Innovative Funding and Collaborative Philanthropy High-Level Panel: Discussing Blended Finance and Impact Investment

WEF 2020: Addressing the SDG financing gap and reducing inequalities beyond ODA via alternative investment models.

The international development finance landscape has been changing rapidly since the agreement on the 2030 Agenda on Sustainable Development. This sense of urgency has only increased since the news at UNGA last year that the global community’s current efforts are well off-track. Overall, the global SDG financing gap has been estimated at USD 2.5 trillion annually (UNCTAD, 2019), and low income and developing countries (LIDCs) are particularly in need of financing and support, facing an estimated SDG financing gap of USD 0.52 trillion annually (IMF, 2019).

Filling the development aid gap with alternative investment models

While a top-down approach such as Domestic Resource Mobilization is the primary source of financing for development, public revenues in many countries remain below the minimum required for effective state functioning and the achievement of the SDGs. Increasing the tax to GDP ratios across developing countries by just 1% would provide an extra $250 billion in revenues in developing countries. Moreover, the OECD-UNDP joint program, Tax Inspectors without Borders, creates $100 of tax return to developing countries for each dollar spent. Yet for many developing countries, administrative and capacity constraints continue to limit their ability to increase taxation revenue.

The OECD is responsible for around $150bn of ODA annually[1]. While ODA is critical, this challenge needs much more than ODA. A holistic approach to financing the SDGs is needed by 2030, which incorporates the whole gamut of domestic and international financial flows that can contribute to financing the global goals – both private and public. Hence why the OECD is pioneering a three pillar approach to help fill the financing gap: mobilizing additional and enhancing existing financing for the SDGs; aligning this finance with the Goals; and measuring and managing its impact on people’s lives.

Including the private sector in development finance

The OECD has time and time again demonstrated the importance of engaging and leveraging the expertise and additional resources of the private sector to fill the gap in development aid through blended finance, impact investment and green finance.

The Blended Finance Funds and Facilities report confirms that the blended finance market is growing (in both breadth and depth), with well over USD 60.2 billion invested in 111 developing countries at the end of 2017. About a quarter of the total assets sitting in blended funds stems from commercial investors – pension funds, HNWIs, insurance companies, and commercial banks.

The 2019 Social Impact Investment report also demonstrates significant growth in the impact investment market in terms of the number of funds investing and the amount invested[2], as well as through the growing number of policies being put in place around the world to facilitate the market (almost 600 policies in over 45 countries, up from a very small number covered in our earlier 2015 report). States must recognize the urgency of “Aligning development co-operation and climate action” to reach development goals more efficiently and effectively. Recent report find that only 20% of development finance provided each year by members of the OECD DAC over 2013-2017 included a focus on climate change.

The OECD has established key partnerships with foundations as to tackle economic, social and environmental challenges collaboratively. These engagements have enabled the support of a common vision of improving well-being, sustainable development and open societies. According to OECD DAC statistics, 33 of the largest private philanthropic foundations have provided USD 7.8 billion (on a gross disbursement basis) in support of development finance. While this amount remains modest compared to ODA (USD 153 billion), these foundations remain key actors – the efforts of the Bill and Melinda Gates Foundation in the health and reproductive health sectors have had a significantly positive impact.

The third annual Private Finance for Sustainable Development (PF4SD) Conference and Week will be taking place at the end of January 2020, with the goal of bringing the relevant communities together – from blended finance, to impact investment, to private philanthropy and green finance – to work on how to build financing in support of the SDGs while also fostering innovative approaches that can lead to systemic change.

Aligning investment with development goals

The G7 has mandated the OECD and the UNDP to develop a robust common framework to help align private finance and investment with the SDGs. Guided by a group of senior experts drawn from across the public and private sectors, the framework will help align finance with the SDGs through three main components: standards of impact and process, innovative financial tools and partnerships, and regulations that provide incentives for alignment.

A multi-year programme of action on Financing for Sustainable Development has also been mandated by the KSA Presidency at the G20 to help overcome the SDG financing gap, focused specifically on low-income and developing countries (LIDCs). This programme looks at all sources of financing – domestic and external, public and private – and maps them against the SDGs.

These new investment models are not just about mobilizing more private and philanthropic resources to address the SDGs, but also about piloting more effective and efficient solutions. Many of the current “solutions” are simply not working and more and better innovations are needed to reach these global goals.

Governments play a critical role in systems change, but change also requires the commitment and collaboration of the private sector, civil society and other stakeholders. This is why SGD 17 is about partnerships and the WEF Annual Meeting this year relies heavily on stakeholder engagement.

Inclusive growth and innovative financing

A number of years ago, the OECD launched an initiative on Inclusive Growth as a major response to address the increase of inequality and its widespread consequences on the economy and the society.In August of 2019, the B4IG platform was launched at the G7 Summit in Biarritz. B4IG brings the CEOs of 34 leading global firms together to pledge against inequalities. Two major foundations have also joined – Rockefeller Foundation and the Bill and Melinda Gates Foundation. The initiative includes an accelerator and a financing forum with the goal of scaling and funding solutions that have proven to be effective. The financing forum aims to bring together philanthropists, impact investors and other investors to fund models that can deliver tangible impact.

In a nutshell, outcomes focused approaches and instruments require the blending of philanthropic, private and public funding. The objective of the financing forum is to further work and focus on these models.

Efforts in Impact measurement

The OECD is leveraging its expertise and long-standing experience in measurement of social and environmental outcomes, including the work on measuring well-being.  Apartnership with an international coalition of standard setters is currently in process for the development of a conceptual framework and set of guidelines for impact measurement.  The Impact Measurement Project (IMP) Structured Network was joined by the OECD alongside the UNDP, IFC and many other key players.IMP notably aims to build a common framework to help all types of investors and businesses (MNEs, SMEs, social enterprises, etc.) in navigating the numerous management and impact measurement methodologies that exist. In addition, the OECD is currently working to provide more guidance to ensure that investments in sustainable development can be designed, tracked and evaluated in a comparable manner across policy sectors and independently of the type of organisation.

To this end, the OECD endeavors to drive a process of sharing and coordinating public and private actors, and bringing together the best practices to build consensus in the industry on the most credible principles, frameworks, standards and metrics for measuring and managing impact. The objective is to create consensus around a Development Impact Framework to enhance the ability of all stakeholders to design, measure and track in a comparable manner sustainable investments in developing countries. Collaboration for the development of a consensus around impact management and measurement is critical, and efforts are targeting having some deliverables ready for the UK G7 Presidency in 2021.

It is essential to continue to work on identifying criteria and metrics to measure the specific impact of social enterprises and social economy organization to produce an international manual on this issue in the next couple of years.

Engaging Foundations and Governments to innovative funding models

Many countries have started to explore innovative financing mechanisms, such as payment by outcomes. Among these, Social Impact Bonds (SIBs) allow governments or commissioners to enter  into  agreements  with  social  service  providers (e.g. social  enterprises  or  non-profit  organisations) and investors  to  pay  for  the delivery  of  pre-defined  social  outcomes  (OECD,  2015). SIBs can thus be an opportunity to nurture a culture of monitoring and evaluation in social service delivery.

Yet, SIBs and other financing experimentations should be embedded in a holistic policy strategy that ensures continuity of social service delivery by the public sector, particularly for vulnerable groups. SIBs should be designed in a way that helps fostering social innovations and tackling severe social challenges – which is not always the case.

Policy makers should pay attention to the models of the many initiatives that promote financial intermediaries in order to match the demand and the supply side, often by analysing deal by deal solutions and providing non-financial support (e.g. assistance in preparing a business plan etc.).

Transforming innovative funding to development and enabling collaboration necessitates taking into account the different needs and interests at stake in the financing, philanthropic and third sectors while working toward a common framework to measure impact – without losing sight of the specificities of the different actors (e.g. social enterprises and social economy organisations).

[1] According to the OECD DAC statistics, ODA in 2018 was USD 153 billion, a decline of 2.7% from 2017, with a declining share going to the neediest countries.

[2] The GIIN estimates the current size of the global impact investing market to be $502 billion. Based on the collation of AUM data on more than 1,300 impact investors around the world

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