It gives me a great pleasure to close the Building Bridges Summit on behalf of the family of the United Nations.
GENEVA, Switzerland, (ITC News) – Carl Jung famously said, ‘Everything that irritates us about others can lead us to an understanding of ourselves.”
This may not appear to be the most positive quote to end a day about building bridges between the United Nations and the finance community here in Geneva, but actually at the core of Jung’s words is a call to partnership. A recognition that engagement with ‘the other’ can lead to an outcome that is better for all.
Today (October 10) we have laid the first foundation stone on this partnership to 2030.
We are at the start of a unique collaboration that can show that “profit with a purpose” truly exists. And the basis of this has to be the shared achievement of the United Nations Sustainable Development Goals. Because, frankly, it is clear these goals will not be reached if we do not mobilise more capital.
Official Development Assistance in 2018 amounted to $149 billion globally; nowhere near the scale needed. Private capital must be attracted to finance projects in emerging markets that are aligned to the Sustainable Development Goals (SDGs).
Let’s put the SDG funding gap in perspective: it is equal to three percent of global GDP; it is equal to 14 percent of global annual savings; it is equal to one percent of global capital markets
While not every goal, target or indicator in Agenda 2030 offers fertile ground for investors, many do. There is money to be made. Not aid. Not charity. Not philanthropy – but investment that can bring a return, could help us reach more than half of the SDG’s.
We live in a world where there is liquidity on the one hand, while an unmet need exists on the other. Our challenge is that funds do not flow where they are most needed – at the micro-level.
We speak of millions. Billions. Trillions. All of us tend to look at the economy from a ‘macro’ level. But the real economy, where it really matters, is at the ‘micro’ level.
The question for all of us is: how can we allocate capital so that it reaches the “base of the pyramid”? Why is it so difficult to mobilize capital from private investors for companies or projects in developing countries? There are many reasons.
Developing countries are too risky, investors say. The median of ODA-eligible countries have a sovereign rating of “B+”. This means that the borrowers in their countries would have a minimum rating of B-. This puts them in the bracket of speculative-grade with a very high probability of default that is 12 times higher of investment-grade borrowers. So this is far too high for the majority of commercial investors. Much work is needed to improve developing countries’ overall rating otherwise borrowers will not benefit.
Investment opportunities may not provide the type of returns that investors target. Despite financial theory and common belief, equity investors generally do not earn higher returns investing in emerging markets. If risk-adjusted returns are less attractive relative to other markets, investors will not allocate capital to emerging and frontier markets. Someone has to take such risk on board, otherwise capital will never flow to borrowers that need it.
Investors would like to see faster returns than is often possible. Liquidity and exit from investments in developing countries are among the main concerns listed by international investors before considering investing in them.
There is a big information gap for them as well as a lack of local networks they can use. Lack of data about developing countries, particularly in the investment space, increases the perceived risks from investors.
Investment opportunities are too small, not worth the risk. Business distribution shows a huge number of micro-businesses and a small number of large one. Investors do not consistently target the smaller ones.
This describes some of the barriers: financing on one hand; unmet need on the other. How can we break down the barriers and build the bridge we need?
I can think at least three factors that make today’s Building Bridges Summit truly timely.
First, the public sector has committed more finance to catalyse much needed private capital to achieving the SDGs in the Addis Ababa Action Agenda on Financing for Development of 2015. With blended finance, public governments catalysed more than $140 billion in private capital for SDG-aligned projects in developing countries.
Second, the impact investing revolution has created momentum behind mobilizing private capital for the SDGs. The impact investing market is now worth $502 billion – growing five times in the last three years alone. If the development community does not get organized, these funds will not flow to developing countries, but developed countries. So we must act now.
Third, new technologies have, for the first time, created the possibility of financial institutions reaching small borrowers in remote areas at a fraction of the cost, and of analysing risk without collateral requirements. This opens the door to lower-cost finance and more accessible terms.
These factors make our meeting today auspicious, but there are several things we will need to do to take full advantage of these opportunities.
We will need to include non-financial parameters into financing decisions and link them to the SDG goals. This is the “profit with a purpose” I spoke about earlier.
For instance, Goal 5 on gender equality, Goal 8 on decent work and entrepreneurship, Goal 11 on sustainable cities and Goal 12 on responsible production can all provide ground for social or environmental metrics. Banks are already doing something like this by starting to provide what they call “positive incentive financing” to companies, by offering lower interest rates when companies’ investments create positive social or environmental value – and they have to prove this via regular KPI reporting
In fact demand-side pressure is changing – banks’ customers require their money to be spent on sustainable projects. This is a market opportunity for banks which is moving from niche to mainstream
We will need to move beyond purely financial valuation of investments and begin mainstreaming sustainability valuations. We can use a “triple-bottom-line” approach and many companies already provide extensive sustainability reports, but we must further institutionalize them and make them comparable, for example with climate-related financial disclosures. We must also ensure that stock exchanges incorporate this reporting.
We must use blended public/private finance instruments – with the expectation that investments reach the “base of the pyramid”. And let’s extend the use of public finance to de-risk investments. Let us also increase the focus on ensuring that the resulting investments do not cross-finance the investors, but that they unlock projects, which would not have happened otherwise.
We must better connect investors with investment opportunities. This is where the United Nations can help by bringing its pipeline of initiatives and projects closer to the investment community.
We must pay particular attention to financing for digital and innovative entrepreneurship. At the end of the day, if we are to leave no one behind, we must ensure the digital revolution benefits all corners of our planet. For that, we can funnel support through the new UN Innovation Labs and local ecosystems that are being created and supported around the world.
In a nutshell, finance does exist for a purpose – and the original purpose is to finance the real economy, real enterprises, a real ecological transition.
Over a decade ago the United Nations was instrumental in the setting up of the first-ever impact investment fund here in Switzerland. Today Switzerland can help finance the United Nations Sustainable Development Goals and become the world hub for private sector development finance, as you have indicated in the declaration you have adopted for this summit.
Thank you for your attention and looking forward to the next edition of this summit.