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World Investment Report 2020

Overview

Chapter 5 – Investing in the SDGs

SDG-investment trends in developing countries

UNCTAD first estimated investment requirements for the SDGs in WIR14, identifying 10 relevant sectors (encompassing all 17 SDGs) and estimating an annual investment gap of in developing countries of $2.5 trillion. Progress on investment in the SDGs in developing countries – from all sources(domestic and international, public and private) – is now evident across six out of ten SDG sectors, including infrastructure, climate change mitigation, food and agriculture, health, telecommunications, and ecosystems and biodiversity (table 4). However, even in sectors where investment shows signs of growth, the order of magnitude is not yet in the range that would make a significant dent in estimated investment gaps. In addition, investment in important sectors, including education and water and sanitation, appears stagnant at best.

Of the various sources of investment, international private investment in SDG sectors is not yet landing on the ground in developing countries. FDI, and in particular greenfield investment and project finance, have been lacklustre in relevant sectors, partly reflecting stagnant global investment trends.

Capital spending announcements for greenfield FDI projects (in eight SDG sectors for which data is available) amounted to $134 billion annually on average during 2015–2019, marking an increase of 18 per cent from 2010–2014. However, this increase was due largely to heightened investment levels in the first two years of the SDG framework (2015 and 2016). In the last three years, it fell back to pre-SDG levels. One positive sign was the number of renewable energy projects, which almost doubled over the period.

Project finance in developing countries in SDG sectors – mostly power, infrastructure, telecommunication, and water and sanitation – announced in 2015–2019 amounted to an annual average of $418 billion, down 32 per cent from the pre-SDG period (2010–2014). The number of projects increased by more than 40 per cent, because of many relatively low-cost renewable energy projects. The value of financed projects targeting LDCs remained negligible (about $8 billion, or 6 per cent of the total in all developing economies) and failed to grow over the last five-year period.

The COVID-19 crisis will make the task of channelling private investment to SDG relevant sectors in developing countries even more daunting and risks upending scant progress made in the last five years.

SDG-financing trends in global capital markets

Sustainability funds target ESG or SDG-related themes or sectors, such as clean energy, clean technology or sustainable agriculture and food security. They have grown rapidly in number, variety, and size. UNCTAD estimates that funds dedicated to investment in sustainable development have reached $1.2–$1.3 trillion today. They include sustainability-themed funds, green bonds, and social bonds.

Sustainability-themed funds include mutual funds and exchange-traded funds that use ESG criteria as part of their security selection process or seek a measurable positive impact alongside financial returns. UNCTAD estimates there are close to 3,100 such funds worldwide, with assets under management of about $900 billion. From 2010 to 2019, the number of sustainable funds in Europe and the United States, the two largest markets for sustainable investment, rose from 1,304 to 2,708, with assets under management growing from $195 billion to $813 billion. Sustainable funds in developing economies remain a relatively new phenomenon. In China there are 95 sustainability-themed funds, with assets under management of nearly $7 billion as of 2019. Most were created in the last five years. ESG funds also have experienced growing traction in Brazil, Singapore and South Africa in recent years, albeit from a low starting level.

Green bonds promote investment in climate action (SDG 13), affordable and clean energy (SDG 7), and sustainable cities and communities (SDG 11). The global green bond market saw rapid growth in 2019, to nearly $260 billion, a 51 per cent year-on-year increase. The proceeds of green bonds are primarily used in three sectors (energy, buildings and transport).

Social bonds are seeing significant growth this year, as the global effort to fight the COVID-19 pandemic is boosting their number. In the first quarter of 2020, social bonds related to COVID-19 crisis relief raised $55 billion, exceeding the total value of social bonds issued in all of 2019. Stock exchanges actively support the fast growing COVID-19 response bond market, for example by waiving listing fees.

In addition to sustainability funds, the much broader category of responsible investment refers to general investment funds that adopt sustainability-linked investment criteria. This type of investment does not directly target SDG relevant sectors. The total assets under management of these funds could be about $29 trillion.

Over the next 10 years, the “decade of delivery” for the SDGs, capital markets can be expected to significantly expand their offering of sustainability-themed products. The challenge will be how to combine growth with a greater focus on channelling funds to SDG-relevant investments in developing countries, especially LDCs, and generate sustainable development impact. To date, most of the assets that sustainability-themed funds invest in are in developed countries.

ESG integration trends

Progress on investing in the SDGs is not just about mobilizing funds and channeling them to priority sectors. It is also about integrating good environmental, social and governance (ESG) practices in business operations to ensure positive investment impact. Global capital markets are again instrumental in this process. Security regulators and policymakers, as well as international organizations, such as the UN Sustainable Stock Exchanges initiative and International Organization of Securities Commissions, push for ESG integration in capital markets.

Stock exchanges have an important role to play in promoting sustainability in the capital market. They provide a platform for sustainable finance and guidance for corporate governance. The last decade has witnessed a sharp increase across a range of sustainability initiatives undertaken by exchanges. More than half of exchanges worldwide now provide guidance to listed companies on sustainability reporting. Other activities include training and the development of relevant tools and platforms for the development and transaction of sustainability-themed financial products (figure 10).

Companies and institutional investors acknowledge the need to align investment and business decisions with positive SDG outcomes. The SDGs are increasingly becoming a focus of investor interest and company reporting for impact. A key challenge is the quality of disclosure and harmonization of reporting standards.

To take private sector contribution to the SDGs to the next level of implementation and delivery will require enhanced measurement and reporting by MNEs. The Global Reporting Initiative mapped the SDGs to its widely used reporting standard. In 2019, UNCTAD published the Guidance on Core Indicators as a framework for corporate reporting on their contribution towards the attainment of the SDGs. It was the outcome of extensive consultations among experts from over 190 UN Members States.

One SDG on which companies are increasingly expected to report is gender equality (figure 11). About 70 per cent of the world’s 5,000 largest MNEs now report on progress in this area. Overall, women’s representation remains unequal. At the global level, the reported share of women employees in the largest MNEs is 17 per cent, with 9 per cent at the managerial level, but a larger share (18 percent) at board level, where regulation and investor pressure have led to better representation.

Globally, about four out of five companies have published a diversity policy. The degree to which such policies translate into concrete action can be proxied by the presence of flexible working arrangements or the provision of childcare services that might positively benefit women and facilitate their participation in the labour market. The number of companies with such arrangements or facilities is far lower than those with diversity policies.

Mainstreaming the SDGs in investment policies

More than 150 countries have adopted national strategies on sustainable development or revised existing development plans to reflect the SDGs. An analysis by UNCTAD, based on 128 voluntary national reviews, reveals that although many of these strategies highlight the need for additional financial resources, very few contain concrete road map for the promotion of investment in the SDGs.

Existing investment promotion instruments applicable to the SDGs are limited in number and follow a piecemeal approach. UNCTAD’s global review of national investment policy regimes shows that less than half of UN Member States maintain specific promotion tools for investment in the SDGs for these countries, on average, each targets no more than three SDG-related sectors or activities in its regulatory framework. Many other countries do not have such policies at all. Countries promote inward investment in the SDGs primarily through incentive schemes. Several key SDG sectors, such as health, water and sanitation, education and climate change adaptation, are rarely covered by specific investment promotion measures. Developed economies also promote outward investment through state guarantees and loans using sustainability criteria.

Since the adoption of the SDGs, some efforts have been made to enhance the promotion of investment in SDG sectors. In total, 55 countries implemented almost 200 policy measures related to these sectors, with the vast majority of them aiming at liberalizing or facilitating investment in food and agriculture, transportation or innovation. Most policy changes were adopted by developing economies, with developing Asia alone responsible for 42 per cent of them. The pandemic has triggered a shift in priorities towards more promotion of investment in health, food security and digitalization.

Factoring in the SDGs in the international investment treaty regime presents a daunting task. The vast majority of the 3.300 existing treaties pre-date the SDGs. Since the adoption of the SDGs in 2015, 190 IIAs have been concluded. Of those, more than 30 per cent include provisions addressing the SDGs directly, and almost 60 per cent include a reference to sustainable development in their preamble. In addition, several countries are reformulating their treaty models in line with UNCTAD’s Reform Package for the IIA regime.

A more systematic approach is needed for factoring investment promotion into national SDG strategies, and mainstreaming SDGs into national investment policy frameworks and the IIA regime.

A big push for investment in the SDGs – a new set of transformative actions

A new set of global actions to facilitate a “Big Push” in private sector investment in the SDGs is urgently needed. Current investment in SDG sectors, especially in developing countries, is too low, sustainability financing largely bypasses developing countries and SDG-specific investment policies are not being rolled out fast enough. This situation is compounded by the impact of the COVID-19 crisis, which risks subordinating progress on the SDGs to the priority of economic recovery.

Building on the six transformative actions proposed in its Investment Policy Framework for Sustainable Development (IPFSD), UNCTAD’s new Action Plan combines several policy instruments to provide an implementation framework for the UN Secretary-General’s Strategy for Financing the 2030 Agenda for Sustainable Development.

The framework of the IPFSD Action Plan, mobilizing funds, channelling them into SDG sectors and maximizing their impact, remains a valid point of departure. The four guiding principles for private sector investment in the SDGs proposed by the IPFSD, namely (a) balancing liberalization and regulation, (b) ensuring both attractive risk/return profiles and accessible and affordable goods and services, (c) aligning measures to attract private funds with the fundamental role of the State and (d) differentiating between the global scope of the SDGs and special efforts for LDCs and other vulnerable economies, must remain the overriding considerations in any policy agenda for boosting investment in the SDGs.

The new Action Plan presents a range of policy options to respond to the investment mobilization, channeling and impact challenges faced especially by developing countries (figure 12). Its transformative actions include the following six:

  • Mainstreaming the SDGs in national investment policy frameworks and in the international investment treaty regime
  • Re-orienting investment promotion and facilitation strategies toward SDG investment
  • Establishing regional SDG Investment Compacts
  • Fostering new forms of partnerships for SDG investment
  • Deepening ESG integration in financial markets by establishing a global monitoring mechanism with a harmonized approach to disclosure
  • Changing the global business mindset

The new Action Plan is a response to the call in the United Nations General Assembly resolution on “Promoting investments for sustainable development” (A/RES/74/199), for “concrete recommendations for the advancement of investment for the implementation of the 2030 Agenda”.

As requested by the General Assembly, UNCTAD will continue its regular monitoring of global SDG investment trends and policies through the Global SDG Investment Trends Monitor, the Global SDG Investment Policy Monitor and the World Investment Report. It will also continue to promote investment in the SDGs through global platforms, such as the World Investment Forum, in partnership with all key investment–development stakeholders.