Labourimpactindicators• Employment of women (and comparable pay) and of disadvantagedgroups

• Skillsupgrading,trainingprovided• Healthandsafetyeffects,occupationalinjuries

10. Socialimpactindicators • Numberoffamiliesliftedoutofpoverty,wagesabovesubsistencelevel• Expansionofgoodsandservicesoffered,accesstoandaffordabilityofbasicgoodsandservices

11. Environmentalimpactindicators • GHGemissions,carbonoffset/credits,carboncreditrevenues• Energyandwaterconsumption/efficiencyhazardousmaterials• Enterprisedevelopmentineco-sectors

12. Developmentimpactindicators • Developmentoflocalresources• Technologydissemination

Source:IAWG(2011).

Note: Thereportwasproducedbyaninter-agencyworkinggroupcoordinatedbyUNCTAD.


stock exchanges have implemented mandatorylisting requirements in the area of sustainabilityreporting.36

The content and approach to the preparation ofsustainability reports is influenced by a numberof international initiatives actively promotingreporting practices, standards and frameworks.

Recent examples of such initiatives and entitiesinclude the Global Reporting Initiative (GRI),37the Carbon Disclosure Project (CDP),38 theInternational IntegratedReportingCouncil (IIRC),39the Accounting for Sustainability (A4S)40 andthe Sustainability Accounting Standards Board(SASB).41UNCTADhasalsobeenactiveinthisarea(boxIV.6)

Box Iv.6. UNCTAd’s initiative on sustainability reporting

UNCTADhasprovidedguidanceonsustainabilityrulemakingviaitsIntergovernmentalWorkingGroupofExpertsonInternationalStandardsofAccountingandReporting(ISAR)(UNCTAD2014).MemberStatesatISARendorsedthefollowingrecommendations:

• Introducingvoluntarysustainability reporting initiativescanbeapracticaloption toallowcompanies timetodevelopthecapacitytopreparehigh-qualitysustainabilityreports.

• Sustainabilityreportinginitiativescanalsobeintroducedonacomplyorexplainbasis,toestablishaclearsetofdisclosureexpectationswhileallowingforflexibilityandavoidinganundueburdenonenterprises.

• Stockexchangesand/orregulatorsmayconsideradvisingthemarketonthefuturedirectionofsustainabilityreportingrules.Companiesshouldbeallottedsufficienttimetoadapt,especiallyifstockexchangesorregulatorsareconsideringmovingfromavoluntaryapproachtoamandatoryapproach.

• Sustainabilityreportinginitiativesshouldavoidcreatingreportingobligationsforcompaniesthatmaynothavethecapacitytomeetthem.Particularlyinthecaseofmandatorydisclosureinitiatives,oneoptionistorequireonlyasubsetofcompanies (e.g. largecompaniesorState-ownedcompanies) todiscloseonsustainabilityissues.

• Stockexchangesandregulatorsmaywishtoconsiderhighlightingsustainabilityissuesintheirexistingdefinitionsofwhatconstitutesmaterialinformationforthepurposesofcorporatereporting.

• Withaviewtopromotinganinternationallyharmonizedapproach,stockexchangesandregulatorsmaywishtoconsiderbasingsustainabilityreportinginitiativesonaninternationalreportingframework.

Considerations for the design and implementation of sustainability reporting initiatives include using a multi-stakeholderconsultationapproachinthedevelopmentprocessforcreatingwidespreadadoptionandbuy-inandcreatingincentivesforcompliance,includingpublicrecognitionandinvestorengagement.

Source:UNCTAD.


The range of challenges discussed in previoussections,aswellasthewidearrayofexistingandpotential policy solutions available to overcomethose challenges, demonstrate above all thatthere is no single all-encompassing solution or“magicbullet”forincreasingtheengagementoftheprivate sector in raising finance for, and investingin,sustainabledevelopment.Thepotentialsourcesanddestinationsof financial resourcesarevaried,andsoaretheconstraintstheyface.Thischapterhasattemptedtohighlightsomeofthepathsthatfinancialflowscanfollowtowardsusefulinvestmentin sustainable development projects, indicatinga number of policy solutions to encourage suchflows,toremovehurdles,tomaximizethepositiveimpactsandtominimizethepotentialrisksinvolved.

Manyofthemoreconcretesolutionshavebeentriedandtestedoverasignificantperiodoftimealready

G. AN ACTION PlAN FOR PRIVATe SeCTOR INVeSTmeNT IN The SDGs

–suchasrisk-sharingmechanismsincludingPPPsandinvestmentguarantees.Othershaveemergedmorerecently,suchasvariouswaystoraisefinanceforandstimulateimpactinvestment.Andyetothersrequirebroaderchangeinmarketsthemselves, inthemindsetofparticipantsinthemarket,inthewaysustainable development projects are packagedandmarketed,or inthebroaderpolicysettingforinvestment.

Given the massive financing needs that will beassociated with the achievement of the SDGs,all of these solutions are worth exploring. Whatthey need is a concerted push to address themain challenges they face in raising finance andin channelling it to sustainable developmentobjectives. Figure IV.14 summarizes the keychallengesandsolutionsdiscussedinthischapterinthecontextoftheproposedStrategicFrameworkforPrivateInvestmentintheSDGs.

Figure IV.14. Key challenges and possible policy responses

IMPACTMaximizing sustainable development bene�ts,

minimizing risks

CHANNELLING

Promoting and facilitatinginvestment into SDG sectors

LEADERSHIPSetting guiding principles, galvanizing action, ensuring

policy coherence

MOBILIZATIONRaising �nance and re-orienting

�nancial markets towards investment in SDGs

Key challenges Policy responses

• Need for a clear sense of direction and common policy design criteria

• Need for clear objectives to galvanize global action• Need to manage investment policy interactions• Need for global consensus and an inclusive

process

• Agree a set of guiding principles for SDG investment policymaking

• Set SDG investment targets• Ensure policy coherence and synergies• Multi-stakeholder platform and multi-agency technical

assistance facility

• Build an investment policy climate conducive to investing in SDGs, while safeguarding public interests

• Expand use of risk sharing mechanisms for SDG investments

• Establish new incentives schemes and a new generation of investment promotion institutions

• Build SDG investment partnerships

• Build productive capacity, entrepreneurship, technology, skills, linkages

• Establish effective regulatory frameworks and standards

• Good governance, capable institutions, stakeholder engagements• Implement a common set of SDG investment impact

indicators and push Integrated Corporate Reporting

• Create fertile soil for innovative SDG-financing approaches and corporate initiatives

• Build or improve pricing mechanisms for externalities• Promote Sustainable Stock Exchanges

• Introduce financial market reforms

• Start-up and scaling issues for new financing solutions

• Failures in global capital markets• Lack of transparency on sustainable corporate

performance• Misaligned investor rewards/pay structures

• Entry barriers

• Lack of information and effective packaging and promotion of SDG investment projects

• Inadequate risk-return ratios for SDG investments

• Lack of investor expertise in SDG sectors

• Weak absorptive capacity in developing countries

• Need to minimize risks associated with private investment in SDG sectors

• Need to engage stakeholders and manage impact trade-offs

• Inadequate investment impact measurement and reporting tools

Source:UNCTAD.


1. A Big Push for private investment in the SDGs

While there is a range of policy ideas and options available to policymakers, a focused set of priority packages can help shape a big push for SDG investment.

Therearemanysolutions,mechanismsandpolicyinitiatives that can work in raising private sectorinvestmentinsustainabledevelopment.However,aconcertedpushbytheinternationalcommunity,andbypolicymakersatnational levels,needstofocuson fewpriorityactions–orpackages.Sixprioritypackages that address specific segments of the“SDGinvestmentchain”andrelativelyhomogenousgroups of stakeholders, could constitute asignificant “BigPush” for investment in theSDGs(figureIV.15).Suchactionsmustbeinlinewiththeguiding principles for private sector investment inSDGs(sectionC.2),namelybalancingliberalizationandregulation,attractiveriskreturnwithaccessibleandaffordableservices,thepushforprivatefundswith the fundamental role of the State, and theglobal scopeof theSDGswith special efforts forLDCsandothervulnerableeconomies.

1. A new generation of investment promotion strategies and institutions. Sustainabledevelopment projects, whether in infrastructure,social housing or renewable energy, requireintensified efforts for investment promotionand facilitation. Such projects should becomeapriorityof theworkof investmentpromotionagencies and business developmentorganizations, taking into account theirpeculiarities compared to other sectors. Forexample,somecategoriesofinvestorsinsuchprojectsmay be less experienced in businessoperations inchallenginghosteconomiesandrequire more intensive business developmentsupport.

Themostfrequentconstraintfacedbypotentialinvestors in sustainable development projectsis the lack of concrete proposals of sizeable,impactful, and bankable projects. Promotionand facilitation of investment in sustainabledevelopment should include the marketingof pre-packaged and structured projectswith priority consideration and sponsorship

at the highest political level. This requiresspecialist expertise and dedicated units,e.g. government-sponsored “brokers” ofsustainabledevelopmentinvestmentprojects.

Putting in place such specialist expertise(ranging from project and structured financeexpertise to engineering and project designskills) can be supported by technicalassistance from international organizationsandMDBs.Units could also be set up at theregional level (seealso the regionalcompacts)to share costs and achieve economies ofscale.

At the international investment policy level,promotion and facilitation objectives shouldbe supported by ensuring that IIAs pursuethe same objectives. Current agreementsfocus on the protection of investment.MainstreamingsustainabledevelopmentinIIAsrequires, among others, proactive promotionof SDG investment, with commitments inareas such as technical assistance. Othermeasuresincludelinkinginvestmentpromotioninstitutions, facilitating SDG investmentsthrough investment insuranceandguarantees,andregularimpactmonitoring.

2. SDG-oriented investment incentives. Investment incentive schemes can berestructuredspecificallytofacilitatesustainabledevelopment projects, e.g. as part of risk-sharing solutions. In addition, investmentincentives in general – independent of theeconomic sector for which they are granted– can incorporate sustainable developmentconsiderations by encouraging corporatebehaviour in linewith SDGs. A transformationis needed to move incentives from purely“location-focused” (aiming to increasethe attractiveness of a location) towardsincreasingly“SDG-focused”,aimingtopromoteinvestmentforsustainabledevelopment.

Regional economic cooperation organizations,with national investment authorities in theirregion could adopt common incentive designcriteria with the objective of reorientinginvestment incentive schemes towardssustainabledevelopment.


Source:UNCTAD.

Figure IV.15. A Big Push for private investment in the SDGs: action packages

Balancingliberalization andregulation

Balancing the needfor attractive risk-return rates with theneed for accessibleand affordableservices for all

Balancing a pushfor private fundswith the push for publicinvestment

Balancing the globalscope of the SDGs withthe need to make aspecial effort in LDCs

Action Packages

2Reorientation of investment

incentives

5

1New generation of investment

promotion strategies and institutions

Pro-active SDG investmentpromotion and facilitation

At national level:– New investment promotion

strategies focusing on SDGsectors

– New investment promotioninstitutions: SDG investmentdevelopment agenciesdeveloping and marketingpipelines of bankable projects

New generation of IIAs:–

– Safeguarding policy space forsustainable development

6

Guiding Principles

SDG-oriented investment incentives– Targeting SDG sectors– Conditional on sustainability

contributions

SDG investment guarantees and insurance schemes

3

Regional/South-South economiccooperation focusing on:– Regional cross-border SDG

infrastructure development– Regional SDG industrial

clusters, including developmentof regional value chains

– Regional industrial collaborationagreements

Regional SDG Investment Compacts

Enabling innovative �nancingand a reorientation of

�nancial markets

New SDG �nancing vehicles SDG investment impact

indicators

Investors’ SDG contributionrating

Integrated reporting and multi-stakeholder monitoring

Sustainable Stock Exchanges (SSEs)

Changing the global business mindset

Global Impact MBAs Training programmes for SDG

investment (e.g. fundmanagement/�nancial marketcerti�cations)

Enrepreneurship programmesin schools

4

Partnerships between outwardinvestment agencies in homecountries and IPAs in hostcountries

Online pools of bankable SDGprojects

SDG-oriented linkages programmes

Multi-agency technicalassistance consortia

SVE-TNC-MDG partnerships

New forms of partnerships for SDG investment


3. Regional SDG Investment Compacts.RegionalSouth-South cooperation can foster SDGinvestment. A key area for such SDG-relatedcross-border cooperation is infrastructuredevelopment. Existing regional economiccooperation initiatives could evolve towardsregional SDG investment compacts. Suchcompacts could focus on reducing barriersand facilitating investment and establishjoint investment promotion mechanisms andinstitutions. Regional industrial developmentcompacts could include all policy areasimportant for enabling regional development,suchas theharmonization,mutual recognitionor approximation of regulatory standardsand the consolidation of private standards onenvironmental,socialandgovernanceissues.

4. New forms of partnership for SDG investments.Partnerships in many forms, and at differentlevels,includingSouth-South,arecrucialtotheperformanceandsuccessofSDGinvestments.First,cooperationbetweenoutwardinvestmentagencies in home countries and IPAs inhost countries could be institutionalized forthe purpose of marketing SDG investmentopportunities in home countries, provision ofinvestment incentives and facilitation servicesfor SDG projects; and joint monitoring andimpact assessment. Outward investmentagencies could evolve into genuine businessdevelopment agencies for investments inSDG sectors in developing countries, raisingawareness of investment opportunities,helping investors bridge knowledge gapsand gain expertise, and practically facilitatingthe investment process. Concrete tools thatmight support SDG investment businessdevelopment services might include on-linetools with pipelines of bankable projects,and opportunities for linkages programmesin developing countries. Multi-agency consortia (a “one-stop shop” for SDGinvestment solutions) could help to supportLDCs in establishing appropriate institutionsand schemes to encourage, channel andmaximize the impact from private sectorinvestment.

Other formsofpartnershipmight lead toSDGincubatorsandspecialeconomiczonesbased

on close collaboration between the publicand private sectors (domestic and foreign),such as SDG-focused rural-based agriculturezones or SDG industrial model towns, whichcould support more effective generation,dissemination and absorption of technologiesand skills. They would represent hubs fromwhich activity, knowledge and expertise couldspillintoanddiffuseacrossthewidereconomy.In a similar vein, triangular partnerships, suchasbetweenSVEs,TNCsandMDBscouldbefostered to engage the private sector in thenurturing and expansion of sectors, industriesorvaluechainsegments.

5. Enabling innovative financing mechanisms and reorienting financial markets. New andexisting innovative financing mechanisms,such as green bonds and impact investing,would benefit from a more effective enablingenvironment, allowing them to be scaled upandtargetedatrelevantsourcesofcapitalandultimatebeneficiaries.Systematic support andeffective inclusionwould especially encouragethe emergence, take-up and/or expansionof under-utilized catalytic instruments (e.g.vertical funds) or go-to-market channels suchas crowd funding. Beyond this, integratedreporting on the economic, social andenvironmental impact of private investors isa first step towards encouraging responsiblebehaviour by investors on the ground. Itis a condition for other initiatives aimed atchannelling investment into SDG projectsand maximizing impact; for example, whereinvestment incentives are conditional uponcriteriaofsocialinclusivenessorenvironmentalperformance, such criteria need clear andobjective measurement. In addition, it is anenabler for responsible investment behaviourin financial markets and a prerequisite forinitiatives aimed at mobilizing funds forinvestmentinSDGs.

6. Changing the business mindset and developing SDG investment expertise. Themajority of managers in the world’s financialinstitutions and large multinational enterprises– the main sources of global investment –as well as most successful entrepreneurs


tend to be strongly influenced by models ofbusiness, management and investment thatare commonly taught in business schools.Such models tend to focus on business andinvestmentopportunitiesinmatureoremergingmarkets,withtherisk-returnprofilesassociatedwith thosemarkets,while they tend to ignoreopportunities outside the parameters of thesemodels.Conventionalmodels also tend to bedriven exclusively by calculationsof economicrisksandreturns,oftenignoringbroadersocialand environmental impacts, both positive andnegative.Moreover, a lack of consideration instandard business school teachings of thechallenges associated with operating in poorcountries,andtheresultingneedforinnovativeproblem solving, tend to leave managers ill-preparedforpro-poorinvestments.

The majority of students interested in socialentrepreneurship end up starting projectsin middle- to high-income countries, andmost impact investments – investments withobjectives that explicitly include social orenvironmental returns – are located inmaturemarkets. A curriculum for business schoolsthat generates awareness of investmentopportunities inpoorcountriesand that instilsinstudentstheproblemsolvingskillsneededindeveloping-countryoperatingenvironmentswillhaveanimportantlong-termimpact.

UNCTAD, in partnershipwith business schoolnetworks, teachers, students as well ascorporates, is currently running an initiativeto develop an “impact curriculum” for MBAprogrammes and management schools, andaplatformforknowledgesharing,exchangeofteaching materials and pooling of “pro-poor”internship opportunities in LDCs. UNCTADinvites all stakeholders who can contribute tojointhepartnership.

2. Stakeholder engagement and a platform for new ideas

The Strategic Framework for Private Investment in the SDGs provides a basis for stakeholder engagement and development of further ideas. UNCTAD’s World Investment Forum and its

Investment Policy Hub provide the infrastructure.

The Plan of Action for Private Investment in theSDGs(figureIV.16)proposedinthischapterisnotanall-encompassingorexhaustivelistofsolutionsand initiatives. Primarily it provides a structuredframework for thinking about future ideas.Withineach broad solution area, a range of furtheroptions may be available or may be developed,by stakeholders in governments, internationalorganizations,NGOs,orcorporatenetworks.

UNCTAD is keen to learn about such ideas andtoengage indiscussiononhow tooperationalizethem, principally through two channels: first,through UNCTAD’s intergovernmental and expertgroup meetings on investment, and in particularthe biennial World Investment Forum (WIF); and,second, through an open process for collectinginputs and feedback on the Plan of Action, andthroughanon-linediscussionforumonUNCTAD’sInvestmentPolicyHub.

(i) The World Investment Forum: Investing in Sustainable Development

The World Investment Forum 2014 will be heldin October 2014 in Geneva, and will have as itstheme “Investing in Sustainable Development”.High-level participants including Heads of State,parliamentarians,ministers, heads of internationalorganizations,CEOs, stock exchange executives,SWF managers, impact investors, businessleaders,academics,andmanyotherstakeholderswillconsiderhowto raisefinancingby theprivatesector, how to channel investment to sustainabledevelopment projects, and how to maximizethe impact of such investment while minimizingpotential risks involved. They will explore existingandnewsolutionsanddiscussquestionssuchas:

• which financingmechanisms provide the bestreturn, i.e. which mechanisms can mobilizemoreresources,morerapidlyandatthelowestopportunitycostforsustainabledevelopment;

• which types of investments will yield themost progress on the SDGs and are naturalcandidates for involvement of the privatesector;


• whichtypesofinvestmentinwhichasignificantrole isenvisaged for theprivatesector requirethemostpolicyattention.

AssuggestedinthePlanofAction,thebiennialWIFcould become a permanent “Global StakeholderReviewMechanism” for investment in the SDGs,reporting to ECOSOC and the UN GeneralAssembly.

(ii) UNCTAD’s Investment Policy Hub

Initscurrentform,thePlanofActionforInvestmentin the SDGs has gone through numerousconsultations with experts and practitioners. It isUNCTAD’sintentiontoprovideaplatformforfurtherconsultationanddiscussionwithallinvestmentandsustainable development stakeholders, includingpolicymakers, the international developmentcommunity, investors, business associations,

and relevantNGOs and interest groups. To allowfor further improvements resulting from suchconsultations,thePlanofActionhasbeendesignedas a “living document”. The fact that the SDGsarestillunderdiscussion,aswellsasthedynamicnatureoftheinvestmentpolicyenvironmentaddtotherationaleforsuchanapproach.

ThePlanofActionprovidesapointofreferenceandacommonstructurefordebateandcooperationonnationalandinternationalpoliciestomobilizeprivatesectorfunds,channelthemtoSDGs,andmaximizeimpact.UNCTADwilladdtheinfrastructureforsuchcooperation, not only through its policy forumson investment, but also by providing a platformfor “open sourcing” of best practice investmentpolicies through its website, as a basis for theinclusive development of further options with theparticipationofall.


Figure IV.16. Detailed plan of action for private investment in the SDGsDetailed plan of action for private investment in the SDGs

LeadershipSetting guiding principles, galvanizing action, ensuringpolicy coherence

Recommended Actions

Description

Mobilization

Furtherpolicyoptions

chanisms for externalities


Debt swaps and write-offs

Voluntary contributions/product labelling/certi�cation

Set SDG investment targets

Change business/investor mindsets

Build or improve pricing me

Create fertile soil for innovative SDG-�nancing approaches and corporate initiatives

Establish a global multi-stakeholder platform on investing in the SDGs

Agree a set of guiding principles for SDG investment policymaking

Create a multi-agency technical assistance facility

Promote Sustainable Stock Exchanges

– Realign incentives in capital markets

– Develop new rating methodologies for SDG investments

Introduce �nancial market reforms

– Facilitate and support SDG-dedicated �nancial instruments and impact Investing initiatives

– Expand initiatives that use the capacity of a public sector to mobilize private �nance

– Build and support go-to-market channels for SDG investment projects in �nancial markets

– “Global Impact MBA”

– Other educational initiatives

Quantitative and time-bound targets for investment in SDG sectors and LDCs, committed to by the international community.

Modalities to internalize in investment decisions the cots ofexternalities, e.g. carbon emissions, water use.

Mechanisms to redirect debt repayment to SDG sectors.

A multi-agency institutional arrangement to support LDCs, advising on e.g. guarantees, bankable project set-up, incentivescheme design and regulatory frameworks.

Internationally agreed principles, including de�nition of SDGs, policy-setting parameters, and operating, monitoring and impact assessment mechanisms.

A regular forum bringing together all stakeholders, such as a regular segment in UNCTAD’s World Investment Forum or an expert committee on SDG investment reporting to ECOSOC and the General Assembly.

SDG listing requirements, indices for performance measurementand reporting for investors and broader stakeholders.

Reform of pay, performance and reporting structures to favor long-term investment conducive to SDG achievement

Rating methodologies that reward long-term real investment inSDG sectors.

Incentives for and facilitation of �nancial instruments that link investor returns to impact, e.g. green bonds.

Use of government-development funds as seed capital orguarantee to raise further private sector resources in �nancialmarkets

Channels for SDG investment projects to reach fund managers, savers and investors in mature �nancial markets, ranging from securitization to crowd funding.

Contributions collected by �rms (e.g. through product sales) and passed on to development funds.

Dedicated MBA programme or modules to teach mindset and skills required for investing and operating in SDG sectors in low-income countries (e.g. pro-poor business models).

Changes in other educational programmes, e.g. specialized �nancial markets/advisors training, accounting training, SDGentrepreneurship training.

Raising�nance andreorienting�nancialmarketstowardsinvestmentin SDGs

/...


Figure IV.16. Detailed plan of action for private investment in the SDGs (concluded)

– Create SDG incubators and clusters

Build an investment policy climate conducive to investing in SDGs, while safeguarding public interests

Increase absorptive capacity

Establish effective regulatory frameworks and

Good governance, capable institutions, stakeholder engagement

– Build productive capacities, linkages and spillovers

Detailed plan of action for private investment in the SDGs (concluded)

Recommended Actions Description

National and international investment policy elements geared towards promoting sustainable development (e.g. UNCTAD's IPFSD); formulating national strategies for attracting investmentin SDG sectors.

New economic zones for SDG investment, or conversion ofexisting SEZs and technology zones.


Entrepreneurship development, technology dissemination, business linkages, inclusive �nance initiatives, etc.

Establish new incentives schemes and a newgeneration of investment promotion institution

– Make investment incentives �t-for-purpose for the promotion of SDG investment

– Transform IPAs into SDG investment development agencies

– Establish regional SDG investment compacts

Expand use of risk-sharing tools for SDG investments

– Improve and expand use of PPPs

– Provide SDG investment guarantees and risk insurance facilities

– Expand use of ODA-leveraged and blended �nancing

– Create markets for SDG investment outputs

Transformation of IPAs towards a new generation of investment promotion, focusing on the preparation and marketing of pipelines of bankable projects and impact assessment

Regional cooperation mechanisms to promote investment in SDGs, e.g. regional cross-border infrastructure, regional SDGclusters.

Re-design of investment incentives, facilitating SDG investment projects, and supporting impact objectives of all investment.

standards

Environmental, labour and social regulations; effective taxation;mainstreaming of SDGs into IIAs; coordination of SDG investment policies at national and international levels, etc.

Advance market commitments and other mechanisms to providemore stable and more reliable markets for SDG investors.

Wider use of PPPs for SDG projects to improve risk-returnpro�les and address market failures.

Wider availability of investment guarantee and risk insurance facilities to speci�cally support and protect SDG investments.

Use of ODA funds as base capital or junior debt, to share risksor improve risk-return pro�le for private sector funders.

– Require integrated corporate reporting for SDGs

Implement SDG impact assessment systems

– Develop a common set of SDG investment impact indicators

Addition of ESG and SDG dimensions to �nancial reporting toin�uence corporate behavior on the ground.

Indicators for measuring (and reporting to stakeholders) theeconomic, social and environmental performance of SDGinvestments.

Stakeholder engagement for private investment in sensitive SDG sectors; institutions with the power to act in the interest of stakeholders, etc.

Build SDG investment partnerships

– Partner home- and host-country investment promotion agencies for investment in the SDGs

– Develop SVE-TNC-MDB triangular partnerships

Create a global SDG Wiki platform and investor

Home-country partner to act as business development agencyto facilitate investment in SDG sectors in developing countries.

Global companies and MDBs to partner with LDCs and small vulnerable economies, focusing on a key SDG sector or a product key to economic development.

Knowledge-sharing platforms and networks to share expertise on SDG investments and signal opportunities

networks


ImpactMaximizingsustainabledevelopmentbene�ts,minimizingrisks

ChanellingPromoting andfacilitatinginvestment inSDG sectors

Source:UNCTAD.


Notes1 For themacroeconomic aspects of investment, see TDR

2008,TDR2013,UNDESA2009.2 Estimates for ecosystems/biodiversity are excluded from

totals because these overlap with estimates for othersectors,suchasclimatechangeandagriculture.

3 Both figures are annualized averages over the period2015-2030.

4 The final year target results from a standard exponentialgrowth projection, to avoid an unrealistic increase ininvestmentinthefirstyear.

5 SeealsoSummers,L. (2010).“Theover-financializationofthe US economy”, www.cambridgeforecast.wordpress.com.

6 BISInternationalBankingStatistics(2014),www.bis.org.7 EquatorPrinciples,www.equator-principles.com.8 Joint statement by Climatewise, MunichRe Climate

InsuranceInitiativeandtheUNPRI,November2013www.climatewise.org.uk.

9 Green bonds were designed in partnership with thefinancial group Skandinaviska Enskilda Banken so thatthey could ensure a triple A rated fixed-income productto support projects related to climate change. Theycan be linked to carbon credits, so that investors cansimultaneouslyfightglobalwarming,supportSDGprojectsand hedge their exposure to carbon credits. Accordingto theWEF(2013-Box2.2)“Thesizeof thegreenbondmarket hasbeenestimatedat $174billionbyHSBCandthe Climate Bonds Initiative, under a definition that looksbeyond explicitly labeled ‘green/climate bonds’. Otherestimates, including those from the OECD, place themarketnearerto$86billion.”

10 Inthecaseofgreenbonds,theseweremainlythepreserveof international financial institutions until recently. In 2013and 2014, EDF and Toyota became issuers of greenbondsandin2014Unileverwentbeyondprojectssuchasrenewable energy and electric vehicles, aiming to reducetheenvironmentalfootprintofitsordinaryactivities(“GreenBonds:Springintheair”,TheEconomist,22March2014).

11 “EDF: Successful launch of EDF’s first Green Bond”,Reuters,20November2013.

12 “ToyotaSaidtoIssue$1.75BillionofGreenAsset-BackedBonds”,BloombergNews,11March2014.

13 “Unileverissuesfirstevergreensustainabilitybond”,www.unilever.com.

14 Some typologies differentiate between social and impactinvestment, with the former stressing the generation ofsocietal value and the latter profit, but the distinctionis not clear (a mix of impact and profit prevails in bothtypes);many organisations and institutions use the termsinterchangeably.

15 The Global Fund to fight AIDS, Tuberculosis andMalariahassecuredpledgesofabout$30billionsinceitscreationin2002,andover60percentofpledgeshavebeenpaidtodate(WorldBank2013b).

16 The Global Environment Fund GEF – a partnershipbetween182countries,internationalagencies,civilsocietyand private sector – has provided $11.5 billion in grantssince itscreation in1991and leveraged$57billion inco-financing for over 3,215 projects in over 165 countries(WorldBank2013b).

17 AfricaEnterpriseChallengeFund,www.aecfafrica.org.18 GAVIMatchingFund,www.gavialliance.org.19 The InternationalFinanceFacility for ImmunisationBonds,

www.iffim.org.

20 “Call to increase opportunities to make low carbon fixedincomeinvestments”,www.climatewise.org.uk.

21 Kiva,www.kiva.org.22 A wide range of institutions has made proposals in this

area, for example, UNCTAD (2009a), Council of the EU(2009),FSB(2008),G-20(2009),IMF(2009),UKFinancialServices Authority (2009), UK H.M. Treasury (2009), USTreasury(2009),amongothers.

23 For an update on global financial architecture see FSB(2014).

24 TheSSEhasanumberofPartnerExchangesfromaroundtheworld, including the Bombay Stock Exchange, BorsaIstanbul,BM&FBOVESPA (Brazil), theEgyptianExchange,the Johannesburg Stock Exchange, the London StockExchange, the Nigerian Stock Exchange, the New YorkStock Exchange, NASDAXOMX, and theWarsaw StockExchange. Collectively these exchanges list over 10,000companieswithamarketcapitalizationofover$32trillion.

25 However, certain SDG sectors, such as water supply orenergydistribution,may formanaturalmonopoly, therebyde-facto impeding the entry of new market participantsevenintheabsenceofformalentrybarriers.

26 ExamplesandcasestudiescanbefoundinUNDP(2008),WorldBank(2009a),IFC(2011),UNECE(2012).

27 Thereexistanumberofusefulguides,for instance,WorldBank(2009b)andUNECE(2008).

28 Australia, Export Finance and Insurance Commission,http://stpf.efic.gov.au; Austrian Environmental and SocialAssessment Procedure, www.oekb.at; Delcredere |Ducroire (2014);NipponExportand Investment Insurance“Guidelines on Environmental and Social Considerationsin Trade Insurance”, http://nexi.go.jp; Atradius DutchState Business, “Environmental and Social Aspects”,www.atradiusdutchstatebusiness.nl; UK Export Finance,“Guidance to Applicants: Processes and Factors in UKExport Finance Consideration of Applications”, www.gov.uk;OverseasPrivateInvestmentCorporation(2010).

29 Multilateral InvestmentGuaranteeAgency,“PolicyonEnvi-ronmentalandSocialSustainability”,www.miga.org.

30 ApexBrasil - Renewable Energy, www2.apexbrasil.com.br; Deloitte (2013b); “Environmental financial incentives inSouth Africa”, Green Business Guide, 14 January 2013,www.greenbusinessguide.co.za; Japan External TradeOrganization-AttractiveSectors:FutureEnergySystems,http://jetro.org;NovaScotia–CapitalInvestmentIncentive,www.novascotia.ca;Regulationof theMinister of Financeof Indonesia Number 130/PMK.011/2011, “Provision ofCorporate IncomeTaxRelieforReductionFacility”;SouthAfrica Department of Trade and Industry, “A Guide toIncentive Schemes 2012/13”, www.thedti.gov.za; TurkeyInvestment Support and Promotion Agency – Turkey’sInvestment Incentives System, www.invest.gov.tr; UnitedKingdomofGreatBritainandNorthernIreland.Departmentfor Business, Innovation & Skills – Grant for BusinessInvestment: Guidelines, www.gov.uk; U.S. Departmentof Energy – About the Loan Programs Office (LPO): OurMission, www.energy.gov/lpo/mission; U.S. Departmentof Energy – State Energy Efficiency Tax Incentives forIndustry,www.energy.gov.

31 UNCTAD Entrepreneurship Policy Framework, www.unctad-org/diae/epf.

32 For example, RLabs Innovation Incubator in South Africaprovides entrepreneurs with a space to develop socialbusinesses ideas aimed at impacting, reconstructing andempowering local communities through innovation. The


AsianSocialEnterprise Incubator (ASEI) in thePhilippinesprovides comprehensive services and state of the arttechnology for social enterprises engaged at the baseof the pyramid. The GSBI Accelerator program, fromSanta Clara University, California, pairs selected socialentrepreneurs with two Silicon Valley executive mentors,toenablethemtoachievescale,sustainabilityandimpact.At the global level, the Yunus Social Business IncubatorFund operates in several developing countries to createand empower local social businesses and entrepreneursto help their own communities by providing pro-poorhealthcare, housing, financial services, nutrition, safedrinkingwaterandrenewableenergy.

33 For instance, the zones may have well developedenvironmental reporting requirements under whichcompaniesarerequiredtoreporttheiranticipatedamountsofwastes, pollutants, and even thedecibel level of noisethat is expected to be produced (see also WIR 2013).SeveralzonesaroundtheworldhavebeencertifiedtotheISO14001environmentalmanagementsystemstandard.

34 WorldBank–EcuadorOverview,www.worldbank.org.35 India, for example, requires the largest 100 listed

companies on its major stock exchanges to report onenvironmentalandsocialimpacts.

36 Forexample,theJohannesburgStockExchangeinSouthAfrica.Many other exchanges, such asBM&FBovespa in

Brazil,haveactivelypromotedvoluntarymechanismssuchasreportingstandardsandindicestoincentivizecorporatesustainabilityreporting.

37 Producer of themostwidely used sustainability reportingguidelines.Accordingtoa2013KPMGstudy,93percentof the world’s largest 250 companies issue a CR report,of which 82 per cent refer to theGRIGuidelines. Three-quarters of the largest 100 companies in 41 countriesproduceCRreports,with78percentofthesereferringtotheGRIGuidelines(KPMG2013).

38 A global system for companies and cities to measure,disclose, manage and share environmental informationand host to the Climate Disclosure Standards Board.Over 4,000 companiesworldwide use theCDP reportingsystem.

39 Producer of the International Integrated ReportingFramework, recognizes sustainability as a contributor tovaluecreation.

40 Works to catalyze action by the finance, accounting andinvestorcommunitytosupportafundamentalshifttowardsresilientbusinessmodelsandasustainableeconomy.

41 Providesstandards forusebypublicly listedcorporationsin the United States in disclosing material sustainabilityissuesforthebenefitofinvestorsandthepublic.

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