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New ODI report urges stakeholders to urgently rethink how Development Finance Institutions invest

Global poverty increased dramatically in 2020 with the impacts of Covid-19 reversing two decades of progress towards achieving the sustainable development goals (SDGs). The demand for development finance continues to grow as governments and policy makers work to build back their economies. Meanwhile, development finance is undergoing extreme pressure and is at risk of decline. A new ODI report finds that fundamental change is required if Development Finance Institutions (DFIs) are to realise the ambitious expectations set out by the United Nations Addis Ababa Action Agenda (AAAA) in 2015.

ODI’s report, Development Finance Institutions: need for bold action to invest better, finds that progress towards the vision set out in the AAAA has been slow, with major course correction required in order for the investment potential of DFIs and Multilateral Development Banks (MDBs) to be realised.

ODI’s report urges shareholders of DFIs and MDBs to urgently rethink their objectives and investment approaches. To do so, the report puts forward the following recommendations:

1) A new focus on transformative investment and market creation – especially in lower-income countries (LICs) and lower-middle-income countries (LMICs)

2) Mobilisation of institutional capital at scale, especially in upper-middle-income countries (UMICs).

For transformative investment this would include close coordination with governments, donors and the public sector operations of MDBs who should step up efforts to support upstream policy reform. It would also mean developing new investment opportunities. This would require an increased focus on pipeline development, demonstration and early-stage investments, and would also require a shift away from the use of senior debt towards an increased use of high-risk capital, for example, in the form of grants, equity, mezzanine financing including convertible finance and contingent grants, as well as guarantees.

To mobilise private investment in Sustainable Development Goals in developing countries, investment options must be made more accessible to institutional investors. There are opportunities for this, particularly in more developed UMICs, and DFIs and MDBs can play a critical role here if they can develop new products which are attractive to these investors. To do this they need to shift away from an approach focused on individual investment to a pooled portfolio approach.

In the most challenging geographies, it may not be possible to mobilise private investment at scale in the short to medium term. Here attention should instead be placed on making transformative investment.

Although the report found that in some areas there are green shoots of promising investment emerging, progress has been very slow. Covid-19 has made the job of mobilising private investment much more difficult and the fall in global foreign direct investment (FDI) makes the chance of this progress being scaled up unlikely. Without bold action by shareholders, DFIs and MDBs are unlikely to realise the potential envisaged in the United Nations Addis Ababa Action Agenda of 2015.

Similarly, whilst DFIs and MDBs reallocated an encouraging percentage of their commitments from upper-middle-income countries (UMICs) to LMICs from 2013-2018, ODI’s report found that their investments in LICs remain stubbornly low.

Samantha Attridge, ODI Senior Research Fellow and report author, said:

“DFIs are powerful development actors but they are at a critical juncture. They are increasingly being tasked with more ambitious goals such as creating new markets and mobilising institutional investment at scale but their business models and investment approaches have been slow to adapt. Bold action by shareholders is required to change business models to help DFIs meet this new ambitious vision.”

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For further information or to interview the researchers please contact Charlotte Howes at ODI on +44 7808 791 265 or at [email protected]

Notes to Editor

About the Research

ODI’s Development and Public Finance programme report, Development Finance Institutions: need for bold action to invest better, will be published on 8th April 2021.

The report evaluates the investment portfolios of 12 DFIs who mobilised over 70% of private finance reported by the OECD from 2017-2018.

The report’s authors are Samantha Attridge, Senior Research Fellow in the Development and Public Finance programme at ODI, and Matthew Gouett, independent consultant and Sustainable Finance Analyst.

About ODI

ODI is a leading global affairs think tank. We inspire people to act on injustice and inequality. We focus on research, convening and influencing, to generate ideas that matter for people and planet.