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The Road to SDG Financing: A New Destination for Private Investment

(PART III)

Implementing the Sustainable Development Goals (SDGs) anywhere in the world will require private investment. Cognizant of this, the SDGs dedicated Goal #17 to an explicit call for partnership and private sector engagement in sustainable development. But in Latin America and the Caribbean (LAC), we consider it particularly important to mobilize private investors to action. In part three of this series on “the Road to SDG Financing,” which analyzes the trends, challenges, and opportunities related to boosting private SDG financing, we explore why LAC is both a worthy recipient of private investment and an exciting investment destination that private investors should not overlook.

To begin with, the numbers show that LAC requires prompt private sector investment if it is to implement the SDGs over the next decade. According to the OECD, investment needs in key SDG sectors in emerging markets are estimated at $3.9 trillion per year globally. With a mere $1.4 trillion invested in the SDGs each year, the global development community must fill an annual gap of $2.5 trillion. From this, we can derive that LAC has an estimated SDG financing gap of $650 billion per year, meaning the $71 billion the region receives in annual development funding is a mere drop in the bucket. In this context we can estimate that for every dollar of development finance invested, the LAC region must mobilize 5-6 dollars from other sources, with a sharp focus on private sources.

Further, development progress in the region has driven the middle-income transition of several LAC countries. While this progress is indeed a positive indication of the region’s development prospects, it can continue limiting flows of traditional development finance to LAC, adding a layer of urgency to efforts to boost private SDG financing. To illustrate this point, we can look to flows of Official Development Assistance (ODA) to the region, which have stagnated since 2006. In the past few years, five LAC countries – the Bahamas, Barbados, Trinidad and Tobago, Uruguay and Chile – have been removed from the official list of ODA recipients. Some others may be removed as well if they remain in the high-income category. And moving forward, it is expected that continued macroeconomic development will further solidify LAC’s standing as a middle-income region, thereby limiting future flows of ODA despite persisting SDG financing needs across LAC countries. 

Yet while these improvements have cost the region some public donor financing, they have also positioned LAC as a prime destination for private capital. LAC’s combination of middle-income economies and less developed ones, burgeoning institutional capacity and fiscal stability, and growing capital markets make the region a fertile ground for private SDG financing. Compared with other developing regions, financial risk is minimized due to these strengths, and the potential for generating returns amplified. In addition, the cultural, economic, and social similarities shared by many LAC countries permit financiers to pilot novel financing mechanisms, scale and replicate proven solutions, and report on the application of solutions to other regions. Ultimately, financial innovation is an excellent tool for unlocking SDG financing, and LAC is an excellent place to experiment.

Fortunately, investors are beginning to recognize that there is no shortage of good risk-return profile for investments in development, even in the developing economies that may be perceived to be riskier. For instance, BlackRock Investment Institute’s April 2018 comparison of traditional equity benchmarks and those focused on environmental, social, and corporate governance (ESG) indicators shows equal annualized returns in the United States, slightly higher returns (by 0.6 percentage points) in the rest of the world, and higher returns in emerging markets (by 1.3 percentage points). And in LAC, we consider that the strengths we have listed enhance the potential for these good risk-return profiles even more.

To help investors capitalize on this, the Inter-American Development Bank (IDB Group) stands as a ready investment partner for private entities. By working with the IDB Group, investors can benefit from its deep knowledge and understanding of the region, its sixty year history investing in LAC countries, and its commitment to lowering the barrier to entry for private investors as a means of helping the region close its SDG financing gap. In part through IDB Invest, its entity for the private sector, the IDB Group is expanding its engagement with private investors, designing and testing financing structures that crowd-in private capital, and complementing this with its continuously evolving portfolio of public sector activities.

Our experience working with the private sector has taught us that building trust and a robust portfolio of investment opportunities is key to engaging any investor. In the next installment of this series, we will discuss just how we are working to meet – and hopefully exceed – these expectations.

Matias Bendersky

Miniatura

Matias Bendersky is Chief of the Resource Mobilization Division at the Inter-American Development Bank (IDB), where he is responsible for forging and expanding the IDB Group’s strategic alliances with partners from the public, private, non-profit, foundation, and academic sectors. He leads a team of professionals that work to identify co-financing opportunities and mobilize resources. In addition, Mr. Bendersky’s team works to explore how to best leverage blended and innovative financing instruments as vehicles for achieving the sustainable development agenda in the region. Prior to joining the IDB in 2007, Mr. Bendersky worked for the World Bank in various sovereign guaranteed operations. Previously, Mr. Bendersky worked for 6 years as a corporate and transactional attorney in both Argentina and the United States. Mr. Bendersky holds a JD from the University of Buenos Aires and a Joint Degree Masters from Northwestern University’s Kellogg Graduate School of Management and Law School in Chicago.