About the Framework
The framework focuses on mobilizing and enhacing development impact of private finance through alignment to the SDGs. It is a living document that will be updated on regular basis to reflect progress. In particular, recommendations should be translated into concrete community action plans matching the priorities and comparative advantages of the different actors and groups of actors along the investment chain.
The scope of the framework encompasses private actors but also public authorities given their role to provide the right environment and set the right incentives to allow the private sector to achieve SDG alignment.
The public sector can play a role in shaping market forces, correcting market failures, through providing regulatory forward guidance and bringing transparency and accountability to end SDG washing, and stepping into the market directly as investors and providers of public goods. In addition, given the development ministers mandate, the framework gives particular attention to the structural challenges of countries most in need, including LDCs and SIDS.
SDG Aligned Finance look like?
The 2030 Agenda is a plan of action for people, planet and prosperity. It provides, with the SDGs, universal goals and targets -or a blueprint- to achieve a better and more sustainable future for all.
SDG aligned finance recognizes the role of all actors -public and private- along the investment chain to implement the Agenda, and the need to better align private sector incentives and practices with the SDGs to foster SDG alignment is both a mean to mobilize resources for the implementation of the 2030 Agenda and a value proposition for private sector to preserve the long-term value of assets by doing no harm and contributing solutions to sustainable development challenges, thereby reducing risks and enhancing resilience of the global financial system.
The SDG aligned finance agenda relies on the achievement of two objectives
Resources should be mobilised to leave no one behind and fill the SDG financing gaps.
across the SDGs.
Alligment is the central part of a three-step approach to shifting finance towards the SDGs on stages of Mobilisation – Alignment – Impact.
SDG alignment allows for the better use of each resource’s leverage power, the reduction of leakages and distortions in resources transmission channels, and the increase the quality of resources for greater sustainability impact.
“Building on the Global Investors for Sustainable Development Alliance (GISD) definition of sustainable development investing as “deploying capital in ways that make a positive contribution to sustainable development using the SDGs as a basis for measurement”, SDG aligned finance should aim at creating a net positive impact, and also ensuring that investments does no harm across the SDGs”.
Director of the UNDP Finance Sector Hub
Why a Framework for
SDG Aligned Finance?
The COVID-19 crisis provides a stark wakeup call to the importance of aligning our economies to the SDGs and the Paris Agreement for building resilience.
The ignorance of systemic risks, poor risk governance and underinvesting in disaster risk reduction, linked to poor sustainability and equality management across countries, comes at a high price for all: the IMF forecasts a 4.4% decline in global GDP in 2020, with -5.8% in advanced economies and -3.3% in emerging markets and developing economies.
1 Declining resources.
Pre-crisis USD 2.5 trillion that were missing annually to achieve the SDGs by 2030 widened with the crisis with an estimated USD 1 trillion gap in COVID-19 emergency and response spending in developing countries compared to OECD countries. This, together with an estimated a USD 150 billion loss of external private financing to developing countries, means 2020 risks a collapse of development finance.
2 Increasing needs.
COVID-19 crisis, climate related disasters, and famine are hitting the most vulnerable and worsening gender gaps. It is expected that poverty will rise for the first time since 1998 with about 100 million people expected to be pushed into extreme poverty and at least twice as many into poverty, and with hundreds of millions of jobs lost. Inequality is rising across many groups as they are disproportionately affected. For example, people from low and middle-income countries are seven times more likely to die from natural disasters, and the financial burden associated with rising debt levels in those climate-vulnerable countries are expected to double over the next decade.
The pandemic has exposed the interlinkages between the SDGs such as the links between health, eradication of poverty and continued degradation of nature. A failure to meet one SDG will be to the detriment of the others and will affect us all. The world is already at a tipping point with nature declining globally at unprecedented rates in human history. With more than half of global GDP (55%) depending on high-functioning biodiversity and ecosystem services (BES), failure to adapt and mitigate climate change, extreme weather events, loss of biodiversity and ecosystem collapse, food crises, and water crises will cause irreversible catastrophic damage to people and planet. In fact, the OECD estimates that the total annual financial allocation for global biodiversity conservation was between USD 78 and 91 billion per year (2015-17 average), a mere fraction of the economic impact on the global economy from COVID-19, already estimated in the tens of trillions of dollars. Hence, the imperative to explore nature-related risks and dependencies to which our economies and financial systems are exposed and redirect flows of finance towards nature-positive activities.
Mitigation and reduction of these and other risks is a paramount concern to realise the transformative potential of the 2030 Agenda and the Paris Agreement.
It underlines why SDG alignment is critical. SDG alignment unlocks the resources, directs them towards needs, and builds a more sustainable and inclusive economy, which protects against risks, builds resilience and generates financial returns and economic growth. The case for alignment has never been stronger:
Alignment builds resilience and generates economic growth opportunities. Incorporating SDG into business strategies could result in efficiency gains and new economic opportunities worth at least USD 12 trillion by 2030 (more than 10% of global GDP) and closing the gender gap in the workforce would add another USD 28 trillion to the global GDP. Transition to a green economy could lead to a net increase of approximately 18 million jobs across the world18_and achieving the 2030 Agenda could generate up to 380 million jobs.
There is not necessarily a trade-off between financial and non-financial return, and alignment can preserve the long-term value of assets by mitigating systemic risks. The crisis has shown that the depreciation of assets linked to global shocks, such as epidemics, climate change, or forced displacements of populations, is not a distant threat. While the effectiveness of sustainable strategies to achieve superior financial and extra-financial returns is still debated in academic literature (partly due to incomparable reporting) and can come up against legal obligations of institutional investors, researchers agree that there are strong theoretical foundations to the fact that the twin goals of higher non-financial and financial return mutually reinforce and that ESG-aligned finance has shown more resilience during crises.
Alignment can unlock the volumes of finance needed to meet the SDGs which public resources could never achieve alone – the yearly USD 2.5 trillion SDGs financing gap in developing countries23, which could increase by USD 1.2 trillion (i.e. about +50%) in 2020 due to global economic uncertainty and an estimated USD 1 trillion gap in COVID-19 emergency and response24, is over 20x total ODA (over 30x G7 ODA) but only 1% of global financial assets. Total financial assets are valued at more than USD 378.9 trillion having grown at 5.9% year on year since 2012.