A key challenge to delivering the SDGs relates to financing and how to mobilise the public and private resources needed to implement countries commitments. Public expenditure plays a key role, especially in providing public goods and essential social services. It accounts for the largest source of development financing in developing countries and is the most sustainable source of investment in national development priorities over the long term. Beyond mobilising additional resources towards the SDGs, there is also a need to ensure the efficient and equitable allocation of these resources in national budget planning and expenditure frameworks. It is not just about spending more, but about spending available resources better. In this context, fiscal policies, which are concerned with reforming government spending and revenue generation, provide a critical set of instruments to support the shift to an inclusive green economy. By reflecting externalities in prices, generating public revenues, creating fiscal space and enhancing the effectiveness and coherence of public spending, fiscal policies can support delivery of several SDGs. Governments also use different financial vehicles, funds and mechanisms to manage public expenditures, promote green investments and support sustainable development for example through national environment/climate funds and Sovereign Wealth Funds/Natural Resource Funds.
Beyond domestic public finance, other important sources of financing for inclusive green economies include international finance, private investment and blended finance mechanisms such as Green Credit Funds, which provide a risk-sharing facility for participating banks and support sustainable development projects that align with government goals. There are also various green financial instruments such as climate-aligned/green bonds that can offer a new and growing source of funding for an inclusive green economy transition. The development of such mechanisms can be further encouraged/supported through targeted fiscal incentives. Depending on their financing needs and national conditions, there are thus several potential sources of financing available to countries which can be used to mobilize resources towards the inclusive green economy.
UN Environment’s work on facilitating green investment and financing through financial vehicles, mechanisms and fiscal incentives explores the challenges and opportunities for Sovereign Wealth Funds/Natural Resource Funds to promote green investments; the role of other funds and mechanisms to support sustainable development such as national environment/climate funds; and the role of fiscal incentives for green finance instruments. This work also provides advice on how to incorporate green economy policies in fiscal frameworks including annual, medium and long-term budget plans; how to allocate, deliver and monitor expenditures to support green economy policies, how to review the effectiveness and efficiency of these expenditures against relevant green economy indicators, how to evaluate fiscal and budgetary policies in terms of environmental impacts and coherence, among others.
Sovereign Wealth Funds (SWFs) and green investment
Sovereign Wealth Funds hold total assets under management worth USD 7.5 trillion. Yet, to date, SWFs’ participation in green finance has remained very low, accounting for less than 1% of their total assets. However, there is growing interest among SWFs on climate issues and recent initiatives aim to support the integration of climate risk in SWF investment strategies, strengthen existing principles and governance structures.
UN Environment’s work in this area has explored the challenges and opportunities for SWFs to use their long-term assets to finance green projects. A 2017 UN Environment study on SWFs sheds light on countries’ experiences of using SWFs to invest in green assets and to finance the SDGs, and sets out guidelines for countries interested in designing SWFs to finance action on SDGs.
National funds to support climate action
To deliver their climate commitments, countries need to adopt a holistic, integrated approach to financing expenditures for climate mitigation and adaptation, which encompasses the mobilization, budgeting, and allocation of resources in line with their NDCs. Some countries have established (or are planning to set up) dedicated national climate or green funds to finance priority actions in their NDCs. These funds are capitalized through different sources, including domestic public revenues. For example, Antigua and Barbuda’s Sustainable Island Resource Framework Fund (SIRF Fund), India’s National Clean Environment Fund, Rwanda’s National Fund for Environment and Climate change (FONERWA) and Tunisia’s Energy Transition Fund.
UN Environment is supporting countries in this process through targeted policy analysis and advice on how fiscal policies can support green financial mechanisms including national funds as part of a comprehensive financing strategy to deliver their NDCs.
