Sustainable development needs sustainable finance
By Gavin Wilson
When I joined the Business & Sustainable Development Commission last year, I remember the sense of urgency we shared as new Commissioners. The world had just signed up to the UN’s Sustainable Development Goals, and we all realized that the only way for the Goals to be achieved would be for private capital to fund them and for private business to implement them.
As Commissioners, we sensed that the Sustainable Development Goals were not only goals for the global community, but also a signpost for business leaders looking for guidance on how to grasp the new market opportunities offered by a changing world. The Goals would need to become as central to the business world as they are to the world of development.
The key question we asked ourselves was how could we build a powerful and evidence-based case that successful realization of the Goals would be the greatest business opportunity of our generation. We knew from the beginning that the challenge was to quantify the opportunity and explain how business, suitably financed, could address it. We wanted to make the business case for the SDGs and the SDG case for business.
After a year’s work, we have indeed found that the business case is compelling. The Commission’s team have calculated that achieving the Goals will open up a US$12 trillion market opportunity — difficult for a forward-looking business to ignore.
The Commission’s newly published report articulates the opportunity and shows how many of the market winners of tomorrow are already promoting sustainability in their business models today. But even for these companies, investment on this scale requires a new more sustainable approach from investors, the providers of their capital.
What is required to bring about a more sustainable financial sector? Let me highlight three immediate action points which could strengthen the flow of capital to sustainable investments in emerging markets.
First, we need greater transparency and a more consistent approach to measuring the sustainability performance of business. We need to link these standards explicitly to the Sustainable Development Goals. Today, most of the world’s largest companies do in fact report on sustainability, but we need a common benchmark and a more standardized system for reporting. This will make performance more transparent and it will be less time-consuming and expensive for companies to report and for investors to use.
Secondly, we need more widespread use of financial instruments that efficiently share risk in a way that attracts more private finance into sustainable development.
Part of this relates simply to having more information on the underlying financial performance of sustainable investments in developing countries. In many cases the perception of risk is much greater than the real risk and this can be overcome through more detailed and transparent data on existing investments. This is the cheapest form of risk mitigation.
More expensive, but still good value, is the use of blended finance, where policy-driven funders can help structure transactions that reduce the risk profile for large long-term commercial investors. The Commission is calling for a scaling of such blended finance with greater sharing of risks between private and public investors and closer public-private cooperation. Such financial innovation is key to achieving the Sustainable Development Goals.
Thirdly, we need regulatory reforms that promote long-term investment and avoid short-termism. This is may be the most important point since sustainable development often requires a longer-term perspective. Institutional investors with long-term liability streams, such as pension funds and insurance companies, should not be discouraged from matching these liabilities with long-term assets. They are the natural providers of the capital that is required.
Across the business, financial and regulatory sectors, we must take practical steps to change the prevailing mindsets. Leadership of course must start at the top. In their succession planning, Boards should be looking for CEOs who understand the business opportunity presented by the Goals, and the need to bring purpose into their company’s mission. Not only does this address the market opportunity itself, but it also helps to attract more customers and the best employees looking to work for a company with a sense of purpose.
The Commission’s estimate is that a consistent focus on sustainability can give a company a five year market advantage. In other words, sustainable business is simply good business.
But the challenges ahead of us are not inconsiderable. Investors do face elevated uncertainty and are understandably more cautious about investing in unfamiliar locations at times of geopolitical instability. Yet our call as Commissioners is: learn more about these markets now, understand the new dynamics, be present, get on the field of play.
Companies with a bias for purpose-driven action are the ones likely to secure the first mover advantage and grasp the greater share of the SDG business opportunity. They will be the ones acting on Goethe’s aphorism that “Knowing is not enough. We must apply. Being willing is not enough. We must do”. This is the essence of the Commission’s message.
Gavin Wilson is the CEO of IFC Asset Management Company.
This piece originally appeared on The Hill.