Sustainable Finance word is used interchangeably by Sustainable Investing and ESG. This report includes videos focused on sustainable finance/sustainable investing/ESG. Before we begin our journey on sustainable finance developments, let’s understand the actors within the sustainable development sector. The report is update with recent figures since it was first published.
Actors within the Sustainable Development Sector
United Nations is the principal actor driving sustainable development goals supported by the following actors. UN as an umbrella brand networked into different specialized agencies like UNDP (global development arm for sustained development), UN/DESA (home and pioneer of SDGs) and UN Capital Development Fund which focuses on mobilizing both private and public capital for least developed countries.
Organization for Economic Co-operation and Development (OECD), a Supranational Organization headquartered in Paris, with 38 high-income members, is a major international organization driving sustainable development globally. It captures quantum of international aid through Official Development Assistance (ODA), a term coined by OECD’s Development Cooperation Directorate (DAC) in 1969 and a gold standard in international aid. Official development assistance (ODA) is defined by the OECD Development Assistance Committee (DAC) as government aid that promotes and specifically targets the economic development and welfare of developing countries.
ODA is the largest source of external finance flows for emerging economies for funding development projects. The definition of ODA grants is revised from time to time and includes a minimum of 25 percent grant elements, among other parameters. (Beyond ODA flows: definition and research framework).
UN stipulates a grant ratio of 0.7 percent of GNI for OECD countries towards contribution to ODA. Only a few countries meet the grant ratio target with Sweden leading the group in terms of participation as a percentage of GNI while the US leads in the total amount. In recent years, China, although not a part of the OECD group, is a significant contributor to development assistance. Apart from foreign direct investments and personal remittances which are tuned towards the private sector, the core responsibility of government borrowings is through the issuance of sovereign bonds. (Refer Masala Bond section in this report).
Other significant forms of external financing assistance in development sector include philanthropic assistance through foundations, international sovereign bond issuance across various multilateral institutions, climate finance through PPP (public-private partnerships) as a critical enabler in forging multi-stakeholders’ alliances among different sets of actors within the development arena. (Beyond ODA flows: definition and research framework). The rise of sustainable finance is a result of the rise in different sources of development external funding facilitated by the PPPs.
OECD works with multiple actors within the development sector, including multilateral banks, policymakers and think tanks to layout foundation for social and economic well-being. Multilateral Development Banks or MDBs further form the most vital component of fostering public private partnerships, a key partnership to attract $5-7 trillion worth of capital per year in meeting SDGs target by 2030. MDBs work along Government-backed institutions and are the most critical enablers presently and include multilateral institutions, especially Multilateral development banks, bilateral aid agencies, development institutions, supranational organizations, sovereigns, agencies, among others. These are chief actors who define and promote sustainable finance globally, pivotal to financial innovation. Civic societies through non-profits, think tanks, philanthropists, activists and social change enablers are catalysts in promoting social issues.
Net ODA – ODA grant equivalent, % of gross national income, 2018 – 2021
OECD (2022), Net ODA (indicator). doi: 10.1787/33346549-en (Accessed on 10 July 2022) | Graph: The middle Road. The definition of OECD ODA flow basis methodology has changed. According to OECD; prior to 2018, the ODA flows basis methodology covered loans expressed on a “cash basis”, meaning their full-face value was included, then repayments were subtracted as they came in. From 2018, the ODA grant-equivalent methodology is used whereby only the “grant portion” of the loan, i.e. the amount “given” by lending below market rates, counts as ODA. The value is in USD 2008 constant prices
Foundations, charitable and religious institutions apart from government-backed organizations are the primary source of concessional finance. Financial Institutions, insurance funds, pension funds and the emerging impact investors are fostering incremental capital in the development sector. Seed accelerators example Y Combinator, Techstars, incubators and start-up platforms like Slush work as catalyst in boosting social entrepreneurship. Social stock exchanges are a step in the right direction to provide liquidity among actors within sustainable development. Angel Investors, Venture Capitalists and even private equity are playing an increasing role in the social impact ecosystem. Corporate social responsibility is another driver of ESG theme globally.
Note from Global Sustainable Investment Review 2020 –* Europe and Australasia have enacted significant changes in the way sustainable investment is defined in these regions, so direct comparisons between regions and with previous versions of this report are not easily made. From the report Global Sustainable Investment Review 2020.
Sustainable Investing/Sustainable Finance/ ESG is now a global mainstream phenomenon with the Global Sustainable Investment Alliance estimating the market at $35.3 trillion in 2020 in five major markets, an increase of 15 percent from its value in 2018. IMF defines Sustainable Finance/ Sustainable Investing as the incorporation of Environmental, Social, and Governance (ESG) principles into business decisions, economic development, and investment strategies. According to GSIA, Global Sustainable Investment Review 2020, the Canadian market accounts for the largest share of sustainable investment assets in the world at 62 percent overtaking Europe with a market share of 42 percent. The other top markets are Australasia at 38 percent, the United States at 33 percent, and Japan at 24 percent. The United States and Canada combined have more than 80 percent of the global sustainable investments during the period covered from 2018 to 2020.
Graph : The middle Road : Data Source: Global Sustainable Investment Review 2020
Kindly refer to the note from Global Sustainable Investment Review 2020 | NOTE: European sustainable investing strategy data is based on extrapolation from historic data from the 2018 GSIR report and applying the same proportion to 2020 sustainable investing data across the different sustainable investing strategies. US SIF data extrapolates from numbers provided by a subset of overall respondents in its 2020 Trends report. US and Australasia did not report on the category of norms-based screening and Australasia on the category positive/best in-class screening. Australasia also includes corporate engagement within ESG integration.
The rise in sustainable investment in recent years is strongly enabled by the inclusion of the ESG model among pension funds in Japan. Sustainable Investing has come a long way from following a negative screening of companies and sectors example gambling, and tobacco to incorporating a more action-driven bottoms-up approach including best-in-class screening, ESG integration, sustainable themed sectors, and norms-based investing, impact/community investing, corporate engagement and shareholder action. 1
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