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SDGs offer business opportunities
– by Homi Kharas, Hans Dembowski
The new metro line in the Indian metropolis of Nagpur is being built with support from German ODA via KfW Development Bank.
For decades, OECD nations have mostly failed to live up to their pledge of spending 0.7 % of gross national income (GNI) on official development assistance (ODA). What can and must their ODA contribute to achieving the SDGs?
ODA is an important catalytic source of funds. The focus on 0.7 % is important as a target, but not all OECD members have signed up to this. ODA should not be judged on the basis of the volume alone; it is important that ODA is targeted to the poorest and most fragile countries, that it helps mobilise other sources of funding, including private capital, and that it helps providing core resources for development agencies and allows them to deliver global public goods.
What can and must the governments of emerging markets such as the BRICS contribute?
Emerging market economies have a philosophy of mutual cooperation, and many have specific areas of expertise, like infrastructure in the case of China, or tropical agriculture in the case of Brazil. Other emerging economies have focused on aiding their regional neighbourhood. They are also starting to contribute more resources to multilateral development agencies. These are all welcome initiatives.
How do you define south-south cooperation in this context – or does the ODA definition basically apply?
South-south cooperation does not always have the same degree of concessionality as ODA. Concessionality means that recipients do not pay the full market prices, including, in the case of loans, interest rates. By definition, south-south cooperation is not about “aid” from a richer to a poorer country, but about a spirit of solidarity and mutual benefit that can be obtained through several different modalities, not just ODA.
Yes, that is the way emerging-market governments see it. Ultimately, they count any kind of exchange among developing countries and emerging markets as south-south cooperation. But is this view still justified when an increasing number of developing countries are struggling to pay back Chinese loans, many of which relate to ODA-like infrastructure investments?
This is a very important point. Ultimately, ODA or any other source of finance is not the core benefit that developing countries receive from others. The benefit comes from the projects that that can be implemented as a result of the financing. As long as the infrastructure projects undertaken by Chinese companies are successful, one can conclude that this type of south-south cooperation is also successful. But we have to understand that infrastructure projects, by their nature, can be risky. Some will succeed while others will fail. We have to be careful to move beyond anecdotes of success and failure in judging the benefits of this type of cooperation.
What can and must the private sector contribute to achieving the SDGs?
The private sector can benefit enormously by aligning activities with the SDGs. By one estimate there is a potential market of $ 12 trillion in sustainable activities. Research increasingly suggests that if the private sector focuses explicitly on sustainability it can improve its long-run profitability as well. Thus, it is important for private-sector companies to think about which SDG targets are most relevant for their operations and to include these targets into their operational, financial and human-resource plans.
In what sense are there different obligations for northern-based and southern-based private companies?
All companies face the same markets, so there are no differences between northern-based and southern-based companies.
Who can press private-sector companies into actually considering other goals than maximising profits – and by what means?
Because the SDG targets are interlinked, there is no long-term trade-off between profits and environmental and social goals. Profits are unlikely to be sustainable in the long-run if they affect SDG achievement negatively. What is needed is simplification of reporting and adherence to core standards, so all companies face a common level playing field. The International Finance Corporation (IFC), the World Bank subsidiary that specifically supports private-sector development, for example, has just introduced a new set of impact investing principles that it hopes all companies will follow.
SDG achievement ultimately depends on governments’ ability to provide public services and safeguard public goods. To what extent is raising sufficient domestic revenues the core challenge and more important than international cooperation?
Most spending on the SDGs comes from domestic tax revenues. Sound public finances are a prerequisite for achieving the SDGs. But many low-income countries simply do not have the resources to match the scale and urgency of the challenge. In these cases, international cooperation is essential. Middle-income countries also face high costs for putting in place sustainable infrastructure, in particular. So they too require international cooperation, from development agencies and the private sector, each of which would contribute funding and risk sharing to blend with domestic resources in a suitable financing package.
Apart from ODA, rich nations have pledged to provide an annual $ 100 billion in private and public funding for climate action in developing countries and emerging markets. To what extent is climate finance a separate agenda?
Climate finance is sustainable development finance, but it has emerged on a separate institutional track for a number of reasons, in just the same way as many sectors have earmarked financing. The $ 100 billion commitment, however, is only one part of the required climate finance.
What are the others, and who is responsible for making them available?
The biggest part of climate finance today is the private sector. About $ 168 billion in green bonds were issued in 2018, a large absolute number but still a very small fraction of the total corporate bond market that issued $ 1.34 trillion. Much of this falls under the heading of “impact investing”. This is a broader asset class that includes both climate and social investments. The IFC estimates the size of the impact investing market as up to $ 26 trillion. This potential can be realised if the financial sector as a whole starts to consider climate change, along the lines recommended by the task force on climate-related financial disclosures. It was set up by the multilateral Financial Stability Board, which in turn was established by the G20 summit in London in 2009.
Homi Kharas works for the Brookings Institution in Washington and specialises in global development.