Contemporary Issues in Sustainable Finance. Creating an Efficient Market through Innovative Polices and Instruments

The 2030 Agenda for Sustainable Development aspires at a better future for all, thereby calling for an innovative and sophisticated financing strat- egy, with the dual challenge of mobilizing an unprecedented volume of resources, and leaving no one behind. Public action alone is not sufficient to address the scale and complexity of today’s global challenges. The Addis Ababa Action Agenda, agreed by United Nations in 2015, calls on gov- ernments, businesses, foundations and individuals to act in a more coordi- nated manner, in the pursuit of a new model for economic growth that enhances human well-being and preserves the environment. In response to international commitments, public actors are increas- ingly turning to the private sector as a potential ally in the pursuit of sus- tainable development, environment protection and poverty reduction. At the same time, mainstream investors and asset managers have become more attentive to the social, environmental and governance consequences of their operations. Market estimates vary greatly, depending on the defi- nitions employed, but the trend is clearly upward, as investors progres- sively incorporate extra-financial considerations and decide to actively pursue positive impact strategies. Independently of the labelling applied, public and private investors are turning to green, blended, social finance as a way to access new growth markets and respond to public expectations. While blending is driven by the need to increase the total funding available for the Sustainable Development Goals, green and impact finance aim to foster better ways to achieve these goals, through innovative approaches to social and environ- mental challenges. In practice, individual asset managers may adopt very diverse approaches to guide their portfolio allocation, ranging from risk mitigation (exclusionary screening) to impact creation (active ownership). As institutional investors engage further and deeper in sustainable devel- opment, their skill set, risk/returns assessment and incentive structures will need to evolve accordingly. While investors agree that financial and sustainable development returns can go hand in hand, the challenge lies in defining impact. Public and private organizations continue to measure different elements by different yardsticks, owing to the absence of common culture and language. The terms evaluation, monitoring, results and impact measurement are used interchangeably and without clear definitions. Complex governance patterns and multiple layers of intermediation deeply affect our collective capacity to understand the actual contribution of joint public and private investments to the global agenda. As the deliv- ery chain grows longer, it becomes more difficult for governments to exer- cise their steering and oversight function. The use of concessionality represents commercially sensitive information, which is often advanced as ground for non-disclosure. Evidence gathered by the Organisation for Economic Co-operation and Development (OECD) shows that most impact investors seek market rate returns, while the capacity to track social outcomes is uneven at best.1 Too often, public initiatives fostering impact investment also do not explicitly require an independent assessment of results actually achieved. The accountability lines become even more blurred when funding is pooled in collective investment vehicles. The 2018 OECD Survey on Blended Finance Funds and Facilities2 shed new light on their low propen- sity to track and publicly disseminate the results actually achieved through their operations. Almost two-thirds of the surveyed vehicles do not sys- tematically update the social or environmental performance indicators at the end of the investment and a third of them have no dedicated internal monitoring and evaluation function. For a non-negligible amount (12%), an evaluation has never been performed, nor is it planned in the future. When it is, only one in four of the ensuing reports is made public. The growing awareness of the need for private sector involvement has only intensified the urgency to enhance their degree of public account- ability. But the measurement of investment outcomes should not be con- fused with, and cannot replace, the ex post evaluation of public policies supporting those investments. Impact investors are mostly concerned by the need to estimate or measure outcomes for immediate investment decision or external reporting requirements, whereas public authorities need to ensure long-term policy learning based on actual, independently observed results. In order to harness the full potential of sustainable development finance, we cannot shy away from “the impact imperative”: a shared understanding of how we define and assess the results of our collective efforts towards sustainable development. In this rapidly moving context, the impact imperative should embrace all resources deployed in pursuit of sustainable development, independently of their labelling. In their capacity as policy makers, market regulators and development finance providers, public authorities have the ultimate responsibility to counter the danger of “impact washing”, by establishing and promoting integrity standards. We are at crossroads in terms of how governments and society as a whole are responding to the Sustainable Development Goals. Marginal adjustments will not be sufficient to deliver the billions of financing to the trillions of people that are in need. This shift in paradigm can only happen, if we redefine the way financial and economic markets function to pro-mote a more equitable and sustainable allocation of resources. All sustainable development finance actors share the responsibility for delivering the 2030 Agenda, and this implies converging towards a united vision on what we mean and how we assess progress towards sustainable development.