4.3 Aligning finance with SDG purpose

unmitigated, the financial effects of the pandemic could set achievement of the SDGs back a decade.106 The financing gap estimate tells only a partial story. Analysis by IMF staff indicates that low-income developing countries will require close to $200 billion in spending over five years to combat the pandemic and $250 billion to regain the convergent paths they were on prior to the pandemic – an implausible level of investment without increased aid and debt relief.107

Global estimates may underestimate the real costs of an ‘SDG recovery’ for two reasons. First, reversals of progress have added to immediate investment costs. For example, research by UNESCO suggests the rising costs of remedial education and wider support for children returning to school and projected reductions in government budgets could increase the financing gap for SDG 4 by one third.108 Second, current studies may have underestimated the cost of acting on commitments to leave no one behind. As coverage rates expand in areas such as health and education, the marginal costs of delivery rise above average costs (which most of the research highlighted above uses to estimate financing gaps). Travelling the next mile towards the SDG targets involves reaching hard-to-reach populations and addressing the social determinants of disadvantage. Unlike average costs, marginal costs are non-linear, with important implications for SDG financing.

This is no less the case for the funding of climate change, with one estimate suggesting that emerging markets (excluding China) and developing countries will need to mobilize an additional $0.8 trillion annually by mid-decade and $2 trillion by 2030, if the Paris Agreement targets are to be achieved.109 Meanwhile, the annual costs of climate adaptation have been estimated by the United Nations Environment Programme (UNEP) at around $300 billion – between 5 and 10 times current financing levels.110 Achieving universal electricity access in sub-Saharan Africa will require investments of $135 billion in cumulative investment to 2030.

These financing gap estimates underscore the relevance of the ambitions of the UNDP Strategic Plan and the challenges the organization will face in achieving them. Doing so would materially improve the fiscal environment facing developing countries and make a distinctive contribution to an ‘SDG recovery’. However, in many countries UNDP will be swimming against a financial tide. Changing this picture will require a combination of technical advice and engagement on wider development financing issues (See below and section 7).

Viewing the SDGs through the prism of global finance highlights the ‘affordability’ of the SDGs and large inequalities in wealth. While SDG financing gaps are large in relation to the fiscal resources of many Governments, they are modest when measured against international capital markets. The $4.2 trillion SDG financing gap estimated by the OECD represents111 just 1 percent of the $404 trillion

106 Benedek, Dora et al, ‘A Post-Pandemic Assessment of the Sustainable Development Goals’, IMF Staff discussion note,

SDN/2021/003, April 2021. 107 IMF Policy Paper, March 2021, Macroeconomic Developments and Prospects in low-Income Countries-2021 108 UNESCO, ‘UNESCO warns that the funding gap to reach SDG4 in poorer countries risks increasing to US$200 billion annually due to COVID-19 if we do not take urgent action’, Press release, 4 September 2020, https://en.unesco.org/news/unesco-warnsfunding-gap-reach-sdg4-poorer-countries-risks-increasing-us-200-billion-annually, accessed 25 March 2022. 109 Bhattacharya, Amar and Nicholas Stern, ‘Beyond the $100 billion: financing a sustainable and resilient future’, London School of

Economics and Political Science, Policy Note, November 2021. 110 United Nations Environment Programme (2021). The Gathering Storm: Adapting to Climate Change in a Post-pandemic World -

Adaptation Gap Report 2021: Executive Summary. https://wedocs.unep.org/20.500.11822/37312. 111 OECD (2020), Global Outlook on Financing for Sustainable Development 2021: A New Way to Invest for People and Planet, OECD

Publishing, Paris, https://doi.org/10.1787/e3c30a9a-en.

in 2019 global financial assets and 2 percent of non-bank financial assets as measured by the Financial Stability Board.112 Such comparisons serve to highlight the gap between private capital markets and the social purpose enshrined in the SDGs. That gap may be growing. Despite the global economic downturn, asset wealth has grown during the pandemic – by 10 percent in 2020 according to one estimate. 113 The 2020 increase in billionaire wealth of $5.5 trillion exceeds the total SDG financing gap.114

Global capital is heavily concentrated in advanced economies and a small number of emerging markets, and it is overwhelmingly governed by practices and business models prioritizing short-term commercial profit rather than long-term SDG priorities. Simple aggregate measures of the SDG financing gap can also obscure critical public policy challenges. What matters for achieving the SDGs is getting the right type of finance to the relevant country on the right terms. Public finance has to account for the bulk of the heavy lifting in areas such as universal health coverage, basic education and safety net provision. In other areas, including energy and employment, unlocking private finance – both domestic and international – is the key to achieving the SDGs, operating in concert with public finance.

Climate financing illustrates the critical importance of aligning the purpose of the SDGs with appropriate sources of capital. There has been a proliferation of initiatives highlighting the assets under the control of ‘net-zero’ asset managers. The Glasgow Financial Alliance for Net Zero is a consortium of financial companies with reported assets of $135 trillion with a unifying conviction that “private finance can help fund private sector initiatives and turn billions committed to climate investment through public channels into trillions of total climate investment.”115 That objective is a climate imperative. Clean energy transitions consistent with the Paris Agreement goals will require private capital to finance between half and 70 percent of energy transition investments. As the consortium illustrates, there is no shortage of global finance, but the investment is not reaching the countries and sectors in developing countries where it most needed – and where abatement benefits could be greatest. Achieving the 2030 Goal for energy access poses distinct financing challenges. Hitting the global target will require annual investments of over $35 billion, according to the IEA, half of it in off-grid systems.

For all its potential, blended finance remains limited – and fell during the pandemic. Financial flows from this source have averaged $9 billion since 2015 but fell by half in 2020. Major constraints include shortages of bankable projects and limited scale. The conclusions of the 2021 Convergence report are relevant to the financing of the SDGs: “There is a lack of financial intermediation in the blended finance market, and for addressing the SDG investment gap more generally. On the one hand, donors and investors are looking to channel large amounts of capital towards market opportunities aligned with the SDGs. Yet, SDG projects are often small, and there are few intermediaries in the market equipped to channel these flows.”116 Aid commitments to blended finance are limited, at around 2 percent of ODA and $10 billion to $15 billion of project volumes annually.117 Where funds are available, they are often left undisbursed because of problems linked to payment arrangements, tariff levels and market readiness. The Mini-grid Funders Group reports that less than 15 percent of the $2 billion approved since 2007 has been disbursed.

112 Financial Stability Board, Global Monitoring Report on Non-Bank Financial Intermediation, 2020. 113 Allianz Research, ‘Allianz Global Wealth Report 2021’, October 2021, https://www.eulerhermes.com/en_global/news-insights/ economic-insights/Allianz-global-wealth-report-2021.html 114 Collins, Chuck, ‘Global Billionaires See $5.5 Trillion Pandemic Wealth Surge’, Institute for Policy Studies, 11 August 2021, https://ips-dc.org/global-billionaires-see-5-5-trillion-pandemic-wealth-surge/, accessed 25 March 2022. 115 Glasgow Financial Alliance for Net Zero, https://www.gfanzero.com/, accessed 25 March 2022. 116 Convergence, The State of Blended Finance 2021, Toronto, 27 October 2021, page 7. 117 Lankes, Hans Peter, ‘Blended finance for scaling up climate and nature investments’, One Planet Lab, London School of Economics and Political Science, October 2021.