How SDG Partnerships and Their Funders Can Better Unlock Finance for Impact
Around the world, governments, companies and others are taking transformative action to address the largest issues of our time, including climate change, poverty, water scarcity and hunger. The Sustainable Development Goals (SDGs) provide a guiding framework to secure a more sustainable future; however, the estimated annual financing needed to achieve them is a whopping $4.2 trillion. While the global community has fallen short of achieving the proper financing to date, the money is out there — institutional asset owners, for example, hold more than $100 trillion, some of which could be directed to SDG financing.
SDG 17 envisages the key role partnerships — those comprised of stakeholders from government, business and civil society organizations (CSO) — can play in catalyzing finance to accelerate the SDGs. A 2020 WRI report discussed the success factors and challenges of transformative partnerships. Not surprisingly, the top challenge partnerships reported was access to financing.
In a new report, Unlocking Early-Stage Financing for SDG Partnerships, WRI researchers unpack this challenge, looking to understand why so many partnerships, like other impact entrepreneurs, get stuck in the “valley of death” or “missing middle” — that transitory period when an enterprise is too big for grant funding but too small for commercial investment. The report finds that partnerships struggle to get appropriate investment because grant funders and investors often prioritize matters like political capital, reputation, risk and bureaucracy over achieving impact.
By recognizing the challenges faced by partnerships and funders, the new report provides recommendations to help both groups expand beyond the status quo, close the SDG financing gap and advance exciting new business models to accelerate the SDGs.
Outlined are four recommendations to help both funders and partnerships better achieve impact.
1) Grant funders and investors should adopt approaches to financing that stretch beyond their comfort level.
Catalytic capital is financing that accepts higher risk, more flexible terms, longer time frames and often concessional returns compared to conventional investments. Catalytic capital is necessary to accelerate high-impact enterprises, as the biggest barrier they face is often accessing appropriate capital across the risk/return spectrum.
For example, donor governments should increase the proportion of their disbursed funding dedicated to catalytic structures, perhaps serving as a first loss guarantor. This is when a third party absorbs a loss if a partnership fails to generate sufficient revenue to cover loan payments. USAID is acting in this capacity as a funder to the partnership Nutritious Food Financing Facility (N3F). Likewise, development finance institutions (DFIs) should reassess their risk tolerance in order to provide funding to early-stage ventures as opposed to what is usually funded — larger, commercial, established investment opportunities.
2) Grant funders and investors should be more open about how they make investment decisions and be more flexible with their funding requirements.
Financing that is flexible, transparent and innovative can help partnerships advance their transformative ambitions. If funders and investors can streamline their eligibility and reporting requirements, they can enable partnerships to have greater freedom to achieve proof of concept. Often, eligibility and reporting requirements delay financing for partnerships and keep them from being able to establish a comprehensive business plan because their funding is uncertain. For example, philanthropic funders may want to collaborate with other foundations to align on reporting metrics and processes.
3) Investors should be more transparent and increase their accountability to better optimize impact.
Investors may find it hard to prioritize impact over other considerations, partially because impact is difficult and expensive to assess. However, a lack of investor transparency and accountability to drive impact is a major challenge both for partnerships and investors. Partnerships report that the lack of public reporting by investors on performance and mixed disclosure of financial information makes it difficult for them to know which investors to connect with. Investors, on the other hand, report impact washing as a major challenge for the impact investing industry. Additionally, the lack of investor transparency and accountability is leading to an overall lack of knowledge on how well investments are accelerating the SDGs. Investors greatly need to improve their transparency and accountability. They can do so by adopting generally accepted impact measurement and management principles and frameworks for the public reporting of their impacts, by reporting publicly on key information like positive and negative impacts and fund objectives and eligibility criteria and by verifying impact performance through third party audits.
4) Partnerships should focus on building a high-quality funder and incubation network.
The report found that many of the partnerships that successfully acquired returnable investment tended to collaborate with a partnership acceleration program. Connecting with partnership acceleration platforms like Partnering for Green Growth and the Global Goals 2030 (P4G), Energy Catalyst or the Climate Policy Initiative can provide partnerships with a strong start in developing a network of technical and financial assistance.
In addition, partnerships that acquired investment tended to have one to two high quality anchor funders that were willing to provide flexible catalytic capital with a low reporting burden.Often these anchor funders provided partnerships with multiple rounds of funding and connected partnerships with investors within their circle.
Finally, the report found that more successful partnerships were also adept at developing a solid business plan with a strategy for securing returnable investment. Several partnerships also reported the importance of having a strong team focused on process as well as impact.
Engaging with New and Innovative Financing for Greater Impact
Innovative approaches to financing, greater flexibility, greater impact transparency and strong networks can help both partnerships and funders close the SDG financing gap. When funding is no longer a barrier, partnerships can fully focus on addressing the SDGs they seek to tackle.
By working together and looking outside of the status-quo, partnerships can not only address SDG 17, they can also spur a domino effect by addressing other challenges like equity, energy access and more through their success. By working together and using resources from across sectors, the returns — economical, developmental and environmental — will inevitably follow.