Sustainable Finance Facility

Introduction

The Sustainable Finance Facility (SFF) helps countries with emerging financial markets and strong growth potential to build the foundations for attracting private investment. The program, funded by Switzerland’s State Secretariat for Economic Affairs (SECO), works with governments to improve financial market infrastructure, regulatory frameworks, and other systems. By supporting real investment projects in areas like infrastructure, housing, and business development, the program demonstrates that these reforms can attract much-needed capital. As a result, thriving capital markets enable countries to access private sector finances for long-term investments in vital sectors.

Governments in many countries are constrained by high public debt and foreign currency-denominated debt, which carries significant exchange rate risk. Development assistance is most effective when it promotes private capital flows via well-functioning markets. This support can channel domestic and international savings into productive, long-term investments.   Functioning capital markets also create incentives for governments to use debt productively, for instance by supporting well-planned and efficiently executed infrastructure projects. Vibrant capital markets also discourage unproductive investments that would not find market financing. Without these conditions, developing economies will struggle to finance vital projects and their industries will fail to reach their full potential.

Context

Debt forgiveness, low-interest lending, and direct budgetary aid alone can never meet the needs of developing economies or finance the massive, long-term investments needed in infrastructure, housing, and enterprise development crucial to global prosperity and to the world’s energy transition. Governments in many countries are constrained by high public debt. Foreign currency-denominated debt imposes significant exchange rate risk.

The best development assistance promotes private capital flows via well-functioning markets and can channel domestic and international savings into productive, long-term investments like infrastructure. Without well-developed capital markets, developing economies will continue to struggle to raise money for vital projects and their industries will struggle to reach their full potential. The financial system, in short, is the gateway to progress.

Through projects that persuade private investors of the merits of greater investment in developing economies, the SFF is harnessing the power of global capital markets. Since the programs inception, work supported by the SFF has helped to drive $14.9 billion in private investment.

Fortunately, international investor interest in making investments with development impacts is growing. Institutional investors are actively seeking long-term investible opportunities that provide adequate returns to their beneficiaries (e.g. pension policy holders) and, for a growing majority, support sustainable development goals.

Accumulated sustainable bond issuance reached about US$5.97 trillion in Q3 2024 following several years of rapid growth. Annual issuance of green, social, sustainability, and energy transition bonds broke the US$1 trillion barrier in 2021 and shows no sign of slowing. But the world still needs US$2.4 trillion of investment each year in developing economies (outside China) to complete the energy transition and adapt to climate change.

Domestic capital markets, with transactions denominated in local currencies, have enormous potential to drive economic development, job creation, and resilient growth. They can mobilize domestic savings that are otherwise often tied up in low-yield government securities. Transactions between domestic actors – a national pension fund buying private-sector bonds, for example – can eliminate the foreign currency risk that dooms so many promising projects.

But these domestic markets face challenges including:

• An underdeveloped investor base.
• Limited numbers of investment opportunities.
• Costly and inefficient financial system infrastructure.
• Inadequate regulatory and institutional frameworks.

The gap between what developing economies require in the long term and the investment they are currently attracting is immense:

• Developing countries need to invest around 4.5% of GDP to achieve infrastructure-related Sustainable Development Goals (SDGs) and to stay on track to limit the warming of the climate by no more than two degrees Celsius.
• Their needs stretch across the real economy, including infrastructure, corporates, small- and medium-sized enterprises, housing, and agriculture.
• Many projects are too long-term, too risky, or have a public policy goal that makes commercial bank lending insufficient.

The Solution

The SFF, part of the Joint Capital Markets Program (J-CAP), helps close the financing gap, especially for infrastructure, despite limited government resources in developing economies. With the expertise of the World Bank Group, the SFF helps partner countries improve the ability of their capital markets to:

• Provide debt and equity capital to the domestic private sector.
• Offer investment opportunities and diversification to domestic investors.
• Help finance projects that promote greater economic resiliency.
• Avoid an undue buildup of foreign currency debt.

This self-reinforcing process has four elements:

Conclusion

In the virtuous cycle that the SFF supports, policy and sector reforms in developing economies create a predictable environment. Institutional investors, domestic and international, come to appreciate these improvements. Capital markets offer opportunities to invest. Demonstration transactions, in turn, provide concrete evidence of change that fosters further investment.