Financial-market oriented PSEs
SDC refers to financial market-oriented projects as those in which SDC's main objective is to increase private financing for the SDGs, particularly for social and impact enterprises, and in countries or sectors where the SDG investment gap is greatest. In recent years, SDC has expanded its investment project portfolio through various instruments, including impact-linked financing, ecosystem-building initiatives such as the SDG Impact Finance Initative, collaboration with the Swiss DFI SIFEM, and the deployment of de-risking capital via the SDC investment credit.
Investments for sustainable development
Most impact investors however still expect market-rate returns and therefore most impact investments are made in high income countries. To promote socially and environmentally impactful investment, the SDC is working with a small subset of impact investors interested in creating positive change in SDC’s priority countries and sectors. To promote such investments, SDC is increasingly applying innovative finance tools, notable impact-linked finance which SDC co-developed with its partner Roots of Impact.
The world is off-track to meet the Sustainable Development Goals (SDGs) by 2030. The funding available to finance the SDGs, in particular in developing countries, is no way near sufficient to achieve the goals in time. This is not due to a lack of money: UNDP estimates that 4 trillion dollars are needed to close the finance gap, representing roughly 1% of global wealth, or 4% of global assets under management (AUM). The problem is therefore a problem of allocation: investments, seeking returns, are not going towards those countries and sectors that have the biggest impact towards the SDGs.
Reasons for this mis-allocation are various but include: lack of available profitable investment opportunities (or lack of awareness of these opportunities); unfriendly investment climate in SDG relevant sectors and countries; perceived or real trade-off between financial and impact returns; lack of comparable impact data, just to name a few.
Over the past decade, various investment strategies have been developed that aim at bridging the gap between the investment needs for the SDGs and the current allocation of capital. Below you find brief definitions of the most commonly used approaches and examples as to how SDC can collaborate with partners from the financial sector.
Sustainable finance
Sustainable finance in its broadest definition refers to financial services that integrate environmental, social, and governance (ESG) criteria into investment decisionmaking processes and aim to promote sustainable development and long-term value creation. It involves directing capital flows towards projects and companies that contribute positively to environmental protection, social well-being, and ethical governance practices. It is estimated that roughly one third of global investments (around 30 trillion) are sustainable investments.
Impact finance or impact investing
Impact Finance or Impact Investing is a sub-set of sustainable investment referring to investments made with the intention to generate positive, measurable social and environmental impact alongside a financial return. Impact investments can be made in both emerging and developed markets, and target a range of returns from below market to market rate, depending on investors' strategic goals.
The Global Impact Investing Network (GIIN) estimates the size of the worldwide impact investing market to be USD 1.164 trillion. Two thirds of these investments are seeking market rate returns with an additional 18% seeking returns «close to market rate». Around 10 %, are invested in private asset impact funds in emerging and frontier markets, of which 9.6% are allocated to Least Developed Countries (LDCs). This niche segment, where transparency and benchmarking remain limited, is currently valued at USD 103.7 billion, encompassing 798 funds managed by 468 managers.
Impact-linked finance
Impact-linked finance (ILF) falls within the realm of innovative finance and is a financial innovation developed by SDC and Roots of Impact that provides high-impact organizations, often called social or impact enterprises, with financial incentives to achieve pre-defined social or environmental impact targets. It can therefore be added to any type of investment targeting social enterprises, which there are estimated to be 2 mio. with an annual funding gap of USD 50bn.
Impact-linked finance can therefore be understood as a response to the acknowledgement that mainstream finance alone, as deployed through sustainable and impact investments, will not suffice to fund key SDG sectors and geographies. It also recognizes the fact that there may, indeed, be a trade off between impact and financial returns.
Gender lens investing
Gender lens investing (GLI), also known as gender smart investing, is the deliberate integration of gender analysis, investment analysis and decision making, where investments are made in more women- owned or led enterprises and/or investments are made in enterprises that promote gender equality at the workplace, as well as in products or services that substantially improve the lives of women and girls, building strong, resilient economies of the future (Source: UNIDO).
Since SDG 5 on gender equality and women’s empowerment is one of the most underfinanced Sustainable Development Goals, the SDC seeks to further strengthen its profile on gender lens investing by promoting innovative approaches in gender financing and by advancing systems change.
In 2022, the SDC Gender Team launched a partnership with the organisation 2X Global in order to advance the topic of GLI internationally.
A gender lens can be applied to any type of investment. Three main approaches to GLI exist, referring to investing in businesses, initiatives or programmes that:
- Are led by women,
- Promote gender equity in their internal practices and policies, or
- Offer products or services that positively impact women.
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Partnerships
The E+E works with a range of strategic partnerships at the international, regional and national levels to strengthen the international policy dialogue.
Swiss Sustainable Finance
The leading Swiss association in the field of sustainable finance.
Impact Europe
Impact Europe is a unique network of impact capital providers along the full continuum of capital.
Asian Venture Philanthropy Network
The largest network of social investors in Asia.
African Venture Philanthropy Alliance
A Pan-African Network for Social Investors.