Change is an evergreen mantra—exemplified by Sheryl Crow’s iconic song A Change Would Do You Good. Sheryl Crow became a household name through this song as it blasted on MTV in the late 1990s. MTV played a defining role in shaping people’s lives, for better or worse. Similarly, the sustainable development sector has undergone a profound change for the better, with A Change Would Do You Good becoming a rallying cry for many striving for a more resilient, inclusive, and environmentally friendly tomorrow.
In the last decade, the development sector, including philanthropy, has evolved with increasingly measurable results. My book, Global Development Sector, covers many of these aspects. One major change is the rise in the complexity of financial products. The use of structured finance and blended finance has grown at an exponential rate. Structured finance is typically segmented into senior, mezzanine, junior, or equity tranches. These tranches are sold to various investors depending on their risk profiles. The waterfall structure is designed to reflect the seniority of cash flows, moving from the senior tranche to the mezzanine and then to the junior or equity tranche. Blended finance is an effective way of channeling concessional capital through public-private partnerships. This shift has led to a greater focus on results-based financing, involving multiple actors to mobilize capital for funding interventions. Consequently, there has been an increase in the number of impact investors and assets under sustainable investing. Strategy that blends both active and passive modes of investment is Smart Beta is gaining ground.
Smart Beta
More themes have emerged with the rise in both active and passive investments. Strategic beta or rules-based investment has been on the rise. Passive investments like ETFs (exchange-traded funds) have increased over the years. Unlike index funds, ETFs are traded as stocks and can be redeemed in real time; ETFs have a lower tracking error and better liquidity than index funds. According to data shared by the Board of Governors of the Federal Reserve System (US), exchange-traded funds (ETFs) had total financial assets of $9.97 trillion as of July 1, 2024. To put this into perspective, this represents an increase of 26,990 percent between January 1, 2000, and July 1, 2024, or 271 times the value on January 1, 2000. An increase in ETFs also suggests an increase in Strategic Beta ETFs. Smart Beta, also known as Strategic Beta, is a systematic active investment that uses various strategies focusing on specific factors such as value, quality, momentum, size, dividend, growth, or low volatility.
Performance-based Grants
Performance-based grants have also heightened the focus on measuring the impact of interventions. As a result, impact measurement leaders like J-PAL and IDinsight have emerged into prominence. With the rise of sustainable financial instruments, the breadth and depth of capital markets have expanded. More actors—including corporates, sovereigns, and supranationals—are accessing capital markets through green, social, sustainability, ESG, and sustainability-linked bonds. This development has led to more structured processes for raising capital, increasing the number of entities participating in fund-raising from institutional and HNI/UHNI investors. In turn, this has spurred the growth of investment banking actors and expanded the role and number of multilateral institutions. The increasing quantitative focus on measuring impact has also driven the rigorous implementation of frameworks like the Theory of Change.
Sustainable Regulations
Landmark sustainable regulations have emerged, for example, the EU Taxonomy and the Sustainable Finance Disclosure Regulation (SFDR). Classification System for Sustainable Activities: The EU Taxonomy provides a clear and science-based classification framework to determine which economic activities are environmentally sustainable.
Classification System for Sustainable Activities: The EU Taxonomy provides a clear and science-based classification framework to determine which economic activities are environmentally sustainable.
Six Environmental Objectives: To qualify, an activity must contribute substantially to at least one of six objectives, including climate change mitigation, adaptation, water and marine resources, circular economy, pollution prevention, and biodiversity.
“Do No Significant Harm Principle (DNSH)”: Activities must not significantly harm any of the other environmental objectives and must meet minimum social safeguards.
Applies to Financial Market Participants (FMPs): Mandatory for certain firms under SFDR and NFRD/CSRD to disclose how investments align with the Taxonomy, increasing transparency and comparability in sustainable finance.
In the end, the enabling of technology for giving and other purposes has grown. Kiva is an excellent example in this space.
These are some of the key aspects that have grown in prominence over the last decade.
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