By Sony Kapoor, CEO of the Nordic Institute for Finance, Technology and Sustainability (NIFTYS) and Chair of Re-Define
The humanitarian, moral and economic case for development aid has been made eloquently and does not bear repeating. But the stark, ongoing highly inequitable impact of climate change and the COVID-19 pandemic, both of which hurt poor and developing economies the most, has turbocharged the case for more aid and now. However, present levels of aid languish at 0.32% of GDP, or $161.2 billion, less than half the promised amount of 0.7% of GDP. This commitment needs to be at least doubled, but despite the OECD call for a “massive expansion of aid” countries such as the UK are cutting, rather than increasing aid.
Meanwhile, in the developing world, COVID-19 may push 150 million to 200 million people into extreme poverty, reversing years of hard-earned progress. Even a dynamic economy such as India has seen an increase of 75 million additional poor, with the middle class also being hollowed out. The IMF has highlighted the uneven nature of the recovery between rich economies that have vaccines and large stimulus programmes, and developing countries that are lagging behind on both, now also facing fresh outbreaks of the virus. Climate change is likely to push an additional 130 million people into extreme poverty absent urgent mitigation and resources for adaptation. As Oxfam has highlighted, developed economies have failed to meet their promise to mobilise $100 billion in climate funding with the true value likely at only a third of the reported volume.
The need to frontload aid to 1) finance vaccination efforts in developing economies 2) rescue the millions who have just fallen into extreme poverty before permanent scarring sets in 3) support ambitious mitigation efforts in developing economies to reduce greenhouse gases and 4) fund adaptation measures, could not be stronger. Every euro spent on these efforts will deliver several euros of return, for both developing countries and the global economy.
The large benefits of frontloading spending on vaccines is what led some donors to launch the International Financing Facility for Immunization (IFFIm) in 2006. IFFIm borrowed $6.4 billion and used it to fund the delivery of vaccines, which otherwise were unlikely to have been developed and administered, and which contributed to saving 13 million lives until 2019. The vaccine bonds issued by IFFIm will be repaid by pledges from 10 countries over a period of 32 years. Remarkably, IFFm was able to borrow at a lower rate than the weighted average borrowing costs of the pledging countries, because so many environmental, social and governance (ESG) conscious investors wanted to save lives.
Now is the time for the EU, accounting for nearly 50% of all aid, the US under a Biden administration keen to reengage with the world, Japan and the UK to launch an ambitious IFFIm-like facility with the explicit aim of doubling aid volumes until 2030. Other donors, especially the Norway, Canada, Australia and South Korea, would be natural partners. This is also the Decade of Delivery for the Sustainable Development Goals (SDGs) that are badly lagging behind.
Enter FASTER – Frontloading Aid for the SDGs, The Environment and (COVID) Recovery – a plan to nearly double the volume of aid over the next decade to $250 – $300 billion. This will entail the issuance of around $1 trillion in SDG bonds, social bonds and green bonds to be repaid by ring fencing 25% -30% of current aid (as a % of GDP) for 20 years between 2031 and 2050.
At prevailing record low interest rates and given the dramatic growth of ESG investors, real interest rates on these bonds will be zero or negative with coupons of around 1%. Far from undermining the total volume of aid between now and 2050, borrowing will actually increase it. ESG investors and impact funds who have been buying green and social bonds will lap these up. Unlike many of the outstanding green, social, and sustainability (GSS) bonds, these bonds will provide additional financing for climate action, SDG investments, social and health interventions that would otherwise not have been funded.
Even if the frontloaded expenditure from FASTER is only modestly successful in saving lives, reducing extreme poverty and tackling climate change, public support for aid among existing donors is likely to increase, raising aid allocations. Combined with the growing variety of donors, this means that aid volume won´t see a dramatic drop-off in 2031, after FASTER expires.
The logic of FASTER dovetails neatly with the reasoning behind the €750 billion EU Recovery Fund, as well as the Biden administration´s stimulus and economic recovery and infrastructure plans. All seek to frontload spending and investments to minimise economic scarring, tackle climate change and catalyse economic growth. If anything, FASTER has the most compelling logic of bigger economic multipliers, greater emissions reductions, saving more lives and biggest impact per Euro.
What better way for an EU keen to project soft power by prioritising the Green Deal and an EU-Africa partnership than to launch a FASTER facility to tackle climate change, save tens of millions of lives, and catalyse growth in the developing world? And for a Biden administration and Japan – keen to rebuild environmental credentials and address China´s influence – to co-sponsor it, demonstrating intent? The UK, a lead sponsor of IFFm, is perfectly placed to co-ordinate the launch of FASTER ahead of the forthcoming COP26 to also help catalyse ambitious climate commitments.