The Financing Gap

“Mobilizing sufficient financing remains a major challenge in implementing the 2030 Agenda for Sustainable Development”. So concludes the UN’s Inter-Agency Task Force on Financing for Development (IATF) in its 2019 annual report. The Sustainable Development Solutions Network estimates the shortfall as US$400 billion per annum to 2030 for 59 less developed countries. The United Nations Conference on Trade and Development (UNCTAD) estimates the shortfall as being of the order of US$2.5 trillion per year to 2030 for developing countries, with US$5-7 trillion per year investment required over the same period globally. Digitalization will make a difference if it helps to overcome barriers to financing the SDGs.

The gap does not arise from a lack of finance. The gap does world is awash with money. With increased volatility and uncertainties, private capital is increasingly focused on finding safe harbour and even minimal financial returns. The likely economic downturn in the face of the coronavirus is driving the cost of capital even lower after a decade of historically unprecedented zero and negative interest rates across tens of trillions of dollars of privately held assets. Governments with robust borrowing capabilities are responding to the emerging economic crisis with an expansionist period of debt-based public spending.

“The financing for sustainable development is available, given the size, scale and level of sophistication of the global financial system.”

UN Secretary General’s
Strategy for Financing the 2030 Agenda

Financing is not aligned with the SDGs because of lack of data and standards, misaligned incentives and regulations, and gaps and weaknesses in the institutions and markets through which finance is deployed. These flaws are well understood. Most obvious is the lack of low cost, trustworthy and timely data that enables SDG-related risks and impacts to be taken into account in private and public financing decisions. Other flaws are more structural, such as weaknesses and gaps in capital markets and the multilateral trading system. Financial and capital markets fail to take SDG impacts into account because of perceptions that such action would reduce financial returns. This is reinforced by short-termism, missing and costly data, and weak or absent standards and definitions.

Yet other problems concern the impact of climate and other environmental factors on the availability and cost of capital in, for example, climate-stressed countries, particularly Small Island Developing States and Least Developed Countries, with the shortfall estimated by one study as already amounting to US$62 billion per annum. For public finance, institutional weaknesses perpetuate a cycle of insufficient and poorly-used resources, and citizen distrust, despite a growing pool of domestic savings in many developing countries

Much is being done to overcome barriers to financing the SDGs, but we are still not on course. Many initiatives are actively seeking to overcome these flaws and inequalities in capabilities. Many are private sector led and focused on improved risk assessment, such as the Task Force on Climate-related Financial Disclosures. Others are government-led, such the European Commission’s Sustainable Finance Framework. There have been advances in international tax information exchange and related measures to address financial crime and money laundering. Despite such efforts, financing remains misaligned with the SDGs.

Today’s digitalization of financing is already delivering financing for the SDGs. The DNA of digital finance – more and better data on risks and impacts, cheaper and wider accessibility of financial services, and innovative products and services – is already being harnessed to finance the SDGs.