2015 is a star-powered year in the world of international development. The year kicked off with the World Economic Forum’s annual meeting in Davos to discuss the new global context for decision-making. In September, the United Nations will host leaders from around the world in New York to agree on the Sustainable Development Goals (SDGs), which will set the global development agenda for the next fifteen years. And the Paris Climate Conference (COP21) in December will round it out, with the goal of reaching a global agreement on combating climate change.
The stakes are high: If we are going to achieve systemic change in addressing the world’s most critical challenges, the global community will need to live up to the ambitious commitments we make this year. Failing to do so will result in unprecedented costs to human wellbeing and planetary health.
But, of course, those commitments come with a hefty price tag. The UN estimates that it will cost $3.9 trillion a year to achieve the SDGs in developing countries alone. Current levels of both public and private funding cover only $1.4 trillion, leaving an annual shortfall of an estimated $2.5 trillion.
Global philanthropic funds, development aid, and public budgets simply do not have the resources to fill this gap.
Innovation Not Just For Innovation’s Sake
What these numbers tell us is that, if we are serious about achieving our goals, business as usual is not an option. We need new thinking, new solutions, and sustained partnership with the private sector in order to address the $2.5 trillion shortfall.
In recent years, a small group of bold financiers, policy makers, development experts, and entrepreneurs have helped point us in the right direction. Working at the intersection of finance and international development, these pioneers have developed new solutions for harnessing additional capital, and/or improving the efficiency of capital for addressing the world’s most critical social, economic, and environmental problems. Baptized “innovative finance,” these solutions have taken varied shapes and forms—from novel securitizations to micro-levies—and have addressed a wide range of development challenges.
Prominent successes include a more efficient model for financing vaccines (IFFIm); new and predictable funding streams for treatments for HIV/AIDS, malaria and tuberculosis (UNITAID); more efficient private sector financing for social outcomes (social impact bonds); increased financing for green investments (green bonds); and the availability of more affordable vaccines for children (Advance Market Commitment). In the process, these successes have laid blueprints for public policy interventions and new forms of collaboration between private sector corporations, institutional investors, governments, and the philanthropic and nonprofit sector.
While the emergence of these innovative finance solutions shows us a way forward, the successes remain few and far between. Individually, these mechanisms have made significant contributions to their causes by raising capital in the billions, but in aggregate, they barely make a dent in addressing the global development financing need. A recent industry study estimates that approximately US $10 billion dollars in public and private capital is channeled through innovative finance mechanisms annually. Collectively, this represents less than 0.4 percent of the estimated $2.5 trillion annual financing gap for tackling the SDGs.
The road to financing $2.5 trillion involves scaling existing innovative solutions where possible. However, large scale social, economic, and environmental challenges often come with complex, context-specific market failures where there are no standard off-the-shelf financing solutions.
The only way forward is to make a sustained commitment to innovation—innovation in developing novel financing mechanisms and enabling public policy interventions that collectively have the power to mobilize new and additional private sector capital.
The Rockefeller Foundation’s Effort Toward ‘Zero Gap’
Innovation is notoriously difficult to achieve—it calls for creativity, risk-taking, patience, collaboration, resources, and grit. These elements that are not easy to come by. Philanthropy has the potential to play a catalytic role in bringing them together, and we at The Rockefeller Foundation are committed to fulfilling this potential.
That’s why we’ve launched our new “Zero Gap” effort, focused on shaping and supporting the next generation of innovative financing solutions. Our approach employs a venture philanthropy model that leans heavily on collaboration with both private and public sector partners, embraces experimentation, risk-taking, and a long-term time horizon. Through these efforts, our goal is to develop solutions that can help ensure that the development commitments we make in 2015 see the light of day, and don’t just end up as our dreams for a better tomorrow.
Here are two examples of work that we’re pursuing in innovative finance:
1. World Bank City Creditworthiness Initiative:
Innovate to Improve Cities’ Access to Funding for Low Carbon Infrastructure
In a rapidly urbanizing world, the demand for infrastructure is vast. The industry consensus is that the global investment shortfall in infrastructure is at least $1 trillion per year. Cities will require better access to capital markets and large scale project finance to pursue a low-carbon growth path. Today, just 4 percent of the 500 largest developing country cities have globally recognized credit ratings and only 20 percent in local markets, limiting their access to private capital.
The World Bank’s “City Creditworthiness Initiative” aims to address this challenge by helping cities improve their financial performance and secure the private investment they need to fund climate-smart infrastructure and services through a range of activities spanning several years—from training workshops to follow-up support for action planning, technical assistance for adaptation or mitigation projects, and fund raising.
The Foundation provided seed funding of US$1 million for the launch of a new multi-donor trust fund to support this effort.
2. Extreme Climate Facility (XCF):
Exploring Innovative Funding Mechanisms for Climate Adaptation across Africa
Africa is widely recognized to be the region most vulnerable to weather risks. Weather-related disasters are already undermining record growth across the continent, threatening hard-won development gains and vulnerable populations. Increasing climate volatility will counteract investments being made by countries to mitigate, prepare for and manage current weather risks
The World Bank estimates an adaptation investment cost of $14-17 billion per year over the period 2010—50 for sub-Saharan countries is needed to adapt to an approximate 2°C warmer climate forecast for 2050. Climate change is particularly threatening to the future of African agriculture, which impacts global food security and the economic livelihoods of hundreds of millions of Africans. To date, funds have not been forthcoming in the magnitude required.
The Extreme Climate Facility (XCF) is an African-led effort designed to access private capital, diversifying the sources and increasing the amount of international funding available for climate adaptation in Africa. XCF is a data-driven, multi-year vehicle that will provide financial support to eligible African countries to help them build climate resilience and be financially prepared to undertake greater adaptation measures, should extreme weather event frequency and intensity increase in their region.
XCF will be structured so as to issue more than $1 billion in African climate change bonds over the next 30 years. The Foundation provided a grant of US$1 million to support initial R&D for XCF.