To achieve the Sustainable Development Goals (SDGs), we desperately need to mobilise capital in this direction. There is a large gap between the amount of capital required to meet the goals by the 2030 deadline and the financial resources being provided by government and development aid. Due to this gap, private capital is very much needed to propel business and establish market opportunities for a more planet-friendly world. Continue reading as we explore the role of private capital in helping us to prepare for a sustainable future.
Private equity well placed to lead on sustainability
In order to meet the SDG’s investment requirements, the worldwide community has to alter the current discussion from billions to trillions. That is because the goals require trillion-dollar investments. In addition, investments of all kinds including national and global but also public and private.
To create the transformation required in developed and developing countries, global goals desperately require innovative capital mobilisation. Not just that but a worldwide change of accountability, approach, and mindset. Generally, most of the development spending comes from public resources and governments. However, the biggest potential is from the private sector.
These investments are what is needed to help each country and worldwide community support each other to fund and achieve the mission of the SDGs. Private capital is becoming a popular and vital tool for ensuring global development. Moreover, it is one of the greatest business opportunities. To put it into perspective, the market opportunities could create tonnes of jobs within industries.
While this pushes the idea of great business potential, there is still a bit of a journey to go when it comes to private capital. These kinds of investments can be a great source of comprehensive employment and societal profit. Currently, the allocation of capital in specific areas like sustainable infrastructure only equates to approximately 10 percent of its money from the private sector.
This reveals there is room for growth in terms of getting the private sector involved. The billions to trillions also highlight the realisation that meeting the SDGs will need more than simply the public money currently available. The private sector has to contribute to filling the financial gaps. Tens of thousands of institutional participants can be found in the financial system, and there are billions of individual market participants. Therefore, this is a great opportunity to utilise this power of scale for good and for profit.
Integrate sustainability into the full investment life cycle
It’s becoming increasingly common that philanthropic and public donors are engaging with private investors to make their limited financial resources go that bit further. Additionally, they engage to increase the pool of funding currently available for development. However, there are more reasons for this growing interest. Namely, public donors realise how vital private sector activity and finance can be.
They are key drivers of knowledge transfer and growth in developing and developed countries. When measured against the likes of grant funding, some donors expect the private sector’s involvement will have a positive impact on the financial discipline of shared-funded projects. This is because donors want to earn a financial return through recycling their money and being able to reinvest it into other various development projects.
Private investors are too keen to invest in developing and developed countries. This is because they are attracted by things like portfolio diversification, high potential returns, and exploring new markets. In saying that, there are still some barriers that require a bit of support to overcome. Namely, private investors do not tend to support high-impact ventures, projects, or funds in emerging markets.
The reason for this is due to the actual and perceived high risk and low returns. Additionally, these opportunities with the highest impact are generally segmented and small. This reduces attractiveness for large investors and boosts transaction costs. Also, on this note, most emerging and developing countries do not have the regulatory framework or market infrastructure in place to direct and attract private investment for development projects.
Not to mention, every investor will have their own risk-return profile that is specific to them. Also, they will have unique investing strategies, asset allocation plans, and exit requirements. All of these factors determine where their capital is deployed and how. So how do we mobilise private capital for development? Unfortunately, there is no one-size-fits-all approach.
The answer to this is things like more structured funds to mitigate sector and capacity risks using technical assistance facilities. These would be financed by user contributions or grant funding for project preparation, research, capacity building, and impact assessments. With this in mind, structured funds can help a lot as they can better meet the risk-return profiles of a range of investors. For instance, banks, pension funds, foundations, and development finance institutions.
Result-based financing mechanisms are another way to drive resource mobilisation from private capital for sustainable development. They can do this by connecting investors’ financial returns to measurable and agreed-upon impact. One popular example here would be development impact bonds (DIBs). To encourage collaboration, public and philanthropic donors can also utilise a range of supporting instruments to prepare the ground for developmental private investment, mitigate risks, and enhance revenue potential.
Collaboration is key to addressing barriers
The ingredient to success when addressing the barriers to private capital investments into sustainability is collaboration. Private capital is necessary to meet the 2030 climate goals. As mentioned above, a large amount of capital is needed, too, so we need contributions from public and private investors. According to the United Nations Conference on Trade and Development (UNCTAD), a global investment of between $5 and $7 trillion is needed to achieve these goals.
Therefore, all parties must participate in helping us get there. For developing countries, it could take £3.9 trillion each year alone. However, the funding that is available falls short of these amounts. Current public and private funding covers only $1.4 trillion. This leaves a significant gap of $3.6 trillion. This number may seem far out of reach, however, it is relatively small when compared to the value the SDGs will unlock.
A large part of the present gap can be filled by private capital because the amount of capital the private sector holds is greater than that of the public sector. As the movement toward achieving the SDGs accelerates, we require all capital in the entire finance spectrum to make the much-needed transition. The amount of private capital opportunities is evident, particularly in developing countries which account for 60 percent of GDP, 90 percent of jobs, and 80 percent of capital flows.
If this gap does not close soon, it will only become larger and cost us more in the long run. Until recently, climate action was considered a cost as opposed to a business opportunity. We are now seeing the major risks and costs of taking zero action. Disaster weather events will continue, temperatures will be on the rise, and pollution will remain a threat if we do not tackle this gap in the near future. If private capital is not invested, it could actually hinder our growth and place us further from our goals.
There is a huge amount of pressure to get the necessary funds needed to make the green transition. Unfortunately, public and philanthropic donors are not filling the gap. Private capital has a major role to play and can fill this gap to help us achieve the SDGs by the 2030 timeline.
Collaboration will be key in driving this as all players must work together. Climate change is not just an environmental issue, it is a humanitarian crisis too. In order to secure the SDG’s vision, we urgently need to start filling this gap. Otherwise, it’ll become more costly and difficult to close.