SDG Impact Finance Initiative: impact for whom?

On 1 December 2021, the State Secretariat for Economic Affairs (SECO) unveiled the SDG Impact Finance Initiative, a new "public-private partnership for innovative development funding." It is being supported by the UBS Optimus Foundation, the Credit Suisse Foundation and the Swiss Agency for Development and Cooperation (SDC). According to these sponsors, the initiative is expected to raise as much as CHF 1 billion in private capital, in order to achieve "measurable impact in developing countries". SECO is contributing CHF 19.5 million to the initiative, and the UBS Optimus Foundation CHF 5 million; the contributions of the other participants are not yet known.

Blending is trendy

SECO's rationale for the partnership is that the funding gap to meet the Sustainable Development Goals (SDGs) by 2030 is estimated at more than USD 2.5 trillion per year. SECO therefore concludes that "private sector investments in developing countries must be increased in order to bridge this funding gap". Blended financing comprising public and philanthropic funds are seen as an effective way of mobilising private financing, which otherwise would not find its way into the countries concerned. The SDG Impact Finance Initiative aims to raise CHF 100 million from public and philanthropic players by 2030, and those funds will then serve to unlock "up to CHF 1 billion in private capital towards the SDGs in developing countries."

Three objectives have been stated: (1) supporting "innovative financial solutions" for new "impact-investing tools" through grant and seed funding, these being investments which, besides a financial return, also aim to generate positive, measurable social and environmental impact (innovation window); (2) promoting impact investing by mobilising more private capital and strengthening underlying portfolio companies (product window); and (3) contributing to " improved framework conditions for impact investing in Switzerland " and promoting "the quality of impact measurement". To that end, the initiative will work closely with Swiss Sustainable Finance (the umbrella association of financial service providers for the promotion of sustainable financial management) and the State Secretariat for International Finance (SIF).

Let’s open the debate

The launch of the initiative (SIFI) raises numerous questions, first regarding governance and management. An association was established, chaired by a business lawyer, and including one representative from each of the banking foundations that are participating in the SIFI. Neither SECO nor the SDC is represented on the board. It is therefore hard to see how the federal representatives will be able to promote the development priorities that are to be implemented thanks to SECO’s contribution (and in the future presumably also that of the SDC).

Yet another key question is that of defining impact and measurability. To date there has been no universally applicable definition of impact investing, and according to the Organisation for Economic Cooperation and Development (OECD), the boundaries of what may be regarded as impact investing are fluid. To cite the Chair of the OECD-DAC (Development Assistance Committee), "the difficulty lies in defining and measuring this impact. The various countries and public and private organisations use different instruments for measuring different criteria. If the risk of impact washing is to be tackled, public authorities must undertake to lay down standards and monitor their observance." What is more, internationally comparable data and assessment tools are lacking.

The recourse to development cooperation funds (currently CHF 19.5 million from SECO) raises the fundamental question of the Federal Government's role and aims under this initiative; its declared aim "to raise" CHF 1 billion in private funding to finance the SDGs in developing countries presupposes that there are measures to lower the (real or perceived) risks to private investors (de-risking). Such measures may take the form of guarantees, covering first losses, technical assistance for underlying portfolio companies or bearing project preparation costs. These measures are all tantamount to subsidies, the implicit aim of which is to facilitate the preparation of a portfolio of bankable projects that must conform to the risk-return profiles (risk-adjusted return) expected by private and institutional investors. Is the purpose of international cooperation funds therefore to satisfy the growing appetite of investors or – on the contrary – to ensure that the intended and unintended development impacts of investments are measured, monitored and made public?

The question also arises as to the criteria that should apply to the planned investments. Because public donors have so far not laid down a "sustainability framework"[1] for private financing, there is the danger that, with the level of requirements varying so considerably from one investor to another, the ESG criteria (environment, social, governance) may be applied arbitrarily (SDG washing). Besides, there are no indications as to the sectors and countries for which blended financing is intended and the SDGs to which it is meant to contribute. Lastly, this type of public-private partnership raises a number of systemic issues relating to the financialisation of development; the key question that arises when a portion of international cooperation funding is diverted from its original purpose of sustainably funding public goods and services and used as a "lure" and a lever for private investments is the following: does this new use of public funds in fact conform to inclusive development as is being pursued in the 2030 Agenda (leave no one behind)? In other words: how well-suited are these public funds for truly aligning private investments with the goals of sustainable and inclusive development and poverty alleviation? What kind of development is being promoted by this financialization? To what extent can these investments in developing countries contribute to combating inequality, both regionally and between social groups?

The discussion has only just begun.

[1] By indiscriminately incorporating the ambivalent ESG approaches rather than clarifying them individually, the latest reform of the World Bank’s Environmental and Social Framework leaves the door wide open to the danger of SDG washing. See Securitization for Sustainability. Does it help achieve the Sustainable Development Goals? Heinrich Böll Stiftung, 2019, p. 17.