sustainable finance narrative image

The investment needed to solve global challenges

What will it take to create a more sustainable world?

Six trillion dollars per year over the next decade, according to the United Nations (UN)footnote1.

It will also take a concentrated effort across every constituency to lift 800 million people out of poverty and provide 1.8 billion people access to sanitation, among other challenges. To help frame the challenge and organize the response, the United Nations has identified 17 Sustainable Development Goals (SDGs) and their estimated cost. The SDGs are a roadmap of sorts, providing direction on what the biggest issues facing society are, and what is needed to solve them.

More than half of the funding needed is already flowing from governments and philanthropic organizations toward projects identified by the SDGs. But, there’s still roughly a $2.5 trillion gap. The reality, according to Alicia Seiger, managing director of the Stanford University Sustainable Finance Initiative, is, “Global-scale challenges require investment that exceeds public coffers.”

Tapping global resources

In fact, the issues are so large that raising the funds needed to address them requires the involvement of the entire capitalist system. According to Anne Finucane, former vice chairman at Bank of America, that scale of mobilization means new ways of thinking about problem solving. “We have to approach achieving these goals differently,” she says. “If governments and NGOs and businesses work together, we can do so much more than any of us can do alone.”

Major financial institutions, because of their scale, reach and expertise, can play a key role. Globally, pension funds alone control more than $36 trillion in investible assets. Insurance companies represent another $18.8 trillion, wealth managers nearly $70 trillion, and banks more than $85 trillionfootnote2. Along with that financial strength comes a growing sense that profit and purpose go hand in hand, says Brian Moynihan, chairman and chief executive officer of Bank of America. “Many stakeholders understand that they have to produce great results and create greater benefit for society.” But tapping into this capital isn’t a straightforward process.

Anne Finucane headshot

How capital attracts capital

One approach, called blended finance, aims to attract more investors by removing some of the investment risk. For example, a development bank or nonprofit organization that has lower return expectations provides the first layer of financing to a more risky project, like a desalinization plant in rural Kenya. By taking on a share of the risk and remaining invested for the duration, this first investment makes it possible for other private sector investors to join. Pension funds, insurance companies, banks and others are then able to invest at a risk level that suits their needs.

Through this process, a relatively modest investment can attract many times its initial amount from private sector financing. And because that development bank or nonprofit isn’t trying to fund the whole project alone, those organizations can use their resources to seed and sustainably finance a wide array of projects.

Combining money from development banks, nonprofits, global banks, private equity firms and others, gets things going that would have been impossible otherwise.
Anne Finucane  |  former Vice Chairman at Bank of America

The business benefits of a sustainable world

From North and South America to Europe, Asia and Africa, there’s a growing awareness that solving the issues outlined in the SDGs is critical to a healthy bottom line. “Agriculture and related industries account for more than half of Kenya’s GDP,” says Nuru Mugambi, curator of the Kenya Green Bonds Programme and public affairs director at Kenya Bankers Association. “If flooding destroys tomato crops, damage ripples from farms to transportation to food manufacturing.”

Quantifying the economic impact of climate change is difficult. According to one reportfootnote3, over the past three years climate disasters such as Hurricanes Harvey and Katrina alone have cost the global economy as much as $415 billion—a number widely expected to grow. What’s more, the SDGs identify the missed opportunities that stem from global issues such as income inequality. A McKinsey Global Institute report noted that as much as $28 trillion could be added to the global economy by 2025 if women achieved pay equity with menfootnote4.

In light of these global challenges and opportunities, individual companies are considering how they can both minimize their own impact on the environment and foster healthier communities, while benefiting from pursuing the SDGs as part of their day-to-day business practices. Bank of America, for example, has committed $445 billion in financing and other business activities through its Environmental Business Initiative, between 2007 and 2030, to help accelerate the transition to a low-carbon, sustainable economy. Additionally, in 2020 the bank announced it had met its goal of becoming carbon neutral.

Driving that understanding is the knowledge that when like-minded organizations pool their skills and resources, it becomes possible to address immense challenges in a meaningful and fundamental way. “Just a few years ago, many of these issues seemed insurmountable,” says Finucane. “Now, there’s evidence that companies that invest in the environment and social issues are doing better than those that haven’t.”footnote5

Learn more about Bank of America’s commitment to responsible growth.

Originally published on 8/3/2020