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G20 DWG meeting - OECD on SDG Alignment

  1. Haje Schütte Senior Counsellor and Head of Division, Financing for Sustainable Development, OECD, Development Co-operation Directorate Finance for Sustainable Development: Filling the gap, aligning finance to the SDGs G20 DWG WORKSHOP| 12 JANUARY 2021
  2. The SDG financing gap in developing countries has widened by 70% 2
  3. Note: Stacked columns display stimulus financing needs using International Monetary Fund (2020[20]) projections for 2020 by region and income level. Diamonds display aggregate regional needs using the World Bank (2020[13]) Global Economic Projections, June 2020. The difference stems from large differences in growth prospects. Sources: Author’s based on Center for Strategic and International Studies (2020[21]), CSIS G20 COVID-19 Fiscal Relief Tracker Dataset, b883-4140-a294-5d0ab65974fa/page/v7WYB; International Monetary Fund (2020[20]), World Economic Outlook: A Crisis Like No Other, An Uncertain Recovery,; World Bank (2020[13]), Global Economic Projections, June 2020,; Hale et al. (2020[22]), Oxford COVID-19 Government Response Tracker, A spending gap to recover from COVID-19 has emerged in developing countries STIMULUS PACKAGES: COMPARING THE FINANCING NEEDS (BASED ON GDP PROJECTIONS) WITH CURRENT SPENDING 3
  4. Covid-19 outbreak resulted in a collapse in external private finance in developing countries Note: Based on OECD estimations as from June 2020. All data refer to ODA-eligible countries. The sudden stop of capital flows in 2015 is not shown here, as it would have included a USD 556-billion drop relating only to China. Other investment excludes IMF lending and Special Drawing Rights allocations. Source: Author’s based on KNOMAD (2020[8]), Remittances inflows (database), Historical FDI, portfolio investment and other investment data refer to net incurrence of liabilities and are from IMF (2020[9]), Balance of payments (database),, and national central bank data. COVID-19 projections are based on combining historical data with projections on remittances and FDI by the World Bank (2020[26]), “COVID-19 Crisis through a migration lens”,, with portfolio and other investment data by the Institute of International Finance (2020[25]), IF Capital Flows Report: Sudden Stop in Emerging Markets, 4
  5. Financial assets are not aligned in favour of the SDGs, contributing to inequalities and unsustainable activities Source: Author’s based on Financial Stability Board (2020[28]), Global Monitoring Report on Non-Bank Financial Intermediation 2019, report-on-non-bank-financial-intermediation-2019/ and Global Sustainable Investment Alliance (2018[29]), Global Sustainable Investment Review 2018, http://www.gsi- 1.1% of total assets needed to fill the gap 5
  6. Increasing proliferation of sustainable finance measurements and instruments in advanced economies Note: The amounts in the figure do not add up to the estimated USD 30-trillion estimate sustainable investments due to double-counting across several categories. Source: Author’s based on Global Sustainable Investment Alliance (2018[29]), Global Sustainable Investment Review 2018, content/uploads/2019/03/GSIR_Review2018.3.28.pdf; European Sustainable Investment Forum (2018[36]), European SRI Study 2018, Study.pdf; Responsible Investment Association Australasia (2019[37]), Responsible Investment Benchmark Report: Australia 2019, Benchmark-Report-Australia-2019-2.pdf. Elsewhere, the number of impact bonds issued per year since 2015 has quadrupled Source: Brookings (2020), What is the size and scope of the impact bond market?, content/uploads/2020/09/Impact_Bonds-Brief_1-FINAL.pdf Few impact bonds are carried out in developing countries Source: Brookings (2020), What is the size and scope of the impact bond market?, content/uploads/2020/09/Impact_Bonds-Brief_1-FINAL.pdf Estimates of sustainable finance vary from billions to trillions of dollars of assets under management depending on measurement criteria 6
  7. Filling the SDG financing gap: implementing the Addis Ababa Action Agenda Alignment is the central part of a three- step approach to shifting finance towards the SDGs. The SDGs provide the common frame of reference to ensure a net positive impact over the life of investments and do no harm across the SDGs. It aims for financial and non-financial returns which rely on the achievement of two objectives: 1. Increase equality: resources should be mobilised to leave no one behind and fill the SDG financing gaps, and 2. Build sustainability: resources should accelerate progress across the SDGs. 7
  8. SDG alignment: issues, solutions, possible actions 1. Three main issues preventing SDG alignment  Transparency in sustainable finance with a proliferation of standards and initiatives (185 initiatives)  Accountability of non-financial returns, which risks undermining efforts and credibility towards sustainable investments and sustainable finance  Coherence. Still misalignment due to lack of incentives and fragmented regulations 2. Three sets of solutions  Policies to create appropriate incentives and promote accountability  Standards to raise the bar on sustainability and strive for transparency and harmonization  Tools to better leverage existing resources for quantity and quality, and leave no one and no SDG behind 3. Three ways of working  Community actions plans (for public and private actors, e.g. pension fund and asset managers)  Finance for Sustainable Development dialogues (in international fora; UN FFD; AAAA)  Accountability mechanisms (to review progress on alignment). (Framework for SDG Aligned Finance launched by OECD and UNDP in Nov 2020, more detail slides 13, 14, 15) 8
  9. What could the G20 do? 1. Stress importance of SDG Financing Strategies • Help the implementation of holistic and sustainable national development financing strategies, such as INFFs, through development of G20 Guidance Material / Mechanism for FSD capacity building / Stocktaking exercise / Performance framework. • Promote greater alignment of public and private finance with the SDGs, through a discussion of the main obstacles for greater alignment and the development of a G20 SDG Alignment Framework. 2. Commit to advance innovative finance instruments • Commit to use innovative finance instruments, avoid SDG washing, and strengthen integrity and efficiency, through development of G20 Guidelines/Principles on scaling-up Sustainability Bonds in developing countries • Leverage catalytic effects of official assistance through blended finance mechanisms, such as the Tri Hita Karana Roadmap, through a G20 roadmap for Blended Finance 3. Bridge gaps between development co-operation and finance communities, and between public and private actors. • Consider briefings other G20 WGs; organise joint meetings of the finance track and the DWG; hold consultations with B20 and the private sector; 9
  10. 10 ANNEX
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  12. 12 SDG Investment Chain - Bringing all actors behind the SDG investment chain
  13. 13 Issues
  14. 14
  15. 15 Roadmap
  16. Example innovative instruments (bonds) Definitions Oversight bodies Bonds Green bonds Green Bonds are any type of bond instrument where the proceeds will be exclusively applied to finance or re-finance, in part or in full, new and/or existing eligible Green Projects and which are aligned with the four core components of the GBP (Green Bond Principles). Green Bond Principles and Green Bond mapping by ICMA (International Capital Market association) Social bonds Social Bonds are any type of bond instrument where the proceeds will be exclusively applied to finance or re-finance in part or in full new and/or existing eligible Social Projects and which are aligned with the four core components of the SBP (Social Bond Principles). Social Bond Principles (SBP) by ICMA Sustainability bonds Sustainability Bonds are bonds where the proceeds will be exclusively applied to finance or re-finance a combination of both Green and Social Projects the Sustainability Bond Guidelines (SBG) by ICMA Sustainability linked bonds Sustainability-Linked Bonds (“SLBs”) are any type of bond instrument for which the financial and/or structural characteristics can vary depending on whether the issuer achieves predefined Sustainability/ ESG objectives. the Sustainability-Linked Bond Principles (SLBP) by ICMA SDG bonds Issuers, investors and bond market participants can evaluate the financing objectives of a given Green, Social or Sustainability Bond Programme against the Sustainable Development Goals (SDGs). 37.5% of green, social and sustainability issuances explicitly aligned with the Sustainable Development Goals in 2019. High level mapping to the SDGs by ICMA SDG-linked bonds In SDG-linked bonds, the coupon payable by the bond issuer is linked to achieving targets against specific SDG outcomes ICMA Covid-19 bonds A “corona bond” can take the social bond label or be a non-labelled thematic bond, with proceeds earmarked for fighting the effects of COVID-19. As with regular social bonds, the issuer discloses use of proceeds and commits to reporting regularly on progress and impacts. ICMA Transition bonds Transition bonds are new products that aim to finance the transition to a low-carbon economy. ICMA has formed a working group to examine the lack of issuance in the green bond market by carbon-intensive corporates and will consider providing guidance for issuance ICMA Outcome-based mechanisms Social impact bonds (SIBs) A SIB is an innovative financing mechanism in which governments or commissioners enter into agreements with social service providers, such as social enterprises or non-profit organisations, and investors to pay for the delivery of pre-defined social outcomes. The Social Impact Bond (SIB) is not a ‘bond’ in a traditional sense — it’s a unique public-private partnership that funds effective social programs through outcomes-based contracting. Individual government authorities, Public procurement rules Development impact bonds (DIBs) Development Impact Bonds (DIBs) are a variation on Social Impact Bonds (SIBs), which have been implemented in the UK, the US, and countries. The main difference between a SIB and a DIB is the outcomes funder. For a SIB, the outcomes funder is most of the times the government whereas for a DIB is usually a donor Individual government authorities, Public procurement rules Outcome funds Outcomes Funds are financing vehicles set up by a public actor pooling public or/and donor’s funding (philanthropy or corporate-giving) to finance multiple outcome-based mechanisms (OBMs) – such as SIBs, DIBs and SSN – in parallel. Individual government authorities, Public procurement rules Social success notes (SSNs) Social success note (SSN) are a blended finance instrument based on the principle of pay-for-success, that helps for-profit social enterprises access affordable debt to scale their operations and impact while tackling the issue of mission drift. Individual government authorities, Public procurement rules [i] Environmental Finance [ii] Social Finance [iii] 16
  17. COVID-19 had severe macroeconomic impacts on developing countries Source: Author’s based on (World Bank, 2020[13]), Global Economic Prospects, June 2020, 10.1596/978-1-4648-1553-9; (World Bank, 2020[14]), World Development Indicators (database), Figure 4. GROWTH FORECASTS AMID THE COVID-19 RECESSION IN 2020 BY INCOME GROUP Direct impact worsens with income Tourism: Tourism could decline by 60% to 80% in 2020 Commodities commodity exporting countries are projected to experience growth decline of more than 8% Trade a slowdown in trade of 18.5% for Q2 2020 17
  18. The trillions are not benefiting people and countries most in need Source: Authors based on Financial Stability Board (2020[28]), Global Monitoring Report on Non-Bank Financial Intermediation 2019, report-on-non-bank-financial-intermediation-2019/. Figure 9. FINANCIAL ASSETS HELD BY FINANCIAL ACTORS AS A PERCENT OF GDP ACROSS COUNTRY GROUPS, 2005-18 Total financial assets by year and country group 18

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