A new report by the Global Steering Group for Impact Investment (GSG) calls investors to look beyond “traditional” thematic investments towards place-based investing in poor urban communities
- There is sufficient private capital to invest in informal settlements but new financing vehicles and solutions are needed
- Impact investors are encouraged to look beyond thematic approaches towards place-based investing to create impact across nearly all SDGs
- Report highlights untapped sizeable economic opportunities of informal settlements
In its latest report ‘Informal Settlements: No Longer Invisible‘, the Global Steering Group for Impact Investment (GSG) highlights the urgent need for investment in urban slums globally, which it says is critical to delivering the SDGs by 2030.
According to the report, more than one billion people currently live in slums and informal settlements across the Global South without formal access to potable water, sewage or electricity. This figure is likely to grow with increasing urbanisation and migration, made worse by climate change and conflict, pushing people to settle in areas that lack access to basic infrastructure. The COVID-19 pandemic is also highlighted as having exacerbated the problem.
The report finds that public financing by local or national governments alone is insufficient to respond to the problem with total investment needs estimated at $6trn globally.
“Government budgets are not [big] enough to cope with the investment needs, or even keep up at current levels with the projected growth of these needs,” said Sebastián Welisiejko, chief policy officer at the GSG and co-author of the report, at the online launch of the report on Wednesday.
Looking at projections for population growth to 2050, he added: “As populations grow faster and the world becomes more urbanised, this dynamic will add extra pressure on cities. This will, very likely, have consequences for urban informality, as cities struggle to produce housing and housing solutions at scale to absorb the new populations. We also need to be mindful that things are probably going to get worse with climate driven and conflict driven migration.”
To meet the financing needs the report’s authors have called for greater dialogue and coordinated action between governments and regulators, urban experts, impact investors and local communities.
Informal economies offer untapped investment opportunities
According to the GSG “the urban poor have an active and complex economic life contrary to the perception that they are passive recipients of state and charitable aid,” with several studies cited in the report, including the 2020 study Economia das Favelas, which found that residents of Brazilian favelas had a combined purchasing power of R$119.8bn ($27.7bn) and the SDG 11 Synthesis Report, which calculated that more than 55% of households in sub-Saharan Africa spend more than 30% of their income on housing costs.
But the report’s authors say that informal economies in slums have been largely overlooked by investors and other stakeholders, and argue that both public and private stakeholders need to stop viewing informal settlements and the people that live within them as a problem, but rather as a significant opportunity.
“People tend to think that the economic lives of the urban poor are non-existent. Well, they do exist. They may be informal but they spend a large portion of their disposable income on solutions that improve their habitat, whether it’s chipping into improving a road or connecting to the electricity grid. All this is done informally, or illegally, some might say. But, critically speaking, there is a revenue model and adequate structures that can be leveraged, particularly with funding from capital markets,” added Welisiejko.
In order to unlock this opportunity and transform urban liabilities into assets, the report highlights the potential to adapt existing financial instruments such as green, social, sustainability and sustainable-linked bonds to channel private capital investment into informal settlements, which it says would “offer purpose-driven investors the opportunity to deliver impact at scale whilst meeting their financial return objectives.”
Place-based investment brings multiple benefits
According to the report, there is enough private capital available to fund the necessary improvements to informal settlements, with recommendations given to impact, ESG and other investors to look beyond “traditional” thematic investments such as healthcare, agriculture or education.
The GSG argues that place-based investing in poor urban communities in the Global South would create significant impact across nearly all of the SDGs, alongside returns, and calls on investors to “work with governments, regulators and multilaterals to find ways of overcoming current barriers to investment and of boosting capital flows towards slum-upgrading programmes.“
The report also provides recommendations for governments, regulators, multilaterals and development finance institutions as well as for urban and habitat experts, and includes a recommendation for all stakeholders to place communities at the centre of projects from design to delivery.
Welisiejko said: “All of us care very deeply about the delivery of the SDGs and the just transition to net zero by 2030 but there is no way we can achieve that agenda or to move it [forward] meaningfully, if we don’t put urban informality at the centre of the global impact agenda.
“We are calling on governments, regulators, multilaterals and DFIs to make informal habitats a priority and deploy solutions to de-risk investments. We are asking investors, particularly in the impact space, to pay more attention to these issues, to look beyond traditional thematic investments and help to co-design solutions. And we are calling on urban and habitat experts, who tend to think less in terms of how to finance the solutions they are putting together, to bring their world together with the world of finance and innovate with financial strategies that will encourage investment at scale”.
Replicating solutions across the Global South
An independent panel of urban and investment specialists joined the launch event, including Jingdong Hua, former vice president and treasurer at the World Bank, Laurie Spengler, founder and CEO of Courageous Capital Advisors and Cynthia Goytia, head of the MSc in urban economics at the Torcuato di Tella University in Buenos Aires.
Addressing the panel, Sir Ronald Cohen, chair of the GSG, highlighted the importance of government receptivity in implementing the rehabilitation of slums, from the willingness to change land ownership and transfer policy and being open to infrastructure investment and investment in housing, to being prepared to play a role in attracting investment in reskilling the local workforce and improving employability. He asked: “If we had a matrix for those needs, which countries qualify? Because if we can demonstrate on the ground how this is done, then replication is a lot easier.”
Spengler responded, saying that not only was government receptivity important but also identifying if the private sector was already participating in mainstream infrastructure.
She said: “You want to see already a constellation of capital investors, even if they’re not supporting the informal settlement investment, so that when you do have the demonstration, it’s not such a big move to get them to go from where they are in-country to this new opportunity set. So, I would add that as a criteria in the heat mapping.”
Welisiejko said that working with the GSG’s National Advisory Boards and network of experts, his team would pick pilots to demonstrate the solutions identified in the report, but added that similar issues in relation to the financing gap for informal settlements plagued the whole of the Global South, adding that “no country has cracked it”.