Innovative Financing for the Sustainable Development Goals - International Banker
By Armida Salsiah Alisjahbana , Executive Secretary, United Nations Economic and Social Commission for Asia and the Pacific
The Sustainable Development Goals (SDGs) have increasingly transformed how the private sector operates to achieve inclusive and sustainable development. Corporations are beginning to realign their priorities with the SDGs in the face of increasing pressure from consumers, investors and employees. Innovative business models such as social enterprises and inclusive businesses are emerging, which purposefully aim to address social and environmental challenges as well as provide products and services to those at the base of the economic pyramid.
The SDG-financing challenge
In order to scale up their impact, these enterprises need additional investment. Prior to the COVID-19 pandemic, it was estimated that developing countries in the Asia-Pacific region would need an additional annual investment of $1.5 trillion to achieve the SDGs by 2030.1 In a post-pandemic world, this figure is likely to be significantly higher, and private-sector investors are key to bridging this gap. If even a fraction of the $50 trillion in assets managed by the financial sector in the Asia-Pacific region were channelled towards enterprises that contribute to the SDGs, their achievement by 2030 would be within reach.2
Innovative financing solutions have the potential to meet the challenge
Addressing the SDG-financing challenge—and building back better from the pandemic with inclusivity, resilience and sustainability—will require innovation in how we finance and invest. While there is no single agreed definition for innovative financing, in the context of sustainable development, it can broadly be described as “ anything different from standard investing or financing practice that has the potential to deliver significant socio-economic or environmental impact” .3
This broad definition encompasses the multitude of ideas that have been tested in the field. As an example, the concept of investing for positive social and environmental impact alongside economic return is different from the established approach of investing purely for profit. Fintech (financial technology) is challenging the norms of how we have traditionally financed and invested, while “gender lens” investing is emerging as a new approach to complement environmental, social and governance (ESG) investing.
With these examples in mind, to meet the SDG-financing challenge, we need to:
- shift our mindset from investing for profit to investing for impact;
- exploit the opportunities at the intersection of finance and technology; and
- invest in women to ensure that we “leave no one behind”.
The emerging impact-investing movement in the Asia-Pacific region
One such innovation is impact investing, which can be defined as an investment made into a company, organization or fund with the intention of having a social and/or environmental impact in addition to generating a financial return. 4 This concept may be an evolution in thought—from investing purely for financial return—but could also be a revolution in impact for the SDGs.
In 2018, impact investments worldwide totalled $502 billion. Of this, $170 billion was deployed in Asia.5 Government policy has played a key role in spearheading this movement in the region. In 2017, for the very first time, the United Nations member states committed to supporting the development of enabling environments for impact investing as outlined in a resolution adopted by the United Nations Economic and Social Commission for Asia and the Pacific (ESCAP).6 Building on this resolution, governments in Asia and the Pacific have since implemented some innovative policies to catalyse impact investing.
The role of government in creating an enabling environment for impact investing
Governments can create enabling environments for impact investing by assuming the role of market facilitators, regulators and participants (see figure 1).
Figure 1: The roles of government in enabling impact investing
Source: E SCAP, based on the framework developed in partnership with the Global Steering Group for Impact Investment (GSG).
As market facilitators, governments can establish governance bodies, strategies and platforms to support the growth of impact-investing markets. In Bangladesh, ESCAP supported the establishment of the National Advisory Board for Impact Investment that sets out the strategic direction for developing impact investment in the country. Meanwhile, the Government of India is in the process of establishing a Social Stock Exchange , a potentially groundbreaking initiative that aims to create an electronic platform to link impact investors to social enterprises looking to raise capital.7
Governments can regulate such markets by introducing regulations and impact requirements to incentivize more impactful investments. Over the past few years, ESCAP has supported the Government of Thailand to grow the social-enterprise and impact-investing ecosystems in the country. In 2016, the Royal Decree on Tax Exemption provided tax benefits to social enterprises as well as to investors in such enterprises. Firms that invest in or donate to social enterprises will now be allowed a 100-percent deduction on corporate income taxes.8 Some governments in the region have codes in place to support the measurement of impact investment, such as the Cambodian Sustainable Finance Initiative (CSFI), which includes mandated safeguards and standards for environmental and social impact created by private-sector activity.9
Lastly, governments can participate in markets themselves by providing access to capital to invest alongside private investors. There are few government-backed impact investment funds, but one such example that ESCAP has been supporting is Startup Bangladesh Limited,10 the flagship and only venture-capital fund sponsored by the Government of Bangladesh. The fund has integrated inclusive and sustainable dimensions by promoting under-represented tech groups and investing in startups that can support the achievement of the SDGs. The fund provides investment in the form of equity, convertible debt and grants in pre-seed, seed and growth-stage startups. It also invests through co-investments, as a “fund-of-funds”, and as an asset manager.
Social enterprises often find it challenging to access conventional bank loans as they are unable to provide the kind of collateral required. Credit-guarantee programmes have been implemented to address this issue, allowing social enterprises access to loans under preferential conditions, with the funders providing guarantees to cover the default risk of the borrowers. For example, the Korea Inclusive Finance Agency provides guarantees for loans worth up to $7 million for firms working on social issues.11
Innovations at the intersection of technology and finance
A defining feature of the pandemic has been the accelerated digital transformation that has permeated every aspect of our lives. This has created the conditions for an explosion of innovative fintech startups to emerge.
In Bangladesh, ESCAP supports iFarmer12 to create an app to establish a profit-sharing model between urban investors and rural farm entrepreneurs. In Nepal, we support Aeloi Technologies13 to make impact funding accountable and accessible using digital tokens, providing an assured digital link between investors and carbon-offset providers. We are working with Khmum Technology14 in Cambodia to support MSMEs (micro, small and medium-sized enterprises) in building their financial-statement histories, which they can use as collateral to borrow and repay loans. These startups provide innovative solutions to increase access to finance and investment to allow businesses to continue to operate during the pandemic.
Our fintech investments have focused on markets that may be perceived as high risk. However, to ensure that investment is inclusive and to “leave no country behind”, it will be critical to invest in what the United Nations terms least-developed countries and countries in special situations. In addition, with inclusivity in mind, our investments have a specific focus on supporting women.
Investing in women is an untapped dividend.
Advancing women’s equality in the Asia-Pacific region could add as much as $4.5 trillion—a 12-percent increase—to the region’s gross domestic product (GDP) annually by 2025.15 With the economic slump that countries now face, none can afford to continue to miss out on this largely untapped dividend.
However, the effects of the pandemic on women and women entrepreneurs across the region have been disproportionate to those of their male counterparts. Women have continued to take on even more of the burden of unpaid care work and homeschooling. Women entrepreneurs, who predominately make up the informal sector, face a range of financial and digital-literacy constraints affecting business continuity.
That is why ESCAP and the Government of Canada initiated the Catalyzing Women’s Entrepreneurship 16 programme to address a fundamental barrier that is hindering the growth of women-led businesses, lack of access to finance. The programme works to unlock private capital for women-led enterprises. This capital—whether loans, equity or blended finance—is used to provide targeted support to women entrepreneurs. The programme has created partnerships to support a range of gender-smart investment mechanisms, including a women-focused impact-investment fund17 and the world’s first Women’s Livelihood Bond (WLB) Series.18 To date, the programme has enabled more than 7,000 women to access formal financial services and has unlocked more than $50 million in private capital for women entrepreneurs.
More needs to be done to harness the potential of innovative financing for the SDGs.
First, governments in the Asia-Pacific region have demonstrated global leadership by implementing innovative policies to build ecosystems for impact investing, even though policymaking is still in its infancy. Governments should, therefore, prioritize the evaluation of the impact of such pioneering initiatives to determine what works and, of equal importance, what does not and in which context. Continued policy innovation is also still needed to build this emerging field.
Second, as the world becomes digital by default in the post-pandemic reality, governments and investors must continue to back innovations at the intersection of technology and finance. Continued investment in the digital economy will be critical to create a vibrant fintech ecosystem for more inclusive finance and investment.
And finally, building back better means ensuring that women entrepreneurs not only survive this crisis but thrive coming out of it. This will require scaling up investments directed to women-run businesses exponentially.
ESCAP has partnered with governments and private-sector investors in the region to harness the potential of innovative financing to meet the ambitions of the SDGs and build back better with inclusivity, resilience and sustainability. We have learnt many lessons during this journey but also have models for success. As we scale up our work on this agenda, we are open to new partnerships with governments and private-sector investors.
Only together can we scale up the innovations so urgently required to make investment and finance work, not only for economies but for society and the environment.
ABOUT THE AUTHOR
Armida Salsiah Alisjahbana is the Executive Secretary of the United Nations Economic and Social Commission for Asia and the Pacific (ESCAP). Prior to joining ESCAP in 2018, Ms. Alisjahbana was Professor of Economics at Universitas Padjadjaran in Bandung, Indonesia, Minister of National Development Planning and Head of the National Development Planning Agency (BAPPENAS) in Indonesia.
1 UN ESCAP: “ Economic and Social Survey of Asia and the Pacific 2019 .” 2 UN ESCAP and Global Steering Group for Impact Investment (GSG): “ Towards an Enabling Policy Environment for Impact Investment in Asia and the Pacific ,” December 2020. 3 UN ESCAP: “ Innovative Financing for Development in Asia and the Pacific ,” 2017. 4 Monitor Institute: “Investing for Social and Environmental Impact: A Design for Catalyzing an Emerging Industry,” 2019. 5 Global Impact Investing Network (GIIN): “ Sizing the Impact Investing Market ,” April 1, 2019. 6 UN ESCAP: “ Regional Road Map for Implementing the 2030 Agenda for Sustainable Development in Asia and the Pacific ,” 2017.) 7 Securities and Exchange Board of India (SEBI): “ SEBI constitutes working group on ‘Social Stock Exchanges’ (SSE) ,” September 19, 2019. Securities and Exchange Board of India (SEBI), Committee Reports: “ Report of the working group on Social Stock Exchange ,” June 1, 2020. Securities and Exchange Board of India (SEBI), Reports for Public Comments SEBI: “ Technical Group Report on Social Stock Exchange ,” May 6, 2021. 8 Bangkok Post: “ Draft bill on social firms approved ,” July 11, 2018. 9 Association of Banks in Cambodia (ABC): Sustainable Finance Initiative (CSFI) . 10 IDEA ( Innovation Design and Entrepreneurship Academy ) of Bangladesh. 11 The Korea Bizwire: “ Government to Boost Policy Support for Social Impact Investments ,” April 4, 2018. 12 iFarmer: Democratizing Agriculture Financing and Supply Chain . 13 Aeloi Technologies: Last-Mile Impact: Loan insight software that powers affordable finance for micro-entrepreneurs . 14 Khmum Technology: Versita . 15 UN ESCAP: “ Why investing in women is key to achieving the Sustainable Development Goals ,” June 1, 2021. 16 UN ESCAP: Projects: Catalyzing Women’s Entrepreneurship . 17 UN ESCAP: “ United Nations ESCAP partners with SEAF to launch the Women’s Economic Empowerment Fund ,” January 14, 2021. 18 UN ESCAP: “ UN Supports IIX in Accelerating its Women’s Livelihood Bond Series ,” December 7, 2020.