Paris Peace Forum Panel: The Challenge of Alignment Towards a Common Framework for SDG-Compatible Finance

On 12 November 2019, I participated in a panel entitled “The Challenge of Alignment Towards a Common Framework for SDG-Compatible Finance” with M. Abdoulaye Mar Dieye, Special advisor, UNDP; M. Mathias Vicherat, Secretary General, Danone ; Mme Aba Esther Eshun, young expert, AU-EU Youth Cooperation Hub and a respresentative from the Secretary of State to the Minister of Europe and Foreign Affairs. See my remarks below:

Ladies and Gentlemen,

Let me get straight to the point: we run the risk of defaulting on our promise to finance the 2030 Agenda. The annual financing gap for the SDGs stands at 2.5 trillion dollars in developing countries alone.

And yet, our Global Outlook on Financing for Sustainable Development concluded that total external support to financing the SDGs in developing countries had actually dropped over the past year, primarily due to a contraction of FDI, which has declined by 20% in the first half of 2019.

At the same time our countries have been struggling to maintain the level of official development assistance (ODA) to a collective $150 billion. We would need 20 times more to fill the gap.

We need to “shift the trillions”, as the French G7 Presidency put it, with the Development Ministers’ Declaration calling for a more comprehensive approach to SDG-compatible finance, based on the work of the OECD and the UN, and other stakeholders. For this, we need a strategy oriented around three key pillars: mobilisation, alignment, and impact.

Mobilisation

The financing is there, if we could only mobilise it. That begins with increasing domestic resource mobilization, which remains the primary source of financing for the SDGs.

We know that increasing the tax to GDP ratios across developing countries by just 1% would provide an extra $250 billion in revenues in developing countries.[1] 

Our joint program with UNDP, Tax Inspectors without Borders (TIWB), creates $100 of tax return to developing countries for each dollar spent, and has already collected around 500 million dollars of additional tax revenue since it was launched 2015.

On the global scale, OECD work on Automatic Exchange of Information has helped raise close to EUR 100 billion of additional tax revenues. Base erosion and profit shifting, which we are tackling through the OECD/G20 Inclusive Framework on BEPS, disproportionately affects developing countries, and costs up to 240 billion USD per year in lost tax revenue.

However, in addition to taxation, we must also increase ODA volumes from 0.3% of GNI in DAC countries to the UN approved target of 0.7%.

We also need to mobilise new forms of financing. The 2.5 trillion USD gap actually represents less than 1% of available global financial assets. But, as the G7 development ministers recognized, we have to find new solutions, like blended finance.

Some progress has been made. DAC members mobilized over $150 billion of private finance for development between 2012 and 2017 through the use of blended finance and other instruments. Impact investment is another example, the estimated total global impact investments stand at approximately USD 502 billion, but it’s still not enough.

Alignment

We are lagging behind in mobilizing, but we are lagging three times behind in alignment.  

The size of the challenge would require to re-think all the budget processes and allocations to align them with the SDGs, but we are not doing it nearly enough. Less than half of OECD countries specifically include SDG reporting in their budgets.

New Zealand is interesting because they moved to Well Being budgeting. This is based on the idea that gauging the long-term impact of policies on the quality of people’s lives should be the focus of the national budget, rather than focusing on short-term output measures, and not taking account of the negative consequences of policies.

And more than anything, we need to stop dedicating resources to the ‘wrongs’. Spending more in fossil fuels (almost 1 trillion) instead of financing renewables, for example.

The OECD is launching a new report on the alignment of development co-operation with the Paris Agreement, to end the practice of using concessional finance for fossil fuels and instead to finance low-carbon alternatives.

Alignment is about incentives, financial markets cannot continue rewarding the same pattern of consumption and production that has led to such social and environmental outcomes.

Mark Carney talked about the “tragedy of horizons”, imposing a cost on future generations that we have no incentive to fix, and pointed out that meaningful action would leave most of our assets “stranded”.

The key will be to reward and encourage good investment decisions and for that we need to change the metrics.

Instead of calling for more FDI without discriminating, we should call for quality FDI.

Just the other day, I launched the OECD FDI Qualities Policy Toolkit, which will advise policymaking to improve alignment of FDI with the SDGs.

The indicators focus on five clusters linked to the SDGs: productivity and innovation; employment and job quality; skills; gender equality, and carbon footprint.

These indicators will be a practical tool to shape the investment policy framework conditions to deliver on the SDGs.  Because this is ultimately about impact, and impact requires measurement.

Impact

We need to change the metrics to overhaul existing financial and development systems. This means incorporating   impact measurement – including both positive and negative outcomes.

I met with Sir Ronald Cohen at the UNGA in September . We discussed that the criteria for business and measurement should not only be risk and return, but include impact. The same for the traditional cost benefit analysis by our governments.

But this requires a common framework for impact measurement.

This is why the OECD is working with partners like UNDP and the IMP Structured Network to develop a generally accepted Conceptual Framework that will contribute to impact performance measurement and integration of impact into investment decision-making by using the Financial Accounting conceptual framework (IFRS) as a basis.  

The framework will include a set of principles, with accompanying implementation guidance, regarding how information should be collected and disclosed by organisations to inform a range of decisions, including to decrease negative impact and increase positive impact on people and planet.

This will be critical in delivering on the SDG agenda, and as Betrand Badré would say enabling “finance to save the world.”

Thank you.


[1] Overall, the ratio for the 53 developing countries in the OECD Revenue Statistics is 19.1%, compared to 34% for the OECD. 

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