How do we go from measuring quantity to quality when financing sustainable development?

April 30, 2019

This blog series takes a look at the new landscape of financing for development, the focus of our upcoming Istanbul Development Dialogues, an annual a global development forum where policy-makers, business leaders, and experts discuss issues of our time.

Things that can’t be measured often can’t be managed, and finance for sustainable development is no different.

Historically, development finance accounting has largely been a quantitative exercise in tracking transfers of official development assistance (ODA) from rich to poor countries. However, thanks to financial market globalization and growth in international labour migration, now commercial investments and remittances dwarf ODA—which, since 2000, has constituted at best 15 percent of global development finance. Nonetheless, development finance continues to be understood quantitatively, as the sum of ODA and foreign direct (and other commercial) investments, plus remittances developing countries receive from abroad.

However, limiting ourselves to quantitative approaches no longer makes sense. Most developing economies of yesterday are the middle-income countries of today, with state budgets and private companies themselves playing large development finance roles.

But bringing state budgets and domestic investment into development finance accounting raises two issues.

The first is double-counting. Both government expenditures and domestic commercial investments in many countries are partially financed from abroad. Counting both the foreign investments and the domestic expenditures they fund as sustainable development finance means counting the same spending twice.

Second, it is not clear that everything in the state budget, or that all private investments (regardless of their purpose and impact), should be counted as financing sustainable development. Most people would agree that public spending on health and education, or private investments to build modern factories that create decent jobs, should be treated as sustainable development finance. But what about public spending on weapons of war? Or perhaps even more complex, private investments in plastics?

These questions underscore the importance of adjusting quantitative measures of finance for development with qualitative sustainability filters. This means, for example, more closely linking specific state budget lines or private investment projects with targets and indicators of the Sustainable Development Goals (SDGs).

Some governments are already rising to these challenges. Public finance analysis conducted for Albania’s Voluntary National Report on SDG achievement, for example, found that 61 percent of spending under the country’s 2015-2017 medium-term budget programme could be directly classified as financing for national SDG achievement. Outlays on SDGs 3 (health and wellbeing), 4 (lifelong education), 9 (infrastructure and innovation), and 10 (reduce inequalities) were particularly well funded, while aspirations to reduce climate change and promote sustainable production and consumption were not.

Likewise, capital markets are increasingly looking for ways to use SDG indicators to track the sustainability implications of private sector investments. A May 2018 JPMorgan study found that the SDGs are “the most comprehensive set of targets” for social impact investment available for market participants. A recent PWC report finds that 72 percent of surveyed companies now mention the SDGs in their annual corporate or sustainability reporting.

But while these are important first steps, we still have a long way to go. When I review a state budget to learn about a government’s fiscal priorities, I want to look beyond the vast sums of money and see which SDGs it is (and is not) prioritizing. When I buy a product at the supermarket, I look to see whether its packaging is recyclable and if it contains ingredients to which I might be allergic. But I also want to be able to see which SDGs the company that produces the product will help to achieve, with the money I am spending on the purchase.

When this day comes, I will know that we are more seriously, and accurately, measuring, managing and financing sustainable development.

Under the overall theme of “Putting money to work for sustainable development”, the Istanbul Development Dialogues, taking place 27-28 May 2019, will seek to tackle some of these issues.