4. Actions for alignment

The sustainable development agenda is at a tipping point. Action to chart a greener, more inclusive and more resilient pathway is needed, today, before development and climate setbacks become irreversible. Despite hard-fought progress to deliver a better future for people, the planet and prosperity over the past decade, the distance to the SDGs is rapidly growing as the pandemic and climate-related events send shockwaves that derail collective efforts. Millions of people are falling back into poverty and hundreds of millions more are losing their jobs and livelihoods (Chapter 1). The cumulative impacts of the pandemic in 2020 – increasing the gap to finance the SDGs - are a wake-up call. Now, the international community must accelerate actions to shift the additional trillions needed to rebuild and help achieve the 2030 Agenda.

Resources are not being directed to where needs are greatest. This will lead to SDG setbacks for all countries. OECD countries have mobilised trillions of dollars for domestic COVID-19 recovery, yet ODA budgets are at risk of shrinking. Solidarity between countries is needed to address the unprecedented financing constraints in developing countries. Development finance (i.e. ODA and other official flows) is an investment in the resilience of economic systems. Health, refugee and climate crises are among the global challenges that require development finance. Their negative spill over effects have no borders, and failure to tackle these crises in one country could increase the cost and threaten the capacity to progress in other countries.

Five years after their adoption, the 2030 Agenda and the SDGs remain the best blueprint to successfully build back better after the crisis, and the Addis Ababa Action Agenda remains the best framework to finance the goals. These agendas set out the ambitious strategy needed for a more holistic approach to finance sustainable development. The 2019 Global Outlook on Financing for Sustainable Development made specific recommendations to better mobilise (quantity) and align (quality) all available public, private, domestic and international resources in support of sustainable development. With all sources of financing under stress, none will be sufficient on its own to ensure that developing countries surmount the crisis. The holistic approach to financing development of the AAAA offers several levers that should be better exploited to overcome the inequalities. The trillions of dollars currently misaligned in the system, for instance, represent existing resources that could be shifted to where the needs are most acute – both to avoid the collapse of financing in developing countries and to build back a better, more sustainable and resilient system.

Aligning finance to the SDGs requires a dual assessment. One is the equality assessment, in which finance should flow to where the needs are greatest to mitigate the risk of negative spill overs such as future pandemics, refugee crises and increasing carbon emissions in developing countries. The other is the sustainability assessment, in which finance should do no harm and positively contribute to the SDGs. Both assessments are required to strengthen the resilience of the system (Chapter 3). Policies should aim to increase the efficiency of markets and remedy their failures, including leaving no one and no goal behind.

Sections 4.1.1 and 4.1.2 outline an ambitious strategy for development finance providers to unleash the potential of the AAAA and address first equality (quantity) and then sustainability (quality) aspects of SDG alignment. This strategy is summarised in Figure 4.1.

Developing countries face a risk of external finance collapse (USD 700 billion) that surpasses the drop following the global financial crisis by 60% (Chapter 2). These growing financial inequalities in developing countries will magnify the effects of the crisis globally, creating cascading setbacks to collective progress towards the SDGs. For example, if developing countries experience future COVID-19 or other outbreaks due to a lack of sufficient healthcare and social protection, OECD countries could find themselves at greater risk of subsequent waves of contamination and migration. Investing upstream to prevent future outbreaks is an investment to reduce these risks and potential negative spill over effects.

Developing countries will face a longer and slower recovery path from the current crisis than developed countries (Chapter 1). Spending by advanced economies in response to the pandemic represents 9% of their collective gross domestic product (GDP). Developing countries have less capacity to respond, however. Middle-income countries injected about 3% of GDP, and low-income countries only about 1% of GDP, in stimulus packages, representing a USD 1 trillion deficit in the magnitude of spending in response to the pandemic relative to high-income countries. As developing countries’ capacities to finance emergency and recovery responses are increasingly constrained, debt levels have surged, reducing fiscal space even further. For those most in need and heavily reliant on external finance, there is a risk of insufficient resource inflows due to divestment linked to both economic uncertainty and diversion of resources to feed expensive stimulus packages in wealthier countries.

In the face of unprecedented economic and financing constraints, development finance can provide support to developing countries to staunch the bleeding of resources in the short term. All possible efforts must be made to foster domestic resource mobilisation and tax reform to improve public finances and reduce leakages (e.g. illicit financial flows); achieve ODA commitments and leverage its catalytic potential; mobilise additional resources using innovative finance; and reduce debt distress and explore more sustainable debt management strategies. The following sub-sections explore these topics in turn.

Domestic resource mobilisation remains the most sustainable long-term source of financing. While revenues are likely to fall during the pandemic, and the immediate focus in most countries will understandably not be on tax increases, it is important to identify both the potential sources of increased revenues, and the processes to facilitate collecting them. Domestic financing leakages are an obvious place to start, not least as tolerance of tax avoidance and evasion is rapidly evaporating in response to the pandemic. Such leakages drain significant resources from developing countries that could be used to respond to the pandemic and build more sustainable public finances. Chapter 3 showed that aggressive tax avoidance by multinational enterprises is estimated to cost countries globally as much as USD 240 billion annually, and developing countries are disproportionately affected because they rely more on corporate tax revenues than do developed countries. Tax base erosion and profit shifting (BEPS) is therefore a significant problem that requires international action, including by donors to address.

International co-operation is vital to counter tax avoidance as many of the methods used to avoid and evade taxes make use of mismatches between tax systems, or entail shifting profits and/or assets overseas. There are a growing range of bodies, tools and instruments for international tax co-operation The Inclusive Framework on BEPS brings together 137 countries, on an equal footing, to agree and implement standards to counter corporate to avoidance, while the Global Forum of Transparency and Exchange of Information for Tax Purposes consists of 161 members committed to implementing common standards on transparency and exchanging information to combat tax avoidance and evasion. Developing country engagement in these forums, and associated multilateral instruments is growing, for example the number of African country members of the Global Forum on Transparency and Exchange of Information for Tax Purposes increased from 4 in 2009 to 32 in 2020 (OECD, 2019[1]), while exchange of information networks have also grown, from 913 relationships created by African countries in 2014 to 3262 in 2020. The speed of integration is not as fast as it could be, particularly among least developed countries, where many are not yet participating in international tax co-operation instruments (UN IATF, 2020[2]); further efforts are therefore needed by all to support and encourage all countries to benefit.

There are a range of actions that OECD countries can take to support developing countries improve their ability to tax cross-border activity. Continuing to expand developing country access to offshore information is vital. Successfully taxing cross-border activity often requires access to information held offshore. The international tax transparency standards are putting an end to bank secrecy globally. Over 100 countries are already implementing the new standard on Automatic Exchange of Financial Account Information. This has resulted in the identification of over EUR 100 billion in additional revenues. As a result of this work, information on 47 million accounts worth EUR 4.9 trillion has been exchanged and offshore bank deposits have fallen by over USD 410 billion over the last decade. Not all developing countries have access to this valuable source of information however, further actions are needed to ensure more developing countries can also benefit fully from this enhanced co-operation, including building the political will to put the necessary measures in place, and technical assistance to support implementation.

Information exchange is also crucial for tackling illicit financial flows, but restrictions need to be removed to make full use of it. In addition to helping identify tax avoidance and evasion the information available through tax information exchange agreements could also be valuable in identifying illicit financial flows, including corruption and money laundering. Currently however the information is restricted to use only for tax purposes, limiting its value in addressing other financial crimes. Most information exchange agreements include provisions to extend the use of information on agreement between countries, activating such provisions could provide a quick and effective way to support the campaign against illicit financial flows.

Modernising and adjusting tax systems to a digital world can also benefit from international co-operation. The OECD, through the OECD Global Forum on value added tax (VAT) (comprising over 100 countries), has developed standards and solutions to address the VAT challenges of the digitalisation of the economy, which include the risk of creating an uneven playing field if non-resident companies are able to avoid charging VAT. Over 50 countries have implemented the standards on cross-border supplies of digital services, raising significant revenues (for example South Africa has raised over ZAR 5 billion (approx. USD 276 million) between June 2014 and September 2019. Developing countries can benefit from the experience already gained in implementing these standards, not least as all the main digital platforms, which are vital partners for implementation, are now already familiar with the standards.

Taxing the profits arising from the digitalising economy is a more challenging task, where the 137 members of the Inclusive Framework are currently negotiating new standards based around two pillars the first would create a new taxing right for market jurisdictions, whilst looking to simplify the processes for taxing the profits from certain routine functions of MNEs. The second pillar would establish a global minimum rate of tax, to reduce the incentive for companies to adopt aggressive tax avoidance strategies. Both of these pillars offer potential gains for developing countries. While the impacts are difficult to model the economic impact analysis suggests the combined effect of both pillars could be around 4% of global corporate income tax revenues (up to USD 100 billion). There is also a significant cost to not implementing an agreed multilateral solution, as unilateral measures could lead to retaliatory tax and trade measures, which could cost up to 1% of global GDP (OECD, 2020[3]). All countries therefore need to work together on resolving the remaining political challenges, including accommodating developing country priorities.

Beyond tax co-operation and exchange of information, development finance providers can provide capacity building and peer-to-peer exchange to raise additional revenues in developing countries. As part of the Addis Tax Initiative (ATI), launched in 2015, donors committed to doubling funding to support domestic resource mobilisation in the period 2015-2020, yet by the end of 2018 ATI members were less than halfway to meeting the target with commitments reaching USD 275 million (from the 2015 level of USD 182 million). Ensuring continued funding beyond the end of 2020 will be vital to enable further capacity building. Peer networks, e.g. through Regional Tax Organisations, have been shown to be especially valuable, and need to be encouraged further. Tax Inspectors Without Borders (TIWB) is a peer-to-peer forum bringing in expertise which has helped raise over half a billion dollars in revenues in supporting audits of MNEs. TIWB programmes provide a significant return on investment and represent excellent value for money. On average, USD 70 in additional tax revenues have been recovered by Host Administrations for every dollar spent on TIWB operating costs between 2012 and 30 June 2020 (OECD/UNDP, 2020[4]). Expanding the TIWB approach beyond auditing, including to supporting investigating tax crimes, has significant potential, all countries with established capacity should consider temporarily releasing expertise to support such initiatives. In addition countries that have already digitalised their tax administrations should be willing to support other countries through the process of digitalisation, which has become even more important as the pandemic has shown how effective digital administration is part of an effective response to such shocks.

Efforts to repatriate funds are an important tool to help avoid leaks in the domestic resource base of developing countries. Many developing countries lack the judicial capacity necessary to produce legitimate requests for asset recovery. The Financial Action Task Force is currently working to identify mechanisms, laws, structures and other approaches to overcome the challenges in asset recovery cases and ensure effective asset recovery operations. In parallel, OECD countries can take actions to reduce the incentives and opportunities from channelling illicit financial flows through their own territories.

With the outbreak of COVID-19, ODA remains the bedrock of international co-operation and is vital for poorer and fragile developing countries. In 2019, ODA totalled USD 153 billion, or ratio of ODA to gross national income (GNI) of 0.31%, and reaches hundreds of developing countries. Especially in the context of COVID-19, ODA has played a key role, targeting social sectors such as healthcare, which is particularly important in terms of financing vaccines and other treatments - related to COVID-19 as well as clean water, sanitation and education, which often struggle to attract private investment. In February 2020, the World Health Organization published a Strategic Preparedness and Response Plan that outlined the main operational needs to fight the pandemic, estimating the plan’s funding requirements at USD 675 million. Development finance providers contributed to this Plan by providing more than USD 125 million (OECD, 2020[5]).

Development finance providers must make every effort to maintain ODA budgets as GDP growth contracts. DAC members agreed to “strive to protect ODA budgets” during the COVID-19 crisis (OECD DAC, 2020[6]). Nonetheless, given acknowledged pressure on DAC members’ own budgets, the overall level of ODA could decline in 2020. The OECD calculates that if DAC members keep the same ODA-to-GNI ratios as in 2019, total ODA could decline by as much as USD 11 billion to USD 14 billion, depending on a “single-hit” or “double-hit” recession scenario for member countries’ GDP (OECD, 2020[7]). Political will is key to safeguarding ODA. The OECD DAC High Level Meeting in November 2020 is a critical opportunity for development finance providers to discuss how to meet their commitments during the crisis.

Despite the challenging economic context, several DAC members are taking a leadership role to redirect resources to developing countries to combat the pandemic. For example, through its Team Europe initiative that builds on existing programmes, the European Union (EU) has committed USD 20 billion to developing countries as part of its global response to COVID-19 that targets partner countries and fragile populations (Borrel, 2020[8]).1 As resources are redirected to support the emergency response, it will be necessary to pre-empt the long-term consequences of such trade-offs, including ensuring, for example, that they do not slow efforts on climate action.

Developing countries suffering sudden investment outflows must carefully assess policy trade-offs in the short run to avoid dramatic and prolonged financial volatility. Some countries have eased measures on capital inflows. The People’s Republic of China (“China”), India and Peru, have relaxed controls on, respectively, cross-border borrowing, foreign portfolio investment, and short-term external liabilities. Several others have relaxed currency-based measures, among them Indonesia, Peru and Turkey (OECD, 2020[9]). Capital controls on outflows, on the other hand, are typically implemented as a last resort tool in crisis circumstances, and developing countries have so far not resorted to them. In this situation, international co-operation is particularly important to find the best means of ensuring finance stability, including through multilateral platforms and frameworks such as those provided by the OECD capital movements code (OECD, 2020[9]; OECD, 2020[10]). The temptation to provide tax incentives to encourage (re)investment must be carefully managed as poorly designed incentives can result in a significant loss of revenue, with no impact on investment. Implementing international standards for taxation can help increase revenues, whilst also providing increased tax certainty for investors.

The COVID-19 crisis creates new impetus for development finance providers to innovate resource mobilisation to ensure no one is left behind. The pandemic has profoundly altered and in some ways accelerated certain trends. For example, new financial instruments (e.g. COVID-19 and SDG bonds) are emerging as a means of mobilising financial support to developing countries in responding to the crisis. In addition, digitalisation of the economy has become a policy priority to help adapt to lockdowns and the need to socially distance. Alongside lockdowns, many developing countries have introduced measures facilitating the use of digital financial services, such as lowering transaction fees or increasing limits on transactions.

Blended finance presents growing opportunities to mobilise additional private finance. For example, the use of blended finance to mobilise private resources has resulted in USD 205.1 billion of private finance mobilised by development finance between 2012-18; 17 DAC members now engage in blending, and 167 facilities were launched over 2000-16 to pool finance for blending (OECD, 2020[11]). A wide variety of blended finance instruments exist, including direct investments, credit lines, bonds, de-risking instruments such as guarantees and insurance, hedging, grants, and technical assistance.

However, private finance mobilised by ODA must be strengthened to reach countries and sectors most in need. Of total private finance mobilised by official development finance interventions between 2012 and 2017, only USD 9.3 billion, or 6%, went to least developed countries (LDCs), whereas over 70% went to middle-income countries (OECD/UNCDF, 2019[12]). For blended finance to work effectively, a common policy framework and guidance are essential. The OECD DAC Blended Finance Principles are a policy tool for all providers of development finance – donor governments, development co-operation agencies, philanthropies and other stakeholders – and have been adopted by the past two Group of Seven (G7) Presidencies and the last Group of Twenty (G20) Presidency.2 Applying the Principles – tailoring blended finance to the local context and dedicating appropriate resources for monitoring and evaluation – can help better direct resources to countries and sectors most in need.

Beyond blended finance instruments, other forms of innovative financing include efforts to find new sources of ODA such as new funds and incentive mechanisms for social protection. Governments, multilateral development banks (MDBs), development finance institutions (DFIs), among others, can help catalyse new sources of finance and financial innovations to scale up investment in the SDGs. Governments and the private sector globally raised USD 150 billion in four months using COVID-19 bonds (Hirtenstein, 2020[13]). While debt financing labelled as COVID-19 bonds is expected to address the impacts of the pandemic, a common definition or criteria for determining which financing achieves the intended impact is needed. Another example, the Leading Group on Innovative Financing for Development, which began work in 2006, has a longstanding history of co-ordination among development finance providers and developing countries to promote innovative financing mechanisms that generate additional ODA financing. For example, work by France to implement a solidarity tax (airline levy) demonstrates the possibility to generate billions of dollars to finance the SDGs. It also shows the potential of tax policy to help to help support international public goods and leaving no one behind. Other funds led by multilateral organisations can further raise resources in support of the emergency response. For example, the International Labour Organization has responded to the massive loss of jobs in the garment industry in developing countries by establishing a new fund to protect workers’ income and health (ILO, 2020[14]).

Greater incorporation of ICT tools in the delivery of development co-operation can facilitate the transfer of domestic resources. In November 2018, the United Nations (UN) Secretary-General established the Task Force on Digital Financing of the Sustainable Development Goals with a mandate to recommend and catalyse ways to harness digitalisation in accelerating financing of the SDGs. A recent Task Force report notes that while digitalisation is transforming finance, these transformations must align with the 2030 Agenda and reflect how citizens want their resources (e.g. taxes and investments) to be used (UN, 2020[15]). It also highlights the potential of crowd funding, digital insurance, digital transfers and blockchain-powered supply chain finance to help mobilise additional resources in developing countries. The 2030 Agenda, makes the specific call, in SDG target 8.10, to “strengthen the capacity of domestic financial institutions to improve access to banking, insurance and financial services for all.” Yet globally, an estimated 1.7 billion people, concentrated mainly in developing countries, do not have access to a bank account to store or receive payments, (World Bank, 2020[16]). Financial inclusion can be improved through innovative technological advances. For example, the rapid expansion of mobile banking in Kenya through M-Pesa, an initiative sponsored by the United Kingdom Department for International Development, has permitted the Kenya government to grow its local financial markets, including through growth of pension, insurance and savings.

Development finance providers should help ensure greater shares of remittances reach their destination through promoting innovative financing instruments and better technology and lowering regulatory barriers. The G20 has committed to supporting the new target on remittances under SDG 10 in 2016. SDG 10.C, which aims to reduce transfer costs to less than 3% and to eliminate remittance corridors with costs higher than 5% by 2030. However, more progress is needed. As noted in Chapter 3, the cost of sending remittances to ODA-eligible countries remains high – between 6.8% and 7% on average in 2017-19 or between USD 30.26 billion and USD 31.15 billion annually. Exclusive partnerships between national post offices and the large money transfer operators heighten the cost of transfers. Relaxing restrictions and barriers to entry of new players, including mobile operators, would help. The use of diaspora bonds in several countries has proven an effective means for governments to further mobilise additional resources linked to SDG spending and could generate USD 50 billion in developing countries annually (Shalal and Arnold, 2020[17]). The lockdowns and job losses due to the COVID-19 pandemic, however, have stifled migrant workers’ ability to send remittances back to their home countries, which decreases the likelihood of investment in such initiatives. Further researching the capacity of blockchain technologies can help reduce transfer fees (OECD, 2020[18]). Global principles for the financial sector and blockchain technology could be further developed to ensure consumer protection, align regulatory standards and minimise know your customer requirements while respecting ethical values.

Even before the COVID-19 crisis, developing countries faced mounting risk of debt distress and SDG setbacks. Of the 69 countries applying the low-income countries debt sustainability analysis in 2019, half were either already “in debt distress” or “at high risk of debt distress”, compared to 23% in 2013 (IMF, 2020[19]). Commodity exporters in particular have experienced high fiscal deficits leading to increasing debt. Foreign currency debt also increased rapidly (by about 10 percentage points of GDP between 2013 and 2018 for low income-countries), increasing risks linked to exchange rate movements. As a result, debt service is higher in so-called bad times as currencies of developing countries depreciate. In addition, new forms of lending both from private and official creditors, and in particular collateralised debt, have made restructuring even more difficult. Formal co-ordination institutions such as the Paris Club now represent a minority of lending volumes to developing countries, which has made agreement on global restructuring more difficult to negotiate and enforce.

Immediately following the outbreak of the COVID-19 pandemic, the development community took action to prevent the collapse of financing in developing countries through debt suspension. G20 finance ministers agreed to a Debt Service Suspension Initiative (DSSI) until the end of 2020 in an effort to provide some fiscal breathing space for the poorest countries, and the initiative could be renewed for all or part of 2021. As of late September 2020, 43 countries (of 73 eligible countries) had requested of their official bilateral creditors to suspend their debt payments, for a total possible temporary relief of USD 8.6 billion (out of a possible USD 11.5 billion). However, implementation has been imperfect, and not all bilateral official creditors offered the same terms. Moreover, some countries have not requested a standstill at all because of fears of triggering default clauses on their private commitments or worries that they would not be able to borrow from non-concessional sources. Furthermore, DSSI failed to induce private creditors to participate voluntarily; any further restructuring of debt will need to include them in re-establishing debt sustainability (OECD, 2020[20]). Despite these limitations, the standstill offers a blueprint for international co-ordination on restructuring debt of the poorest countries.

Debt suspension and relief should be used as a lever to promote a greener and more resilient growth path in developing countries. The DSSI has helped improve transparency of external debt, including with new methodologies piloted by the International Monetary Fund (IMF) and the World Bank to make sure deferred payments are allocated to SDG-compatible expenditure. Thus, the DSSI can also be used to make government-issued SDG bonds more credible. However, additional efforts beyond the DSSI are needed to ensure that debt restructuring and management are sustainable. Development finance providers should take the following key actions:

  • actively participate in the efforts of debt restructuring, including greening debt and employing innovative tools such as nature for debt swaps

  • work with relevant stakeholders and partner countries to enhance debt transparency and qualities, for example through the Voluntary Principles of Debt Transparency adopted by the Institute of International Finance, or by ensuring debt restructuring follows the UN Basic Principles on Sovereign Debt Restructurings and other soft law principles and instruments, such as the G20 Operational Guidelines for Sustainable Financing (UN, 2020[21]).

  • support existing debt management initiatives and reinforce technical assistance to identify the best type of SDG financing.

Debt suspension immediately following the outbreak of the pandemic helped avoid adding outflows linked to official debt service on top of the existing short-term collapse in external financing in developing countries. But over the long term, these resources must contribute to building back a greener and more resilient growth path. The challenge of debt sustainability and other forms of resource mobilisation demonstrates the importance of ensuring not only the quantity but the quality of resources. The next subsection outlines the key actions required to maximise the development impact of all public, private, domestic and external sources of financing.

The global “billions to trillions” mobilisation effort is not moving fast enough and a step change is needed to shift the trillions. In 2015, the World Bank-IMF Development Committee meetings called on the development finance community to invest ODA in the private sector to mobilise the trillions needed to narrow the SDG financing gap. However, mobilising additional private finance through ODA remains limited as demonstrated in the sections above and a more dynamic approach is required. As Chapter 3 notes, asset managers, banks, institutional investors and others including DFIs and MDBs hold trillions of dollars in assets. These resources are frequently misaligned with the 2030 Agenda, however (fossil fuel subsidies for example). The COVID-19 crisis forces leaders to consider a new risk-based paradigm. The investments made today can either mitigate or expand risks for sustainable development in the future. Shifting the trillions is a call to better assess the quality of the different sources of financing both to ensure these do not contribute to further backtracking and to help accelerate progress toward the SDGs in the future.

The sustainability assessment of SDG alignment is necessary for all sources of financing to embed resilience and build back better. Aligning finance with the SDGs means leaving no goals behind. For instance, biodiversity loss is cited as a possible origin of the COVID-19 pandemic. Yet, two of the least-funded SDGs are those relating to life on land and life under water.

Given the imminent risks of future climate and health shocks, particularly in developing countries, planning ahead is an urgent task for development finance providers. The cost of global epidemics and increasing climate-related events will only increase with time unless preventive action is taken. For instance, according to a recent study, the cumulative economic losses due to natural disasters in 2019 were nearly equivalent to total ODA volumes in the same year (USD 150 billion) (Löw, 2020[22]). The financing deployed today to recover from the crisis must be directed with a long-term vision that integrates potential risks to people and planet. The development community can strengthen the quality of these resources in two ways: first, by improving the national SDG supply and demand matchmaking and financing strategies and second, by bolstering international support for the multilateral system and international public goods.

The COVID-19 pandemic requires better tools to ensure national SDG financing needs are met. The growing scissors effect described in this report – rising SDG needs and declining resources – calls for a renewed effort to shed light on the supply and demand for all available resources at country level. A one-size-fits-all approach will not address the wide range of vulnerabilities and local contexts across developing countries that each face very different development finance challenges.

A central challenge is that most countries lack strategies to finance the SDGs. More than 70% of Voluntary National Reviews, or 79 out of 109, reported on national development plans and strategies but did not detail how governments would finance the SDGs in 2019 (Harris, 2019[23]). Assessing SDG financing needs and available resources is challenging at national level, given the wide range of actors and growing complexity of different sources of financing that can hamper co-ordination and alignment with national financing strategies.

In recent years, the international community has worked collaboratively to develop a framework for assessing national SDG financing needs. Integrated National Financing Frameworks (INFFs) provide a tool to help countries operationalise the AAAA, as well as how-to financing strategies at country level. Sixty countries have thus far received financial support for designing their INFF, under the supervision of the UN Development Programme (UNDP). However, there is no pipeline of bankable SDG-compatible projects in developing countries, which the United Nations Secretary-General’s Roadmap for Financing the 2030 Agenda for Sustainable Development 2019-2021 cites as a key constraint to channelling financing to achieve the 2030 Agenda and the Paris Agreement on climate (UN, 2020[24]). Identifying such projects requires better country-level capacities, particularly among investment promotion agencies, to formulate high-quality, bankable projects.

Development finance providers can help support this process and improve the strategic use of ODA within the broader mix of sources of financing at country level. As developing countries transition from lower to higher income categories, their access to different sources of financing shifts, with accompanying risks of financing gaps and setbacks. With the historic levels of lending taking place in the context of COVID-19, countries can use the OECD Transition Finance Toolkit3 and conduct Multi-Dimensional Country Reviews4 to ensure that resources borrowed today do not lead to development setbacks in the future.

Strengthening engagement between the development co-operation and investment communities is an important strategy to better align private finance, including foreign direct investment (FDI), to the SDGs. FDI plays an important financing role in developing countries and by linking domestic firms with MNEs and helping host economies integrate into global value chains, FDI also can enhance productivity and innovation, create quality jobs and develop human capital, and raise living and environmental standards. Evidence from past crises also shows that foreign-owned affiliates can exhibit greater resilience during crises thanks to their linkages with their parent companies and their and access to these companies’ financial resources. Moreover, a gradual growth of FDI is essential to a smooth phasing-out of ODA as countries advance along the development continuum.

Not all FDI contributes positively to progress towards the global goals, however. The OECD FDI Qualities Initiative (OECD, 2019[25]) looks at the impact of FDI on the SDGs across five areas to help enhance its impact: productivity and innovation; employment and job quality; skills; gender equality; and carbon footprint. Broadly speaking, the analysis points to more positive FDI impacts on the economic and environmental sustainability dimensions than on social dimensions, with the caveat that specific country conditions can amplify or mitigate these impacts (OECD, 2019[25]).

Development finance providers can also seek to improve the quality of trade and investment at country level. Revamping aid for trade can help improve the qualities of trade, for example, through the integration of developing economies into global value chains and economic diversification. Development finance providers can work with MNEs and investment policy makers to ensure that temporary unemployment or social protection schemes established during the crisis become permanent and are tailored to specific groups in need (e.g. women) and to different country contexts. Development finance providers’ investment promotion agencies already collaborate with counterpart agencies in developing countries, particularly to provide capacity building and technical assistance to countries most in need, such as LDCs. One example is support to integrating responsible business conduct principles and standards into business and investor operations. Another is the World Trade Organization’s structured discussions on investment facilitation for development, which seek to establish best practices and guidance for international co-operation to advance the development impact of investment promotion and facilitation (Baliño and Bernasconi-Osterwalder, 2019[26]).

Tax incentives to attract private investors can affect both revenues and behaviours, and are likely to be especially challenging in the response to the pandemic, as countries seek to balance the need for revenues, with the desire to attract investment and jobs. As outlined in Chapter 3, tax incentives are a significant challenge in many countries, forgoing significant revenues - often with limited or no evidence of a benefit in return – and in some cases actually encouraging activities likely to undermine progress towards the SDGs. Increasing the transparency and accountability of tax incentives is essential to reduce the risks of wasteful incentives, for example through ensuring that incentives are incorporated into the tax law and are not discretionary, have clearly defined and verifiable criteria, can only be granted by the Minister of Finance, are administered and monitored by the tax administration, and where practicable are temporary.5 The OECD Task Force on Tax and Development developed principles on transparency and governance of tax incentives to help all stakeholders support improved tax incentive regimes.6 Development finance providers can further lead by example through increasing the transparency and accountability of the tax incentives provided on ODA funded goods and services, which many LDCs have identified as challenging (ODI, 2018[27]).

Development co-operation providers can also work to improve the quality of infrastructure financing.7 To ensure that financial resources spent on infrastructure enhance sustainable development and mitigate the risk of debt crises, a thorough examination of the quality and uses of infrastructure finance is necessary. This involves taking a holistic approach that considers how infrastructure will contribute to economic growth, the social groups the infrastructure is likely to benefit, its environmental consequences and its cost-efficiency (OECD, forthcoming[28]). For example, climate-resilient infrastructure leads to fewer disruptions and reduced economic impacts, with an overall net benefit estimated at USD 4.2 trillion (in developing countries only). This translates into a USD 4 benefit for each dollar invested in resilience (Hallegatte, Rentschler and Rozenberg, 2019[29]).

Development finance providers, among others, have recently started to address the sustainability concerns of infrastructure investments. In recognition of the importance of quality infrastructure investment, for instance, the G7 endorsed the Ise-Shima Principles for Promoting Quality Infrastructure Investment” under the Japanese Presidency in 2016. In June 2019, the G20 endorsed the Principles for Quality Infrastructure Investment. Another recent initiative is the Blue Dot Network, announced by the Australia, Japan and the United States in November 2019 at the Indo-Pacific Business Forum in Thailand. It aims to assure private investors – including United States pension funds and insurance companies with a combined portfolio of trillions of dollars in long-term assets – of the economic, environmental and social sustainability of infrastructure investments to better mobilise their resources to address the infrastructure gap worldwide.

Development finance providers can also help to ensure that taxation is aligned to support SDG financing strategies at country-level. Tax systems can support the SDGs through four interrelated pathways:

  1. 1. Taxes generate the funds that finance government activities in support of the SDGs;

  2. 2. Taxation affects equity and economic growth;

  3. 3. Taxes influence peoples’ and businesses’ consumption and production behaviour and choices: and,

  4. 4. Fair and equitable taxation promotes taxpayer trust in government and strengthens social contracts that underpin development.

Reforming tax systems to make the best use of these pathways is challenging, requiring significant commitment, both from the government seeking to implement the changes, and from development partners supporting such reforms. Box 4.2 demonstrates how countries can utilise medium term revenue strategies (MTRS), to both plan reforms, and coordinate support for implementation, for example, as a part of their INFFs to better align domestic resources to the achievement of the 2030 Agenda. The OECD can support this process through its Multi-Dimensional Country Reviews and Transition Finance Toolkit.

Countries may be looking increasingly at underexploited tax bases as they rebuild. As outlined in Chapter 2 the tax to GDP ratio in many developing countries is substantially lower than OECD countries. A large share of this difference can be attributed to OECD countries obtaining a much greater share of GDP in taxes on labour and social security contributions. While expanding the tax base on labour may be the best option for some countries, in the COVID-19 era where job creation will be a high priority for many countries, alternatives to labour taxation may be sought. Underexploited tax bases in many countries include property taxation and wealth taxation (both of which are generally progressive and can support the reduction of inequality), carbon taxation that can help countries meet their Paris commitments, and health behaviour orientated taxes such as taxes on tobacco, sugar and alcohol. Such taxes can combine with broader tax measures to help meet the SDGs. Box 4.2 outlines findings from recent OECD research on how Côte d’Ivoire (OECD, 2020[32]) and Morocco (OECD, 2020[33]) can improve the design of their tax systems to generate additional financing for their health systems through a combination of reforms including both social security contributions and health behaviour oriented taxes. Support should be provided for countries to enable tem undertake similar analyses to identify potential for improved domestic financing approaches, especially on health and the environment.

The pandemic demonstrates the need for co-ordinated approaches and partnerships across all actors to address global challenges. From bilateral and multilateral providers’ emergency debt support response and foundations’ pledges to help deliver vaccines and health treatment to the private sector with governments ramping up support for COVID-19 financing instruments – all actors are stepping up to respond to the crisis. The value of co-ordination is clear: no single actor can tackle global challenges alone.

Multi-stakeholder efforts to enhance development co-operation effectiveness in the COVID-19 era should continue to align to the Busan principles (OECD, 2011[36]) that were advanced under the aegis of the Global Partnership for Effective Development Co-operation (GPEDC).8 As part of a global effort to assess the effectiveness of development co-operation, 86 partner countries and territories, more than 100 development partners, and hundreds of representatives from civil society organisations and the private sector participated in the third GPEDC monitoring round in 2018 that reviewed progress against four principles: country ownership, focus on results, inclusive partnerships, and transparency and accountability. In a joint statement issued early in the pandemic, in May 2020, the Global Partnership Co-chairs (Bangladesh, Democratic Republic of the Congo and Switzerland (and a fourth non-executive Co-chair underscored the potential human and economic costs of not delivering on the effectiveness commitments, noting that the Busan principles can be an even more relevant tool for effective partnerships at country level during the COVID-19 pandemic and recovery (GPEDC, 2020[37]).

In recent years, the multilateral development system has grown in importance as a channel of development co-operation, with DAC providers channelling an increasing share of their ODA through multilateral organisations. Multilateral organisations also are playing a key role in the immediate response to the crisis. However, the COVID-19 pandemic and the triple crisis looming in developing countries (health, economic and humanitarian) demonstrate the need to building a stronger multilateral system – one that is equipped to address global challenges of a new magnitude (OECD, 2020[38]). In the spirit of building back better, multilateral stakeholders should use the current crisis as an opportunity to build a more effective and coherent system by focusing on key reform areas, such as scaling up the impact of multilateral development finance, enhancing its efficiency and promoting greater accountability (Figure 4.2).

The international community must develop new approaches to shift the trillions and help align finance with the SDGs. While traditional development finance providers must continue to leverage public finance, the private sector must also step up with the trillions that they invest and manage. Looking at SDG alignment through the lens of development co-operation alone misses the big picture. Misalignment starts at home: domestic policies in OECD and other countries, in addition to international regulations, guide where, in what and how the private sector decides to invest.

Shifting the trillions requires tipping the balance of risks and returns across markets. Pursuing risk management strategies that seek the twin goals of financial and non-financial returns can help to build a more resilient system and preserve the value of assets. However, a number of market inefficiencies limit achievement of the twin goals, among them poor incentives and insufficient transparency, accountability and integrity. These impede better allocation of resources and, as in the case of green or SDG washing, allow the use of sustainability labelling or branding without reliable assessment of how financing impacts progress towards the global goals. Moreover, the maintenance of certain asset values are also incompatible with some SDG goals. SDG 13 stopping global warming, for example, will require leaving hundreds of billions of dollars of coal, oil, and gas in the ground and worthless.9

The AAAA, which provides a foundation to improve market efficiency and integrity, requires a renewed focus on the investment chain. It calls for “policies, including capital market regulations where appropriate, that promote incentives along the investment chain that are aligned with long-term performance and sustainability indicators” (para 38) (UN, 2015[39]). Following the global financial crisis, private sector actors, particularly in the financial sector, anticipated changes in regulations that would require a greater non-material financial focus (i.e. long-term performance and sustainability) to avoid future shocks. While governments and regulators enacted reforms to build financial market resilience (e.g. the Dodd–Frank Wall Street Reform and Consumer Protection Act enacted by the United States in 2010), they have been slow to adopt policies to reduce the risk of SDG washing. Initiatives and standards pertaining to sustainable business or finance have become more pervasive, for example environmental, social and governance (ESG) managed funds; the issuance of green bonds; and increasing adherence to the UN Principles for Responsible Investment (PRI). Yet there have been few reforms since 2015 that have significantly changed incentives to promote or accompany SDG alignment of finance.

The COVID-19 crisis could create momentum for action to carry out the unfinished business of the AAAA. Relevant provisions could be strengthened by a companion framework for SDG alignment that would aim to restore the predictability and coherence of policies as well as the efficiency and integrity of markets. This would help actors identify individual and collective actions along the investment chain contributing to the SDG alignment effort and shift the trillions towards more sustainability.

This remainder of this chapter explores new actors outside the traditional financing for sustainable development landscape and actions they can take for SDG alignment. It identifies ongoing efforts by the international community to shift the trillions in favour of the financing for sustainable development agenda in the COVID-19 era and beyond, and proposes a roadmap to capitalise on political momentum towards a common framework for SDG alignment outlined in Figure 4.3.

The AAAA reflects a global consensus that no single source of financing would be sufficient to achieve the 2030 Agenda. It built on earlier financing for sustainable development agendas (e.g. the Doha Declaration on Financing for Development and the Monterrey Consensus on Financing for Development) that sought to establish a more holistic approach to financing sustainable development including and beyond traditional development finance. The AAAA recognised that while the public sector leverages billions of dollars to finance sustainable development, the private sector holds the trillions. These trillions are needed to realise the scale and speed of progress that are called for in the Decade of Action.

The COVID-19 crisis reveals the interdependence of financial and non-financial returns, i.e. the imperative for private finance to align to the SDGs. Financial returns rely on collective action to avoid global shocks such as climate-related risks that incur financial losses. Following the outbreak of the COVID-19 pandemic, the volatility of global capital markets caused asset values to plunge in the face of uncertainty about prolonged economic lockdowns. Asset managers and institutional investors increasingly recognise that non-financial ESG risks can have a material impact on risk-adjusted returns and long-term value (OECD, 2020[40]). As investors seek to sustain and increase value, they require improved metrics and data on sustainability to make better-informed investment decisions that help to avoid future shocks.

The global financial system is a complex, adaptive system and policy makers must work to enhance its resilience. Growing complexity and interdependence have made the global financial system susceptible to widespread, irreversible, and cascading failure. The global financial crisis of 2008 and the current crisis illustrate how interconnected global financial markets can be subject to cascading shocks. It revealed significant limitations in the financial sector’s ability to predict disruptions, and in the capacity of both economists and those responsible for the “real economy” to understand the impact of those disruptions. The costs of these errors were and are being borne by individuals around the world. A systems resilience framework can enable policy makers to better accommodate the inevitable future disruptions to financial markets (Hynes, Love and Stuart, 2020[41]).

Along the investment chain, public and private actors play differentiated roles to finance sustainable development. While the private sector plays a central role in driving growth and job creation, the public sector must seek partnerships in the business world to support the development process. Such partnerships can help guide private sector behaviour towards more sustainable production and consumption patterns, and private international capital flows can complement national development efforts.

However, there are two central obstacles to increasing market efficiency and meeting demand for sustainable development financing. First, the SDGs remain disconnected from the private sector. SDG targets and indicators require better translation into relevant private sector metrics. Second, domestic policies in OECD countries that can be the root cause of inefficiency in markets (i.e. misallocation of resources across different types of assets or countries) have not caught up to meet the demand for sustainability and SDG alignment of financing.

The SDG targets and indicators were primarily drafted by and for governments. This is reflected in the makeup of the UN Statistical Commission, the group responsible for agreeing on the SDG targets and indicators: its membership comprises 24 revolving governments but no private sector representatives (UN, 2020[42]). SDG targets are thus poorly suited to measure the non-financial performance of the private sector. The private sector largely continues to perceive the SDGs as a policy framework rather than an investable framework that industry can engage with.

Private sector support for the SDGs is largely outside the ambit of the 2030 Agenda targets and indicators framework. For example, the World Economic Forum analysed 800 observations of business providing support for the SDGs in developing countries and found only 40 of 169 SDG targets were supported and only 22 of these targets were supported more than once (GrowInclusive, 2020[43]).

Many SDG targets are not fit for the private sector or adapted to private sector activities, for example:

  • Gender: SDG target 5.5 calls for ensuring women’s opportunities for “leadership” in economic life. However, the private sector contributes by offering jobs with equal pay and conditions to women.

  • Trade: Many private sector efforts to facilitate trade are not captured by the trade-related targets that are policy-focused, with the exception of SDG target 17.11 on exports.

  • Fishing: Conservation and sustainable use of oceans and their resources are left to governments and international organisations rather than private sector practices.

  • Market prices: Many private sector efforts to increase access to information about markets and prices are not captured. Yet SDG target 2.c refers to the functioning of food commodity markets and their derivatives (global versus local).

  • Wages and social protection: SDG target 10.4 makes reference to social protection policies without setting objectives for private sector practices that could achieve the same objective.

In many instances, private companies contribute to the spirit of the SDGs rather than the metrics defined in the SDG targets. The SDGs remain largely aspirational and not a reference for private sector disclosure, performance or ratings because in many sectors and for many companies, the SDGs do not help deliver on a firm’s primary fiduciary duty – that is, to maximise profits for shareholders. While the private sector has adopted ESG and other sustainability measurement tools, these frequently still do not protect consumers against misleading information (SDG washing). It is not enough that a company’s operations contribute to a particular SDG if their impact is not assessed across all SDGs and throughout the company’s supply chain. For example, car manufacturers can contribute to the reduction of carbon pollution (SDG 13) by replacing internal combustion engines with electric engines, while at the same time relying on lithium and cobalt that come from unsustainable mining done under poor working conditions (SDG 12).

Sustainability standards have proliferated over recent years. The UN identifies 115 multi-stakeholder initiatives involving 5 181 constituent members that seek to grow the sustainable finance market (Van Acker and Mancini, 2020[44]). The expanding system of sustainability products, certifications and standards is complex and many policy makers now find it impenetrable. The complexity has other implications. Research published by ShareAction (2020[45]), for instance, suggests that membership in initiatives as the PRI does not guarantee a strong approach to responsible investing. Another study found that only half of all companies subscribing to the PRI mention the SDGs in their reporting, and as few as 10% provide details on how they actually integrate the SDGs in their investment strategy (Novethic, 2019[46]).

The sustainable finance market remains immature. Consequently, assessing its magnitude is challenging. The market is growing, spurred by shifts in demand from across the finance ecosystem that are being driven by the pursuit of traditional financial value and by the pursuit for non-financial, values-driven outcomes. However, as outlined in Chapter 3, estimates of financing that qualifies as sustainable vary significantly, ranging from as high as USD 30.7 trillion10 to as low as USD 3 trillion (IMF, 2019[47]). Sustainable finance can reflect different levels of ambition: for example, investment could be labeled as solidarity, responsible, ethical, “green”, “sustainable”, for impact, etc. The discrepancy in estimated volumes of sustainable financing, and the lack of consensus on terminology and standards of sustainable finance, are emblematic of an immature market.

Moreover, there is a gap between market aspirations for greater sustainability and regulations governing the market. Greater coherence between domestic and international SDG financing strategies is needed to address the proliferation of policies and regulations. While the AAAA, in paragraph 38, calls for alignment of policies, regulations and incentives with the SDGs, the focus of the financing for sustainable development (FSD) process has been on policies in developing countries rather than in countries of origin of the financing. Significant work remains to effectively tackle international tax evasion and avoidance, as demonstrated through the ongoing work on BEPS. Other misaligned sources of finance include fossil fuel subsidies. As noted in Chapter 3, fossil fuel subsidies cost upwards of USD 4.7 trillion in 2019, or 6.3% of global GDP (Coady et al., 2019[48]), and 44 OECD and G20 countries spent an estimated USD 178 billion on fossil fuel subsidies in 2019 (OECD, 2020[49]).

Market forces will correct some early failures and will likely drive, for instance, a consolidation and harmonisation of standards. However, it is also important that early movers are protected, and good practices rewarded to spur emulation and sustain the SDG alignment movement. Policies should facilitate self-adjustments of the market. To help policies catch up to market demand, three key obstacles – transparency, accountability and incentives – must be overcome. The three issues emerged in a stock taking of some key initiatives on sustainable finance11 that is to be released as part of the joint OECD-UNDP work on SDG alignment.12

First, a lack of transparency reduces comparability. It is not mandatory to disclose methodologies, which sometimes are regarded as intellectual property. For example, ESG rating agencies often do not provide complete and public information about the criteria and the assessment process developed to evaluate corporate sustainability performance (Escrig-Olmedo et al., 2019[50]). Moreover, among methodologies that are disclosed, there are stark inconsistencies in terms of how sustainability is measured. For example, Tesla was recently rated in the bottom 10% of all companies by JUST Capital yet received an A grade from MSCI (Nauman, 2020[51]). An important asymmetry of information is created by the absence of common definitions and metrics. The mushrooming of initiatives creates noise on the market and does not help investors make informed choices about the allocation of their assets or help consumers make informed choices about products.

Second, ensuring accountability for non-financial returns is complex. The absence of harmonised rules on reporting non-financial returns has resulted in selective reporting or cherry-picking of results in favour of positive sustainability outcomes, rather than additionality13 or net impact.14 Rating agencies, for example, generally focus on financial performance and do not include non-financial performance with their own methodologies, or include it to limited extent. Boffo, Marshall and Patalano (2020[52]), in a report on ESG investing for the OECD, demonstrate that prioritisation of criteria can be complex. For some ESG rating providers, high E (or environmental) ESG scores positively correlate with high carbon emissions. The E score captures metrics such as renewable energy management, resource use, water output and management, impact on ecology, and biodiversity as well as carbon footprint, although it does not prioritise carbon footprint or intensity.

Regarding the third of the obstacles, there are increasing calls for regulators to catch up with markets and set out guidance to create incentives to align. Better incentives require better rules. If they are not designed with international considerations, new regulations could cement fragmentation. The lack of policy coherence and clarity of regulations is holding up alignment. The incentives, rewards and sanctions are neither coherent nor structured to capitalise on the improving economic case underpinning sustainable finance. As noted in Section 4.1.1, while blended finance aims to provide financing to the poorest countries, only 6% actually targets LDCs. Meanwhile, only 4% of FDI goes to LDCs, largely due to the private sector’s perception of these countries being high-risk (e.g. currency risks, political risk, lack of liquidity). Improved incentives are needed to encourage more private investment in low-income and fragile contexts.

The challenge will be to ensure standards converge in support of the 2030 Agenda, with a requisite level of ambition and within and across communities of actors along the investment chain. All efforts should be consolidated to reach the scale needed for financing the SDGs and leave no one behind. For example, while exclusionary principles are widely used, they are limited in that they only protect from doing harm without contributing to positive impact. The USD 68-billion UN Joint Staff Pension Fund includes exclusionary clauses for human rights, tobacco and arms, and it recently announced it would divest from investments in publicly trade coal companies by the end of 2020 (Chief Investment Officer, 2019[53]). Yet, the pension fund does not include metrics to invest for non-financial returns linked explicitly to the SDGs.

What could be done to remove these obstacles identified along the investment chain? This moment in time presents a golden opportunity. The COVID-19 crisis has galvanised a movement for SDG alignment. At the same time, there is growing realisation that the twin goals of higher financial and higher non-financial returns are within reach if long-term risks can be better managed. Calls to enhance the integrity and efficiency of markets have increased following the outbreak of the pandemic. For example, the G20 action plan in response to COVID-19, launched in April 2020, calls on G20 countries and the international community to improve market efficiency, strengthen resilience and create the conditions for a sustainable recovery. It is important to ensure that policies are supportive of this movement, contribute to removing obstacles to SDG alignment and do not become obstacles themselves by not adjusting quickly enough to the changing needs of investors. As governments intervene with stimulus packages, subsidies and bailouts, it is equally important that all scarce public resources spent have maximum short and long-term impact and do not support non-sustainable practices.

Ensuring market integrity requires clearer standards for the private sector and more robust safeguards to protect against deceitful practices. Some prominent private sector actors are urging higher-quality sustainability standards, among them Larry Fink, Chairman and Chief Executive Officer of BlackRock, the world's largest asset manager with more than USD 7 trillion in assets under management. In a recent open letter to corporate executives, he calls for greater transparency and more widespread and harmonised sustainability standards (Fink, 2020[54]). At the same time, policy makers and academics are calling into question the traditional model of capitalism that holds that the only aim of business is financial return: they point to the climate crisis, rising inequalities and the global pandemic as evidence of the need to integrate long-term, non-financial risks and returns into the equation (Badré, 2020[55]).

The example of the green finance market could be instructive for financing the SDGs. The Paris Agreement was the impetus, providing the critical driving force to align policies in support of the climate-related SDGs. Recent initiatives such as the EU Taxonomy for sustainable activities and various efforts by the Climate Bonds Initiative) have worked to achieve consensus around the green finance market and its terminology. The International Capital Market Association has registered approximately 400 green bond frameworks and about 400 regulations have been published, two-thirds of which cover developed markets. Almost USD 200 billion of green bonds were issued in 2019 alone, a record for green finance (Climate Bonds Initiative, 2019[56]). While this volume is still clearly insufficient to finance the low-carbon transition, policy makers and investors have a much clearer understanding of the financing needs, the necessary financing instruments and how much more needs to be done for this transition compared to the financing needs for the SDGs. Policy makers should seek to build on these solutions for financing the SDGs.

The identification of SDG metrics, by building on existing initiatives that are fit for the private sector, could help to clarify standards. Strategies of business and portfolio managers need to shift from a logic of either using ESG factors to better manage risk and possibly enhance financial returns or selecting best-performing ESG companies to an approach of including and reporting on SDG considerations. A first step could be for the international community to identify SDG targets fit for the private sector. Companies’ and investors’ performance could be measured against relevant targets. This could build on existing initiatives, such as the SDG Compass, a tool jointly developed by the UN Global Compact (2015[57]).

Governments and multilateral organisations are leading other initiatives that can also help business more clearly define their sustainability objectives and enhance their impact:

  • Organisations including the OECD contribute to raising the bar on sustainability by helping companies understand their impacts on the SDGs across their entire supply chains and integrating risk-based due diligence into their business operations, for instance with the Guidelines for Multinational Enterprises and the Due Diligence Guidance for Responsible Business Conduct (OECD, 2019[58]).

  • The Principles for Responsible Investment (2020[59]) initiative works to understand the investment implications of ESG factors and support its international network of investor signatories in incorporating these factors into their investment and ownership decisions. The number of PRI signatories has grown from 100 to 3 000 in a few years.

  • More than 3 300 certified B Corporations across 150 industries in 71 countries are legally required to consider the impact of their decisions on their workers, customers, suppliers, community and the environment.

  • Some business groupings are engaged in a dialogue with governments to improve regulations and underlying metrics (e.g. on impact measurement), including Business for Inclusive Growth – a network of companies set up to help business reduce inequalities (OECD, 2020[60]).

Against this backdrop, a global consensus is emerging that finance must make a positive contribution to sustainable development, using the SDGs as a basis for measurement. The Global Investors for Sustainable Development (GISD) Alliance has adopted a definition of sustainable development investing that promotes positive impact as a prerequisite and suggests that investors can strengthen their contribution through active ownership, including engagement for more sustainability in companies, sectors and projects and more investment in developing countries (GISD Alliance, 2020[61]).

To help bring about this positive contribution to sustainable development, there is a need to first close the gap between high-level principles and reporting standards for impact. In the area of impact, the Impact Management Project (IMP) provides a forum for building global consensus around how to measure, manage and report impacts. The project brings together several public and private actors along the investment value chain, including both practitioners and standard-setting organisations such as the OECD.15 Five standard setters16 have agreed to work together on a comprehensive corporate sustainability reporting. Facilitated by the IMP, this work will help provide the basis for a comprehensive corporate reporting system.

In the absence of common definitions or standards, benchmarking could also play a critical role to increase transparency and better inform investors and consumers of the performance of companies on sustainability issues. For example, the World Benchmarking Alliance aims to measure and compare companies’ performance on the SDGs. An independent benchmarking mechanism with a publicly available methodology and results could be put in place for sustainable finance that would force some disclosure while respecting privileged information. Such a mechanism could promote a race to the top in which leading companies would be incentivised to do more and laggards would be held to account.

Market efficiency starts at home by ensuring coherence of domestic policies with the international agenda. The same assessment of the sustainability of financing by the private sector should be applied to governmental actors. All countries are affected by the performance of other countries, as the COVID-19 crisis starkly illustrates. Measures to promote SDG alignment in OECD countries should not create further market segmentation or distortions that would be detrimental to collective progress towards the SDGs. Increasing the efficiency of the markets will allow a better-informed allocation of assets, including across countries.

The 2030 Agenda recognises that the success of one country to achieve progress on the SDGs will be dependent on the performance of other countries. A disconnect between domestic and international SDG financing strategies, therefore, detracts from the effectiveness of all efforts. For example, it is crucial to ensure not only that stimulus packages help raise the bar on sustainability standards but that they do not sat the same time contribute to diversion of resources from crucial sectors and from developing countries most in need is crucial. This is easier said than done, however. For example, in the period between the beginning of the pandemic in early 2020 and 15 July 2020, G20 countries committed at least USD 151 billion to fossil fuels but only USD 89 billion to clean energy in their stimulus and recovery packages (Gerasimchuk and Urazova, 2020[62]).

Governments should aim to collectively set the right incentives and phase out support for misalignment. Subsidies to industries that have a clear negative impact on the SDGs should be stopped. Taxation that rewards positive SDG activity and penalises negative activity could also help. In some cases, green taxes and levies on polluting imports could be implemented, whereas in others, more strict prohibitions might be warranted. In the context of the COVID-19 crisis, sustainability performance and commitments should complement public support such as stimulus packages, bailouts or subsidies so that finance delivers better recovery and builds resilience.

Standards on non-financial reporting should favour mandatory over voluntary mechanisms when possible. Stricter rules on reporting of non-financial results, disclosure and harmonisation of metrics, and revised liabilities and ratings of performance can help increase transparency and accountability. These rules should be globally harmonised or at least built in a coherent manner to avoid risk of cementing fragmentation. Third-party verification could be required for the biggest companies to ensure accountability.

International, voluntary non-financial reporting standards are already being implemented and should be expanded. The Task Force on Climate-related Financial Disclosure (TCFD), for example, aims to develop voluntary, consistent climate-related financial risk disclosures for companies to use when providing information to investors, lenders, insurers and other stakeholders. Industry actors have started moving towards the adoption and implementation phases: more than 1 440 organisations have taken up TCFD recommendations, representing a market capitalisation of over USD 12.6 trillion. Some countries are taking action at the government or financial authority level: New Zealand is the first country to formally move towards a comprehensive, mandatory reporting regime for TCFD disclosures; under proposed legislation, the requirement would apply to certain publicly listed financial entities as of 2023. The Swiss Financial Market Supervisory Authority, the United Kingdom Financial Conduct Authority and the Hong Kong Monetary authority are currently working on approaches for improved disclosure of climate risks by major financial institutions, which could lead to mandatory TCFD disclosures.

The implementation of national mandatory and/or legal frameworks for non-financial reporting also is further helping to increase accountability. A number of countries, among them New Zealand, have mandated climate reporting, and governments in other countries (e.g. Canada, Japan, the United Kingdom, the EU) are also looking to introduce legislation. Beyond environmental objectives, other countries also are seeking to integrate social considerations in their strategies. For example, France enacted the Loi Pacte that incentivises companies to include what it calls a “purpose” that enshrines the notion of social interest – i.e. they consider the social and environmental issues inherent in their statutes and strategies – and creates a new category of a company with purpose (entreprise à mission) that is subject to regular monitoring by its employees and an independent body.

Domestic stimulus packages should include a financing for sustainable development chapter on how recovery supports SDG alignment, and several national stimulus packages have made progress in ensuring sustainability. For example, Canada has announced that businesses with revenues of USD 300 million or more requesting COVID-19 economic aid would be required to disclose their climate impacts and commit to making environmentally sustainable decisions. The scaling up of sustainable finance or efforts to develop a more mature the market can help close the SDG financing gaps, respond to the COVID-19 crisis and build back better.

To avoid market fragmentation, governments should adopt comparable taxonomy regulations across different dimensions of the SDGs. To address risks of fragmentation of markets and restore predictability for investors, policies should focus on incentivising businesses to incorporate sustainability objectives aligned with the SDGs. The idea is not to replace all private standards with public ones, but to agree on watchdog mechanisms and minimum requirements to protect investors against deceitful practices. The EU has been a pioneer in developing a unified classification system for sustainable activities – the EU Taxonomy on sustainable finance taxonomy – to provide businesses and investors practical tools to identify environmentally sustainable economic activities and investment opportunities. Despite minimum social safeguards,17 the Taxonomy focuses on environmental objectives and does not yet cover all SDGs, but work to include social considerations is ongoing.

While the AAAA recognised the need for private sector engagement, it fell short of translating the SDGs into industry-relatable targets and metrics. In the era of COVID-19, the AAAA also does not expressly provide governments with a framework to rebuild and prepare recovery packages that are aligned with the 2030 Agenda.

A supplementary framework to the AAAA, led by the UN and other actors, could serve as a reference for SDG alignment and be translated into concrete action plans by the various actors and communities active along the investment chain. Communities such as businesses, stock exchanges, pension funds, asset managers and sovereign funds need to progressively commit to integrate this new paradigm. Action plans should be developed by all communities involved along the investment chain. A reference document should include a monitoring and accountability mechanism, with progress reported annually.

This section sets out the actions that governments can take to support the UN-led financing for sustainable development agenda and to help implement action plans for SDG alignment among a broader set of actors.

The UN system and its partners took action before the crisis to begin development of a common framework for SDG alignment. The UN Secretary-General accelerated the financing for sustainable development agenda in 2018 with the adoption of the Strategy for Financing the 2030 Agenda roadmap (UN, 2018[63]). Estimating global gross private sector financial assets at hundreds of trillions of dollars), the report urged that all available finance be channeled towards sustainable development. It further called for a transformation of the financial system to leverage opportunities to increase investments in the SDGs at scale.

The COVID-19 crisis could create momentum for a fourth international conference on financing for sustainable development, as was stipulated in the AAAA that charts a path to SDG alignment. In the meantime, follow-up and monitoring on the financing for sustainable development agenda must leverage national and regional initiatives. The UN Secretary-General, Canada and Jamaica convened the Initiative on Financing for Development in the Era of COVID-19 and Beyond 2020 in May 2020 as a first step. Concrete financing solutions to the COVID-19 health and development emergency and recommendations for a common framework for SDG alignment that would supplement the AAAA were discussed.

The initiative injected fresh ideas and policy options for financing the SDGs, including the idea of SDG alignment, to the FSD process. As the leader of this process, the UN can help ensure the recommendations are translated into regional and domestic laws and practices including via heightened co-ordination with regional groups. In another effort, the EU announced the launch in September 2019, at the Climate Action Summit, of an International Platform on Sustainable Finance to co-ordinate regulatory policy tools for capital markets. The platform aims to exchange best practices and bring together different initiatives on environmentally sustainable finance and investment, including green taxonomies, disclosures, standards (e.g. green bonds), labels and benchmarks. This international platform to date comprises EU member states, Argentina, Canada, Chile, China, India, Indonesia, Kenya, Morocco, New Zealand, Norway, Senegal, Singapore and Switzerland. It is also supported by the Coalition of Ministers for Climate Action and several organisations.18

National and regional initiatives to develop a common SDG alignment framework have accelerated as the horizon to achieve the 2030 Agenda approaches. The G7 and G20 have both highlighted the importance of SDG alignment, most recently at the G7 in France in 2019 and the G20 in Saudi Arabia in 2020. The G20 Development Working Group is currently working on a G20 framework on FSD, including exploring whether to dedicate one of its three pillars to the mobilisation of finances and their use for sustainable development. As many of these initiatives are relatively new, there are ongoing efforts broaden the scope of the frameworks and improve their capacity. For instance, both the EU and China have indicated their intention to update and possibly expand their respective frameworks19 to include new sectors.

The United Kingdom and Italy, respectively, are hosting the G7 and G20 in 2021 and are co-hosting the UN Climate Change Conference, COP26, in Glasgow. Both countries have championed sustainable finance as having an important role in the post-COVID-19 recovery. The upcoming G7, G20 and COP26 presidencies provide a unique opportunity to capitalise on momentum securing action for alignment. The Italian presidency of the G20 has announced it is exploring whether to include the alignment of public and private investment to the SDGs as part of its priorities.

In support of these national and regional initiatives, the French G7 Presidency mandated the OECD and UNDP to define a “robust common framework for SDG-compatible finance”” (G7 France, 2019[64]). The aim of such a framework is to create a roadmap, identify building blocks, engage different communities in a coherent manner, and set out long-term objectives and recommendations needed to achieve alignment. To be launched in November, the framework will provide the tools, standards and policies needed to deliver greater transparency, accountability and better incentives.

Voluntary community action plans are an important step to help incentivise public and private actors to support a government-led SDG alignment framework. The framework needs the support of the new actors in financing sustainable development, as many of these are already taking steps to align. Now is the time to amplify their efforts and chart a path for co-ordinated action. Ten emerging community action plans outlined in Table 4.1 provide an overview of the new actors and how their role relates to SDG alignment and set forth a series of voluntary actions to accelerate alignment. The action plans are based on stakeholder consultations, including in the context of the OECD-UNDP joint SDG alignment work, and are intended to provide a foundation for public-private collaboration. The examples of actions to align are illustrative and not intended to be comprehensive. Detailed community action plans are provided as supplementary materials for this chapter.

New actors including asset managers, banks, institutional investors, credit rating agencies and stock markets can take concrete actions to improve transparency, accountability and incentives for SDG alignment. Investors with trillions of dollar in assets under management (AUM) can make efforts to reduce misalignment, including by avoiding negative externalities such as carbon emissions, human rights abuse, etc. They also can take preventive measures to facilitate greener and more sustainable forms of finance by, for example, developing asset classes beyond equities such as green bonds (e.g. asset managers and investment banks) and leveraging capital markets to mobilise more finance directed to developing countries (e.g. public development banks). Institutional investors such as pension funds, sovereign wealth funds and insurers can further integrate ESG considerations and better monitor and evaluate ESG risk reduction in ways that are compatible with the SDGs and based on accountability for sustainable development impact. Market regulators such as rating agencies and stock markets can set stronger financial and non-financial disclosure requirements to increase transparency and harmonise reporting standards.

For new actors to succeed, policy makers must work together to facilitate integration of the global goals and long-term risks for people and planet. Market efficiency and integrity will rely on policy makers setting the right incentives for investors, regulators and portfolio managers that are aligned with the 2030 Agenda and the Paris Agreement. Policy makers can strengthen regulatory and legal frameworks based on a common framework to aligning finance in support of the SDGs (e.g. sustainability taxonomies). Policy makers also can build the evidence base on economic policies that support a green transition and a more resilient financial system. Developing such regulation at the national level will require greater co-operation and dialogue with the private sector, building on and scaling up existing initiatives such as the TCFD and the UN PRI, among others. These activities can help countries identify the best practices, SDG-compatible private sector metrics and strategies to incentivise greater investments for the SDGs.


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[114] White & Case (2020), The G20 Debt Service Suspension Initiative – Reaction from Key Market Participants, https://www.whitecase.com/publications/alert/g20-debt-service-suspension-initiative-reaction-key-market-participants.

[105] White, L. (2013), “Credit Rating Agencies: An Overview”, Annual Review of Financial Economics, Vol. 5, pp. 93-122, https://doi.org/10.1146/annurev-financial-110112-120942.

[91] Willis Towers Watson (2019), “The world’s largest fund managers - 2019”, https://www.thinkingaheadinstitute.org/en/Library/Public/Research-and-Ideas/2019/10/P_I_500_2019_Survey.

[16] World Bank (2020), Universal Financial Access 2020 (webpage), https://ufa.worldbank.org/.

[69] World Bank Group (2018), 2017 Survey of National Development Banks, http://documents.worldbank.org/curated/en/977821525438071799/pdf/125958-WP-PUBLIC-WorldBankGlobalReportNationalDevelopmentBanksVFull.pdf (accessed on 9 March 2020).

[110] World Economic Forum (2019), Seeking Return on ESG, http://www3.weforum.org/docs/WEF_ESG_Report_digital_pages.pdf.

[102] World Federation of Exchanges (2016), The Role of Stock Exchanges in Fostering Economic Growth and Sustainable Development, https://www.world-exchanges.org/storage/app/media/research/Studies_Reports/WFE%20UNCTAD%20Exchanges%20-%20Growth%20and%20Sustainable%20Development.pdf.

[100] WRI (2019), “How Are Banks Doing on Sustainable Finance Commitments? Not Good Enough”, https://www.wri.org/blog/2019/10/how-are-banks-doing-sustainable-finance-commitments-not-good-enough#:~:text=1.,made%20a%20sustainable%20finance%20commitment.&text=Public%20commitments%20can%20embolden%20banks,new%20opportunities%20that%20support%20sustai.

As publicly owned financial institutions with a development mandate, development banks can play a countercyclical role in financial systems, helping to soften effects of credit crunches and deleverage private banks in times of financial crises. They also playing critical role in financing infrastructure. Public development banks (PDBs) have a massive collective financial footprint: the national and bilateral banks that make up the membership of the International Development Finance Club (IDFC) represent USD 3.8 trillion in total assets – roughly 2.5 times the size of the total assets of multilateral development banks (Crishna Morgado and Taskin, 2019[65]).

Equipped with national, mission-driven mandates, PDBs can mobilise additional commercial capital to deliver on both the 2030 Agenda and Paris Agreement, thus contributing to both the equality and sustainability dimensions of the alignment agenda. PDBs and sub-national development banks have specific comparative advantages over internationally operating MDBs and bilateral banks that make them particularly important actors in the alignment agenda (Abramskiehn et al., 2017[66]; Griffith-Jones, Attridge and Gouett, 2020[67]; OECD, 2019[68]).

  • Proximity to local markets and embeddedness in the national context. While both international and domestic development banks often work with government institutions and local private actors, domestic banks are closer to the local financing, policy and development context in their country of operation. This proximity often translates into long-standing relationships with local partners that can allow PDBs to more readily target projects with high sustainable development impact. Additionally, sub-national governments, municipalities and local communities are easier reached by domestic institutions, in particular sub-national development banks.

  • Providing financing in local currency. PDBs provide financing in local currency – which international institutions often have difficulty in doing – and support local capital market development, including through the mobilisation of additional, local commercial capital.

  • Sectoral expertise. In many cases, PDBs have a narrow policy mandate focusing on a specific sector (e.g. agriculture, infrastructure, etc.) or type of client (e.g. SMEs). Such institutions thus benefit from long-standing and specialised expertise in managing sector- or client-specific risks. Moreover, they can focus their activities on specific market gaps (World Bank Group, 2018[69]).

As such, PDBs can also play a key role in developing the domestic financial sector by: providing concessional and non-concessional finance in local currencies, mobilising additional commercial capital, and shaping a sustainable investment environment by creating markets, reforming investment policies, removing barriers to investment and developing project pipelines.

The role of central banks in economic policy making has evolved rapidly since the 2008 financial crisis and particularly during the current pandemic. As Chapter 3 showed, central banks have seen the fastest growth rates among all financial intermediaries, increasing from 5 trillion USD to 30 USD trillion in total assets from 2002 to 2018, or annualised growth post-crisis of 8.5%. For decades, central banks were primarily concerned with upholding price stability. After engaging in successive waves of quantitative easing (QE) to pump liquidity into economies during the last financial crisis, central banks are now viewed as central economic players in their own right with a broader mandate of responsibilities (Tooze, 2020[70]). This view has been cemented by the COVID-19 crisis, in which central banks of reserve currencies in countries with deep and liquid financial markets are helping to finance massive recovery and stimulus packages by lending directly to governments. This remit is likely to expand further as central banks help to manage the enormous build-up of public debt in the aftermath of the pandemic.

Central banks are becoming more prominent in promoting green and sustainable finance. Membership of sustainable finance networks, such as the Network of Central Banks and Supervisors for Greening the Financial System (NGFS) and the Sustainable Banking Network (SBN), is growing. In addition to membership in such networks, central banks are increasingly engaging in other green activities, such as integrating climate risks into macro-prudential policy, creating guidelines for climate risk management and green lending, and imposing disclosure requirements. Central banks in many developing countries are frequently even more active in promoting green finance and sustainable development than their counterparts in advanced economies. A possible explanation for this is that in developing countries, the case for central banks to take action against climate change and other sustainability issues is stronger than in advanced economies (Dikau and Volz, 2020[71]).

Sovereign wealth funds are pools of assets owned and managed directly or indirectly by governments to achieve national objectives (OECD, 2008[72]). Countries that heavily rely on one source of income (e.g. oil revenues for Norway and the Middle East) often make use of these funds to diversify and become less reliant of one single revenue stream (WEF, 2017[73]). Total sovereign wealth fund assets under management are estimated worth around USD 7.2 trillion (WEF, 2017[73])

Sovereign wealth funds are diverse in terms of their structures, geographical distribution, and mandates. The main types are: stabilisation funds, which protect government budgets from commodity price volatility; savings or reserves funds, which preserve wealth for future generations; pension reserve or “buffer” funds, which invest excess reserves to guard against future pension liabilities; and strategic investment funds, also known as development funds, which have a double line objective of financial returns alongside developmental and policy goals. While sovereign wealth funds tend to be associated with countries that have oil and gas revenue, many non-resource rich countries have pooled national assets to make strategic investments. Some strategic investment funds are capitalised from the state budget, such as Senegal’s FONSIS, while others are capitalised from pension assets, such as the Ireland Strategic Investment Fund (ISIF). Other countries have sub-funds within a larger sovereign investment authority that target specific sectors, such as the Nigerian Infrastructure Fund (Halland, 2016[74]).

Because sovereign wealth funds are long-term in nature, fund managers in theory would deploy patient capital with an eye toward higher long-term returns, take risks that would not be possible in environments where there is pressure to quickly deliver above-market adjusted returns, and avoid “harmful” asset classes that are higher risk long-term. Many managers have developed explicit ESG strategies and have borrowed heavily from the Global Impact Investment Network’s Impact Reporting and Investment Statistics and other metrics to guide part of their portfolio allocations (UNEP, 2018[75]).

In 2017, six sovereign wealth funds with assets of more than USD 3 trillion founded the One Planet SWF Working Group to establish a climate risk mitigation framework to guide their sustainable investment strategy (IISD, 2018[76]). That framework included a commitment to incorporating climate change into the management of assets, fostering agreement among asset owners on climate-related principles, indicators, and methodologies, identifying sound climate-related investments and risks, and more. The International Forum of Sovereign Wealth Funds, comprised of 31 members with more than USD 5.5 trillion in assets, has codified sovereign wealth fund best practices on good governance, accountability, transparency, and sound investment practices through the Santiago Principles (IWG, 2008[77]). Norway’s Norges Bank Investment Management (NBIM) has worked to divest or press for changes to the business models for companies in sectors contributing to deforestation and pollution, such as plastics (Fouche, 2018[78]). The UAE’s Mubadala Fund has invested in wind and solar projects in developing countries (UNEP, 2018[75]).

Despite ad hoc progress by NBIM and others , sovereign wealth funds by and large have not invested in developing sustainable and measurable metrics for SDG investments. Many fund managers are still assessed by quarterly performance, with a focus solely on financial returns. Sovereign wealth funds investments in green finance are estimated to be less than 1% of total assets under management (UNEP, 2018[75]). Initiatives like the Santiago Principles have not yet charted a clear path toward SDG alignment.

Pension funds are a pool of assets that form an independent legal entity that pays for people’s retirements. The assets are bought using pension plan contributions, for the exclusive purpose of financing pension plan benefits. The plan/fund members have a legal or beneficial right or some other contractual claim against the assets of the pension fund. Pension funds take the form of either a special purpose entity with legal personality (such as a trust, foundation, or corporate entity) or a legally separated fund without legal personality managed by a dedicated provider (pension fund management company) or other financial institution on behalf of the plan/fund members (OECD, 2005[79]).

Pension assets amounted to USD 33 trillion at the end of 2019, with USD 32.3 trillion coming from the OECD area, and only USD 700 billion coming from non-OECD countries. The United States is by far the largest pension market, accounting for USD 18.75 trillion, while the United Kingdom (USD 3.58 trillion), Australia (USD 1.78 trillion), the Netherlands (USD 1.75 trillion), Canada (USD 1.53 trillion), and Japan (USD 1.44 trillion) follow well behind (OECD, 2019[80]). While pension assets are concentrated in a handful of developed countries, middle-income countries have seen substantial growth of pension markets. Nigeria’s pension market grew from USD 6.9 billion in 2007 to USD 24.6 billion in 2017, while China’s from USD 20.8 billion to USD 197.8 billion over the same time period (OECD, 2019[80]). Most of Africa has low pension coverage. Only 17% of older persons in sub-Saharan Africa and 37% in North Africa receive an old-age pension (Brookings Institute, 2017[81]).

Pension funds around the world have begun prioritising sustainable investment due to investor demand, evidence of financial returns, regulatory changes, and rising climate risks. The United Kingdom is implementing regulations that require pension fund trustees to factor in ESG impact, and requires those who do not incorporate ESG to justify why not. The European Union has adopted similar regulations to reduce structural and behavioural barriers to sustainable investing (Mooney, 2018[82]). Japan’s fund has plans to raise its allocation of ESG investments from 3 to 10%. Danish pension funds have formed a partnership with Denmark’s development finance institution to commit USD 600 million to finance sustainable development projects around the world, such as clean energy in Pakistan, education and hospitals in Africa, and solar energy in Ukraine. Two Dutch pension funds, APG and PGGM, have created a decision tree of sustainable development investments, which they have published online for others (IISD, 2019[83]). Despite progress, significant barriers to pension fund alignment remain, including lack of quality data on SDG investments, difficulties in mapping financial data to SDGs, wide variations in methodologies used by funds to track SDG alignment, and insufficient regulatory incentives (Smith, 2020[84]).

The United States pension funds have an outsized ability to shift pension funds toward sustainable investing given their size. A recent regulation, however, actually restricts US pension funds from considering ESG, requiring fund managers to prove they are not sacrificing financial results by investing in ESG funds. State Street Global Advisors and other US asset managers are pushing back on the ruling, defending their fiduciary responsibility to provide sound advice to clients based on evidence of high financial and non-financial returns from sustainable investments (Junior, 2020[85]).

Insurance is a form of financial intermediation in which funds are collected from policy holders and invested in financial or other assets which are held as technical reserves to meet future claims arising from the occurrence of the events specified in the insurance policies. Individual policy holders (the insured) pay regular payments (premiums) to an insurance company. These premiums are pooled with those of other policy holders so that in the event that an insurance claim is filed, the company can pay out of this pool to cover the loss. Insurers safeguard against the risk of loss for clients (OECD, 2003[86]).

Gross premiums have continued to grow in OECD countries due to increased demand for insurance products. Total gross premiums of life and non-life sectors totalled USD 5.1 trillion in 2018, a 19% increase over 2010, equivalent to 6% of world GDP. Since 2017 gross premiums grew by 2.5% and 3.5% in the life and non-life insurance sectors. Emerging markets only account for 20%of insurance premiums, despite having 80% of the population, so there is significant room for growth (III, 2020[87]). That said, demand for insurance is growing in developing countries, with the Asia-Pacific expected to account for 42%of global premiums by 2030, with China leading the way at 20% of global premiums. Latin America and eastern Europe are also on track to see coverage grow in the coming decade.

A group of insurers representing 20% of world premium volume and USD 14 trillion in assets under management have signed onto the Principles for Sustainable Insurance (PSI), an industry consortium that helps insurers integrate environmental, social, and governance issues into their business models. With its members, PSI has begun conversations on defining specific insurance SDGs, mapping insurance products to the SDGs, and connecting portfolios to the goals while measuring impact (2020[88]). SwissRe, a PSI member and the second largest insurance company, has committed to achieving net zero emissions with its products by 2050, and has developed quantitative evaluation methodologies for its SDG underwriting. The insurance industry has also been closely involved in the Task Force on Climate-related Financial Disclosures to develop underwriting and pricing tools for climate risk mitigation (Johansson, 2020[89]). The Global Federation of Insurance Associations, which includes insurers that cover nearly 90% of premiums, also forges co-operation in the industry on global governance standards.

Despite progress made, insurers are not collectively factoring ESG risks into their pricing, nor are they systematically moving from a focus on downside risk to forward looking impact. New laws requiring disclosure of climate risk in the United Kingdom, France, and the European Commission, if applied to insurance companies, could help them do so. Moreover, the success of individual insurers such as SwissRe that are covering climate, food security, and other risks in emerging markets could encourage other insurers to broaden coverage, expand product offerings, and embed ESG principles into their mandates.

Asset managers manage investments on behalf of asset owners. They manage capital not just for people, but also for institutional investors. Blackrock, for example, is an independent asset manager that accounts for its own investments and also the investment accounts of others. Asset owners are legally responsible for the assets owned (such as savings) while asset managers act as an intermediary between asset owners and the final investments. They are bound by their fiduciary duty to make investments according to the instructions provided by the institution for whom they manage assets. A significant overlap exists between the two categories. In many instances, asset owners hold stakes in the asset management firms to which they delegate responsibility of funds (e.g. bank-owned asset management firms) (Celik, 2014[90]).

Total assets under management of the 500 largest managers was USD 91.5 trillion at the end of 2018, and managers with USD 82 trillion AUM have already signed onto the Principles for Responsible Investment. ESG investments continue to grow, including a 17.8% from 2017 to 2018 (Willis Towers Watson, 2019[91]). A Morgan Stanley survey from 2018 demonstrated that there is room for further growth, finding that 84%of asset owners are pursuing or actively considering integrating ESG into their process, and 60%have done so in the past four years (Morgan Stanley, 2018[92]). Some forward-looking asset managers have moved beyond the ESG framework and “do no harm” doctrines to structuring investments to support the SDGs, using tools such as green bonds and sustainable food equities. HSBC has listed a UN SDG bond, RobecoSAM has a sustainable food equity fund, Pax Ellevate has a Global Women’s Leadership Fund, and the World Bank has issued a sustainable cities bond (17 Asset Management, 2019[93]).

Despite ad hoc progress, according to a BNP Paribas Survey of 347 asset owners and managers, only 16%of asset managers apply ESG investment strategies to at least 50%of their mutual funds, although 78%of respondents reported that ESG plays a role in their organisation. The report notes that there is no internal reporting structure in many asset management organisations, and only 23%consider ESG principles embedded into day-to-day operations of their organisation. The biggest barrier to SDG alignment, according to the managers, is simple, reliable, and standardised data (66%), namely inconsistent coverage across asset classes, conflicting ESG ratings and indices, and a lack of advanced analytical tools and technologies (BNP Paribas, 2019[94]).

Investment banks are financial intermediaries that connect buyers and sellers of financial products and transactions. They provide an array of services such as asset securitisation, mergers and acquisitions, and equity and debt placement with institutional investors. Their clients, especially at larger global banks, are primarily corporations, pension funds, governments, and hedge funds. Commercial banks comprise deposit taking, lending, and payment services (OECD, 2019[95]). Following the financial crisis of 2008, national governments undertook reforms to tighten regulations, increase the resilience of banks in the event of losses, and prevent spill overs across the global financial system, while the international community undertook parallel steps through the Basel III accords. The top 1000 banks manage over USD 147.9 trillion in assets under management in 2018, and represent 39% of global financial assets. 29 are in the European Union, 19 are in China, and 11 are in the United States (FSB, 2020[96]).

Banks have begun taking steps to become more sustainable. The Principles for Responsible Banking is a partnership between the UN and 185 banks that manage more than USD 47 trillion in total assets. It is a largely voluntary network, focused on getting each institution to agree on the principles, set internal targets, publicly report on progress, and analyse how the bank’s investments impact the people and planet. The principles are: aligning business strategy to meet the SDGs, maximising impact and publishing targets, working responsibly with clients and customers, proactive stakeholder engagement, strong governance and culture, and transparency and accountability (UNEPFI, 2020[97]).

These initiatives, combined with activist groups such as the Partnership for Carbon Accounting Financials (PCAF) and the Task Force on Climate Disclosures, have prompted banks to take action. The Bank of England decided to make climate change a systemic risk that has to be stress tested (Bank of England, 2019[98]). JP Morgan Chase created its own development finance institution. BNP Paribas, Standard Chartered, and three other European Banks with loans worth USD 2.7 trillion agreed to measure and report on their carbon assets (Chasan, 2018[99]). More than 100 financial institutions have committed to phasing out coal. This July, Morgan Stanley became the first US-based global bank to commit to disclose how its loans and investments impact climate change, joining the PCAF which now has 66 financial institutions that manage USD 5.3 trillion in assets, and encouraging with other large US investment banks to join the initiative.

Despite progress, banks continue to finance the fossil fuel industry while promoting sustainable lending, with US banks lagging compared to European and Australian banks (WRI, 2019[100]). Moreover, while the Principles for Responsible Banking are ambitious, they are also voluntary. Efforts to develop a standardised methodology for measuring SDG commitments, common reporting and disclosure standards, and SDG investment criteria have been largely ad hoc and at the discretion of each financial institution.

The stock market represents the companies that list equity shares for investors to buy and sell. Globally, it functions as a network of exchanges that allow buyers and sellers to make trades of shares of public companies. Stock exchanges are the platforms that facilitate the trading of those equity securities. The World Federation of Stock Exchanges (WFE), the industry group of 250 exchanges and clearinghouses, estimates its membership has a total market capitalisation of USD 95 trillion. The largest exchanges are the New York Stock Exchange (USD 23.21 trillion), NASDAQ (USD 11.22 trillion), Tokyo Stock Exchange (USD 5.61 trillion), Shanghai Stock Exchange (USD 5.01 trillion) and Hong Kong Stock Exchange (USD 4.4 trillion) (Statista, 2020[101]). As the platform where investors, companies, and regulators interact, stock exchanges are key to improving corporate governance and ESG disclosure.

Most regulators do not have an explicit mandate to incorporate sustainable development criteria into their exchange operations. However, not doing exposes investors to financial risk, missed listing opportunities, and instability in equity markets, such as by failing to deal with the risk of “stranded assets” for listed energy companies. Nonetheless, stock exchanges are developing sustainability mechanisms due to demand from institutional investors seeking quality ESG data and transparency, groups such as the Extractive Industries Transparency Initiative spotlighting the importance of sustainable corporate governance, and global initiatives led by the World Federation of Exchanges, which has advanced a roadmap for stock exchanges to improve sustainable development practices (World Federation of Exchanges, 2016[102]). Some larger exchanges, like NASDAQ, now publish ESG reporting guides for listing companies (NASDAQ, 2019[103]).

The Sustainable Stock Exchange Initiative is a partnership of nearly 102 stock exchanges representing over 70%of listed equity markets, with a market cap of USD 88.2 trillion. It tracks the initiatives by Sustainable Stock Exchange Initiative members, such as reporting, guidance, presence of an ESG index, provision of ESG bonds, and mandatory ESG listing requirements. It includes several large exchanges such as the Nasdaq and the Hong Kong Exchanges and Clearing Limited. However, not all exchanges adhere to the same degree of compliance. Fewer than half of stock exchanges have issued sustainability reports or are covered by a sustainability-related indices, while only a quarter require ESG reporting for listed companies (SSE, 2020[104]).

The top nine exchanges constitute USD 63 trillion of the USD 95 trillion in total market capitalisation for global stock exchanges and they are all from the United States, European Union, and China. Alignment to address the SDGs and make stock exchanges more sustainable will need to be led by those institutions, given the concentration of market value in a handful of exchanges.

Credit rating agencies play a central role in guiding investor decisions. They “collect information about bond issuers and the bonds that they have issued, and […] publish assessments of the prospects for repayment of specific bond issuances” (White, 2013[105]). These assessments, the credit ratings, help lenders gather information about the borrower before making a loan and monitor the borrower once the loan has been made. While, in principle, every lender with sufficient resources could gather such information, there are two additional roles credit rating agencies play in the financial system: they provide a means of comparison and provide market participants with a common standard to refer to credit risk (OECD, 2010[106]). To avoid a plethora of standards, the credit rating agency market is a natural oligopoly, with three companies - Standard & Poor’s, Moody’s and Fitch – having a market share of more than 90% in the European Union (ESMA, 2019[107]).

The main lever of rating agencies to facilitate sustainable investment is the inclusion of ESG criteria into their credit ratings. This can have the effect of lowering borrowing costs for bond issuers performing well in terms of sustainability. As of now, credit ratings only include those ESG criteria that are material for a bond issuer’s ability to repay debt (FT, 2019[108]). Transparency on how exactly this is done is limited. Increasing the weight of ESG criteria in credit ratings and improving transparency by disclosure requirements such as by the ESMA (2019[109]) will therefore be crucial. Two of the three largest credit rating agencies also go beyond their core business of credit ratings by recently starting to offer ESG ratings measuring the exposure of an investment to ESG risks and its ability to manage these risks. To ensure that ESG ratings do not harm investor trust in sustainable investment, progress needs to be made on the transparency of ESG rating methodology thus helping to explain significantly different ESG ratings of the same company (World Economic Forum, 2019[110]).

Particularly in times of economic turmoil, credit rating agencies are a key factor determining whether capital flows to developed or developing economies. Credit rating policy tends to be pro-cyclical: “Ratings tend to be sticky, lagging markets, and then to overreact when they do change” (Elkhoury, 2008[111]). Both can imply an advantage for developed over developing economies. First, developed economies usually have better credit ratings than developing economies, and therefore profit more if ratings tend to be “sticky”. Second, in times of economic turmoil, developing economies suffer most even before credit ratings change, as investors seek a flight to safety. If credit rating agencies then “overreact” (see e.g. Ferri et al. (1999[112]) for the case of the Asian financial crisis, 1997), this again disproportionately harms borrowing conditions and capital market access of developing economies. Following COVID-19, credit rating agencies have again been active downgrading emerging market sovereigns (Fitch Ratings, 2020[113]), partly punishing participation in the DSSI (White & Case, 2020[114]). More transparency by credit ratings agencies in rating changes can help investors assess whether the rating change is justified. Developing economies can regulate the timing of credit ratings and need to develop more capacity engaging with credit rating agencies (Mutize, 2020[115]).

Philanthropy refers to the use private initiatives and resources for the public good. The term “private philanthropic flows for development” refers to transactions from the private sector that promote economic development and welfare of developing countries as their main objective, and which originate from foundations’ own sources (notably endowment, donations from companies and individuals, as well as income from royalties, investments and lotteries) (OECD, 2018[118]).

Philanthropies are increasingly important actors in sustainable development and thus for “SDG alignment” – the redirection of various sources of global finance towards the sustainable development of countries that need it most. Philanthropic flows are still modest in volume compared to official development assistance (ODA) but in key sectors such as health and reproductive health, private foundations are increasingly significant players. They provided USD 23.9 billion for development over 2013-15, i.e. almost USD 8 billion per year on average. While philanthropic giving remains relatively modest compared to ODA (5% of the three-year total) and financing for development more broadly, foundations have already become major partners in some specific areas. For example, in the health and reproductive health sectors in 2013-15, foundations’ support was the third-largest source of financing for developing countries, following that of the United States and the Global Fund to Fight AIDS, Tuberculosis and Malaria (OECD, 2018[118]).

Over a third (37%) of private philanthropy for development was targeted towards SDG 3 on “Good Health and Well-Being” in 2018, followed by SDG 8 (25%) on “Decent Work and Economic Growth”, SDG 5 on “Gender Equality” (23%) and towards SDG 11 on “Sustainable Cities and Communities” (23%). In terms of sectoral distribution, foundations concentrate their financial contributions to a limited number of socio-economic sectors. In 2018, a majority of these funds targeted health and population (USD 3.2 billion; 44% of private development finance), followed by agriculture (11%), support to government and civil society (7%) and education (5%). In contrast, little private philanthropy was allocated for example towards physical infrastructure sectors (e.g. transport and storage, energy and communication) or production sectors beyond agriculture (e.g. industry, mining and construction) (OECD, 2020[119]).


← 1. The Team Europe package combines resources from existing programmes (approximately EUR 11 billion) with support from financial institutions such as the European Investment Bank and the European Bank for Reconstruction and Development (EUR 5 billion) and from EU member states (EUR 4 billion).

← 2. The OECD (2020[120]) Blended Finance Principles are available at https://www.oecd.org/dac/financing-sustainable-development/blended-finance-principles/. The OECD is currently working on a series of guidance notes to advise on the implementation of each of the five principles: 1) anchor blended finance use to a development rationale, 2) design blended finance to increase the mobilisation of commercial finance, 3) tailor blended finance to local context, 4) focus on effective partnering for blended finance, and 5) monitor blended finance for transparency and results.

← 3. http://www.oecd.org/dac/transition-finance-toolkit/

← 4. https://www.oecd.org/development/mdcr/

← 5. See, for example, https://www.oecd.org/tax/options-for-low-income-countries-effective-and-efficient-use-of-tax-incentives-for-investment.pdf

← 6. https://www.oecd.org/tax/tax-global/transparency-and-governance-principles.pdf

← 7. The OECD is supporting these efforts through its Sustainable Infrastructure Policy Initiative that aims to pilot the development of instruments, analysis and data related to sustainable infrastructure. See OECD (2019[122]) at http://www.oecd.org/finance/Sustainable-Infrastructure-Policy-Initiative.pdf.

← 8. See the GPEDC (2020[123]) webpage for more information at https://www.effectivecooperation.org/landing-page/about-partnership.

← 9. “Lex in depth: the $900bn cost of ‘stranded energy assets’”, Financial Times, February 4, 2020, https://www.ft.com/content/95efca74-4299-11ea-a43a-c4b328d9061c.

← 10. This is the estimate for assets under management in 2018 that the Global Sustainable Investment Alliance defines as sustainable.

← 11. These initiatives include the UN Global Compact; UN Principles for Responsible Investing; the EU Taxonomy for sustainable finance; the Global Impact Investing Network; Global Investors for Sustainable Development Alliance;; the Global Reporting Initiative; Global Sustainable Investment Alliance; Impact Management Project; UN Environment Programme Finance Initiative Principles for Positive Impact Finance; the Sustainability Accounting Standards Board; the Taskforce on Climate-related Financial Disclosures; UN Sustainable Stock Exchange Initiative; and the World Benchmarking Alliance..

← 12. As noted, the OECD and UNDP received the G7 mandate during the French Presidency to “take stock of existing initiatives in view of defining a robust common framework for SDG-compatible finance with all relevant stakeholders”. See http://www.oecd.org/dac/financing-sustainable-development/development-finance-standards/G7%20Financing%20for%20Development%20Declaration.pdf.

← 13. Additionality refers to the extent to which a new input (action or item) adds to the existing inputs (instead of replacing any of them) and results in a greater aggregate. See the Impact Management Project glossary at https://impactmanagementproject.com/glossary/#i.

← 14. Net impact refers to positive and negative and primary and secondary long-term effects produced by an intervention, directly or indirectly or intended or unintended. See the Impact Management Project glossary at https://impactmanagementproject.com/glossary/#i.

← 15. A list of the organisations in the IMP Structured Network is available on the website of the Impact Management Project (n.d.[124]) at https://impactmanagementproject.com/impact-management/structured-network/.

← 16. The five are the Carbon Disclosure Project), the Climate Disclosure Standards Board), Global Reporting Initiative, International Integrated Reporting Council and the Sustainability Accounting Standards Board.

← 17. These include alignment with the OECD Guidelines for Multinational Enterprises and the UN Guiding Principles on Business and Human Rights, including the principles and rights set out in the eight fundamental conventions identified in the Declaration of the International Labour Organization on Fundamental Principles and Rights at Work and the International Bill of Human Rights.

← 18. The organisations are the OECD, European Bank for Reconstruction and Development, European Investment Bank, the International Organization of Securities Commissions, the Network for Greening the Financial System and the UN Environment Programme Finance Initiative.

← 19. China has three main frameworks for green finance definitions: the “Guiding Catalogue for the Green Industry, originally established in 2016 and updated in 2019; the Green Bond Endorsed Project Catalogue, often referred to as the Chinese green bond taxonomy; and green credit guidelines, coupled with key performance indicators for green credit and green credit statistics forms.

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