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Affordable and clean energy, widespread access to healthcare and education, quality jobs and infrastructure, safe and sustainable cities. These are pretty ambitious goals for developing countries, so how can we get there? By raising about an extra 2.5 trillion dollars of annual financing until the year 2030.

 

This is: Development Finance Unpacked

 

Back in 1944, the concept of development finance was born. Institutions like the World Bank were created to fund the rebuilding of vital infrastructure and services across efforts of war-torn European countries.

 

Since then, development finance has evolved into what it is today: Funding projects that improve the quality of life and well-being of people in developing countries.

 

In September 2000, a critical milestone took place when all United Nations members agreed on a set of development goals to achieve by 2015 called the “Millennium Development Goals.”

 

The idea? To rally world leaders around efforts to fight extreme poverty, expand access to quality jobs and healthcare, and more.

 

As 2015 approached, the United Nations formed 17 new Sustainable Development Goals to be achieved by 2030. They aimed to advance progress on things like: clean water, infrastructure, education, sustainable farming, improved mobility, and more.

 

Sustainability is the connecting force between them, emphasizing the necessary balance between economic growth, social inclusion, and environmental protection.

 

The estimated total investment needed to achieve the SDGs in emerging economies ranges between 3.3 to 4.5 trillion dollars per year.

 

Currently, we’re only half way there. According to the United Nations, there is a 2.5 trillion dollar gap of development finance – per year – until 2030.

 

Historically, the development financing has primarily come from public institutions, which are owned and operated by government shareholders.

 

It can also come from multilateral institutions, like the World Bank. They receive funding from multiple member governments and use it across projects in developing countries. Currently, around one hundred and forty countries are eligible to borrow from the World Bank.

 

However, this annual funding gap can’t be closed by public institutions alone. To do it the private sector – think multinational corporations or financial institutions – must play a leading role.

 

Private organizations can offer more capital, access to investors, structuring expertise and a global network.

 

It could be a direct investment like opening a factory, or a portfolio investment, like an asset manager buying a bond from a government to provide clean water.

 

Let’s look at an example of how development finance works. Let’s say a government agency in Saharan Africa, to build new infrastructure to provide clean water. While this may intuitively feel “developmental”, a development finance institution will thoroughly evaluate whether this qualifies as a development finance opportunity.

 

Certain questions could include: Will the infrastructure serve areas that struggle to access clean water? Will it be resilient to climate change? Does the agency provide quality jobs and training to employees?

 

If a project meets the necessary requirements, the development finance institution will connect this opportunity with potential investors – usually those interested in supporting development finance activities, like an impact investor or an ESG investment fund manager.

 

From there, projects that support the SDGs and have impact in developing countries, receive their needed funding and we move one step closer to closing that 2.5 trillion annual dollar gap.

 

Development finance funds projects that improve the quality of life and well-being of people in emerging markets. Yet there’s still a huge gap, leading to a push for private institutions to have more active input in development finance. How much additional investment is needed to achieve the United Nations’ Sustainable Development Goals?

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