Following UBS’s announcement at the 2017 World Economic Forum that it is seeking to scale up the amount of private capital invested by wealthy millennials in attaining the Sustainable Development Goals, Development Finance highlights the challenges to leveraging such capital in support of development programmes.
January 2017 could mark a new era in impact investment after UBS, the largest private bank by assets under management, unveiled a white paper setting out its blueprint for channelling private wealth to the United Nations’ Sustainable Development Goals (SDGs).
Presenting its findings at the World Economic Forum in Davos, Switzerland, the firm backed up its announcement by saying it will commit a minimum of US$5 billion of client money over five years to investments linked to international development programmes.
Simon Smiles, chief investment officer for ultra high net worth at UBS Wealth Management, says that apart from the financial strengths of private individuals, their investment needs, which aim for a long-term investment horizon, are also in line with the demands of SDG projects in ways that institutional capital often is not.
“UBS’s wealthiest clients are typically long-term investors who see sustainability as a critical future challenge [and our aim is] to help them address issues that are of concern to them and humanity at large,” says Smiles.
The white paper, entitled Mobilizing Private Wealth for Public Good, highlights the US$5-7 trillion annual investment target that think-tank the Brookings Institute suggests will be required to finance the SDGs between now and 2030. Smiles believes that impact investing, where an environmental or social gain is expected in addition to a financial return, driven by millennials taking over their parents’ wealth can assist in funding the investment gap.
“Private individuals have the ability to invest in the SDGs – in 2015, total household wealth stood at US$250 trillion annually, so just a small allocation to projects funding the Goals would go a long way,” says Smiles. “The allure of impact investing is especially high for millennial heirs to billionaire wealth – this segment of society is expected to receive over US$2 trillion of bequests over the next two decades.”
In 2014, David Galipeau founded the United Nations Social Impact Fund, to help the United Nations Development Programme (UNDP) leverage private capital to achieve the SDGs through partnerships with venture philanthropists, family trusts and private sector investors.
“Private sector capital understands very quickly and at a very granulated level what is successful and what has failed,” says Galipeau. “They also understand these notions at the individual and portfolio perspective. They create and connect dots to maximise economic value based on universal frameworks, principles of accounting and robust business models.”
The main goal of the United Nations Social Impact Fund is to trigger policy changes that will create motives for social investing and inform investors to make balanced decisions – not only based on the appetite for risk and return, but with a new variable in their equations: quantifiable social and environmental impact.
“There is an artificial divide between the public, private and development sectors,” observes Galipeau. “If all three sectors could work with academia to understand and maximise ‘social value’ at the same level of granulation and speed, ‘impact’ simply becomes a new variable in their tried and tested equations.”
Galipeau points out that social enterprises have become more prevalent in Asia than in the West because the Asian business model is newly created and more willing to lean its objective towards impact investment.
“Social enterprises had become mainstreamed particularly in places such as South Korea and Singapore,” says Galipeau. “The Western philanthropy and investments models have a long history whereas the Asian models are based on newly created wealth and business expansion that does not have a history and is therefore more open for shifts towards social investment models.”
An example is the Social Finance Collective Asia which was launched in Singapore in 2016 with the support of the UN Social Impact Fund and which sources investment deals through an online platform.
It is a first of its kind in the Asia-Pacific region that aims to accelerate the funding of SDG-aligned investment proposals in the areas of the circular economy, sustainable energy and positive social impact. It was created through a partnership of Credit Suisse, FMO (the Netherlands’ development finance institution), ING Bank and the UN Development Programme, supported by legal (Clifford Chance), analytics (Sustainalytics) and risk management experts (Atkins Acuity).
Challenges to mobilising private capital
But while collaborative digital platforms like the Social Finance Collective are seeking to accelerate change in Asia-Pacific, there remain major hurdles to overcome in mobilising private capital for development goals.
The first problem that needs to be addressed is the lack of transparency as to which countries and SDGs have the biggest funding gap to plug.
Unlocking the huge potential for mobilising private capital will ultimately require better visibility of where needs are greatest, according to Mark Haefele, global chief investment officer at UBS Wealth Management.
“Policy makers and other stakeholders must tackle the dearth of information around SDG funding needs and eliminate shortfalls in incentivising private investment,” says Haefele.
Secondly, providing platforms to joint investors and stakeholders to promote transparency of investment as well as opportunities for private capital to invest for social impact is highly crucial. “At the moment, there is not much connection between different stakeholders,” explains Smiles. “This prevents private philanthropic and for-profit capital from linking up, therefore investing in one would be another element to consider for accelerating the process.”
To address this, UBS has announced it is helping to launch a new SDG-focused philanthropy and investment platform called Align17. The platform has already received interest from the Gates Foundation, SDG Philanthropy Platform, PwC, and TPG Growth, with others expected to follow by committing resources to the platform.
A third factor is that the current structures favour philanthropy over for-profit impact investing, and institutions over individuals. Philanthropic donations often attract tax breaks, a benefit seldom seen in for-profit impact investing. That is why non-governmental organisations may sweeten an SDG-oriented deal by offering benefits to private individuals.
In today’s world, the role of public institutions, private capital and non-governmental organisations is crossing over at unparalleled rates. It is important to leverage their individual strengths to combat global issues together if private capital is going to play the critical role, which UBS claims it can for the Sustainable Development Goals.