Innovative Finance Framework

Innovative Finance Framework

Finding Our Why

2020 is the year during which numerous organizations (ie. UN, EU, UNFCCC, ) are taking stock on their work over the past decade and planning the final decade towards 2030. Although many actors in Government, Private Sector, Civil Society have set specific targets for the 2030’s, it is still highly uncertain if we will be able to reach those goals. The urgency is there. We are living the consequences of the Climate Crisis every day. The Paris Accord has shown that many countries have realized how important it is to reduce CO2 emissions below Business As Usual (‘BAU’) levels. Still on the implementation many countries are lagging behind on their commitments. 2020 will be the first year to reflect on those Paris Accord commitments. It will be interesting to see how the member countries are really doing.

The great thing about targets and goals, is that we can now finally start measuring. Right?

“Not everything we count counts. Not everything that counts can be counted”

Dr. Stephen Ross

The ESG standards have caused a significant move into greener, cleaner types of investments. It’s not to say that some greenwashing is happening. Considering the fact that now 30 trillion of AUM has moved towards sustainable investment, even a fraction of a percentage would mean hundreds of billions being greenwashed. Still it is a step in the right direction.

For decades we have known there was a gap in Development. We passed from the Millenium Development Goals (MDG’s) to the Sustainable Development Goals (SDG’s). And now, finally, we started measuring this development gap. Even though the hundred’s of indicators that have been developed are not all that easy to measure, again it is a step forward.

The Social Progress Index (‘SPI’) is one of the clearest examples on how countries, and now also cities, are measuring their development gap against our global targets, the SDG’s. SPI for the first time is offering us a detailed ‘state of development’ at a local level. This type of ‘micromapping’ is what’s needed by many development professionals. The majority of the hunger and poverty gaps are now being recorded in middle income countries. Even though the national statistics are telling us one story (the one of progress), on the ground in specific urban and rural areas there can be a striking contrast.

Looking at Malnutrition for a second. Is hunger a supply side problem? Are we not producing enough food? In most countries this is not the case. For some reason the food just doesn’t get to the communities in need. Does that mean they are not having access to food at all? No, they are simply not having access to healthy food at affordable prices. Imagine an obese person having micronutrient deficiencies. The answer therefore is much more nuanced than looking at national statistics.

So even if we might have answers on how to solve a social problem like malnutrition, how is it that we are not closing the gap?

Let’s zoom out here. If we look at Development as a marketplace, there is a clear demand side offering a solution to the Development problem (ie. Malnutrion). On the supply side for Development we are registering increasing funds made available with a focus on impact and sustainability. Then why aren’t these funds being deployed into a solvable problem?

As both sides of the Development market are moving closer to each other what is it that we additionally require to bridge that final gap?

This is where relatively straightforward answering ends and the learning begins.

A lot has to do with SDG 17, Partnerships (or MDG 8 for the older generation). One of those SDG’s that gets the least funding, then again it is all about funding for Development. We know it’s important but we have not really cracked the code on how to achieve it. That’s probably because we can not capture ‘Partnerships’ in a single metric like we can with the job market, foreign direct investment and of course economic growth. Expressing climate change as a measure of CO2 emissions has proven to be very effective. Although it’s not capturing all the effects causing climate change, it has become part of our daily lives. We measure our habits along the measuring stick of CO2 emissions. People and countries or regions (ie. EU) now want to become carbon neutral within one, two or three decades.

But how do you become Partnership Positive?

Here I’m going to steal from Simon Sinek’s work. Part of the answer lies in finding our Why.

Over the years we have figured out the ‘What’ in the Development gap. What are the social consequences, and what the social cost would be if no action is taken. We have researched the causes of climate change, and know what the effects would be on humans.

We have even come so far as to figure out the ‘How’ in the Development gap. How to measure CO2 emissions for example. Many of our international, and multi-lateral institutions have developed toolkits, frameworks, guidelines, protocols etc. All of them focussed on the How question.

But how many of us have focussed on our Why? 

True, we have the Paris Climate Accord. This is an indication that there is a growing global consciousness that points to us knowing our Why. The school strikes in Europe is in my opinion an even stronger indication. The new generation that stands up and is worried about their future.

There are more niche initiatives in the private sector and civil society. One of the best examples in the private sector currently might be Tesla. A company that started out making electric cars, but has moved towards clean energy generation and storage. Tesla through a singular focus on accelerating the transition away from fossil fuels, has caused a revolution in a deeply entrenched automotive industry. Already various assets managers are calculating the stranded assets on the balance sheets of the automotive dinosaurs.

How can the rest of us find our Why?

This is the point where we really have to move up our timeline. Something that is not measured in Quarterly reports, Annual Budgets, or multi-year Policy Agendas. This is something measured in decades. If we are jointly putting a dot on the horizon and ask ourselves what the world should look like for our children and our children’s children, we come to the almost surprising finding that as a community we can develop a shared vision. It allows us to leave behind our personal differences based on politics, religion, culture etc.

One of the best models in my opinion, that captures social innovation is the Transition Management Governance Model. And what is most exciting about the model, is that it’s not just a hypothetical model, but it has been developed within local communities for decades now. Something that has grown from the Dutch Polder Model. Often described as a consensus democracy model, which has allowed for horizontal collaboration between Government, Private Sector and Civil Society.

Transition Management has led to a great number of initiatives across Europe where multi-sector stakeholder alliances are built around a common long term transition goal (ie. clean energy). Through conducting different learning experiences or interventions the partners work towards a shared vision that will helps them forge the changes in habits that are needed to reach their long term goals.

The Innovative Finance Framework

In order to close the funding gap on the SDG’s and Climate Change targets we really need to first address a governance gap. We require innovation. It is very likely that we will not be able to solve our problems just through technological innovation (Silicon Valley style). We would most likely require much more social innovation.

And this brings us to the toolbox of Innovative Finance. We would need to start blending different funding resources at scale (ie. Foreign Direct Investment, Remittances, Tax Revenues, International Aid, Philanthropy etc. etc.). And even if we can find all these capital providers somewhere on the Capital Continuum, they most likely are currently not communicating with each other. If there’s no common language, we have a hard time communicating with each other. We really need to collaborate towards a shared vision for Development which allows us to overcome our differences on taxonomy, risk, impact. 

This is what the Innovative Finance Framework tries to achieve.