Foreign direct investment (FDI), financial intermediation and public private partnerships (PPPs) are three financing options that can bridge the gap between global capital markets and SDG investments that are too small or too risky to attract direct portfolio investments.

Foreign direct investment

In emerging economies, multinational companies have direct access to capital markets. They raise capital through equity or bonds and make direct investments in other countries through FDIs.

FDIs can become a source of finance for more challenging sustainable development issues in frontier markets. An example is Enel Brasil’s acquisition of Eletropaulo through a combination of debt and equity financing. As a leading distributor of electricity in the local Brazilian market, Enel made a significant contribution to achieve SDGs 7, 9, 11 and 13 by leveraging their competencies and expanding their networks in energy markets.

Furthermore, the World Bank has indicated that FDI represents a large share of private capital for emerging markets. This is common in low-income countries, where the share of all capital market instruments drops and FDI becomes the primary source of private capital. In fact, it is a key concept of impact investing and assists in the development of financing activities.

Financial intermediation

Financial intermediation through banks is also important as it creates a link between global capital and private financial solutions through mortgages and loans. For example, Credit Suisse has committed to microfinance since 2002. They are managing 2 billion USD assets that fund microfinance institutions. Such intermediation process of banks and financial institutions presents an opportunity to maximise the impact of downstream investments. They not only have strong governance mechanisms to generate credibility but also ensure that the potential SDG benefits of financial intermediation are actualised. Credibility mechanisms are developed based on different types of financial intermediation and range from more actively managed funds to less actively managed funds.

The report includes case studies of the use-of-proceeds of ANZ and HSBC SDG bonds highlighting the range of SDG benefits that banks can support through the financial services they provide:

• Access to education and healthcare
• Clean water and clean energy
• Sustainable Infrastructure
• Affordable housing and public transit
• Climate adaptation and disaster prevention

Public private partnerships

Corporate partnerships leverage public funds for private financing such that it generates the highest ratio of private-to-public capital in-order to  maximise the impact of SDG finance. In line with World Bank’s cascade approach, this method mobilises commercial finance to address high market risk and constraints in various sectors. Revenue streams and payment for ecosystem services can be capitalised to generate innovative private financing schemes. Cloud Forest Blue Energy Mechanism is an example where funds are used in the restoration and conservation of cloud forests in Latin America, based on revenue from improved productivity of hydroelectric plants.

Financial innovation at global level is beneficial in the long run. This needs to be translated to the country level through transformative steps to increase the flow of capital in the emerging local economies to achieve SDGs and improve all lives.

1. The report draws an important link between institutional investors and the impact of FDI from their portfolio companies in countries and sectors that are key to the realisation of the SDGs. For example, Addis Ababa's Action Agenda on Financing for Development has directed investments towards projects that are aligned with national and regional sustainable development strategies.
2. To gather a better understanding of the FDI, the report has categorised it through value chain of investments whilst types of investment differentiates each of these. Real FDIs indicate investment by companies in real economy and Financial FDI suggests investment by banks by setting up branches or subsidiaries.
3. Regarding the FDI criteria for country investments, countries need to develop a series of national, regional, local strategies and programmes that are documented in their Voluntary National Reviews (VNRs) and Nationally Determined Contribution (NDCs) to translate them towards national development plans. These provide roadmaps for the private sector to invest in the SDGs, and enables them to focus on the unique needs and challenges in specific countries.
4. The report highlights that trade finance can also be an instrument to promote more sustainable international trade. This is particularly important in emerging markets, as a major proportion of international trade is financed through documentary trade.
5. Standardisation plays a critical role in scaling SDG finance by ensuring minimum level of impact. To meet sustainability standards the underlying investments can be used as criteria in the selection and management of assets in funds and other pools of assets.
6. In-order to maximise the SDG impact on activities, banks can offer SDG-linked covenants in loans, mortgages, letters of credit, and other financial products while issuing loans. This would enable the lender to get strong commitments from clients as their key performance indicators related to the SDGs.
7. To create robust business models that can be financed on commercial terms, blended business models are appropriate as indicated in the report. Such robust business models, direct public resources towards reducing the risk or boosting returns of enterprises that provide SDG solutions.
8. Subsidised corporate finance involves using public finance (e.g. catalytic capital, insurance, guarantees) to support corporations operating in difficult but important markets for the SDGs, or proposing solutions where private finance is not available. It can leverage the corporate structure as a scalable and credible investment vehicle for the SDGs, by incorporating the benefits of corporate and financial intermediation as mentioned in the report.
9. Local capital markets are essential to mitigate usurpation of local financial resources when foreign affiliates raise capital locally. Development of such local markets can be achieved by FDI inflows that encourages market-friendly regulations, ultimately promoting the development of the stock market.
10. Lowering the risk of the enormous pool of private investments are needed to realize the SDGs. This can be achieved through financial innovation in the insurance industry that aims to develop new business models for private insurance products and also guarantees that can reduce the risk of SDG investments.