Towards Long-Term Sustainability: Modifying Investment and Valuation Models in the Wake of the Pandemic

June 2, 2020

(Xinhua/Pan Zhixiang)

UNDP China launched a ground-breaking SDG Finance Taxonomy to guide and inform future investments towards a more inclusive and sustainable world. The Taxonomy offers an ambitious and more integrated approach to define eligible SDG-enabling and investable finance projects and assessing their development impact. It is the first project classification system focused on closing the socioeconomic development gap and advancing vulnerable groups, which goes beyond climate change and environment that other international and national initiatives are already championing.

Financing for development in a post COVID-19 landscape

COVID-19 has further exposed the fragility of our financial system and the chronic underinvestment in social infrastructure in both advanced and emerging economies. Public health facilities are under tremendous pressure. Almost 1.6 billion informal workers have lost their earnings during the lockdown[i]. When governments are struggling to introduce rescue packages to bolster the welfare of their people, the global crisis has caused a diversion of USD 90 billion in funding out of emerging markets, the largest outflow ever recorded[ii]. After a lengthy period of neglect, the gap between needs and investment has become unprecedented.

This period of volatility for markets has left a lot of business owners scrambling, but there is a silver lining: some businesses are now playing a bigger role in mitigating the crisis and supporting economic recovery, such as alternative payment and telemedicine, ed-tech industry, which not only contributed to maintaining continuity and accelerating the return to relative normalcy, but also opened new pathways for providing quality services to those who previously did not have access. COVID 19 is like a cardiogenic shock to the financial system, providing a once in a generation opportunity to convince the world of the structural shifts needed in the financial system to balance financial returns with sustainable development.

Uncertainty will reign the post-COVID-19 world, but undoubtably this is the most urgent time ever to embrace the Sustainable Development Goals (SDGs) and ensure that all the spending is connected to sustainable outcomes. In this regard, SDG-aligned finance must have a role to play in the global recovery.

SDG Finance Taxonomy

Financing for the SDGs has come a long way since the Addis Ababa Action Agenda, with widespread recognition that it is possible to balance sustainable development with market returns. The 2300 signatories to the UNs Principle on Responsible Investing, managing assets totalling USD 83 trillion is the case in point.  However, identifying SDG enabling investments and measuring the impact of the investment is problematic due to the lack of commonly accepted Standards and methodologies. The SDG Finance Taxonomy offers just that! An approach to identify SDG-enabling investments and assess their development impact.

In order to build back better for SDGs, the Taxonomy directs public and private investments to underfunded sectors and geographical areas targeting the left behind. It covers areas ranging from resilient infrastructure to health services and social protection systems. In addition, the Taxonomy incentivizes technological investments in social sectors that have tremendous potential for the attainment of SDGs.

The target audience for the Taxonomy

Challenges remain in developing an SDG-aligned market where investors have greater clarity on social assets and projects that deliver both financial and sustainability impact. There are existing initiatives directing investments to be responsible and sustainable. Yet if we do not harmonize the criteria to determine the actual impact generated by financing activities for sustainable development, there will remain the potential for greenwashing or abuse of the SDG brand. The impact assessment indicators and reporting criteria of the Taxonomy allows investors and project developers to identify SDG enabling projects ex ante and report on it post facto. The Taxonomy excludes projects that do harm and guides the selection of better alternatives. All eligible projects under the Taxonomy will make positive contributions to at least one SDG and avoid significant harm to the others.

The Taxonomy can be used by the following stakeholders: 1) it would inform different levels of governments on SDG aligned investments that require financing and policy incentives; 2) it will guide financial institutions to identify and select investable projects aligned with the SDGs; 3) it helps investors and companies to incorporate impact measurement framework into their investments and production processes; 4) it facilitates verification of SDG impact by  independent verifiers on financing instruments such as bonds; and 5) it allows business analysts and the development community to promote credible, consistent language of sustainable investment, which is accepted by the whole financing ecosystem.

Market adoption of the Taxonomy

The SDG Finance Taxonomy was co-developed through an extensive consultation process which covered the financing ecosystem. It entailed building and working with a broad global stakeholder coalition including Chinese and international policy makers, experts in development and financial sectors, such as EY and ICMA, GRI, academia, such as Central University of Finance and Economics, members of different industrial sectors such as China emission exchange Shenzhen, and civil society organisations. It took close to 200 consultations to ensure relevance and usability, as well as quality assurance.

As this Taxonomy is adapted, tested and applied in the future, it is our hope that sustainable finance can enable the investment community to help overcome development challenges, while unlocking new opportunities – and in turn, defying the notion that the interests of business, society and the planet are mutually exclusive. The rationale behind the coalition and co-creation of the taxonomy is to ensure voluntary market adoption of the taxonomy, with increasing regulatory support for standardised reporting and statistical systems.  

The Taxonomy, which is China focused, is buttressed by UNDPs Corporate Initiative SDG Impact, which includes an SDG Bond and Private Equity Standards as well as SDG Investment Country Maps. The hope is these instruments serve as building blocks for the much needed paradigm shift in the financial markets,  which will strengthen confidence in SDG-alignment finance markets by promoting impact integrity, transparency and accountability, and ensuring voices of people are heard and issues affecting people and the planet are fairly represented.[iii]

Authored by Dr. Qing Xu, Programme Specialist on SDG Finance

Download the Technical Report on SDG Finance Taxonomy here.

[i] ILO: As job losses escalate, nearly half of global workforce at risk of losing livelihoods

[ii] United Nations, Inter-agency Task Force on Financing for Development, Financing for Sustainable Development Report 2020. (New York: United Nations, 2020), available from: .

[iii] UNDP. “A pandemic gives permission for change.”