Finance for Sustainable Development: updated March 2018


Finance for Sustainable Development Goals

Cost of Sustainable Development Goals

Decades of uncertainty over the interpretation of the concept of “sustainable development” finally ended with the 2015 approval of the Sustainable Development Goals (SDGs) for the period 2016-2030. The SDGs are fully supported with quantifiable targets and indicators, applicable to all countries.

The World Economic Forum has estimated a total cost of the SDGs at $3.9 trillion per annum, compared with a current annual level of development finance of $1.4 trillion. The UN’s World Economic Situation and Prospects 2017 suggests that investment in the 48 Least Developed Countries will need to rise by at least 11 per cent annually in the period to 2030.

These are just two examples from many estimates offered by multilateral development institutions. The formidable task is generally based on an aggregation of costings of individual targets, many of which benefit from years of analysis. For example, experts in global health and education are confident in their price tags for vital targets such as universal access to reproductive healthcare or provision of secondary education for all.

Putting a price on sustainable development must also overcome the complication that many of the Goals overlap. For example, a programme to diversify crops on small farms in Africa makes as much good sense for poverty reduction as for adaptation to climate change.  Protecting a tropical forest preserves biodiversity as well as reducing carbon dioxide emissions. These “win-win” options are valuable for prioritisation but confuse the financial equations.

Funding the Sustainable Development Goals

As such SDG funding targets are almost certainly out of reach, campaigners press governments to take the simple first step of reducing expenditure which leads to destruction of environmental assets – such as inappropriate agriculture and fishing subsidies.

Nonetheless, endorsement of the SDGs was not accompanied by a plan to pay for them, despite the efforts of the UN Financing for Development Conference. This is doubly unfortunate in that the new vision to “leave no one behind” is radical and has significant implications for cost.

Furthermore, there is growing awareness of the expense of adapting to global environmental change, due to its adverse impact on social and economic development. Whilst responsibility for most degradation largely rests with industrialised countries in the northern hemisphere, the impact is likely to be felt disproportionately in poorer countries located in tropical regions.

Estimating the cost of climate change mitigation and adaptation in developing countries can barely keep pace with new evidence of the scale of harmful impacts. The same is true of financial projections for meeting the Aichi Biodiversity Targets, a set of goals agreed under the Convention on Biological Diversity. Whichever estimates are adopted, the annual cost of tackling environmental change in the poorest countries alone will amount to hundreds of billions of dollars, several times the current supply of foreign aid.

It is clear that conventional sources of finance for the poorer countries will not be sufficient to meet this perfect storm of rising demand. However, dedicated sources of finance for sustainable development are available to shore up the funding gap for low income countries, ranging from conventional foreign aid to new vehicles such as the Green Climate Fund.

Sovereign Debt

Low income countries have limited access to international bond markets for raising sovereign debt finance. Low credit ratings are inevitable, in light of inadequate legal and physical infrastructure, combined with weak economic indicators.

Multilateral development banks, such as the World Bank and the African Development Bank, exist for the purpose of stepping in with debt finance, where normal commercial terms are either unavailable or unaffordable. These concessionary loans for the poorest countries typically fund infrastructure projects or build targeted capacity for economic development. For example, special economic zones are created to attract foreign direct investment, lured by favourable tax and regulatory environments.

In the aftermath of the 2008 global financial crisis, a period of low interest rates has enhanced the attraction of both concessionary and commercial debt finance. Many of the world’s poorest countries have increased their national debt significantly in recent years. And some of the more robust African economies have been successful in global bond markets.

Access to greater financial resources by this means can become a double-edged sword. There are concerns about a resurgence of the debt crisis, especially in Africa. Falling commodity prices, the strong value of the US dollar and the increasing share of aid provided as loans rather than grants are the prevailing negative influences on capacity to service debts.

For example, a quarter of Nigeria’s budget for 2017 will be swallowed up by sovereign debt servicing. The IMF has warned that 30 countries are at high risk of debt distress, more than double the number in 2013.

Aid Statistics

Total foreign aid, the voluntary transfer of funds from richer governments for the purpose of assisting less fortunate countries, was $145 billion in 2016, an all-time high and an increase of 10.7% from 2015 in real terms. However, the $41.8 billion share for sub-Saharan Africa was down 1.5% from 2015, lower than it was in 2010 and a source of concern for the global goal to eliminate poverty and hunger by 2030.

These figures relate only to 29 of the richer OECD countries for whom aid data is collated systematically. Known as “Official Development Assistance” (ODA), this data collection is coordinated by the Development Assistance Committee (DAC). It represents a substantial but diminishing proportion of all international aid.

A further 20 “non-DAC” countries submit data to the OECD, their contribution adding 14.5 billion of foreign aid in 2016. A number of developing countries are also increasingly engaged in strategic “south-south” aid programmes, reported as totalling $6.9 billion in 2015. Private foundations and non-governmental agencies lack formal reporting frameworks but their total for 2016 was given by DAC as $39.9 billion. The Bill & Melinda Gates Foundation contributes about $3bn each year towards development assistance.

These statistics are not confined to conventional long term development programmes. They also cover emergency humanitarian aid provided in response to natural disasters, conflict and post-war reconstruction. The differentiation from development aid is not always straightforward but total humanitarian aid was reported to be $16 billion for 2016, a significant increase over the previous year.

A significant proportion of ODA relates to “multilateral aid” – funds made available to support the development programmes of UN agencies, the European Union, the World Bank and regional development banks.

“Bilateral aid” targets specific beneficiary countries, its distribution reflecting the priorities of individual donor countries as much as any global strategic plan for poverty reduction. It is disbursed largely by grants to government ministries or through national and international development NGOs. Bilateral aid also includes “technical cooperation”, the transfer of skills and knowledge, often involving fees for individual consultants from the donor country.

The remaining two principal categories of aid, debt relief and refugee costs (in the donor’s own country), are moving in opposite directions. In-donor refugee costs have soared to $16 billion, over 10% of all aid. Several European countries, led by Denmark, were the largest single beneficiary of their own aid budget. By contrast, debt relief has fallen to just 2% of the total, having been as high as 20% of total ODA back in 2005.

Aid contributions by individual countries are monitored by reference to a UN Resolution passed as long ago as 1970. The richest countries promised to advance their aid budgets progressively towards a target of 0.7% of national income.

This percentage is somewhat arbitrary in relation to the needs of the poor but it has remained an acknowledged benchmark. The commitment was renewed as recently as September 2015 in the 2030 Agenda for Sustainable Development adopted by the UN General Assembly.

Aid promises have no substance in international law and there is a long track record of backsliding by rich governments. The 0.7% aid target in particular remains unfulfilled. Only six countries, Denmark, Germany, Luxembourg, Norway, Sweden and the UK, attained this benchmark in 2016. The remainder are so far behind that the DAC average for 2016 was only 0.32%, less than the equivalent figure for 1990. Of the richer countries, US, Italy and Japan occupy the foot of the percentage table.

Aid Politics

As a new inward-looking political dynamic sweeps across the traditional donor countries in Europe and North America, foreign aid budgets are coming under increased scrutiny. This mood in aid politics is most explicit in the Trump administration’s intention to inflict a deep cut in US aid.

Critics suggest that the persistence of high rates of extreme poverty in sub-Saharan Africa and South Asia implies that long term development aid is ineffective. There is concern at the apparent neglect in aid programmes of the correlation between poverty and conflict. A large proportion of low income countries are classified as fragile states, lacking robust governance in the wake of internal violence.

The traditional aid model is already questioned by African governments, wary of their budgetary dependency and resentful of the strings attached to most grants and concessional loans. These conditions might demand adherence to templates for economic management, observance of human rights and democracy, and project work for the donor’s own corporations and consultants.

China’s strategic aid model is more popular, in its lack of conditionality. Offers of finance and construction usually require that loan repayments are realised in the equivalent value of oil, timber or other natural resources.

Campaigners pressing for enhanced commitment to foreign aid can point to many impressive success stories. Foreign aid made a significant contribution to the attainment of the Millennium Development Goals, including the elimination of gender disparity in education, increasing access to safe drinking water, reducing infant mortality and preventing millions of deaths from AIDS.

Aid budgets also cater for humanitarian emergencies, such as the ebola health crisis, often in response to public pressure on donor governments, accentuated through the lens of global media coverage.

The response by many governments to criticism about aid has been to sustain their budgets but redirect funds towards global issues of “national interest”. Prevention of terrorism, control of migration and subsidy for private sector engagement top the list.

For example, the European Union’s Partnership Framework has mobilised significant funding packages for countries across the Sahel region, conditional on efforts to persuade potential migrant workers, and those already in transit, not to attempt a journey to Europe. Several European countries have become the largest single beneficiary of their own aid budgets, on account of funding the management of asylum-seekers and refugees.

Many international NGOs have expressed reservations that vital aid resource is being diverted from its core purpose of global poverty reduction. If aid budgets are simultaneously decreasing and subject to reordered priorities, the funding gap for achieving the Sustainable Development Goals will rise.

Furthermore, such priorities in aid politics diminish the the moral dimension of foreign aid, the altruism of supporting the dignity and rights of the poor. Evidence of this shifting ground is already apparent.  The world’s largest aid recipient is Ethiopia, strategically important for regional conflict resolution and control of migration, but with a lamentable record on political freedoms, according to Human Rights Watch.

Nevertheless, even the most passionate advocates of foreign aid accept that it is an insufficient tool to tackle poverty. Donor countries should additionally address the structural causes of the global divide – unfair trade and subsidy regimes, restrictive enforcement of intellectual property rights for technology transfer, cross-border environmental damage and evasion of corporate tax.

Public-Private Partnerships

Mobilisation of private sector finance is perceived by many observers as the essential tool to fill the funding gap for development in the world’s poorest countries. The role of public-private partnerships for sustainable development is to exercise public sector resources in breaking down whatever barrier prevents private finance from tackling a project alone.

Often described as “blended finance”, the most common example involves a donor government or development bank guaranteeing a commercial loan that would not otherwise be granted. The reduction in risk is sufficient to suck in private investors.

This model of private sector involvement is integral to the UN’s 2030 agenda. The Sustainable Development Goals include a target to “encourage and promote effective public, public-private and civil society partnerships. The World Bank has indicated that it is becoming more interested in leveraging private sector finance than in making loans.

Agencies which encourage this path argue that private corporations have unrivalled access to capital and expertise necessary to deliver value for money in projects designed for social or development benefit. Opponents point to the irreconcilable conflict between business goals to maximise return on capital and the duty of government to provide essential services to all, rich or poor. They allege that blended finance increases government debt and raises prices for users.

The public-private model for development finance has a mixed track record, especially in its tendency to veer towards provision for the more affluent households. According to the OECD, the $36.4 billion of private finance leveraged by aid in the period 2012-14 was mostly destined for energy and banking projects in middle income countries. There are limits to the reach of altruism into business models.

The ultimate inspiration for a private sector development model is the global market penetration of mobile phones. Distributors have created business models to reach even the poorest households with virtually no support of public finance.

Could this success be repeated for other products beneficial to livelihoods and health – household solar installations, clean cookstoves, safe sanitation – if necessary with the helping hand of public sector funds?

The thirst for the public-private partnership model within the traditional donor community extends even to the challenge of global hunger. The New Alliance for Food Security and Nutrition announced by President Obama in parallel with the 2012 G20 summit in Mexico invited international agribusiness corporations to participate in programmes within some of Africa’s poorest countries.

Shortly after that summit, the landmark Rio+20 Conference on Sustainable Development brought a rash of announcements of public-private partnerships designed to support Sustainable Energy For All, the initiative championed by the UN Secretary-General.

In one of those announcements, the European Union aims to leverage about EUR 30 billion of energy investments in developing countries by deploying EUR 3.5 billion of aid. Such promises may depend on interpretation of the eligibility conditions for foreign aid. European governments are controversially lobbying for changes to the rules.

Tax Justice

The drive for innovative finance for sustainable development has tended to overlook the potential of basic taxation. Most of the world’s poorer countries have low rates of domestic resource mobilisation as a proportion of GDP, in comparison with developed economies.

The OECD suggests that a rate of 15% is the minimum necessary to support a viable social programme. It reports that, in almost 30 of the 75 poorest countries, tax revenues are below this threshold.

Part of the reason is weak institutional capacity to collect tax, a shortcoming that foreign aid offers to address. Developing countries are also encouraged to phase out government subsidies for fuel which disproportionately reward wealthy households and aggravate environmental pollution.

The greater reason for low tax recovery relates to the volume of illicit financial flows across national borders. These fall into two broad categories – the manipulative accounting practices of multinational companies (including those based within Africa and Asia) and the exploitation of overseas tax havens by local elites and criminal gangs.

Quantifying fiscal leakage of this nature is challenging but researchers believe that capital is syphoned out of Africa on a scale that exceeds the inflows of foreign aid or remittances. A tax justice movement has grown over the last decade to campaign for international regulations against these illicit flows.

The rules for international tax have evolved under the authority of the OECD. In response to tax justice advocacy, that body has made recommendations for reform, but its membership comprises only the world’s richest economies.

Unhappy with their exclusion from this process, developing countries have lobbied strongly for a representative UN body to oversee the fairness of cross-border tax regulations. They seek disaggregation of financial results at country level, data exchange between national tax authorities and greater transparency of structures of company ownership.

Market Mechanisms

A longstanding model of innovative finance for sustainable development is the concept of “market mechanisms,” most familiar in the context of environmental protection. If nature is being destroyed on account of its exclusion from contemporary economics, then nature’s best hope is to become part of the market itself. That is the philosophy of “market mechanisms” for sustainable development. If people and businesses value nature, let them do so by the tried and tested means by which they value familiar goods and services.

In its simplest form, this approach is known as “payment for ecosystem services.” A business or government service dependent on a local ecosystem – such as a forest that provides water security – has a commercial interest in paying the community that lives in the forest region for protecting the environmental service. There are about 550 PES schemes in place globally, the most popular being watersheds, for which transactions valued as $25 billion were in place in 62 countries in 2015.

Extrapolating this example to the global scale, the international community has an interest in protecting the world’s tropical forests, in order to reduce emissions from deforestation and to protect biodiversity.

Unfortunately. the opportunity cost to local owners and communities of not cutting the timber and not clearing the land for agriculture exceeds the amount that public or private sector aid budgets of the richer countries are willing to pay.

However, many private sector sources of finance are willing to pay the full price of protecting forests if in return they receive something of tangible value to their business, over and above the greater human need of a stable climate.

The concept of “carbon credits” was devised to fulfil this need. Companies can “offset” their credits against excessive emissions for which the business is responsible or sell them in the market. Demand for carbon credits can be created through targets for businesses or governments to deliver national pledges to cut emissions.

This type of full-blown market mechanism is controversial. Many environmentalists describe carbon credits as a “licence to pollute” because they relieve pressure on the buyer to cut emissions. Some object in principle to putting a price on functions in nature which are critical to human life. They observe that it is impossible to calculate the cost of restoring an extinct species or an ecosystem which has totally collapsed.

Campaigners fear that market mechanisms for carbon will spread to biodiversity, water and soil, subsuming nature into the ether of speculative investment. The chronic failure of markets in the 2008 banking collapse and in subsequent rocketing food prices provides strong supporting evidence for these opponents to the “commoditisation of nature.”

Further evidence lies in the poor performance of pioneering market mechanisms for sustainable development – the Clean Development Mechanism of the Kyoto Protocol and the European Emissions Trading Scheme. Unambitious national and global targets for emission reductions, beaten down by corporate lobbyists, have reduced the price of carbon credits to the point that they fail in their purpose.

Market mechanisms have therefore struggled to gain wholehearted acceptance by parties to multilateral environmental agreements such as the UN Framework Convention on Climate Change or the Convention on Biological Diversity. Whilst the 2015 Paris Agreement on climate change endorses the potential of market mechanisms, the talismanic scheme for Reducing Emissions from Deforestation and Forest Degradation (REDD) is running years behind schedule.

The richer countries, too, face the challenge of resourcing substantial price tags attached to their own biodiversity action plans. There is widespread interest in experimenting with financial mechanisms which aim to overcome the failure of contemporary economics to reflect the value of biodiversity in market prices.

A series of reports demonstrating possible economic tools has been published under the heading of The Economics of Ecosystems and Biodiversity (TEEB), a research initiative sponsored by the UN Environment Programme. By attributing monetary values to “ecosystem services”, the studies argue that decision-making by policymakers and businesses could be better informed; for example, by comparing the cost of restoring a damaged ecosystem with the economic benefit of a development.

The weakness of opponents to market mechanisms is their failure to articulate alternative methods of financing the actions necessary to achieve sustainable development. The theoretical basis of the carbon market is robust, if politicians can muster the resolve to regulate it effectively.

GDP and Green Economics

The economy is one of the “three pillars” (alongside human development and the environment) by which the aim of sustainable development should be pursued. However, the method of measuring national economies is widely acknowledged to be unfit for purpose.

Gross domestic product (GDP) is calculated as the value of goods and services produced within a country, without adjustment for any change in environmental assets or citizens’ well-being.

The more damaging the economic activity, the more perverse are the results. For example, the construction of a new airport has a positive effect on GDP. Climate change, noise and air pollution, loss of habitat and the increase in inequality (airports benefit people who can afford to fly) are all excluded from the calculations.

Yet GDP is universally regarded as the most important of all economic indicators. The phrase “economic growth” has unequivocally positive connotations, elevating policies which favour the present at the expense of the future.

The same forces are at play within individual corporations. Their balance sheets do not present the “true and fair view” so prized by accountants because they do not internalize social and environmental costs. Shareholders also opt for short term strategies because there is no accounting for the long term damage to the planet.

“Environmental costs” refer to the depletion of the earth’s natural capital – ecosystems, biodiversity and mineral resources – and the damage caused by waste pollution.

Social costs of producing goods and services include any effects on health, employment opportunities and inequality. Attempts to explain the outcome of the 2016 US presidential election have focused on reports of citizens feeling worse off, despite experiencing strong economic growth.  This may illustrate the failure of GDP to identify that only the richest minority are benefiting from growth.

The incompatibility between sustainable development and GDP was recognised in the set of Rio Principles for stabilising the environment drawn up at the UN Conference on Environment and Development in 1992. Principle 16 states:

National authorities should endeavour to promote the internalization of environmental costs

The cumulative effect of more than 25 years of failure to heed this message is alarming. If every country adopted a US lifestyle, the resources of five planet earths would be necessary.

Whilst there is broad acceptance that a green formula for GDP is fundamental to sustainable development, there is no consensus on how green economics might function.

The process of greening a traditional economic model is already familiar. Measures such as the transition to renewable energy and recycling waste are increasingly linked to positive social benefits through net gains in employment. But such measures do not directly tackle the shortcomings of national and corporate accounting.

To advance this challenge, the UN Environment Programme sponsored The Economics of Ecosystems and Biodiversity, a series of reports which estimate a monetary value for each of about 30 ecosystem services, including air quality, pollination and carbon sequestration. Such valuations could potentially feed into national accounting, as well as informing decisions on tax, subsidies and major infrastructure projects.

Influential supporters of this approach, such as the OECD and World Bank, go further and enthuse about prospects of “green growth”, anxious perhaps to satisfy the human addiction to ever-rising standards of living. But many scientists are sceptical that it can ever be possible to decouple economic growth from depletion of environmental resources. They observe that valuation of ecosystem services cannot take account of the risks of species extinction or outright collapse of the system.

The world’s poorest countries are also reluctant to endorse radical reform to GDP, unsure of its relevance to their own priority to bridge the global divide between rich and poor nations. They are wary of being encouraged to leapfrog traditional industrialization and become role models for the uncertain territory of green economics.

Although there is genuine interest in supplementing GDP accounting with new indicators of social and environmental well-being, the traditional GDP paradigm remains intact. Agenda 2030 for Sustainable Development taking effect from 2016 is silent on the subject of green economics.