How Middle East investors can deliver on the UN Sustainable Development Goals

Empty desks fill the UN General Assembly Hall as speakers deliver remarks remotely at the SDG Moment event in 2021. EPA

As the UAE prepares for Cop28, the UN Sustainable Development Goals will receive an increasing amount of attention. The delivery of these goals by 2030 is vital for ending poverty and tackling climate change. Unfortunately, this target is facing increasing difficulties given the emergence of the global “polycrisis” – the simultaneous occurrence of interconnected challenges that compound each other, making them harder to address and resolve.

This polycrisis is having a devastating “scissor effect” on the investment gap. This is the difference between the amount of financial resources needed annually to achieve the goals by 2030, and the current amount being invested. Initially estimated at $2.5 trillion in 2014, the gap more than doubled due to the Covid-19 crisis, and it now stands at $4.3 trillion.

Funding a gap that is rapidly turning into a gaping hole is a daunting challenge for a global economy grappling with persistent inflation and geopolitical crises. Yet, a recent report by the Financial Stability Board estimates that global financial assets amounted to a staggering $469 trillion in 2020. The $30 trillion SDG financing gap for the next seven years represents less than 6 per cent of global financial wealth.

So, there is plenty of financial firepower out there, and in this context the gap looks like a less intimidating figure. But how can this capital be mobilised at scale to deliver on the SDGs in time?

A group of stakeholders gathered recently at New York University Abu Dhabi to discuss the “$30 trillion question” alongside the launch of NYUAD’s Transition Investment Lab annual report.

Long-term institutional investors can play a pivotal role in driving change, with sovereign wealth funds ranking high due to the vast size of their assets and their long-term investment horizon. The report found that over the past three years, sustainable investments by global sovereign wealth funds accounted for just 19 per cent of total deal value.

Middle Eastern sovereign wealth funds' sustainable deals are worth more than a half of the total value, but mostly target developed markets such as Europe and the US rather than emerging markets and lower-income economies.

The report also documented a similar regional distribution in a key area of sustainable finance – impact investment, which focuses on the intentionality and measurability of environmental and social outcomes.

To date, the most active actors in this space are domiciled in North America and Europe, with Middle Eastern investors yet to move significantly into the impact-investing arena. This lag is important not only because there is an SDG financing gap that urgently needs to be filled, but also because Middle Eastern investors have an inherent advantage by being closer to many of the emerging markets to which the SDGs are more relevant.

The question now is: how can Middle Eastern investors speed up this process?

One of the major roadblocks is the perception of impact investing’s lack of commerciality. A consensus emerged at the NYUAD workshop that there are abundant opportunities to generate social impact along with solid financial returns when investors take a long-term commitment to profit and purpose.

Embedded in viable business models, technological progress will drive the transition not only in energy, but also in the other sectors from education to health. Transition investment, a new incarnation of sustainable finance that combines returns and impact to drive positive environmental and societal change, was embraced as a compelling proposition to mobilise capital along the SDGs.

However, this model presents a significant obstacle for large institutional investors as currently there is no standardised risk-returns measurement approach. The outcome of the discussion on the topic was not to wait to have the ideal metric system in place before considering transition investments. The urgency brought about by the polycrisis demands immediate action, and there are some measurement tools available, such as TIL’s Signature Impact Framework, that allow for a rigorous assessment of the impact of a given investment.

It would also help to engage with a new breed of specialised impact investors that can deploy capital at scale while maximising its impact. Recent case studies discussed at the workshop have shown that institutional investors such as sovereign wealth funds or pension funds can play the dual role of investors in the general partner managing the asset and of limited partner in the funds sponsored by the investee GP.

Alternatively, a fund-of-funds approach, providing global investors access at scale to a diversified set of impact managers across the Middle East, Africa and South Asia region, can enable investment participation. These strategies allow the scaling up of execution across the investment cycle, helping to rapidly turn dry powder into deployed capital.

Over and above the technical aspects of capital mobilisation in transition investment strategies, the stakeholders gathered at the NYUAD workshop shared the belief that the severity of the challenges we confront demands a fundamental shift in our approach. While national governments will play a vital role, relying solely on them to solve global issues while catering to local interests is unlikely to be sufficient.

A broad coalition of Middle Eastern generational investors including sovereign wealth funds, family offices and pension funds, in collaboration with development finance institutions and multilateral promotional banks, have the firepower and incentives to mitigate global socio-economic and environmental risks, aligning the interests of beneficiaries and society at large. Indeed, when humanity comes together with a spirit of co-operation and enterprise, extraordinary things can happen, such as closing a $30 trillion financing gap.