The United Nations General Assembly has set 17 Sustainable Development Goals (SDGs), with the objective of eliminating poverty and hunger, realizing human rights for all, achieving gender equality, empowering women and girls, and protecting the planet and its natural resources. However, numerous challenges in the recent years, including pandemic-related uncertainties, escalating geopolitical tensions, and tightening financial conditions, have hindered progress towards the SDGs, which were off-track even before the recent setbacks.
The SDGs require significant financing and allocation to drive meaningful economic and societal change, but the current situation has not seen the necessary mobilization or allocation of resources to achieve these goals. Sustainable finance will be crucial in transforming the economy from one that harms nature and society to one that benefits both. The financial sector can play a vital role in steering capital towards a sustainable future by investing and lending, as well as insuring only companies and projects that address sustainability risks, thereby promoting a restorative and positive influence on the environment and society.
Progress So Far
Despite unanimous support from all 193 member countries, the progress towards achieving the SDGs has been limited due to widespread inequality within and between countries, encompassing economic disparities, political conflicts, and unequal access to essential services like education and healthcare. Even the most urgent goal, SDG 13 on climate action, faces significant challenges. A key challenge encountered by policymakers at the national and international levels is the prevailing financing gap.
The current level of SDG‐related financing and investing is far less than what is needed due to limited flow of capital from developed to developing countries, where a substantial portion of the world's impoverished population resides. Low-income countries (LICs) and lower-middle-income countries (LMICs) particularly face significant challenges in accessing affordable long-term capital to achieve their sustainable development objectives. Despite the pressing need for investment, the amount of capital reaching these regions falls short, resulting in a growing annual investment deficit.
According to UNCTAD World Investment Report 2014, USD3.3-4.5 trillion needs to be mobilized per year to achieve the SDGs. While the annual pre-COVID-19 SDG financing gap was estimated to be USD2.5 trillion, it has increased to USD4.0-4.3 trillion due to shortfalls in the years since 2015, coupled with the impact of higher needs caused by multiple global challenges, including the COVID-19 pandemic and inflation. The pandemic, the escalating effects of climate change, and Russia’s war on Ukraine have led to weak and insufficient progress on more than 50% of the SDGs. For 30% of the SDGs, progress has stalled or reversed, and only 16% are currently on track. Hence, in order to progress towards the 2030 goals, all member countries have to perform better in the years to come.
What’s Next
Renegotiating the SDGs is not feasible due to existing investments, challenges related to international consensus, and a significant financing gap that is unlikely to be fully met. However, the 2023 SDG Summit highlighted that the dynamic nature of global challenges calls for a tailored approach that prioritizes goals based on national priorities, capacities, and immediate needs. It was proposed that countries should adopt flexible strategies that allow them to reassess priorities based on their evolving circumstances, focus on the most impactful goals, leverage data for effective allocation of resources across areas in which they are lagging, and foster a collective effort towards achieving sustainable development.
Sustainable Finance and Current Trends
Sustainable finance refers to the process of factoring in the environmental, social, and governance (ESG) considerations into investment decision-making, thereby leading to long-term investment in sustainable economic activities and projects. It is a powerful movement being led by regulators, institutional investors, and asset managers globally to unlock the capital needed to drive sustainable development and achieve SDGs by 2030. The UNCTAD World Investment Report 2023 highlighted that an additional investment of more than USD30 trillion will be needed in 2023-2030 to meet this deadline. It emphasizes an urgent need to accelerate SDG investment.
Financial institutions must develop investment vehicles, including impact investing tools, to enable targeted investments in developing countries. This could involve leveraging various financial mechanisms, such as financial intermediation, public-private partnerships, and foreign direct investment, to scale up SDG financing. It can also be achieved by fostering collaboration between the private sector, governments, and multilateral organizations to establish robust frameworks, set high standards, and create policy settings that facilitate capital flow.
The sustainable finance market has grown rapidly over the past years. While green bonds remain the most mature instruments, the market has diversified over the past few years with the introduction of a wide range of innovative financial solutions, including sustainability bonds, social bonds, green loans, and sustainability-linked loans.
According to Bloomberg, issuance of sustainable bonds (i.e., green, social, sustainability, and sustainability-linked bonds or GSSSB) totaled USD939 billion in 2023, an increase of 3% from 2022 (the issuance was at a record USD1.1 trillion in 2021). In 2024, S&P Global expects GSSSB issuance to grow modestly to USD0.95-1.05 trillion, representing at least 12-14% of overall bond issuance during the year.
Role of Asset Managers in Achieving SDGs by 2030
The UN Secretary-General has said, “Investing in the SDGs is both sensible and feasible. It is a win-win for the world, as the social and economic rates of return on sustainable development in developing countries is very high.”
Asset managers play a crucial role in investing in SDGs, thereby bridging the financing gap in achieving them. They help by changing their investment choices based on ESG factors aligned with the SDGs, focusing on important sustainability themes like climate change, and investing in projects such as sustainable buildings and roads that support SDGs. Additionally, they innovate financing structures and employ new methods to finance projects that provide financial, social, or environmental benefits.
Additionally, the value of global assets under management (AUM) from sustainable investments grew by over 32% between 2016 and 2022 to approximately USD30.3 trillion, accounting for 30.9% of global AUM.
Need for More Robust Sustainable Investment: Incomplete but Growing
The integration of ESG considerations into investment strategies has become increasingly important as investors seek to understand the societal and environmental impact of their investments. Financial institutions are increasingly incorporating climate risk assessments into their financial modeling and decision-making processes, and portfolio managers are tasked with creating investment portfolios that align with sustainability goals.
However, with half the time already passed, the progress towards the 2030 goals remains insufficient. The United Nations predicts that if the current trends persist, nearly 600 million people will be in a state of extreme poverty by 2030 and beyond, over half of them being women. To make significant progress towards bridging the gap and achieving these goals, investment policymakers must take more decisive action and commit to more robust sustainable investing practices that prioritize both financial returns and positive social and environmental outcomes. Although the current financing gap of ~USD4.2 trillion is significant, it accounts for only 1.1% of the total of USD379.0 trillion of financial assets held by banks, institutional investors, and asset managers.
Europe’s sustainable investing assets increased at a CAGR of 4.0% during 2014-2020. With a stronger 15.6% growth between 2020-2022, Europe now accounts for a significant 46.0% of sustainable investment assets globally (vs 34.0% in 2020), followed by the US (28.0%). Moreover, following the EU’s implementation of Sustainable Finance Disclosure Regulation (SFDR), which requires asset managers to disclose how ESG factors are integrated at both an entity and product level, sustainable funds are expected to continue growing as asset managers strive to meet investors’ sustainability and ESG preferences.
