PARIS, 13 Sept. - (ANA) - The COVID-19 pandemic exacerbated the financing gap for the implementation of the 2030 Agenda in developing countries, estimated at $3.7 trillion in 2020, corresponding to a 50% increase, rev eat a report published today by the OECD. 

 

Shifting only 3.7% of the institutional assets – over $100 trillion in 2019 – towards sustainable activities in those countries would be enough to fill that gap.

 

Analysing the volumes and composition of selected institutional investors’ portfolios, this report finds that the share of investments allocated to developing countries is still limited. It also looks at the main investment drivers and considerations of these actors when operating in developing countries.

 

The report explores solutions to channel more of their institutional assets towards developing economies, especially through blended finance. Whilst evidence shows that risk mitigation instruments such as guarantees can contribute to lowering the perception of risks, more efforts are required to attract institutional investors in significant blended finance operations.

 

 

 

 

Main findingsInstitutional investors – such as pension funds and insurance companies – are key participants in financial markets, holding more than USD 100 trillion of assets at end-2019 (see Chapter 1.    ). Most of these assets are invested in bonds and equities. The investments of institutional investors are usually regulated through quantitative investment limits – relatively common for pension funds – or a more principle-based approach, such as for insurance companies in many countries.While the pre-COVID-19 annual financing gap for the SDGs was estimated to amount to USD 2.5 trillion (UNCTAD,  2020[1])  for  developing  countries,  it  increased  by  50%  in  2020  and  reached  USD  3.7  trillion.

 

Reducing  the  financing  gap  for  the  SDGs  requires  shifting  financial  resources  towards  sustainable  development,  including  from  the  private  sector,  as  well  as  greater  alignment  of  all  the  investment  chain  with the SDGs.Institutional  investors  can  help:  shifting only 3.7%  of  their  assets  towards  sustainable  activities  in  developing countries would be sufficient to fill the USD 3.7 trillion gap (OECD, 2020[2]). However, a survey conducted by the OECD on selected institutional investors confirmed their propensity to mainly  allocate  assets in  stable  and  low-risk  contexts (Chapter 2. ).  Only  a  small  share  of  the  global  assets of institutional investors is allocated to developing countries, mostly to middle-income economies with well-developed investment climate and in the form of asset classes with a relatively low-risk profileand predictable returns.  

 

•During  2017-18, only  8%  of  total  assets  of  the  36  pension  funds  included  in  the  survey  sample were allocated to developing countries, mainly in    Asia (68%) and in particular middle-income countries such as People’s Republic of China, India and Southeast Asian countries. Such assets  were mostly held  in  the  form  of  listed  equity  (57%)  and  fixed-income instruments (25%). Moreover, 85%  of  all  assets  allocated  to  developing  countries  were  managed  by  merely  fourpension  funds  based  in  three  countries,  showing  high  concentration  among  a  limited  number  of  institutions.

 

•As  regards  insurance  companies,  the  survey  sample  of  30  insurers  suggests  an  even  more  cautious allocation decision making. Only 2% of the assets of insurance companies in 2017-18 were  allocated  in  developing  countries,  90%  of  which  in  Asia.  Approximately  two-thirds  of these assets were held in the form of fixed-income instruments while the remainder was diversified mainly across listed equity, loans and cash deposits. Investment currency is also a central driver as regards the investment decisions of insurance companies. 

 

Investment decisions by pension funds and insurance companies are largely influenced by risks associated with local corruption levels and political or macroeconomic instabilities. The availability of skilled workforce plays an important role too for all these actors, while investment opportunities constitute the main investment driver for pension funds (Chapter 3.    ). 

 

Interest rate levels also constitute an important driver. The current low interest rate environment in the OECD countries is a challenge for investors who need to  reorient their investment strategies towards more profitable asset classes and markets: there may lie an opportunity for emerging economies.   Mainstreaming sustainability considerations in the internal policies of institutional investors does not  necessarily  imply  aligning  their  investment with  the  SDGs.  

 

Most  surveyed  pension  funds  and insurance companies showed a rather limited focus on development impact and environmental, social and governance  (ESG)  standards  in  their  portfolio  allocation  decisions.  Moreover,  only  half  of  institutional investors  indicated  to  have  aligned  their  internal  policies  to  some  extent  with  the  2030  Agenda  and  the  SDGs. 

 

Still, mainstreaming the objectives of the Paris Agreement in their internal strategy, at least to some extent, was indicated by approximately two-thirds of the surveyed investors.Collaboration between institutional investors and the public sector – be it governments of provider or partner  countries,  or  multilateral  organisations  –  remains sporadic.  No  more  than  a  fifth  of  the  surveyed  institutional  investors  collaborate  with  provider  countries’  development  co-operation agencies, development  finance  institutions  (DFIs)  or  multilateral  development agencies  and  collaboration  with  governments of the developing countries is even rarer. Still, when collaboration occurs, it concentrates on risk  mitigation,  co-financing,  access  to  knowledge  and  advice  or  due  diligence  services.  

 

In  contrast,  development outcomes are not prioritised under such multi-stakeholder partnerships. Blended finance is one option in the development co-operation tool box to mobilise institutional investors’  assets  toward  developing  countries.  The  use  of  risk  mitigation  instruments  such  as guarantees  can  contribute  to  lowering  the  perception  of  risks  by  institutional  investors.  However,  development finance providers need to put more efforts to further mobilise institutional investors at scale in  blended  finance  operations  given  their  limited  involvement  so  far.  Finally,  the  mobilisation  of  local  pension funds and insurance companies also plays an essential role in developing local capital markets and in providing local currency financing. 

 

 

 

 

•Countries  hosting  large  pension  funds  and  insurance  companies  have  a  role  to  play  in  introducing greater flexibility in investment regulations and removing the micro and macro-economic  barriers –  including  the  lack  of  transparency  and  information  asymmetry  on  private  investment –  to  unlock  institutional  assets  at  the  global  level  and  towards  developing  countries  more specifically. 

 

•While it is necessary to encourage the scaling-up of institutional asset allocation towards developing  countries,  ensuring  their  sustainability  through  impact  investment  policies  is  equally important for the achievement of the SDGs. 

 

Aligning the financial system – banking, capital markets and insurance – with sustainable development pathways requires the involvement of  all  actors,  including  international  financial  institutions,  banks,  institutional  investors,  market-makers  such  as  rating  agencies  and  stock  exchanges,  as  well  as  central  banks  and  financial  regulatory authorities.  

 

•Blended  finance  can  de-risk  deals  and  enhance  returns  to  crowd  in  capital  from  local  or  international institutional investors, but incentives from development finance providers are also  needed  to  mobilise  these  actors  at  scale.  

 

This  includes  efforts  for  aggregating  multiple  projects – e.g. through portfolio investment mechanism – to help achieve the needed investment ticket sizes, as well as to contribute to portfolio diversification for institutional investors.Finally,  increased  transparency  of  institutional  investors’  asset  distribution  is  critical  for  building trust in the markets and, thus, unlocking financing towards developing countries.

 

Transparency does not only build trust in the international development system, but it is also an important  source  of  learning  opportunities  and  inputs  needed for  evidence-based  policies  and informed partnerships for the SDGs.   - (ANA) -

 

 

To download the report, visit: https://www.oecd.org/dac/financing-sustainable-development/Mobilising-institutional-investors-for-financing-sustainable-development-final.pdf

 

AB/ANA/13 September 2021 - - -