Financial-market oriented PSEs
“Financial market-oriented” PSE projects follow an investment logic linked to a development objective, and aim to have a catalytic effect, mobilizing additional capital from other investors - particularly from private investors.
There are six formats within this category, each belonging to one of two groups depending on the SDC’s role. The first group includes formats using returnable investment instruments such as equity, first-loss engagement, or guarantees, in which the SDC assumes an investor role within blended finance structures (de-risking role). The second group includes formats such as technical assistance facilities (linked to investment structures) or outcome-based payments (such as SIINCs). In these formats, the SDC provides traditional grants to encourage or enable investments but does not have a direct investment role (investment enabler role).
In the context of “Financial market-oriented” PSEs, SDC typically targets initiatives and financial vehicles which seek to increase the provision of financing to social and impact enterprises, and in countries or sectors where the SDG investment gap is greatest.
In recent years, SDC has expanded its portfolio through various instruments, including first-loss participations in blended finance investment funds, impact-linked financing, ecosystem-building initiatives such as the SDG Impact Finance Initative.
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 misallocation are numerous but include inter alia: 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 information and data leading to high risk perception, 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.
Impact investors include a broad range of actors, with different ownership structures (public or private), risk appetites, and return expectations. Public impact investors include Development Finance Institutions (DFIs) and donors providing concessional financing. Private impact investors can be private asset owners such as pension funds, insurance companies, banks, family offices, and high-net worth individuals expecting risk-adjusted market returns; and more philanthropic investors, private foundations, impact-driven family offices, wealth individuals, who may prioritize impact generated by the investments, accepting sub-market returns. These actors may invest in investment vehicles like blended finance investment funds, managed by private asset managers or fund managers. The beneficiaries of investment vehicles or funds are local SMEs or entrepreneurs seeking capital to finance their growth and generate development impact (e.g., job creation, reforestation, delivery of goods and services to local communities).
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” is a financing approach that ties financial rewards or terms to the achievement of measurable social or environmental outcomes. It links financial incentives directly to verified impact - the stronger an organization’s impact performance, the more favourable its financial terms.
Impact-linked finance differs from traditional impact investing by embedding variable financial terms directly tied to impact, rather than offering fixed returns regardless of outcome. Typical instruments of impact-linked finance include impact-linked loans (loans with interest rates or repayment terms adjusted based on the achievement of predefined impact targets), Social Impact Incentives (SIINC ), and social or development impact bonds (SIBs or DIBs).
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.
Resources from our partners
Index
Our partners
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.