Innovative Finance: Mobilizing Capital for Maximum Impact
Ending poverty and fostering sustainable development — the aims of the United Nations Sustainable Development Goals (SDGs) — will require some $3.9 trillion annually for the next 15 years in developing countries alone. But official development aid and philanthropy, which are the traditional sources of funds, can be counted on for only slightly more than a quarter of that. Attention has therefore turned to the private sector and the vast sums of money that could be coaxed out with just the right investment opportunity. While the private sector has long been involved in development efforts, and its level of investment has been growing, it is still nowhere near the level required to meet the SDG financing gap. Creative new ways to bring private capital to bear — innovative financial mechanisms — are needed.
In this report, we describe what has come to be known as innovative finance and the various forms it has taken. These include everything from entirely new financial mechanisms to adaptations of existing ones to mechanisms that really aren’t financial instruments at all but strategies for channeling revenue streams from a variety of sources toward development.
In view of the fact that an enormous amount of ingenuity has already been demonstrated in devising mechanisms, we then address the question of why there hasn’t been more innovation and more mobilization of private capital. We consider fiduciary constraints, attitudinal impediments, lack of know-how and institutional barriers. And we note some efforts that are underway to overcome these obstacles.
Next, we look at some of the many innovations that have been made in a variety of asset classes, from equity and bonds to guarantees and insurance. We provide a glimpse of the people who have had the breakthroughs and the circumstances that have been conducive to them. We also note the potential, limitations, expansion and replication of these innovative strategies.
In a final section, we look for patterns in the innovations we have examined. In doing so, we hope to find clues as to what can be done to foster more of the innovation required to marshal sufficient resources to achieve the SDGs in the time allotted.
This report was authored by Knowledge@Wharton in collaboration with the Wharton Social Impact Initiative, with support from The Rockefeller Foundation.