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: