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Reviewing the 0.1 draft of the Report of the Intergovernmental Committee of Experts on Sustainable Development Financing


“Solutions imply new models that, above all else, begin to accept the limits of the carrying capacity of the Earth: moving from efficiency to sufficiency and well-being. Also necessary is the solution of the present economic imbalances and inequalities.

Without equity, peaceful solutions are not possible.”

Chilean economist Prof. Manfred Max-Neef


Those of you who have been following my blog will have noticed my concern with the ongoing process in the Intergovernmental Committee of Experts on Sustainable Development Financing (ICESDF).

To just recap a little on the Committee’s work thus far, it has been done in private without the ability of stakeholders to watch and engage with the Committee’s members. There have been “briefings,” but in the 21st century briefings don’t satisfy in the least what is expected regarding stakeholder engagement in intergovernmental processes.

I was surprised to see the new draft (the zero draft was binned as very bad) to only be a 0.1 draft but of course that could have been a misprint or a recognition of how far they still have to go with the paper. It is my understanding that there will be two further versions – the last being what the Committee will send to the Secretary General and their colleagues.

One of the results of being excluded is that the input that could have been useful and the lobbying therefore of particular members of the committee did not happen. This means the report is being developed almost in a vacuum.

One of my structural concerns was that the committee did not have people on it who were coming from a “sustainable development finance” background as opposed to a “development finance” background. If one was mischievous, one would say the development ministries in the donor governments have ensured that the only real voice is “a development finance voice.”

As the committee is dealing with financing sustainable development the lack of real sustainable development finance people is a huge hole. They also don’t have on the committee people who understand banking and capital market financing and what could be done by those sectors. Considering they were making comments about private sector finance, one wonders on what basis they were doing that.

In my blog “Waiting for the Zero Draft of the Report of the Intergovernmental Committee of Experts on Sustainable Development Financing” I gave 21 suggestions for the text. Perhaps the best way to review where the new 0.1 text is against those suggestions.

A Long Blog
As this is a long blog I want to pick out three recommendations that I make below:

1.  In para 103: “An important starting point for policy action to increase effectiveness of FDI for sustainable development is fostering labour standards as well as ensuring social and environmental safeguards.” This line is wholly inadequate to ensure that FDI is not impacting negatively on sustainable development. This should be calling for the implementation of core ILO standards (explicitly articulated) and should require companies that are investing to produce their ESG reports and their sustainable development strategies as a prerequisite to investment. That core labour standards should be implemented in all countries and FDI should be.

2. Santiago Principles -  Generally Accepted Principles and Practices (GAPP)
a.     Amend GAPP 14. Principle Dealing with third parties for the purpose of the SWF's operational management should be based on economic and financial and sustainable development grounds, and follow clear rules and procedures.
b.     GAPP 18. Principle The SWF's investment policy should be clear and consistent with its defined objectives, risk tolerance, and investment strategy, as set by the owner or the governing body(ies), and be based on sound portfolio management principles.
                                                             i.      GAPP 18.1 Subprinciple The investment policy should guide the SWF's financial and sustainable development risk exposures and the possible use of leverage.
c.      GAPP 19. Principle The SWF's investment decisions should aim to maximize risk-adjusted financial returns in a manner consistent with its investment and sustainable development policy, and based on economic and financial grounds.
d.     GAPP 19.1 Subprinciple If investment decisions are subject to other than  sustainable development, economic and financial considerations, these should be clearly set out in the investment policy and be publicly disclosed.
e.      And add a new sub principle GAPP 22.3 Subprinciple: Independent opinions for the SWF commissioned from rating agencies on the credit risk of debtors (private or public) shall be based on financial and non-financial criteria including sustainable development. Credit rating agencies shall be required to demonstrate to the SWF their competency to undertake such ratings (evaluation framework, qualified analysts). Monaghan (2012) Rating Sovereign Raters: Credit Rating Agencies – Political Scapegoats or Misguided Messengers? (Manchester: Infrangilis)

and finally --- Para 89 does mentioned innovative financing instruments such as financial transaction taxes (FTT – Tobin Tax) and carbon taxes….it does suggest that “such mechanism to international development and financing of global public goods would likely require international agreement and corresponding political will.” It doesn’t suggest HOW to do it. What would be a good idea is to have the funds go to the Green Climate Fund which has already got a good governance structure and would ensure that it is capitalized.

But before I do that let me share the structure of the report:

 Procedural Section of the Report on the Work of the ICESDF
I.                   Introduction
II.                Context
A. Financing Needs
B. A changing world
C. Domestic resource mobilization
D. International resources
 III. Strategic approaches
IV Elements of an integrated sustainable development financing strategy
a.     Mobilize Domestic public resources
b.     Domestic private resources
c.      International public financing
d.     International private financing
e.      Blended finance
V Governance – institutional architecture and arrangements
a.     Increased coherence and effectiveness of international architecture
b.     Strengthen global financial stability
c.      Trade and investment rules that are fairer and more conductive to sustainable development
d.     Enhance international cooperation to address tax evasion and avoidance including the issue of illicit financial flows
e.      Foster harmonized monitoring and accounting systems
f.       Support efforts for a sovereign debt sustainability framework in support of sustainable development financing.
VI Conclusion: Key options for a sustainable development financing strategy (nothing in this yet)
a.      


Twenty One Ideas for the Zero Draft of the Report of the Intergovernmental Committee of Experts on Sustainable Development Financing

A quick look at what I suggested and how it is or is not reflected on the 0.1 draft…in between meetings in the Vienna Café in New York.
1.     Differential approach to countries in different levels of development and what financial packages might be most useful for those countries (could be based on the UNDP Human Development Index);

This suggestion I have to admit does have some problems associated with it as some of the levels of development that are in the HDI do not have formal UN definitions. But I am sure this could have been finessed. What this approach would have done is help focus the financial considerations to the countries requirements e.g. an LLDC needs different packages than an LDC or a medium developed country.

2.     The mechanisms to help countries move from one level of development to another as funding portfolios change;

What is needed is a clear set of guidance for how countries stabilize their new status as they move from one level to the other. So does the 0.1 draft deal with this? Not really, though there is some recognition of the continued role that IDA play to LDCs.

3.     What regulations need to be put into place to ensure the FDI does not impact negatively on sustainable development;

The suggestions in para 103: “An important starting point for policy action to increase effectiveness of FDI for sustainable development is fostering labour standards as well as ensuring social and environmental safeguards.” This line is wholly inadequate to ensure that FDI is not impacting negatively on sustainable development.

This should be calling for the implementation of core ILO standards (explicitly articulated) and should require companies that are investing to produce their ESG reports and their sustainable development strategies as a prerequisite to investment. 

There are so many examples of FDI supporting development that is not sustainable in any way. The suggestion in para 108  does recognize the problems for the investors in long term investment on sustainable development and does make some suggestions on the investors side but not enough on the regulation side.

4.     A recognition that FDI only helps some middle income countries;

The report does expose that perhaps I was wrong to be so stark - there has been growth in FDI outside middle income countries Africa saw a 6.8% rise in FDI and “FDI flows to developing economies reached a new high of US$759 billion, accounting for 52% of global FDI inflows in 2013. At the regional level, flows to Latin America and the Caribbean, and Africa were up; developing Asia, with its flows at a level similar to 2012, remained the largest host region in the world….. APEC now accounts for more than half of global FDI flows, on a par with the G20, while BRICS jumped to over one fifth. In ASEAN and MERCOSUR, the level of FDI inflows doubled compared to the pre-crisis level. Regional and inter-regional groups to which developed economies are members (e.g. G20, NAFTA) are all experiencing a slower recovery.” (UNCTAD)

The question is what form is this FDI - the report does recognize that for sub-Saharan Africa it is “driven primarily by investment in extractive industries.” It was very good to see this recognition in the report. It was important to see the support in para 60 in stating “accountability could be assured by adhering to existing international transparency standards, including for example the Extractive Industries Transparency Initiative (EITI). For those who do not know, EITI is an international standard that ensures transparency around countries’ oil, gas and mineral resources. It is developed and overseen by a coalition of governments, companies, civil society, investors and international organisations. Again, we are missing a set of more directive instructions.

5.     A section on what local and regional governments might be able to achieve and what financial portfolio might be available to them;

In para 37 there is a recognition that subnational governments might play a role but no exploration of what that might be or what packages might be proposed for these levels of government.

6.     A deep dive into what role Capital Markets could do to help sustainable development;

So for us who don’t work in or around the capital markets a quick note on what they are: “Capital markets are financial markets for the buying and selling of long-term debt or equity-backed securities.” In 2009 only 7 per cent or USD 6.8 trillion of investments in the massive USD 121 trillion global capital market was subject to sustainable environmental, social and governance (ESG) considerations. (UNTT) The ICESDF report doesn’t do justice to the input either from AVIVA or the UNTT which suggested:

“To further increase the impact of sustainable finance initiatives, financial institutions could (i) foster sustainability considerations at all levels, including at the Board and senior management levels; (ii) adopt and implement sets of sustainable finance principles relevant for their industries; (iii) increase reporting on the ESG impacts of their operations; and (iv) limit ‘short-termism’ institutionally and promote more long-term and sustainable financing, by changing incentives, such as discussed above, and by further including sustainability objectives in compensation packages.”

There is also some good insights in the new UNDP-ODI Discussion Paper: Where next for aid? THE POST-2015 OPPORTUNITY:

“There are, of course, numerous examples of both successes and failures in IPF interventions, just as there are for activities supported with private funds. It is important to learn from past experiences and to make sure future interventions are as effective as possible. These analyses will be crucial to building a better IPF model for the post-2015 era.”

7.     Action on Sovereign Wealth Funds was originally suggested in the UN Sustainable Development Panel Report – to advance this we should have text suggested on how to amend the Santiago Principles (Generally Accepted Principles and Practices (GAPP));

No suggestion of what should be done with the Santiago Principles.

What could have been suggested is:
a.     Amend GAPP 14. Principle Dealing with third parties for the purpose of the SWF's operational management should be based on economic and financial and sustainable development grounds, and follow clear rules and procedures.
b.     GAPP 18. Principle The SWF's investment policy should be clear and consistent with its defined objectives, risk tolerance, and investment strategy, as set by the owner or the governing body(ies), and be based on sound portfolio management principles.
                                                             i.      GAPP 18.1 Subprinciple The investment policy should guide the SWF's financial and sustainable development risk exposures and the possible use of leverage.
f.       GAPP 19. Principle The SWF's investment decisions should aim to maximize risk-adjusted financial returns in a manner consistent with its investment and sustainable development policy, and based on economic and financial grounds.
g.     GAPP 19.1 Subprinciple If investment decisions are subject to other than sustainable development, economic and financial considerations, these should be clearly set out in the investment policy and be publicly disclosed.
h. And add a new sub principle GAPP 22.3 Subprinciple: Independent opinions for the SWF commissioned from rating agencies on the credit risk of debtors (private or public) shall be based on financial and non-financial criteria including sustainable development. Credit rating agencies shall be required to demonstrate to the SWF their competency to undertake such ratings (evaluation framework, qualified analysts). Monaghan (2012) Rating Sovereign Raters: Credit Rating Agencies – Political Scapegoats or Misguided Messengers? (Manchester: Infrangilis)

8.     The UN Sustainable Development Panel Report and the High Level Panel Report on Post 2015 Development Agenda to introduce in Stock Exchanges the requirement for all companies to report or explain on their Sustainable Development Report. We should see text and a date for this to happen – 2020?

No suggestions of a date for this.

9.     How to expand the role of micro-finance, micro-credit and micro-insurance to support the base of the pyramid;

Mentions of micro finance but no real suggestions of how to utilize them.

10.                        How cooperatives or mutual funds can be utilized for sustainable development;

Mentions of cooperative and mutual funds but no real suggestions on how to utilize them.

11.                        What role the IFIs should play in implementing sustainable development;

There are useful starting places for developing a stronger narrative on this in Section A on Governance, institutional architecture and arrangements. This includes coherence and coordination of existing sustainable development financing frameworks (para 125), improving performance or international organizations to increase mobilizing and deployment of finance for sustainable development (para 126), review governance structures of IFIs to further integrate the voices from the emerging countries and developing countries (para 128).

12.                        IFIs should be audited against the SDGs to ensure their actions do not go against what will be agreed in 2015 – a do no damage clause;

Nothing here.

13.                        What reform of trade rules might help deliver the SDGs and to ensure that trade supports sustainable resource use and not the opposite;

Nothing on this. There is promotion for the Bali Package (para 132) consisting of Trade Facilitation Agreement.

14.                        I expect to see some thoughts on the role that local, national and international green bonds and the role they might play;

Nothing on this.

15.                        What can green banks do to promote sustainable development we now have examples in places like the UK and Australia;

Nothing especially on this…bits that could be brought together under such a suggestion exist in the text.

16.                        The report needs to address intergenerational equity – environmental resources and ecosystems must be carefully managed to ensure the value of assets are there for future generations;

Nothing on this.

17.                        There should be suggestions on international liability to actions taken within national boundaries that have environmental impacts beyond national jurisdictions;

Nothing on this.

18.                        Reform of credit rating agencies requiring them to build in sustainability criteria;

Nothing on credit rating agencies

19.                        Taking away subsidies from fossil fuels and agriculture;
Para 25 does talk about subsidies it does recognize the amount of energy subsidies that exist over $1.9 trillion in mostly in developed countries (post-tax energy subsidies) and $480 billion primarily in developing countries (pre-tax energy subsidies) and among OECD producer subsidies of $259 billion. Very interesting figures- there is a very good recognition that the removal of subsidies can have an impact on the poorer parts of society and there is a need to “improve targeting of welfare/compensation schemes and/or alternative strategies.” The question I have is why we do not have suggestions of what these could be.

20.                        Addressing the issue of resilience funding for disaster relief preparation;

Nothing on this.
21.                        A plan for introducing the Tobin Tax.

Para 89 does mentioned innovative financing instruments such as financial transaction taxes (FTT – Tobin Tax) and carbon taxes….it does suggest that “such mechanism to international development and financing of global public goods would likely require international agreement and corresponding political will.” It doesn’t suggest HOW to do it. What would be a good idea is to have the funds go to the Green Climate Fund which has already got a good governance structure and would ensure that it is capitalized.

Conclusion

The 0.1 draft is a small move forward. I haven’t commented on the more traditional parts of the report that deal with more ‘financing for development’ the old paradigm – there is useful paras there on ODA, domestic mobilization and corruption and South-South financing.

If from this the Committee does in fact start to put real meat on the sections above 
then there is still time to hope that the report might break new ground. It should consider these points in addition to my previous 21:


  • Agree to develop and implement new measures of economic success;
  •  Commit to reduce income and wealth inequalities between and within countries;
  •  Put fiscal policy and public expenditure centre stage in managing economic transition;
  • Recapture the financial sector for the public good.


Reading the report, I believe that a fundamental revolution is needed, not in 40 years’ time, nor in just one country, but in the next ten years and across the globe. 
Reforming the financial sector and the economy for sustainable development is at the center of that revolution. 

As Senator Robert Kennedy put it in 1968: “A revolution is coming — a revolution which will be peaceful if we are wise enough; compassionate if we care enough; successful if we are fortunate enough. But a revolution is coming whether we will it or not. We can affect its character; we cannot alter its inevitability.”

 Let’s work for a world built on sustainable societies, responsive citizens and accountable governments.

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