Finance for SDGs

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.

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.

Asia Public-Private-Partnerships Incubation Hub – World Vision International reports on the launch of a new cross-sector platform hosted by WVI with the support of Singapore’s Economic Development Board
from paagoldstandard

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.

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.

How can we value nature? Three academics weigh up the difficult choices in attributing value to ecosystems
from Gund Institute

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.”

Developing Water Markets – Jennifer Morris, Executive VP of Conservation International, looks at some projects which pioneer market mechanisms in water

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.

Pavan Sukhdev explains the importance of attaching values to biodiversity and ecosystem services
from UN Food and Agriculture Organization

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.


more Sustainable Development briefings (updated March 2018)
What is Sustainable Development?
Resistance to Sustainable Development
From MDGs to SDGs
Aid Statistics
Aid Politics
GDP and Green Economics
Source material and useful links