The latest insights from the We Mean Business coalition

A new architecture for sustainable development

What kind of new economic models will be needed to meet the combined imperatives of poverty reduction, sustainable development, while making the shift to a low carbon future?

The world will soon embark on a new sustainable development path. Through the planned conclusion of several multilateral processes by the end of 2015 governments are gearing up to tackle urgent challenges such as climate change and poverty reduction. Next year will mark a convergence of global efforts around the post- 2015 development agenda, with its sustainable development goals (SDGs), set to replace current objectives. The same year will also hopefully see governments reach a global emissions-cutting deal at UN climate talks slated for Paris, France.

Left unchecked, climate change threatens to hamstring development. UN climate scientists have warned of far-ranging climate consequences based on current growth models, with the poor and vulnerable set to be the most affected. Without a doubt the international development and climate change agendas are inextricably linked.

Economic tools have a crucial role to play in both climate and development policy. These can be wielded to unlock innovation, enable an inclusive trade agenda, transform traditional growth paradigms, embrace low carbon pathways, and foster new inclusive business models.

If achieved both the new development agenda and a universal climate deal would mark a watershed moment for international governance. Ensuring the outcomes are truly successful, however, will only be possible if current challenges are received as opportunities and met with fresh prototypes to confront the status quo. This suggests a clear space for non-state actors, including the private sector, in operationalising both the new climate regime and sustainable development architecture.

Investing in development, climate action

Investors and the private sector are the primary force behind poverty reduction and economic strength in the developing world, accountable for an average 60 percent of GDP, 80 percent of capital flows, and 90 percent of jobs in developing countries.

Leveraging the power of financial markets also holds great potential. With US$62 trillion in global equity markets, small changes to investment allocations can trigger huge progress, if regulations and accounting standards reflect environmental and social considerations.

A UN investment report released earlier this year suggests that developing countries currently face an annual investment gap of around US$2.5 trillion in SDG relevant sectors. The report provides a framework geared towards enhancing private sector contributions with a series of policy options to address the challenges this presents. Overall the message is clear; commitment to an unprecedented scale of investment is required to meet the considerable challenges of both poverty reduction and a low carbon future.

In the same vein, the Global Commission on the Economy and Climate released a report just ahead of the UN Secretary General’s climate summit in September, which presents a range of opportunities to simultaneously achieve economic vitality and action on climate change.

Findings point to evidence that the global economy will undergo major transformations in the next fifteen years, including growth projections of more than 50 percent, with around US$90 trillion to be invested in urban, land use, and energy infrastructure. The report suggests these structural shifts could be met as a chance to foster low-carbon growth trajectories.

Private and public sector actors have the opportunity to work together in this area. For example, financial innovations such as green bonds and similar instruments that align the risk profile of low-carbon assets with the needs of investors could reduce financing costs of low-carbon electricity by up to 20 percent, according to the report.

Meanwhile “We Mean Business,” a new coalition of forward-thinking businesses and investors, has a similar objective to accelerate this private sector-led economic transition. The group recently issued The Climate Has Changed, a report illustrating the strong link between low carbon investment and lucrative financial returns. According to some of the data provided, the internal rate of return (IRR) for process energy efficiency measures in South Africa is 46 percent and 81 percent for the US, which translates into a good financial argument for action. Generally speaking, the higher the IRR, the more desirable it is to undertake a particular project.

The group’s report also calls for the implementation of policies that would help to spur business action and investment. These include eliminating subsidies that incentivise high carbon energy, enacting a meaningful price on carbon, ending deforestation, energy efficiency standards, and structures to scale-up low carbon energy. Finally, the report also suggests that policy regimes dealing with trade-related issues should provide action incentives to encourage the move to a low-carbon future.

As an illustration of the power of putting in place helpful policy frameworks, the report notes that 72 percent of the EU’s new power capacity came from renewable sources in 2013, compared with 80 percent from fossil fuels ten years before. The EU’s target of boosting renewable energy by 20 percent by the end of the decade is credited with driving this transition.

Without action, climate change will cause damage to facilities, disrupt supply chains, jeopardise global food and water resources, and add overall uncertainty to the marketplace. Businesses and investors alike have a critical role to play in altering this narrative and the most progressive have already recognised the strong business case for addressing climate change. These understand the long-term benefits of climate action to their bottom lines through increased productivity, managed risks, reduced input costs, as well as opportunities created through new technology and innovation.

Partnerships for sustainable development

Back in July a UN working group released a set of proposed SDGs for consideration as part of the post-2015 development agenda. Questions around the means to achieve each goal, which would include topics such as finance, trade and technology, proved contentious throughout the group’s talks.

The final proposal represents a compromise with a stand-alone means of implementation (MoI) goal, including various sub-sections, as well as several specific MoI identified under each goal. Trade, wherein businesses are the key ground-level actors, was put forward as one of the possible sources of MoI and included in various sections throughout the framework. The move underlines the potential contribution a revitalised trade agenda could make to the achievement of economic, environmental, and social objectives.

In addition to links through trade, the private sector is mentioned in the preamble of the proposal, and the last goal calls for a revitalisation of global partnerships for sustainable development noting the private sector should be considered as a driver to achieving the new framework’s objectives. However, there is room for more concrete recognition of the role of business in realising the overarching objectives of the SDGs, making the inclusion of a multitude of stakeholders essential.

Partnerships are powerful and adept tools for addressing 21st century challenges. Strategic alliances enable scale, allowing for a departure from traditional aid models administered by governments alone, mobilising different mechanisms and new models of co-investment and collaboration by a diverse range of actors. In recognition of the advantages of this model, the first High-Level Meeting of the Global Partnership for Effective Development Co-operation was held in Mexico in April 2014, with the outcome document pointing to business as a partner in poverty eradication and sustainability objectives.

A report by the UN High Level Panel (HLP) – a group of experts convened by the UN Secretary General to advise on the post-2015 development agenda – builds on this premise, recommending a global multi-stakeholder partnership for every SDG, to ensure delivery across different sectors, value chains, and at national, regional, and local levels.

Collaboration between the World Business Council for Sustainable Development (WBCSD), the Global Reporting Initiative (GRI) and UN Global Compact (UNGC), also offers an example of a successful non-monetary partnership. The three institutions are developing a guide on impact assessment, key performance indicators selection, and goal setting to support the private sector in aligning business strategies and targets with the final SDGs.

In turn, governments could consider including a role for the private sector in the eventual stand-alone MoI SDG, with specific, measurable, achievable, relevant and time-bound references. This would help to outline a clear path for business to contribute quantifiably and in an accountable and transparent manner.

Another example of a private sector-led contribution to sustainable development is the World Business Council for Sustainable Development (WBCSD)’s Action2020. As a platform for private sector solutions to environmental and social challenges, it sets an agenda for business action on sustainability through to 2020 and beyond, helping to drive scalable, impactful, and measurable contributions from a range of companies. In addition WBCSD’s UN climate summit submission outlines 14 solutions aimed at limiting the global temperature rise to below two degree Celsius from pre-industrial levels.

Decisions ahead

Governments are poised at the edge of a key-decision making year. Once the new climate and development agendas are set out, hopefully with enough ambition, thoughts will turn to implementation. Neither the public nor the private sectors alone can bring about the action, scale, and impact necessary to achieve a sustainable future for both society and the environment.

Instead, new investment patterns will be needed to bolster clean energy sources, dated economic incentives overhauled, and new frameworks that favour lower emissions prioritised. Deploying innovative economic tools to address sustainability and environmental challenges will drive forward implementation of the SDGs.

There is an opportunity ahead for the world to embrace a dynamic new architecture for sustainable development, delivering a post-2015 agenda that meets poverty alleviation, as well as climate and broader environmental challenges. The new climate and development agendas have an opportunity to provide the right framing to facilitate fresh economic paradigms that deploy models of partnership, financing, and technology – keeping in mind businesses’ contribution and clear role.

– International Centre for Trade and Sustainable Development