Will recession today shape the future of responsible investing?

2023 may turn out to be a critical year for assessing the global economy's ability to meet the commitments of the United Nations' Sustainable Development Goals (SDGs). With an ongoing recession, uncertainty looms as governments and businesses grapple with how best to shape their economic policies and strategies over the next few years. Though no one knows what the future holds, there are certain trends that can help forecast key elements of an overall strategy.

One trend is regulation: rather than relying on market forces alone, governments around the world have implemented regulations that promote sustainability in areas such as climate change and resource management. By holding companies accountable for their environmental impacts, these regulations provide greater assurance that goals like clean energy sources, eliminating poverty, and preserving human rights will be achieved.

The United Nations Financing for Sustainable Development Report 2023 says:

Global sustainable development prospects continue to diverge. Two years ago, in the midst of the COVID-19 pandemic, the Inter-agency Task Force warned of a global divergence that could lead to a lost decade for development. By 2022, these risks had materialized—a great finance divide was translating into a development divide. 

Over the past 12 months, the war in Ukraine, sharp increases in food and energy prices and rapidly tightening financial conditions further exacerbated challenges for many countries, increasing hunger and poverty and reversing progress on the Sustainable Development Goals (SDGs). 

Despite some positive signs, the global macroeconomic outlook remains highly uncertain and particularly bleak for many of the poorest and most vulnerable countries faced with growing debt service burdens and tight fiscal constraints. 

Recent banking failures in the United States and Switzerland have once again highlighted gaps in financial regulatory and supervisory systems. In today’s extremely challenging global macroeconomic context, financing and sustainable development prospects are diverging even more sharply. If left unaddressed, the finance divide will translate into a lasting sustainable development divide. SDG financing needs are growing, but development financing is not keeping pace. 

There is a continued need for immediate and increased international support for vulnerable countries, including many least developed countries (LDCs), African countries and small island developing States (SIDS). See the Tinder-type app that’s been developed by Xavier Michon and his team at the United Capital Development Fund which he’ll speak about at the next Americas conference for Responsible Asset Owners in NY on June 28th.

At the same time, low levels of investment, particularly in many developing countries, are entrenching the development divide. Delaying investment in sustainable transformations would put the 2030 Agenda for Sustainable Development and climate targets out of reach and exacerbate financing challenges down the line. Delaying investment in transformation is thus not an option. 

The multiple crises can shorten the time horizons for decisions—by policymakers, investors, businesses and individuals. Yet, the crises once again underline the need for a long-term focus on resilient, sustainable and inclusive development. Delaying investments would put the 2030 targets out of reach and exacerbate financing and macroeconomic challenges down the line. Sustainable and productive investments today can transform and diversify economies and enhance resilience to shocks, including inflationary supply-side shocks, tomorrow. 

As laid out in the 2022 Financing for Sustainable Development Report, such investments also enable countries to mobilize resources over time and better service debt. This is why the 2023 Task Force report focuses on sustainable transformations, including a roadmap for governments, along with changes in the way finance works. Both national and international actions are needed to scale up SDG financing. National and global policy frameworks shape incentives, impact risks and influence financing needs and flows. 

Recent global shocks have placed enormous pressure on global institutions and governance. Enhancing relevant global policy frameworks is critical to enabling progress on financing. However, on their own, reforms to the international system will not deliver sustainable development. 

Countries need to chart their own paths to achieve the SDGs. This is embodied in the Addis Ababa Action Agenda and the revitalized global partnership for sustainable development, which gives each country primary responsibility for its own development but tasks the international community with providing a conducive international enabling environment and support. The series of global shocks and overlapping crises have increased the risk of further geoeconomic fragmentation and raised the urgency for reform. But they have also led to momentum for reform and calls for rapid institutional change. 

In the face of a unique confluence of challenges, this report calls on the international community to take advantage of this moment and undertake concerted efforts to finance the xiv 2023 FINANCING FOR SUSTAINABLE DEVELOPMENT REPORT timely realization of the SDGs through: 

• (i) immediate measures to scale up development cooperation and SDG investments; 

• (ii) strengthening the international financial architecture; and 

• (iii) national actions to accelerate sustainable industrial transformations, including through a new generation of sustainable industrial policies. 

Another trend is increased focus on sustainability and climate change. As businesses become more aware of the need to reduce their carbon footprints, many are developing strategies to curate sustainable and ethical practices that meet both environmental and commercial goals. These include measures such as reducing energy consumption and waste, utilizing renewable resources, investing in green technology, and encouraging employee participation in sustainability initiatives.

Finally, more emphasis is being placed on how a company’s operations impact its bottom line. Through careful consideration of costs associated with resource development, production processes, transportation methods,and other factors involved in business operations, companies can maximize profits while minimizing their environmental impacts.

Though it remains unclear what 2023 will bring economically speaking, these trends suggest a clear direction for businesses and governments. By embracing sustainability, developing regulations that promote responsible practices, and taking a holistic view of their operations, organizations can ensure long-term success in the face of economic uncertainty. With these strategies in place, the commitment to the SDGs is more likely to become reality.

By the end of 2023, it was hoped that we would see significant progress towards achieving the Sustainable Development Goals – but only if bold steps are taken now to embrace sustainability and prioritise climate change and resource management. The global economy is at a crossroads – with careful planning and decisive action, 2023 could be an inflection point in our journey towards a greener, more sustainable future.