Creating a financial ecosystem that delivers genuine sustainable finance

At the close of last year’s COP28 meetings in Dubai, the global community heralded the “beginning of the end” for fossil fuels, with nearly 200 Parties agreeing to a rapid, just, and equitable transition away from non-renewable energy sources. While few thought it would be easy, it was a hopeful moment.

In the intervening year, one in which climate change-induced weather extremes caused more than USD 120 billion in economic loses and the displacement of millions of people in the first six months alone, not only are we no closer to meeting these goals, we are backsliding. Fossil fuel subsidies continue their year-on-year increases, while commercial banks continue to invest heavily in fossil fuel-intensive industries.

At a time when the world requires the investment of all available resources to ensure a sustainable future, our financial system is driving investment in the opposite direction, complicitly working against our own best interests.

If we are to achieve the 2030 development agenda, if we are to close the annual USD 4.2 trillion Sustainable Development Goal (SDG) financing gap, it will not be enough for us to say, for example, that fuel subsidies need to be eliminated over time and replaced by increasing investments in social and environmentally related sectors. We need the systems in place that point the way to sustainable investments. Our efforts must be girded by a comprehensive financial ecosystem, one that ensures every dollar, euro, renminbi, and peso invested is measured, not just by their financial return but also by their return on sustainable development metrics.

This will require aligning policies and regulations that enforce both measurement and alignment on development impact. Decision-making on the part of governments, the private sector, and investors will necessitate sustainable and accurate finance taxonomies, financial disclosure, and reporting requirements, all supported by cutting-edge diagnostic and assessment tools.

New ways of working

Underpinning all of this is the need for the public and private sectors to work together in new ways. This includes partnering with development institutions, like UNDP, as well as financial institutions, which are working to invest in bankable SDG-aligned projects.

UNDP, through its Sustainable Finance Hub, works at the nexus of the development and financial sectors. As such, it is at the heart of efforts to build a more sustainable and inclusive financial architecture. This ranges from technical leadership, supporting country-led efforts to deliver on their nationally determined contributions (NDCs), to reigning in tax loss, to advancements in SDG taxation, budgeting, insurance, thematic bonds, and SDG-aligned private investment and analytical work on debt, and more.

Our work in these areas is not only showing promising results. It also offers up examples of some of the elements that would comprise a holistic, sustainable financial ecosystem.

We are proponents of using country-led Integrated National (and local) Financing Frameworks (INFFs) as the primary financing strategy for National Development Plans (NDPs). INFFs have been shown to strengthen fiscal policy coherence, ensuring public revenue and expenditure is SDG-positive, while strengthening capacity and policy for increased domestic revenue mobilization. They can catalyze de-risking of SDG-aligned private investment through policy and instruments. They can also build collaboration between development partners and international financial institutions (IFIs), as well as the private sector, financial institutions, development organizations, civil society, and others.

To date, 86 countries are using INFFs. The frameworks have been instrumental in developing these nations’ NDPs, NDCs, national biodiversity strategies and action plans, as well as more than 260 financing policy reforms. An analysis of reforms implemented by 17 pilot countries found that INFFs leveraged USD 16 billion in new financing for SDG-focused investments, and identified an additional USD 32 billion in existing finance aligned (or with the potential to align) with the SDGs. Examples on the ground include Nigeria establishing a USD 100 million INFF fund to catalyze implementation of its sustainable financing strategy, and Columbia increasing its SDG-aligned budget expenditures by 17% to USD 69 billion.

Bridging the finance gap

Raising public finance through taxation is universal. However, it is estimated that between USD 500 and 650 billion are lost each year due to tax avoidance and inefficiencies. UNDP’s Tax for SDGs initiative works to increase domestic resources to the SDGs by boosting the capacity of governments to raise revenues, including through digitalization. Since 2015, the joint UNDP and Organisation for Economic Co-operation and Development initiative Tax Inspectors Without Borders has supported the collection of more than USD 2 billion in additional tax revenue across Africa, Asia and the Pacific, Eastern Europe, and Latin America.

While we are seeing improved efficiencies in the public arena, it is clear that those resources alone will be insufficient to bridge the USD 4.2 trillion funding gap. Unlocking the vast potential of the estimated USD 450 trillion in private capital is not only crucial to meeting our urgent global challenge, it’s also good business. Moving the wealth needle by just 1% toward SDG-related investment could fill the SDG funding chasm.

Through our Private Finance for the SDGs initiative, UNDP contributes to the financial ecosystem by equipping private investors, financial institutions, and governments with tools and frameworks that prioritize people and planet on par with profit. One such tool, the SDG Investor Platform, uses SDG Investor Maps to provide real-time market intelligence on investment opportunities aligned with climate action, biodiversity protection, and land restoration. To date, the platform has identified more than 600 investment opportunities in 45 markets, showcasing private sector potential for sustainable development and project pipeline building. In Africa alone, SDG Investor Maps have identified 207 investment opportunities across 11 sectors and 42 industries. More than half of these investments are climate-related.

Meanwhile, the recently released ISO/UNDP guidelines for the SDGs provide a structured framework for the private sector to maximize positive impacts, reduce negative impacts, and continue to make profits. The guidelines provide practical tools to align private sector operations with climate action, biodiversity protection, and land restoration goals.

Creating a wider support system for sustainable finance

While these tools provide a clear framework for measuring impact, for the financial ecosystem to be effective, it’s essential that businesses can manage the social and environmental outcomes of their investments. Through our Impact Management and Measurement Trainings, UNDP is building a cadre of professionals among investors, enterprises (of all sizes), financial institutions, and policymakers with the knowledge and skills to ensure that sustainability and the SDGs are integrated into their operations.

Along with the public and private sectors, IFIs are a vital player in an SDG-focused financial ecosystem. Since 2010, UNDP has helped governments and IFIs deliver nearly USD 3.4 billion in IFI investments that are increasing people’s access to renewable energy, clean water, digital IDs, and more. Globally, more than 700 non-profits have raised more than USD 13 million for local SDG action following the completion of digital training. Our partnership with German development bank KfW is improving governance, infrastructure, and public services and creating jobs for women and young people in Chad, Iraq, Lebanon, Syria, Pakistan, and Yemen.

Earlier this year, in a public conversation with the think tank ODI, UNDP Administrator Achim Steiner noted: “The problem is not the economics or the financing in the sense of whether it’s more expensive. It’s more that our entire financial support system is still geared to exporting 20th century technology to solve 21st century problems and locking developing countries into that.”

With five years left to deliver on the SDGs, now more than ever it is time for the global community to step firmly into the 21st century. We must use the tools at our disposal to create the financial ecosystem needed to preserve our planet for future generations, so they inherit choices, not last resorts, and a legacy of opportunity.