Hard target: how foreign investment can help hit the SDG goals

Adopted by UN member states in 2015, the Sustainable Development Goals (SDGs) set the global development agenda until 2030. The list of 17 goals outlined a blueprint for a more sustainable future and a commitment to end poverty. 

However, unless there is significant international action, the SDGs will not be achieved until 2073, according to the Social Progress Imperative, a Washington, DC-based non-profit organisation that publishes the Social Progress Index (SPI). Meanwhile, the first SDG Investment Trends Monitor from Unctad reports that domestic and foreign investment in the 10 sectors relevant to the SDGs is lagging by roughly $2500bn annually.

The new agenda

The mobilisation of capital for the 2030 agenda requires action from both the public and the private sectors. Foreign investment is particularly crucial in developing markets, which are widely considered to be at the greatest threat from climate change, while also lagging in SDG development.

According to research published in the Journal of Clean Production, FDI can influence SDG development most positively by boosting infrastructure, which takes in improvements to renewable energy, waste management and connectivity, together with key areas such as healthcare, affordable housing and education.

The growth of SDG considerations within the private sector highlights a shift from purely profit-focused decision making towards one that includes social and environmental impact assessment, according to Juri Suehrer, senior strategist at Dubai Investment Development Agency, writing in Durham University's Global Policy, a cross sector policy-focused journal. 

In 2019, executives from 181 of the US’s largest companies altered the official definition of ‘the purpose of a corporation’ from ‘profit for shareholders’ to ‘improving our society’, as issued in a statement from the Business Roundtable, a non-profit association chaired by the CEO of JPMorgan Chase.

“Forward-thinking companies are already going further and developing business strategies that embrace the growth potential of responsible environmental and societal policies, and drive sustainable business practices through their value chains,” says a PwC report entitled ‘Navigating the SDGs: a business guide to engaging with the SDGs’. 

The report shows that companies with better environmental and social commitments have lower costs of debt and equity, and outperform the market in the medium and long term. Reduced operational, reputational and regulatory risks add to these benefits.

The right investment

The challenge, however, is not just attracting extra levels of FDI towards the SDGs, but the “right kind” of FDI, known as “sustainable FDI”, according to Karl P Sauvant and Howard Mann – senior advisers at the International Institute for Sustainable Development – writing in the Journal of World Investment & Trade.

Foreign investment is not inherently positive towards SDG progress, according to Messrs Sauvant and Mann, but requires the right intent and investment conditions. Governments must provide the right conditions for long-term, SDG-friendly foreign investment, they add, and on the flip side, protect their countries from abusive or exploitative FDI. The ‘right kind’ of investment must go through environmental, social impact and human rights assessments.

A low-carbon footprint, fair labour rights, workplace safety, stakeholder engagement, non-discriminatory policies and legal compliance are some of the crucial benchmarks for ‘sustainable FDI’, they add. These characteristics must be recognised by all stakeholder groups.

Furthermore, long-term strategies towards investment are crucial, especially with regard to a host country’s development programme. “Any investment made by an entity, organisation, company or country needs to have a long-term outlook. We can no longer afford to operate under a short-sighted ‘right here, right now’ approach to investments. Aligning to the SDGs’ vision is therefore the best guiding point,” says Natasha Mudhar, co-founder and CEO of The World We Want, a private foundation promoting social and environmental change. 

“If a business is setting up a new entity or upgrading, it is important to evaluate all the possibilities for making a difference. Are they increasing R&D funding into sustainability, setting up target plans to migrate to renewable clean energy sources, ensuring gender equality through equal pay, or investing in ESG stocks and markets? The possibilities are endless,” she adds. 

When mindful of social and environmental factors, greenfield foreign investors and the SDG goals share some areas of compatibility, as this form of FDI generally requires long-term planning and creates new jobs, and often transfers knowledge and best practices to the host economy. “When companies move to a new international marketplace through FDI, it is pivotal that they not only bring in their business acumen, but the operational standards and sustainability practices that they adhere to in the strictest of jurisdictions,” says Ms Mudhar. 

“If a car manufacturer from Europe abides by emission norms, they should implement these universally and raise the standards wherever they operate. Imagine if each of the international businesses aligned to the SDGs not only in Scandinavia, but [across] Africa or south Asia: the change would be phenomenal,” she adds.

Tools for the job

There are several key resources that help investors assess a location’s SDG-related climate and needs. One such tool is Unctad’s list of SDG opportunities. Another is the SPI, which tracks countries’ social and environmental progress, complementing GDP measurement. For example, relative to its GDP, the US’s social progress rating strongly underperforms, while Costa Rica overperforms.

Tracking data since 2014, the latest SPI report finds that social progress is improving worldwide, but not fast enough to meet the SDG targets. While there is solid progress on basic disease prevention, shelter and water and sanitation, the world is stagnating significantly on rights and tolerance scores, says the report, adding that ‘environmental quality’ is also moving too slowly.

Indeed, when looking at environmental concerns more closely, global investment in renewable energy appears to have been flat over the past five years, according to Unctad. However, when adjusted for lower costs it has grown by about 55% globally since 2010, especially in the solar and wind sectors. That said, progress remains too slow insofar as new net capacity from renewable power sources rose by roughly 180 gigawatts in 2018, the same as the year before, which is only about 60% of the net additions required each year to stop global temperatures rising well below 1.5 degrees Celsius, according to the International Energy Agency.

In renewable energy, or any other SDG-related sectors, data from SPI can help inform foreign investment decisions. "Where are the opportunities, needs or risks? Tunisia was getting plaudits from the World Bank in 2010, but then there was societal collapse during the Arab Spring. Companies such as Coca-Cola use SPI to manage relationships with communities and local governments abroad, creating [public strategies] for local SDG needs,” says Michael Green, CEO of the non-profit Social Progress Imperative, which publishes the SPI.

“With regards to the sovereign debt market, there is growing interest in SDG information when thinking about which bonds to buy and at what prices. The SPI helps provide investors’ with a robust SDG benchmark so they can assess sovereign issuers in the right way,” he adds.  

Victory or bust

As international geopolitical uncertainty rises, resources such as the SPI are an increasingly important risk management tool for investors. The prospect of faltering investor confidence has potentially grave consequences for the success or failure of the SDGs.

According to preliminary reports from Unctad, global FDI flows to developing economies remained unchanged in 2019. However, the value of greenfield FDI projects worldwide fell by 22%, from $999bn in 2018 to $784bn in 2019, according to greenfield investment monitor fDi Markets, and crossborder M&A also declined to its lowest level since 2014.

These are worrying omens for the SDGs, as the prospect of failure carries existential risk. A report from research consultancy Verisk Maplecroft reveals that ‘extreme’ climate change risks threaten more than 80% of the world’s 100 fastest growing cities – most which are to be found in emerging markets.