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Fueling sustainable development goals with financial instruments

As per the United Nations, annual financing of USD 5-7 trillion will be needed to meet the SDGs, the bulk of which is to come from the private sector

With recent developments in climate change and its effect on our lives, the Sustainable Development Goals (SDGs) are increasingly becoming a global framework for governments and organisations to report on their environment and social impact. SDGs are 17 goals linked to global peace & prosperity and were passed as a resolution during the 2015 United Nations General Assembly to provide a blueprint for a better world by the year 2030.

While most nations across the world have started devising policies and strategies to achieve these targets at the national level, the role of corporates is expected to be that of a catalyst. Businesses generate wealth for the ones who invest in them and they also bear the responsibility of protecting the interests of all stakeholders within their ecosystem. As per the United Nations, annual financing of USD 5-7 trillion will be needed to meet the SDGs, the bulk of which is to come from the private sector.

India has been the first country in the world to mandate corporates beyond a certain earning and size threshold to spend 2% of their profits on uplifting people from poverty and climate action as a part of their corporate social responsibility. This has been a benchmark for Governments globally to channelize corporate funds and expertise for the cause of sustainable development.

Given the synergy between objectives of CSR for societal development and the SDGs being a universal call to action to end poverty and conserve the environment with a target based approach, adaptation by the central and state governments to align their growth agenda to SDGs is becoming progressively common here.

The influx of risk free capital provides a whole new opportunity for social entrepreneurs to experiment and grow without the pressure of profit sharing, provides a base for non-Government organizations to work out solutions for social problems in a programmatic approach and the corporates an opportunity to meet their mandate- a win-win for all! Since its implementation in 2014, more than INR 50,000 crores have been mobilized by corporate India through its CSR programs.

Development Impact Bonds are another set of tools that could be linked to promote the cause of SDGs. These are typically bonds where an investor pays to address a social problem. On the one hand, it helps organizations like NGOs to get initial capital to launch interventions, and on the other it increases their accountability compared to philanthropic donations which might not target measurable returns. This strategy works well for Governments too since it helps them in encouraging innovation for the bottom of pyramid population and thereby major cost savings in the long run. For this mechanism to be successful, it is important for the bond issuers, be it the governments or companies to align them specifically in support of the SDGs.

For instance, in May this year, the World Bank issued a ten-year Global Sustainable Development Bond to raise awareness on specific SDGs. The idea was to engage with institutional investors and encourage them to finance sustainable development activities. Increasingly, investors and other market participants are using the SDGs as a framework for investment and way to communicate support for specific development priorities. With examples like these and annual issuances between USD 40-50 billion, World Bank bonds support the financing of programs towards SDGs while also meeting its own agenda of ending extreme poverty by 2030.

This September marked another issue of an SDG bond, this time by a private entity. The bond was over-subscribed by almost three times, showcasing increased interest in impact investing, including from Socially Responsible Investors. The proceeds are promised to be utilized towards fulfilment of specific SDGs.

More investments would create larger impact; and that would require coming up with a variety of potential impact investment strategies. With this objective, the United Nations Global Compact has collaborated with the Principles for Responsible Investment and the United Nations Environment Programme Finance Initiative to bring together multi-disciplinary groups who would study existing financial instruments and experiment combining returns with social objectives, thereby catalyzing innovation in the arena.

While the ecosystem is preparing itself for tangible actions towards sustainable development, when and how such solutions will help overcome the constraints of time, efforts, risks and upfront costs in developing and implementing them remains to be seen. The urgency in fulfilment of the SDGs requires speedy action by all stakeholders- Governments, businesses and civil society, and collaboration could finally be putting money where the mouth is.

(The article is written by Shipra Sharma, Head Corporate Social Responsibility & Sustainability, LTI)

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