Are we going about infrastructure investment all wrong?

Written By Ben MacCorquodale

The drive to achieve the Sustainable Development Goals (SDGs) by 2030 has underscored the critical need for substantial and strategic financial investments.

A recent UN DESA policy brief highlights the pivotal role of mission-oriented development banks in this effort.

 https://www.un.org/development/desa/dpad/wp-content/uploads/sites/45/PB_Special-Issue_HLAB_September_2023.pdf

So why, if we know what we need to do, can’t we get on with it?

Is it that ‘traditional’ financial institutions may not be the ideal vehicles for fostering a sustainable, post-industrial society that benefits all of us?

What is Mission-Oriented Finance?

Mission-oriented finance emphasises the alignment of economic activities with broader societal goals, focusing on long-term impacts rather than short-term financial gains. This approach involves various financial instruments, such as loans, grants, and bonds, aimed at achieving specific missions.

Historical examples, such as NASA’s Apollo mission, illustrate the success of mission-oriented projects driven by clear societal objectives. Though, as this objective was driven by a space race to beat an ‘enemy’, maybe we. N start to see a flaw in the model.

 

The Role of Development Banks

National Development Banks (NDBs) and Multilateral Development Banks (MDBs) are crucial in mobilising finance for the SDGs.

These banks are designed to support long-term investments in infrastructure, social programs, and sustainable development projects. Despite their importance, NDBs and MDBs face significant challenges, including coordinating finance, managing risks, and ensuring effective governance. Are these challenges in part due to their reliance on political consensus, something lacking in wealthy countries?

 

Unlocking the SDG Multiplier

The SDG multiplier effect refers to the amplification of sustainable development impacts through aligned global development banks. Public-private partnerships play a crucial role in this context, leveraging private sector efficiency and public sector oversight to drive sustainable growth. Successful examples include coordinated efforts by MDBs and NDBs to finance large-scale renewable energy projects and green infrastructure. 

https://www.techuk.org/resource/scotland-is-an-ideal-location-for-green-data-centres-and-a-new-report-pinpoints-the-prime-spots-guest-blog-by-farrpoint.html

 

Governance and Policy Recommendations

Effective governance structures are essential for mission-oriented finance. This includes transparent decision-making processes, robust accountability mechanisms, and strategic policy frameworks. Key policy recommendations emphasise the need for improved coordination among development banks, enhanced capacity-building, and increased stakeholder engagement to ensure that financial activities align with sustainable development objectives. And at this stage we see why progress is being undermined by a weak political will. Moreover, the politicisation of SDG as a ‘woke agenda’ denying the ‘hard working family’.

Conclusions – if there can be any

While mission-oriented development banks are crucial for financing the SDGs, the broader financial system, dominated by traditional financial institutions, often falls short in addressing the complexities of building a sustainable society. This blog post explores why financial institutions may not be the right model for this mission and highlights alternative approaches that prioritise long-term, inclusive, and sustainable growth.

 My Takeaways

·      Mission-oriented finance is essential for achieving the SDGs, focusing on long-term societal impacts.

·       Traditional financial institutions often prioritise short-term gains, which can undermine sustainable development efforts.

·       Effective governance and strategic public-private partnerships are critical for the success of mission-oriented finance.

 

The Inadequacies of Financial Institutions

Definancialisation: A Necessary Shift

Definancialisation involves reducing the dominance of financial motives and speculative investments in the economy. Traditional financial institutions are often driven by short-term profits and market volatility, which can detract from long-term sustainable investments. Redirecting finance towards the SDGs requires a shift in focus from financialisation to productive investments that support real economic growth and social equity.

 

History informs a possible future

Historical models such as friendly societies, cooperative banks, and public development banks offer valuable lessons. These institutions emphasised collective welfare, long-term stability, and community-focused financial practices. For instance:

  • Friendly Societies: These mutual aid organisations provided financial support based on member contributions, focusing on collective welfare. 

  • Cooperative Banks: Owned and controlled by their members, these banks aimed to support local development and member benefits.

  • Public Development Banks: Funded long-term projects promoting economic development and societal benefits.

These models prioritised stability and long-term investments over high-risk, high-reward strategies typically associated with traditional financial institutions.

However, they were still ‘risk off’ to varying degrees, driven by an ideology of not losing people’s money. Do we need something more radical?

The Current Landscape: Impact Investing and Government-Backed Lending

Impact investing involves investments made to generate positive social and environmental impacts alongside financial returns. This model is both "risk-on" and governed by the public good, addressing issues like poverty, healthcare, education, and sustainability. Green bonds, for example, finance environmentally beneficial projects and align financial returns with societal benefits.

Politically or Government-Backed Lending

The UN DESA paper advocates for lending models supported by political and government mandates, such as NDBs and MDBs. These institutions prioritise long-term, risk-tolerant finance for achieving the SDGs, operating under government directives to promote public good and sustainable development.

 

Evidence of Public Good Investment in Western Economies

Despite the political and societal uncertainties, there is a growing appetite for public good investments in Western countries:

1. European Union Initiatives:

   - NextGenerationEU Funds: Substantial funding mechanisms supporting green projects and innovation.

   - EU Green Deal and Taxonomy: Frameworks promoting sustainable activities and substantial investments in ESG projects [oai_citation:1,Global economic outlook 2024 | Deloitte Insights](https://www2.deloitte.com/us/en/insights/economy/global-economic-outlook-2024.html ) [oai_citation:2,Spring 2024 Economic Forecast: A gradual expansion amid high geopolitical risks - European Commission](https://economy-finance.ec.europa.eu/economic-forecast-and-surveys/economic-forecasts/spring-2024-economic-forecast-gradual-expansion-amid-high-geopolitical-risks_en )

2. United States Policies:

   - Inflation Reduction Act: Significant investments in climate and clean energy.

   - Public-Private Partnerships: Driving investments in infrastructure and technology.

 3. UK and Other Western Nations:

   - Green Bonds: Funding projects aimed at mitigating climate change and promoting sustainability.

 

Uncertainties and Political Dynamics

Uncertainties in public good investments arise from various economic, political, and social factors:

Traditional financial institutions, with their focus on short-term gains and speculative investments, are ill-suited for building a sustainable, post-industrial society. Instead, mission-oriented development banks, impact investing, and government-backed lending models offer alternatives. These approaches prioritise long-term, inclusive growth, aligning financial activities with societal goals and sustainable development.

So, what are we missing? Surely not another ‘enemy’, like the US relied on to get Neil Armstrong to the moon. We need to find a way to get along and focus on the common good, a new moonshot. The challenge of our age.

 

Ben MacCorquodale
Previous

Why Silos Kill Insights: The Importance of People Over Systems
Next

Will a love for AI lead to a rush to embrace higher standards?