Re-defining State Intervention: Achieving Balanced Decision Making in Sustainable Finance

By
Marcos Neto
July 14, 2023

The global wealth is estimated at around US$ 463.6 trillion but most of these resources are not being aligned with sustainable development at the scale and speed necessary to achieve the Sustainable Development Goals (SDGs).

Despite many years of efforts to integrate sustainability into financing strategies, financial engineering, and market standards, the sustainable finance market has been slow to develop. The reasons for this slow scale-up include a lack of planning, limited attention to policy design, weak governance processes, and limited state intervention in defining what is sustainable – and holding stakeholders accountable.

UNDP’s work in sustainable finance in developing countries has highlighted the need to position the public sector as a fiduciary of global public goods. Translating this concept into actionable policies requires robust institutional arrangements to ensure that countries’ financing strategies are aligned with national development priorities, community needs, the conservation of natural ecosystems, and the need for strong governance to ensure effective implementation. The toolbox to achieve this includes establishing Integrated National Financing Frameworks, designing Sustainable Development Goals (SDGs) bonds, and redirecting financial flows toward the SDG using the SDG Investor Maps, insurance, and risk financing, as well as SDG impact measurement and management.

The shift towards public economic management

The private sector’s increased power over the global economy has increased shareholder value at the expense of real economic growth. This disconnect between investment and long-term value creation has been a major obstacle to mobilizing capital for achieving the SDGs.

Recent developments in industrial policymaking within developed countries have proven the effectiveness of the ‘carrot’ approach to aligning financial capital with the SDGs. This approach emphasizes the necessity of substantial public spending, including production and consumption subsidies, to achieve the level of investment needed for a clean-energy transition, while addressing strategic dependencies related to energy and mineral supplies.

Such developments suggest the emergence of a new financial framework that assigns the public sector a clear role in shaping capital markets. Simultaneously, regulators’ heightened focus on climate transition planning towards an equitable ‘net zero’ sends a clear signal of the need for enhanced climate and social-related disclosures, integrated with prudential regulation, and inclusive green monetary policies.

This is accompanied by a shift towards prescriptive regulatory frameworks that indicate what activities are sustainable. The new policies are working but need to be supported across emerging markets – especially in developing countries that have limited fiscal space and rising debt-service costs.

These new developments are emerging at a crucial juncture: the post-global-financial-crisis era has exposed the shortcomings in the transmission of monetary policy towards financial markets. Relying on markets alone to achieve financial stability has proven insufficient in driving real economic growth and curbing inflation.

Ongoing discussions on addressing gaps in the international architecture and expanding global development finance have highlighted the importance of strong collaboration between debtor countries and multilateral and bilateral lenders, and the pivotal role of states in driving and monitoring sustainable finance flows.

The private sector is crucial for financing the transition towards a more sustainable economy since the majority of resources are in the hands of private investors – and countries need to rely on private capital to fund investments in sustainability. However, private-sector actors’ main focus will always be on their bottom line – limiting the social and environmental impact of private funding without adequate oversight. It is imperative that governments provide guidance, oversee the flow of funds, and create incentives for investments that yield environmental and social dividends.

A timely and equitable transition of this scale can be only achieved through a supportive financial governance architecture founded upon policies and regulatory frameworks aligned with the Sustainable Development Goals (SDGs). It should ensure that financial decision-making incorporates SDG targets, generating SDG-aligned investment opportunities and reducing the risk inherent to scaling up these investments.

A country-led approach: Enabling the public sector to mobilize capital for sustainable development

UNDP takes a comprehensive approach in its work with national governments on sustainable finance – for example, by supporting the establishment of Integrated National Financing Frameworks (INFFs) – budget planning tools that facilitate the public and private financing for sustainable development priorities.

Tailored to each country’s context, INFFs enable countries to plan for long-term sustainability and overcome obstacles to reaching their SDG and climate targets. Focused on harmonizing public finance policies, they enable the establishment of integrated plans such as medium-term expenditure frameworks, revenue strategies, debt management plans, private-sector development strategies, financial market regulations, and public-private partnership policies.

Worldwide, 86 countries are utilizing INFFs to shape financing for their sustainable development priorities, enabling investments that build their resilience to crises while yielding long-term returns. Through their engagement with UNDP in designing INFFs, 11 national governments have requested additional support with sustainable finance taxonomies. These actions indicate governments’ willingness to develop their own standards for economic actors rather than relying on private sector-led investment strategies.

UNDP also advises governments in managing sovereign debt and issuing new debt to achieve SDG targets. In Indonesia, this advisory and technical assistance was crucial in the issuance of Southeast Asia’s first-ever SDG bond; UNDP’s Sustainable Finance team is now advising on post-issuance impact reporting.

The role of the state in monitoring sustainable outcomes of market mechanisms

In working with governments in emerging economies, it is critical to adjust financial policy reforms to each country’s unique economic context. Challenges in developing countries can include strained budgets, rising debt challenges, limited access to financing, and obstacles to poverty reduction. In these investment settings, the perspective of a neutral actor is crucial to reconcile the often-divergent objectives and time horizons of national policymakers and private finance actors.

In addition to integrating the SDGs into finance policy, UNDP and its partners are working to identify investment opportunities and match investors to them, mitigate the risk inherent in scaling up SDG-aligned investments, and measure the impact of these investments against global SDG and climate targets. In Colombia, UNDP and the government jointly developed an SDG Investor Map and Corporate Tracker to align private investments with SDG financing frameworks.

Incentivizing the financing of global public goods

By adopting green fiscal and industrial policy strategies that are backed by green monetary policy as frameworks for sustainable financing, policymakers are redefining the role of the state in setting the sustainable finance trajectory, and transforming how countries are tackling global challenges. Embracing this approach in development finance is crucial – both at the decision-making stage and during implementation. Strong governance is also vital for aligning capital with national priorities and addressing the needs of the entire population – not just a select few.

Increasingly, the sustainable finance agenda is driven by policymakers who define their frameworks for investment planning in line with the SDGs. But this needs to happen more often. It is a positive sign that developed countries are supporting developing nations in advancing these structural changes within their economies. In essence, this entails prioritizing state intervention over market competition in determining sustainable finance policy – thus using market forces where needed: in alignment with national development and with the SDGs.


About the author:

Marcos Neto is Director of UNDP’s Sustainable Finance Hub. With more than 25 years’ of experience in development finance, Marcos leads UNDP’s work on sustainable finance  in more than 140 countries. He also serves as Head of the G20 Sustainable Finance Working Group Secretariat and co-chairs the executive boards of the Business Call to Action and the Connecting Business Initiative. You can connect with him on LinkedIn or Twitter.

The views and opinions expressed in this think-piece are those of the authors and do not necessarily reflect the official policy or position of SIPA or Columbia University.