Sponsored content: 2022 poised to be a breakthrough year for social finance

Phyllis Constanza

Sponsored content from our partner UBS

New initiatives will mobilize capital and pave way for social finance tools to play a bigger role in meeting dire development needs post-pandemic 

The year 2022 will see new breakthroughs in social finance, where experience honed over the past decade emerges at scale to take on some of the planet’s biggest problems.  

We expect investors to embrace new opportunities to engage with highly effective programs designed to address health, education and environmental issues. 

New social finance approaches that involve blended- and outcomes-based tools will help mobilize much more capital toward the U.N. Sustainable Development Goals SDGs this year, and we can already see signs of it, even as the need for effective philanthropy grows. 

The COVID-19 pandemic has aggravated social problems and widened the wealth gap while the climate crisis worsens 

Conservative estimates place the funding gap needed to reach the SDGs at $2.5 trillion annually; more recent estimates post-COVID place the gap four times higher.  

Something must change, and we believe social finance will play an increasingly significant role, particularly where outcomes-based investments use concessional capital to de-risk private investments, crowding in funds to advance the SDGs. That is the essence of social finance: leveraging public or philanthropic capital to mobilize private investment and produce measurable social- or environmental benefits, frequently through outcomes based contracts. 

Firstly, the most visible developments this year will occur in scale and sophistication. 

This trend was already visible late in 2021 when the Swiss State Secretariate for Economic Affairs, SECO, teamed up with UBS Optimus Foundation and others to launch the SDG Impact Finance Initiative, or SIFI. 

SIFI is a public-private partnership that aims to raise up $1 billion for social and environmental projects in developing countries. It also aims to strengthen the market and regulatory infrastructure in impact finance by standardizing legal frameworks.  

And, we need this standardization. At present, investors cite numerous hurdles to deploying more capital. The issues faced range from the small deal sizes to inadequate regulations and unfavorable risk-return profiles. 

The initiative’s objective is to give private and institutional investors access to a broad range of impact-driven investment products financing the SDGs in developing countries.   

Beyond SIFI, we expect other initiatives to emerge in 2022 as well, creating new social-finance investment classes that will produce more and better impact investments. 

Secondly, we expect low- and middle-income countries to increasingly embrace outcomes based funding structures to meet their own development goals 

As the pandemic slows later this year, we expect LMICs to increasingly consider outcomes based finance to rebuild societies ravaged by the secondary effects of the pandemic. This includes, for example, hundreds of millions of children worldwide who have missed basic schooling for months or even years, and hundreds of millions more of workers who have lost all or part of their jobs. 

Of the 221 social outcomes contracts operating at the start of 2022, less than 10 percent were in low- or middle-income countries. The issuance of outcomes contracts also declined during the pandemic as efforts turned to firefighting the direct damage from COVID-19.  

Because outcomes based finance allows cash-poor governments to derisk provision of services like health and education – both badly needed to ‘build back better’ – it can win more attention from governments and donors.  

Up to now, philanthropic organizations like UBS Optimus Foundation and developed countries have pioneered developments in outcomes based funding social finance. 

For that matter, outcomes contracts will also have continued relevance in developed countries, struggling with levels of increasing debt and rising need to address ‘social long covid’. The pandemic has widened the rich-poor divide, which calls for smarter social spending to redress inequalities in health, education, job training and other development areas. 

Finally, we expect climate strategies and nature based solutions (NBS) using outcomes based funding to further develop in 2022 as the sense of urgency in relation to our climate crisis intensifies. 

Outcomes contracts and other mechanisms can help correct for market failures, also in the area of climate- and biodiversity, by de-risking investments in the private sector.  

Markets have failed to protect the environment sufficiently because negative externalities – like CO2 emissions – are rarely priced into production. To compensate for that, we will see nature-based solutions that include market mechanisms to account for externalities – such as high-quality carbon credits. Social finance tools can kick start an investment cycle that becomes self-sustaining, bridging market failures and repairing the environment. 

This is a big change. Up to now the use of social finance to promote nature-based solutions has been mostly limited to the pilot- or experimental phases. Climate issues are more difficult to quantify and measure than those in, say, health and education, where metrics abound. This lack has slowed development in climate finance. But standards are converging, and new approaches are likely to take off in 2022, such as those aiming to restore coastal mangrove forests which can capture more than four times the carbon of even the rainforest. 

It will be challenging. Environmental projects need to succeed on a social-ecosystem level, creating attractive, self-sustaining jobs for local communities. A collective approach is required. Reforesting, to take one example, can only succeed with local buy-in that includes financial incentives or employment for affected communities. 

So, are these predictions just wishful thinking from an organization that has placed social finance at the center of its strategy? We think not. The need for effective development is dire. We have new financial tools that can create more impact. And green shoots like the SDG Impact Finance Initiative are already visible. We expect 2022 to be a breakthrough year.


Social finance supports women!

On International Women’s Day, we congratulate everyone who made the Utkrisht Maternal and Newborn Health bond a success  

On International Women’s Day this year, it’s worth remembering that innovative social finance tools like impact bonds can focus on specific segments of society and effectively bring measurable improvements.  

The Utkrisht, Maternal and Newborn Health development impact bond (DIB), is one of the most ambitious results-based funding initiatives to date. This innovative program, launched in 2018, draws together several partners to improve quality of care and reduce maternal and newborn mortality in Rajasthan, India.  

When faced with closures and upheavals during the pandemic, the teams involved employed innovative approaches to reach clinics remotely and continued to serve rural moms and their new babies. On this International Women’s Day, we’d like to congratulate everyone who has made the Utkrisht program a success.  

Phyllis Costanza is Head of Social Impact, CEO UBS Optimus Foundation

This article is sponsored by UBS.


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