Our global and complex economy does many things well, but achieving equitable and sustainable outcomes, or in other words ‘sustainable development’, has not been one of its strengths. From climate change to the need for inclusive, sustainable societies, the absence of even the smallest signals leads to investments that degrade the natural systems on which our economy vitally depends.
Doing the same thing over and over and expecting a different result holds little promise if we are to achieve the ‘future we want’. We simply cannot rely on ‘business-as-usual’ to build sustainable development.
We need, instead, a very much ‘business unusual’ approach to find and invest the estimated US$90 trillion required between now and 2030 for critical infrastructure in countries that are modernizing their economies.
We will also need tens of trillions more annually to invest in people, and the millions of small and medium sized business that represent the world`s primary source of employment.
To reach this goal, we must bridge a very wide gap. The UN Commission for Trade and Developments estimates the annual financing gap for developing countries is at least US $2.5 trillion.
While public finance is scarce everywhere, particularly after the recent financial and associated economic crisis, private capital is abundant. The stark truth, however, is that only 1 per cent of institutional investment is directed to infrastructure development, and only a small fraction of this fits the criteria of sustainable development.
In a year such as 2015, when securing financing for sustainable development, including climate related actions, is such a critical theme and ambition, the innovation landscape identified by UNEP’s Inquiry into the Design of a Sustainable Financial System and the practical policy solutions it has highlighted and is now codifying for broader use, shows clearly that the opportunity exists to go beyond identifying ‘additional resources’ for sustainable development, to evolving the contours of an international financial system fit for the needs of an inclusive, sustainable 21st century economy.
The Inquiry, in a word, is a new global initiative exploring what will potentially be one for the most important changes in our international economic landscape: the reshaping of the global financial system such that it plays a productive and scaled up role in financing sustainable development.
Governments met in Addis to commit to implementing a global framework to deliver development finance and assistance. The framework is impressive in its breadth, highlighting many innovative ways to better use public and private finance, including the growing funds from domestic savings in developing countries that will eventually overtake international commercial and concessionary financial flows.
And while the Addis Ababa Agenda is a welcome and promising development, for it to be most effective an integrated and systemic approach must be put in place to expedite the type of implementation that does much more than ‘tweak’ around the edges.
Traditional, financial institutions, for example, remain reluctant to finance the transition to solar energy, despite falling costs, particularly where financiers perceive risks from poorly designed policy risks and markets to serve the poor.
This investment ‘fear cycle’ can be broken through a combination of previously unrelated innovations.
The first is the distributed advantage of solar technology, which allows for smaller and less capital-intensive systems that can be owned by customers, communities and small enterprises. They can be installed on the rooftops of households or even Walmarts. For households in developing countries, add to this new mobile technology, and customers can make low cost, small-scale payments from virtually any place on the planet.
This allows poorer customers to pay as they go, eliminating the need for credit checks and costly contracts. Finally, on-line technology facilitates crowd-sourcing and peer-to-peer financing that can dramatically open financial markets without the need for banks and other intermediating financial institutions.
Each one of these innovations is interesting, but when we “join the dots” we see a new reality emerging, along with the potential for very large-scale deployment of clean energy worth hundreds of billions of dollars.
Energy, of course, is just one avenue, but it serves as a proxy for other investments that encourage new businesses, jobs and local economies, as well as delivering the electricity that can improve education, health, and the local environment. These impacts can then deliver a ‘virtuous cycle’ of new business and job opportunities.
Finance itself further illustrates the potential for integrating systemic change. Developing countries, in particular, recognize that finance is more than a normal sector. Rather, finance is a system that can serve national development needs by investing in an inclusive sustainable economy. Through this lens, central banks and financial regulators do more than their counterparts in developed countries, which confine their focus to financial and monetary stability and market integrity.
Bangladesh`s central bank, for example, provides refinancing to banks for lending to the rural economy and green projects, while Indonesia`s financial services authority has adopted a “Roadmap for Sustainable Finance”.
Kenya`s central bank has led the way in encouraging “cell-based” financial services that has delivered an extraordinary growth in financial inclusion. In each of these cases, and many others, the point is not that these actions are being taken as an extra or add-on to `business as usual`.
Such actions can be a route to developing a healthy financial system that is positioned correctly within a broader economic and social policy framework that in turn underpins efforts to achieve national priorities.
Mobilizing finance for sustainable development is therefore not just a matter of getting more money from A to B.
Directing finance at scale requires us to get smart – triggering innovations that through their integrating effects create a systemic change in the relationship between finance and sustainable development outcomes.
“How do we create sustainable development” is quite literally the trillion-dollar question.
How we direct our investments in the next decades may very well determine the fate of the estimated 9 billion people who will need food, energy, clean air, clean water, but also healthy soils by mid-century.