Can the World Fund Security and Sustainability?

A perfect storm of global economic, political and security shocks has drawn funding and attention away from global sustainability in 2022, compromising the spirit of COP26 in 2021. The cost of the UN Sustainable Development Goals (SDGs) has increased by c.25% to up to US$175 trillion, and the funding gap has widened at an even faster rate of 35% requiring up to US$135 trillion, despite record levels of global funding by the private sector last year, as reported in the 2022 Capital as a Force for Good reportⁱ.

Security and sustainability have become competing priorities, although in a globalized world one cannot be delivered without the other, with a total spending need of up to c.US$200 trillion to the end of the decade. At the same time, global wealth has reached record levels, with the world’s gross liquid assets increasing to US$450 trillion on the back of unprecedented liquidity and the release of pent-up demand following the coronavirus pandemic. Unlocking this capital for the SDGs requires an understanding of the key stakeholders in the world’s financial systems, the asset owners, allocators, custodians and other major influencers, whose collective actions drive the global flow of money across the world and into different asset classes.

Looking at the world’s stock and flows of capital, it is clear however that the conditions for deploying the world’s liquid assets (and c.US$100 trillion in annual global GDP) to meet the demands of secure sustainability are not in place, with the SDGs today seen as worthy causes, rather than as authentic business opportunities, making much of the 99% of the world’s capital that is invested for profit all but inaccessible as it funds competing demands to pay pensions, provides essential services and generally ‘keep the lights on’ for the global economy.

Unlocking capital for secure sustainability is as much about mindset as it is about money, driven by a multi-stakeholder effort in which every major party in global consumer capitalism has a critical role to play to ultimately change the system.

This month’s Sign of the Times provides an overview of the global flow and stock of wealth as the starting point for funding secure sustainability for the world, and considers the challenges of unlocking this capital for the world.ⁱⁱ

Sustainable Development Goals Slipping Away

At the mid-point between the creation of the SDGs and their 2030 target date for completion, the world is not on track to meet the goals. The two years of global economic and social disruption caused by the coronavirus pandemic has created significant setbacks for the goals, and progress on several SDGs has not only stalled but been undone. The lack of commercial business cases associated with funding the SDGs, positioning them as ‘causes’ rather than as opportunities, reduces the likelihood of SDG funding, as cases framed as opportunities attract over 100x times as much capital as CSR and philanthropy. The global extreme poverty rate rose for the first time in over two decades, with over 120 million people being pushed back into extreme poverty in 2020. Schooling disruptions have led to an additional 100 million children have fallen below minimum reading proficiency levels and the number of people experiencing acute insecurity increased by 210 million since 2019.ⁱⁱⁱ

Against this backdrop, the SDGs are set to fail to be achieved by 2030 and risk needing many more decades and many more trillions of investment capital to be met. The total cost of achieving the SDGs has increased by 15%-25% from US$116-US$142 trillion to US$134-176 trillion, driven by inflation, funding for Net Zero, historic underfunding, a persistent gap in official development assistance funding and a shortening window.^iv At the same time, the world’s commitment to accelerate progress towards greater sustainability has been set-back by a perfect storm of interrelated challenges in 2022 that has reset global priorities, with multiple dimensions of security coming to the fore.

Russia’s war in Ukraine has triggered a global energy and commodity shock with energy costs rising by up to 100% in markets already subject to supply side disturbances from two years of the global pandemic, exacerbating significant inflationary pressure. With global inflation expected at 6.6% for industrialised countries and 9.5% for emerging markets, and overall growth for the year down to 3.2%, rising prices are increasing the risk of stagflation amid a period of global economic slowdown and feeble growth that will leave many parts of the world poorer.

Given the above, governments around the world with constrained fiscal policy options following the pandemic are facing the need for increased spending across a spectrum of security related challenges, be they economic, social, military, or political, with the total global bill for this spending projected to reach up to US$59 trillion through the end of the decade. For “secure sustainability” – security and the SDGs - the combined total funding requirement for the world through 2030 is US$194-235 trillion.

Unprecedented Global Wealth Provides Opportunity to Fund the SDGs

This amount represents an almost insurmountable challenge to fund. However, with c.US$450 trillion in gross liquid assets and US$95 trillion in annual economic output, there should be sufficient wealth, and wealth creation, in the world to fund secure sustainability. During 2021, total global wealth increased by 13% to reach US$809 trillion in global assets, consisting of c.US$450 trillion in gross liquid and c.US$365 trillion in illiquid assets. This increase was driven by a macro-economic recovery fuelled by the unprecedented liquidity injected into markets around the world in response to the coronavirus pandemic, with significant pent-up consumer demand being released following the end of major lockdowns in 2021. Global debt hit a high of US$303 trillion, jumping by a record US$77 trillion helped by persistently low interest rates,^v while global equities returned 18.5% in 2021, adding a further US$14.3 trillion in global wealth.^vi These increases in liquid asset prices were mirrored by illiquid asset price growth, albeit in a more moderate fashion, with global house prices rising by 10.3% on average during the year. Real global GDP expanded by 6.1% during 2021 to a new record high of US$95 trillion, following a contraction of 4.9% in 2020.^vii

The Map of Global Capital Stocks

While a simple glance at the world’s wealth and at its global funding need confirms that there is enough money in the world to fund secure sustainability, unlocking this wealth in practice is a more challenging issue. Doing so requires understanding how capital flows across the world, how it is invested, and the roles of the key stakeholders in financial system the drives these flows. Fundamentally, funding secure sustainable development is about mindset as much as it is about money. It requires the alignment of capital owners, managers, rule makers, and the other stakeholders that have a role to play in the system of capitalism. The key pools and allocators of the world’s wealth comprises nearly a quadrillion dollars.

All the Money in the World and Who Has it

In addition, some key observations that arise from examining the “global flow of capital” (see Figure 6 below):

The picture below outlines the global stock and flow of financial assets as of year-end 2021.

This analysis provides a snapshot representation of the global financial flows through the system. Stepping back, the breakdown of the world’s wealth offers several key take-aways for the funding of global security and sustainable development:

• The world has the largest stock of capital in its history at c.US$450 trillion in gross financial assets

• The individual is the most powerful asset owner with 62% of the total, at US$275 trillion in gross liquid assets, and governments with US$167 trillion (38%)

• The finance industry administers 90% of the worlds money, at US$399 trillion in gross liquid assets through various roles including custodian, direct investor, and effective asset owner

• Corporations (from non-financial industries) directly controls US$60 trillion in gross liquid assets but are in turn owned by their shareholders.^xii

• Global GDP at US$95 trillion is also at the highest level in history as an overall measure of the world’s progress and development.

• Consumerism is driven by individuals who represent 78% of the total at US$54 trillion, total consumption was US$69 trillion in the past year.

• Illiquid assets stand at US$290 trillion of which households are the most significant owning 80% (mainly in the form of home ownership) and the government owning the balance.

• Corporations have direct control over US$60 trillion of gross liquid assets but have a far greater impact through their activities and choices on policy, strategy and scope of those activities.

The power players in terms of capital are first and foremost individuals as the owners of capital, followed by the governments they elect who are also owners. Thirdly, financial institutions as the custodians, and - for a smaller proportion of c.25% - as direct investors, of global capital. Finally, non-financial corporations make critical choices on how and what to deliver and each of those decisions affects the world’s sustainability, and they are ultimately owned by the other three groups as direct and indirect shareholders, and the others are also customers of these corporations and so can have a major influence over their actions.

Unlocking the World’s Capital for Secure Sustainability

Not enough capital in a world of record capital

Despite record wealth in the world, the gap to funding the SDGs (and broader secure sustainability) continues to increase, as the conditions to unlock global capital flows are not in place currently. remain missing. A number of observations are pertinent to the flow of capital to sustainability:

1. The lack of commercial business cases associated with funding the SDGs, positioning them as ‘causes’ rather than as opportunities, reduces the likelihood of SDG funding, as cases framed as opportunities attract over 100x times as much capital as CSR and philanthropy.
2. Only c.1% of the world’s liquid wealth has currently been allocated to sustainable assets and strategies, led by sustainable debt 0.2% and sustainable equity 1.1%.
3. The US$4 trillion capital owned by development finance institutions, endowments and foundations is woefully inadequate, even if one considers that much of this could be invested in blended finance solutions alongside ‘for-profit’ capital.
4. “Keeping the lights on” is the well-established funding mandate for financial institutions and all their capital is allocated to generating an adequate risk adjusted returns, which for businesses means investing capital and profits to provide returns for owners and asset allocators, and for governments means providing services to citizens. Neither feels it has discretion to divert money away to do something else such as funding developing countries.
5. Against a backdrop of potential wealth contraction, the bar to deploying capital will likely be raised even further. Global growth in 2022 is currently expected to approximately halve, while major global stock indexes have dropped by c.20% year to date, wiping out all the gains of 2021 and leaving large parts of the world poorer after adjusting for inflation.

Who needs to solve the problem of funding the SDGs?

It is tempting to charge the finance industry with the task of funding the SDGs. However, modern capitalism is a multi-stakeholder system that has evolved to depend on the cooperation of each player in the system. Change comes from multi-stakeholder agreement, leadership from one stakeholder that others feel they must follow (a difficult on without a case for change that leads to others adopting acquiescing), or violent revolution.

So, rather than being an issue for the world’s financial institutions to solve, the peaceful path requires a multi-stakeholder effort that shifts the prevailing model of global consumer capitalism. Each of the major stakeholders will need to play their role to transform how and where capital is deployed around the world to ‘keep the lights on’, fund security and fund sustainable development. In addition to the key owners and allocators of capital, the technology sector as well as science and research have critical roles to play as enablers and innovators. The key roles are:

1. The finance industry, as the custodian of US$400 trillion of global capital, needs to renegotiate its deal with clients to unlock these amounts for sustainability, manage regulators and deliver innovation to fund the SDGs

2. Global corporations, who control US$60 trillion in assets, need to comprehensively embed sustainability in their strategies (only 32% of the world’s 2000 largest corporations have committed to net zero), entering high impact markets, fully accounting for the externalities, both positive and negative, that they generate, and (re-)aligning priorities across their negotiating stakeholder groups

3. National governments owning US$167 trillion need to embrace sustainability goals as a part of national security, prioritising sustainability initiatives, coordinating their execution, and setting rules and standards to incentivize other stakeholders and collaborate with other countries to achieve the SDGs

4. Individuals, who collectively own US$275 trillion in assets and account for US$54 trillion in annual consumption, but also generate 72% of global GHG emissions, need to make active choices to buy products, support companies, invest in assets, and vote for leaders that make a positive impact on the SDGs.

5. The tech sector needs to lead the transition to the digital era, connecting the 33% of the global population not yet online, facilitating the adoption of e-government, and educating the global population on using its platforms.

6. Science and research will need to develop breakthroughs and innovations in energy and materials sciences that are game-changing, replacing the fossil fuels that still account for c.82% of the world’s primary energy needs with sustainable alternatives.

Ultimately, the funding of secure sustainability requires changing the mindset of global stakeholders to align and coordinate on capital allocation, which cannot be accomplished without changes to demand, production, innovation, regulation, and rewards. Viable and sustainable change requires consumers to rethink their consumption and value of consuming, governments to change the rules of engagement, scientists, and innovators to deliver new products and ways of delivering these, and ultimately businesses to do business differently and financiers to fund those most likely to succeed in meeting demand.

Such a multi-stakeholder alignment would redirect the flow of funds. The case for change is clear. The challenge is to ensure that each participant understands what their role is, what the implications are for their lifestyles and operations, and to be accountable for making the change. This is far less clear than it needs to be.

The radical approach is in some ways the obvious one, namely, to fund initiatives that take the most viable solutions to the biggest problems and attract the funding for those as part of the business strategy of entrepreneurs and corporations, and therefore for an acceptable profit and risk.

The world’s c.US$450 trillion of liquid wealth appears to be sufficient to fund global security and the SDGs through 2030 and beyond. Deploying these assets at scale for secure sustainability however will require the alignment of the world’s most important asset owners and allocators, namely the finance industry, individuals, governments, and non-financial corporations.

However actually achieving the SDGs within the next decade will require more than just money. They will require fundamental changes to the current consumption driven model of capitalism that runs the global economy. These changes require changing the mindsets, expectations, and lifestyles of all the stakeholders of the system, aligning their goals, activities, and behaviours, each playing their unique and critical role in meeting the SDGs, ensuring the world continues to function, delivering security in the face of ever-rising threats, and funding the future.