How scaling up investment in fragile states can help achieve SDGs

This article is brought to you thanks to the collaboration of The European Sting with the World Economic Forum.

Author: Michael Jongeneel, Chief Executive Officer, Entrepreneurial Development Bank (FMO)

• Currently there aren’t enough bankable opportunities that support the SDGs.
• Market creation and investing in fragile states are two ways to scale impact.
• These innovative projects in fragile states show how we can achieve success.

With inequality on the rise and the climate crisis raging across our planet, time is running out to meet the UN’s Sustainable Development Goals (SDGs).

We believe in a world where, by 2050, over 9 billion people live well within planetary boundaries. That’s why last year, to maximize our impact towards the SDGs – as we finance the private sector in emerging markets and economies – we announced our updated strategy towards 2030: Pioneer, Develop, Scale.

Institutions like development finance institutions (DFIs) have challenging mandates to fulfil: we need to leverage public and private sector support to contribute to long-term sustainable development, while ensuring profitability. Although there are many tried and tested investing instruments at our disposal, like green bonds or syndications, it’s not enough.

Accelerating action to achieve SDGs

To truly scale impact, we need to step up in certain areas. By 2030, climate adaptation costs will be $300 billion. To meet the SDGs by 2030 and achieve a net-zero society by 2050, $2.6 trillion is needed. Clearly, increased financing is needed before it’s too late.

While our entire strategy aims to maximize our impact in line with the SDGs, there are two key areas I want to highlight that we aim to intensify towards 2030: market creation and investing in fragile and conflict-affected states (FCS).

One important adjustment to our strategy is intensifying our focus on market creation: developing unbankable opportunities into bankable projects. Without enough bankable opportunities, DFIs and commercial financiers cannot support the SDGs sufficiently.

Through market creation, DFIs can maximize impact through both business and ecosystem development. The first is focused on making individual opportunities bankable, while the latter focuses on pinpointing certain systemic market challenges to solve over a longer time horizon.

On a practical level, at COP27 we announced a $2.5 million investment in Treevive through our Mobilising Finance for Forests’ development capacity facility. Essentially, it’s a carbon development platform that supports project owners with funding and technical assistance, so they can accelerate their project’s carbon asset development and attract commercial investors.

Furthermore, we recently closed a $40 million investment in Alcazar Energy Partners II Fund, which stands out due to its focus on early-stage development in renewable energy investments in Egypt, Jordan, and the wider MENA and ECA region.

Both examples have a common end goal. They’re onboarding new businesses models into the market or existing business models in new markets, bridging the ideas-to-commercialization gap. This way, DFIs can pilot, further develop and upscale projects, ensuring they reach profitability and lead to maximum impact (like we do through the Dutch Fund for Climate and Development.)

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What’s the World Economic Forum doing about climate change?

Climate change poses an urgent threat demanding decisive action. Communities around the world are already experiencing increased climate impacts, from droughts to floods to rising seas. The World Economic Forum’s Global Risks Report continues to rank these environmental threats at the top of the list.

To limit global temperature rise to well below 2°C and as close as possible to 1.5°C above pre-industrial levels, it is essential that businesses, policy-makers, and civil society advance comprehensive near- and long-term climate actions in line with the goals of the Paris Agreement on climate change.

The World Economic Forum’s Climate Initiative supports the scaling and acceleration of global climate action through public and private-sector collaboration. The Initiative works across several workstreams to develop and implement inclusive and ambitious solutions.

This includes the Alliance of CEO Climate Leaders, a global network of business leaders from various industries developing cost-effective solutions to transitioning to a low-carbon, climate-resilient economy. CEOs use their position and influence with policy-makers and corporate partners to accelerate the transition and realize the economic benefits of delivering a safer climate.

Contact us to get involved.

Maximum impact can also be reached through investing in FCS, which ties into a topic I already mentioned: inequality. Over half of the world’s poor live in fragile contexts, and while FCS represent a high-risk operating environment (requiring deep expertise from us and knowledgeable partners), we must live up to our mandate in line with SDG 10: Reducing Inequalities.

Our 2030 strategy therefore includes an increased focus on moving into FCS. Through increased initiatives like gender lens investments, we aim to foster inclusive business growth where it’s most needed.

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These projects support the SDGs

One way we’ve been upscaling inclusive business growth is through our innovative NASIRA program. While it has a broader mandate within African countries, it can be used in FCS very effectively. Set up with the European Commission (EC) and powered by Team Europe, it’s a risk-sharing facility providing portfolio guarantees to unlock lending to underserved segments like migrant, women, or youth entrepreneurs.

It targets the perceived and actual risks that emerge from providing finance to entrepreneurs who have limited access to it, helping local financial institutions redirect the money flow and level the playing field by giving often excluded segments equal opportunities at financing and growing their (micro-)businesses.

Through NASIRA, we’ve been able to support the unbanked in Palestine, a young country with one of the highest unemployment rates worldwide. Alongside the EC, EU Delegation, and Palestinian microfinance company Vitas, we provided a $10 million portfolio guarantee to improve and extend financial access for micro-sized enterprises in Palestine.

However, we’re not investing in FCS only through programmes like NASIRA; we’re already piloting these approaches in all our key sectors.

Take ZiZ Energie. It’s a vertically-integrated power company in Chad, a country embroiled in political turmoil with just an 8.4% electrification rate. We provided €4 million for constructing two minigrids and battery energy storage systems; in October 2022, they held the inaugural opening of their first metrogrid – a momentous occasion.

Meanwhile, Yemen is plagued by high food insecurity and some of the worst malnutrition rates in the world, making its humanitarian crisis extremely fragile. We partnered with IFC to provide a syndicated loan of $20 million to HSA Yemen, one of the country’s most important food suppliers. Through our investment in Yemen, we hope to meet the everyday needs of the Yemeni people through staples like flour and milk.

Partnerships are key to finding solutions

These three transactions clearly underscore the high impact that investing in fragile states can provide. But we’re not at the level we need to be at yet – and it won’t be easy. That’s why we aim to develop a few successful proofs of concept as part of our ecosystem development approach and hope to increase our investment volume in FCS. But one thing is certain: we can’t do it alone. Not if we want to scale responsibly.

As we ramp up cooperation in a fragmented world, I want to make an open call to all who share our vision of a sustainable future for all, from fellow DFIs to NGOs to CSOs and all other public or private players. Let’s achieve the win-win-win situations – for ourselves, our clients/partners, and for people, nature, and future generations. Join forces with us so we can intensify our partnerships for collective action. Because if there’s one thing I know for certain, is that now, it’s all or nothing. So, let’s give it our all.