SDG Knowledge Weekly: Private Sector Action, Blended Finance for LDCs
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Trucost presented insights from its SDG Evaluation Tool, which aims to help businesses identify SDG-aligned business revenues, increase transparency and guard against risk.

The UN Capital Development Fund released a joint report on blended finance in LDCs; Convergence released a blog on the report and a data brief on leverage ratios in blended finance.

UNCTAD published ‘The Least Developed Countries Report 2018: Entrepreneurship for Structural Transformation’ which examines how to enhance entrepreneurship in LDC economies.

With a recent IPCC report calling for “unprecedented” societal transitions and a US government report on national climate impacts projecting major reversals to economic and social progress, this brief looks at the kind of action that can deliver the change needed, and the actors that are poised to have such impacts. Among these actors are private companies that are taking corporate sustainability reporting more seriously and investors with an eye on delivering sustainable development.

This brief starts with recent news on private sector actions, and ends with snapshots of blended finance and entrepreneurship in least developed countries (LDCs).

An article by Tony Wines on Eco-Business argues that investors and businesses—which “have the ability to act faster and more efficiently than public institutions”—may have the best chance of averting climate change. Wines emphasizes the rapid uptake of environmental, social and governance (ESG) integration in investors’ strategies, noting that such issues can affect companies’ performance and reputation. However, he acknowledges that there is “little evidence of integrated reporting targeted at investor audiences,” and thus highlights the need for businesses’ alignment with global frameworks such as the SDGs, which offer a more standardized language for stakeholders across the climate, development and financial spaces.

Further on business alignment with the SDGs, Trucost, part of S&P Global, has developed an SDG Evaluation Tool, which helps businesses identify “SDG-aligned business revenue,” increase transparency, inform sustainable growth strategies and guard against risk. According to a publication by Trucost, the tool works by mapping SDG exposure (risk) across a company’s value chain, evaluating the company’s efforts to manage and mitigate its exposure, and assessing the positive impacts created by the company through its products, services, charitable activities, and other societal contributions in line with the SDGs. In its inaugural application, the methodology was applied to 13 company participants and 21 peers from the technology, financial services, utilities and manufacturing sectors. Findings show that nearly 87% of companies’ revenues have the potential to be SDG-aligned. The report was launched at an event held on 5 November 2018 and accompanied by a news release.

Participants at the 2018 Global Corporate Sustainability Forum discussed how SDG achievement can help sustain competitiveness, shared best practices in implementing SDGs vis-à-vis corporate responsibility initiatives, and discussed linking international initiatives to local actions. The Forum took place from 22-23 November 2018, in Taipei, Taiwan. That nation has “entered an era of socially responsible investment” according to Yung-Shuen Shen, Secretary General of the Taiwan Academy of Corporate Sustainability, and the Taiwan Stock Exchange (TWSE) encourages Taiwanese companies to adopt Global Reporting Initiative (GRI) Standards as a step towards enhancing sustainability, notes Rebecca Chen of the TWSE.

Such steps are representative of a broader trend in the Asia-Pacific region, where corporate sustainability and ESG reporting is rapidly increasing, thereby improving transparency and shining a light on companies’ contributions to or detractions from climate action and sustainable development. An article on Sustainable Brands notes the overarching importance of disclosure—particularly on climate change—to investors, who want to know how companies are managing their exposure to climate risks. It offers the example of Ørsted, an energy company headquartered in Denmark, to guide how climate-related financial disclosure can both increase resilience and examine new opportunities.

To further increase alignment in the corporate reporting landscape, GRI is undertaking a joint project to address “reporting fatigue” caused by multiple or overlapping directives, harmonize definitions and terminology, and simplify corporate reporting such that it becomes more useful and effective. As noted in a GRI press release, the project will be conducted in the context of the Corporate Reporting Dialogue, and was launched during the Bloomberg Sustainable Business Summit in London, UK, as well as in Sydney, Australia during the World Congress of Accountants 2018.

Only a small percentage of commercial capital leveraged today is from private sector investors.

Also looking at actors that can leverage private sector investment to the SDGs and the needed climate transitions, Convergence released a data brief that calculates the leverage ratios for a sample of blended finance funds. While leverage ratios must be differentiated according to the conditions of the transaction—including the target sector, country, and impact outcomes—on average, blended finance funds leverage US$4 of commercial capital for every dollar of concessional capital. However, the brief notes that only a small percentage of commercial capital leveraged is from private sector investors, with the majority coming from development finance institutions (DFIs) and multilateral development banks (MDBs).

For those new to the term, ‘blended finance,’ Convergence explains it as the use of capital from public or philanthropic sources to increase private sector investment towards sustainable development, particularly in developing countries. Blended finance can take shape through a variety of transactions, including those with concessional development funding, impact bonds, or grant funding to support projects’ early stages or technical assistance facilities, among others. Convergence released ‘The State of Blended Finance 2018’ report in September of this year.

The UN Capital Development Fund (UNCDF) released report titled, ‘Blended Finance in the Least Development Countries,’ which responds to limited evidence on where, how, why, and in which sectors blended approaches are being deployed in LDCs; the opportunities and challenges with blended finance strategies; and the conditions under which blended finance is most effective. The report comprises four sections: 1) applying blended finance in LDCs, which analyzes the latest financial data, notes barriers and discusses issues of development effectiveness; 2) country case studies from Africa and Asia; 3) guest pieces on a variety of SDG-relevant topics; and 4) the action agenda moving forward, which identifies five areas where action is needed form all stakeholders. The report was developed in collaboration with Convergence, the Organisation for Economic Co-operation and Development (OECD), Southern Voice and UN Foundation.

A blog post relating to the report’s findings by Convergence’s Justice Johnston highlights that LDCs rely heavily on concessional financing, which comprises upwards of 60% of total external finance. It notes that weak enabling environments in LDCs act as deterrents to private investment and serve to increase the risk premiums. Additional project-specific barriers include limited credit histories and lack of market data, which lead investors to seek greater returns to offset increased risks. Thus, blended finance in LDCs may require greater proportions of concessional finance to attract commercial investment or demonstrate viability. Key sectors where blended finance holds promise in LDCs include energy, financial services and infrastructure, though Johnston underscores that in some cases, pure public financing remains the most suitable option. A UNCDF news release on the report is also available.

For those seeking to learn more on blended and private finance strategies, the OECD is hosting Private Finance for Sustainable Development (PF4SD) Week from 15-18 January 2019 at their Boulogne Conference Center in Paris, France. The week will kick off with the launch of a report titled, ‘The Impact Imperative for Financing Sustainable Development.’

On LDCs, the UN Conference on Trade and Development (UNCTAD) released ‘The Least Developed Countries Report 2018: Entrepreneurship for Structural Transformation – Beyond Business as Usual.’ The report appraises the entrepreneurial landscape in the 47 LDCs, examines conditions for creating high-impact businesses, and identifies common structural features of LDCs’ economies that can hinder entrepreneurship. These include: lack of (or weak) institutions, insufficient infrastructure, limited finances and high registration costs, and elevated risks, as noted by the above Convergence blog. The report notes that self-employment constitutes the vast majority of entrepreneurship in LDCs, but laments that there is little capacity to innovate or grow, and thus calls for policies towards a renewed “developmental state” that brings in the private sector to “chart a clear path for development” through “mission-oriented investments.”

An UNCTAD press release consolidates the report’s key facts and figures on the entrepreneurial landscape in LDCs, local entrepreneurship in global production systems, constraints to firms’ growth in LDCs, and current policy frameworks. Separately, comprehensive economic and social statistics on LDCs, compiled by UNCTAD are also available.

Additional issues of the SDG Knowledge Weekly can be found here.

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