Leslie Marbury is the acting chief operating officer at Prosper Africa, and Cameron Khosrowshahi is a senior investment advisor with the initiative. This article was first published in “The State of Blended Finance 2021: Time to Scale,” a report by Convergence. Read the full report here.
In 2015, the Addis Ababa Action Agenda highlighted the critical role the private sector and private capital should play in achieving the SDGs. But in the six years since, this critical role for the private sector has not been translated into practice, threatening to subvert progress on people and planet at a time when twin climate and COVID-19 pandemic crises accelerate. According to the OECD, the annual SDG and climate investment gaps have only grown over the last year, rising from $2.5 trillion in 2019 to $4.2 trillion in 2020 as the global COVID-19 pandemic sapped public and private investment. Against this gargantuan annual sum, all ODA and multilateral finance combined only approaches $200 billion per year.
A widening SDG investment gap seems insurmountable in an era of limited fiscal space, growing global debt levels, and stagnant ODA budgets. But it is not a large sum compared to the $380 trillion in global financial assets, many of which are earning sub-standard returns in mainstream markets under a prevailing low interest rate environment. This capital wants to move into the faster-growing developing world where returns are higher and further diversification mitigates overall risk. Only 1.5% of this vast sum would close the SDG and climate investment gaps entirely, placing planet and people on a trajectory towards recovery. Moreover, much of this capital could be long-term in nature as large investors such as pension funds and insurance companies seek stable, long-dated returns for their retirees and policyholders. These institutions could fund the kinds of systemic investments in the developing world that are so critical to building resilient societies as a new generation of workers and retirees care more about social and environmental impact alongside financial returns.
“This capital wants to move into the faster-growing developing world where returns are higher and further diversification mitigates overall risk.”
But without an active, coordinated mobilization agenda among donors, the largest under-utilized pool of capital in the earth’s history cannot be harnessed for good. Without mobilizing the scale of these private resources, there is no future where the world achieves its SDG and climate goals. Unfortunately, the current development finance system is ill-equipped to mobilize other people’s money. That’s understandable when you realize it was created in a very different world back in the 1950s, when most resource flows to the developing world were from public sources. Today, the reverse is true: 90% of those resource flows are private. According to the OECD, between 2012-19, all donors and MDB/DFI finance combined mobilized an average of $32 billion in private capital per annum, a mere 0.1% of the annual $3.7 trillion in annual SDG investment needed. That amount will never get us there.
While private capital wants to invest in the developing world, most of the developing world—88% of it—lies outside the fiduciary mandate of most investors at sub-investment grade risk levels. Investors are ready to invest more broadly in developing markets; indeed, many of them have to in order to meet their pension commitments to hundreds of millions of workers around the world. But they also need to partner with donors to manage risk in markets that are still unfamiliar to them, allowing them to benchmark, price and make investments. The ultimate goal of an active mobilization agenda is to promote investor partnerships that hinge on a more strategic use of donor resources to take away some of the risk for investors, that they can deploy capital at scale and become familiar with the risk of new markets. It would require donors setting aside a known amount of official funding each year for blended finance transactions that can better apportion risk between the private and public sectors and crowd in capital at scale in the service of the SDG and climate goals. It would require making mobilization an essential pillar of development strategy and tracking it among all recipients of financing and assistance.
“Investors are ready to invest more broadly in developing markets; indeed, many of them have to in order to meet their pension commitments to hundreds of millions of workers around the world.”
The potential is there. If 7.5% of ODA was programmed more strategically, it could mobilize seven times private investment—$80 billion annually—equal to around 15% of the GDP of low-income countries. All with existing development resources. Absent this shift in strategic thinking and development funding allocation, the global community risks continuing to inch forward with halting, marginal progress while poverty, food insecurity, and climate catastrophe loom.