A new report from the G7-backed think tank highlights the growing gap in funding needed to tackle the UN SDGs and suggests how it could be narrowed through smart use of blended finance and the development of more widely accepted sustainability disclosure standards.
A report from the Impact Taskforce (ITF), a think tank backed by the G7 presidency, calls for greater transparency in impact investing and improved public-private funding models to overcome blockages for institutional funding for impact investment by institutions, especially those that are directed at emerging markets.
In the State of Play 2023 report, the ITF notes that while the global ESG market grew by 15% to $35trn (€32.5trn) in 2022, with over $1trn intentionally invested for positive impact, the underlying investment patterns still make for grim reading.
The investment gap to be filled if the UN Sustainable Development Goals (SDGs) can be met has widened to more than $4trn and is set to widen further. Meanwhile, private finance flows into emerging markets and developing economies (EMDEs) fell by around a fifth between 2019 and 2022 and just 10% of all private sector capital mobilised by Development Finance Institutions (DFIs) reached low income countries in 2021, according to OECD data cited in the report.
Nick Hurd, chair of the ITF and the Global Steering Group for Impact Investment (GSG), said the urgency of the situation meant that 2024 needed to be a pivotal year for the sector. This required improved transparency for impact investments and a concerted effort to make it easier and more compelling for private investors to help fill the SDG funding gap, backed by development finance institutions.
“Much more needs to be done to help institutional investors get comfortable with the opportunity to combine acceptable risk-adjusted return with positive impact in sub-investment grade countries,” Hurd, a former UK government minister, said.
Reporting on progress made in the impact sector since it published its first recommendations in 2021, the ITF said the creation of the International Sustainability Standards Board (ISSB), which aims to set a global baseline for harmonized sustainability disclosure standards, had been a major step forward. The ISSB, which is chaired by ITF member Emmanuel Faber, released its first two standards in mid-2023.
The ITF also welcomed efforts to raise the profile of social factors in the standards arena, with the development of a Taskforce for Inequality and Social Related Finance Disclosure, which will complement the work of the Task Force on Climate-Related Financial Disclosures (TCFD) and the Taskforce on Nature-related Financial Disclosures (TNFD). The TCFD formally disbanded in October, with its functions now absorbed into the ISSB.
The report draws investors’ attention to practical tools available for DFIs and other investors, policymakers, regulators, and standard setters. The ITF also says catalytic, risk-adjusting tools such as guarantees and blended finance structures continue to be under deployed by DFIs and Multilateral Development Banks despite evidence of their effectiveness in directing private funds into impact investment.
Role of outcome partnerships
The ITF emphasises the positive role it believes outcome partnerships can play in mobilising private capital into impact-linked investment products. Outcomes partnerships are programmes where end-clients pay for specific, measurable outcomes from providers, rather than taking the conventional investment route of seeking upfront investment to pay for inputs or activities. Impact Investor looked at how one of the funds featured in the report, the SDG Outcomes Fund, is being deployed – for example, to boost waste recycling in Nigeria – in an article earlier this year.
On impact transparency, the ITF said it would support the GSG in its efforts to build capacity and increase inclusivity among stakeholders from emerging markets in global sustainability disclosure standard-setting processes. It also pledged to improve impact accounting through its support for the IFVI-VBA consortium, which is developing an impact valuation methodology with partners and early adopters.
Earlier this month, a similarly named but separate organisation, the Impact Disclosure Taskforce, was launched with the aim of narrowing the impact investment gap. Its members include representatives of major banks, public and private sector financial institutions, capital markets participants, and other industry stakeholders.