Redefining finance for a sustainable future

This article is written by Prof Nazia Mintz Habib, FRSA, Founder and Director, Centre for Resilience and Sustainable Development (CRSD) and Resilience and Sustainable Development Programme (RSDP), University of Cambridge.

“We have the power of choice. We must choose to act.”

Mia Mottley’s 2022 COP27 message urged radical changes to the international financing system to meet the realities of highly indebted, post-pandemic economies threatened by climate change. With COP around the corner, it’s time to take stock of how far we’ve used the ‘power of choice.’

A move away from traditional funding mechanisms

Since Mottley’s call to action, her Government has formed a Coalition of Multilateral Banks to Develop Resilient Infrastructure to drive new capital investments in the country’s social and natural assets. The innovative Barbados coalition, combining non-debt and blended funding for climate policy reforms and infrastructure resilience, is an example of emerging “systems” cooperation among public and private funders. It demonstrates rising responsiveness to the conditions of highly-indebted, struggling economies - for which traditional international funding mechanisms and conditions are proving increasingly unhelpful.

The UN Secretary General warned in July 2023, “the era of global boiling has arrived”. This applies to the climate, but also to an uneven global economy teetering on the brink of financial meltdown. But I see glimmers of hope. Political leaders and market makers are shifting to new funding ‘systems’ to challenge the extractive and unequal effects of globalisation.

The benefits of collaborative action

Collaboration and negotiated, value-based business models are practical realities and sustainable successes in today's dynamic business landscape. Approaches based on co-creation - harnessing collective intelligence to find solutions to complex challenges that foster ownership, relevance, and adaptability - offer these opportunities:

1. Unity is strength – The pandemic and the now-obvious effects of climate change are a wake-up call for doing things differently. Regulations requiring investors to report environmental, social and governance (ESG) impacts opens up opportunities for Small Island Developing States (SIDS) to collectively identify opportunities to pool large-scale investments. For example, one common pooled project could be converting SIDS airports to solar energy. By building coalitions around shared untapped assets, vulnerable countries can:

• Accelerate access to climate finance
• Raise private investment
• Limit sovereign debt exposure

Coalitions like these build collective goodwill, and can create practical support for climate-responsive development in vulnerable countries that would otherwise face barriers to accessing debt-free finance.

2. Perceived liabilities can become assets – The way we look at evidence is changing. New models are being adapted, and new analytical lenses are being applied to explain evidence. Repurposing evidence can disrupt assumptions about what is valuable. For example, by shifting paradigms about whether burgeoning youth populations are a liability or an asset. SDG8.6.1 measures national unemployed youth who are not in education or training. This group is often considered a burden or risk to the productivity of an economy. However, when the huge potential of young people is considered, the youth demographic can be seen as an economically valuable and potentially prolific ‘untapped and investable asset’.

3. New instruments can help assess resilience and investment risk – Discontinuation of the World Bank ‘Doing Business Index’ in 2021 opened space for new indicators of governance systems resilience. This is critical for a responsible and sustainable business culture.

   Take, for example, the Political Economic Resilience Index Visualisation (PERI-VIew). This multidimensional risk assessment tool was developed through the ‘Their Future, Our Action’ partnership and changes the way we look at project risk. If we view projects solely through the lens of country indebtedness, they can look highly risky. But by using the PERI-View Index and whole systems analysis, it was found that most small states in the study could attract SDG-linked investment opportunities, by mapping youth and nature (often seen as liabilities) as assets.

What are our key takeaways?

As the threat of climate disaster throws into sharper relief the vulnerabilities of historically marginalised and exploited economies and the power structures that dominate extraction and distribution of the world’s resources, there is growing conviction that current finance systems must change.

Collaborative, equitable and people-centred arrangements for global finance are needed. Committing private and public investment to what may now appear high-risk and unproductive ventures requires a mindshift: first to recognise the valuable assets these countries hold and second to realise that collaborative action can significantly de-risk investment. Global leaders are calling for innovative investment approaches.

Together with our partners, CRSD is deploying new evidence and methods to encourage more investment in vulnerable economies, so they can attain the self-reliance that sustainable development can bring about.

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(Image Credit: Unsplash)