The recent accumulation of world crises has not only brought to the fore the unprecedented scale of needs, especially for support in the poorest countries, but also the urgency of a collective response involving both the public and private sector. European Development Finance Institutions (EDFIs), as publicly backed investors in the private sector, lie at this intersection and have, gradually and repeatedly, been called to be involved in the response to international development challenges.

This article will examine the growing role of EDFIs in the aid and development architecture, explore ways in which EDFIs can strengthen their sustainable development impact by aligning with the Sustainable Development Goals (SDGs), and investigate areas for further cooperation with other development finance institutions.

The growing role of EDFIs in the financing for development architecture

As development needs increase around the globe and public sector financing remains insufficient to close the gap, investment to support the private sector in partner countries has increased over time.

In 2021, EDFIs’ collective investment capacity reached more than €9 billion, with a record investment of €4.1 billion in Africa. These investments included a substantial focus on small and medium enterprises (SMEs) and the fight against climate change.

Figure 1 – EDFIs sectoral allocation in 2021

The 2021 figures highlight a significant shift from previous years, especially 2020. The share of new commitments on the African continent went up by 30% compared with 2020. The financial contribution to the fight against climate change is up by 51%, while SMEs support is up by 57%, all by comparison with new commitment figures from 2020. There are multiple factors of explanation, ranging from the need to mobilise all available resources, including from and for the private sector, to the inclusion of new geographical and sectoral priorities for investments by EDFIs themselves, their clients in country and their shareholders.

These figures also represent the growing space made over the years for private sector mobilisation in the EU architecture, along with Member States’ priorities. The adoption in June 2021 of the 2021-2027 EU aid and cooperation instrument, Global EU – NDICI, includes a large proportion of funds to be allocated for private sector mobilisation through the €53.4 billion European Fund for Sustainable Development Plus (EFSD+) for blending and guarantees. A part of these funds is made available specifically for EDFIs and other EU-approved financial institutions with proposals “favoring frontier markets in the poorest economies and strengthened development impact for targeted communities”.[1]

EDFIs, private investments and the SDGs for greater development impact

EDFIs’ shared policy states that “EDFIs invest to make a significant contribution towards the Sustainable Development Goals (SDGs) and the Paris Climate Agreement”.^[2] This commitment is very welcome at a time when the scale of needs, challenges, and the multiplicity of actors in the international development and cooperation field requires impactful efforts contributing to collectively agreed objectives. To maximise development impact, to promote a sustainable development trajectory and to monitor concrete contributions to attain the SDGs, ETTG has developed a framework for operationalisation of the SDGs organised around 4 key principles. These principles include top-level leadership on sustainable development, supported by a long-term integrated vision, which can be translated throughout investments operations on the ground and be used to foster partnership with other financial and non-financial actors.

Figure 2 – Four guiding operational principles  

These principles have been developed with public development banks (PDBs) in mind, however the collective dimension of the agenda also calls for a similar approach for DFIs specifically. The involvement of the private sector for development carries many expectations, in terms of financial leveraging (especially for the private sector in the countries of operation), sustainability and development additionality, which all must be clearly demonstrated and evidenced. The commercial nature of EDFIs also inevitably brings trade-offs “that frequently go unacknowledged and perhaps unknown by DFI stakeholders”.^[3] Having clearer guidelines and operationalising tools to effectively manage these trade-offs and demonstrate sustainable development impact would support EDFIs’ role in the sector and further facilitate partnership with other stakeholders.

EDFIs committed in May 2019 to the Principles for Responsible Financing of Sustainable Development, focusing on responsible financing, impact management and transparency.^[4] More recently, in February 2022, EDFIs have also demonstrated the need to develop a collective approach on climate efforts and adopted a harmonised Paris alignment approach[5]. Similar collective efforts exist on results and impact reporting for the private sector, for example with the Joint Impact Indicators initiative.[6]

It is however time now to clearly demonstrate how these commitments have been turned into action and how they have contributed (or not) to sustainably transforming the trajectory of countries of operations. So far, impact reporting, when it is publicly available, remains too quantitatively focused, displaying statistics on the number of jobs created for example.^[7] A more qualitative assessment would be useful to also take into account adjustments made to EDFIs governance and institutional structures to better respond to sustainable development impacts. It should also demonstrate EDFIs’ operations contribution to country development plans^[8] and mobilisation of private SMEs from the country of operation, including beyond the lifespan of an operation. These are key metrics if development outcomes are to be truly sustainable. Additionally, more information on how the various EDFIs policies have been integrated and potential trade-offs managed, between sustainable finance objectives and Paris alignment for example, would be useful to understand lessons learned. If EDFIs can more clearly demonstrate their value-added and complementarity with other development stakeholders, this would also contribute to strengthening the EU leadership on sustainable development.

Making EDFIs fully part of the EU collective for greater coherence

In 2020, the European Union launched the “Team Europe” approach to further improve coherence and coordination of efforts of all EU stakeholders. Building on existing approaches to work better together, the EU institutions, Member States, their agencies and the private sector are gathered around collective objectives and common positions. Yet, concrete efforts remain to be made to enhance cooperation in practice and for all EU stakeholders to work in a truly coordinated and complementary manner.[9]

Figure 3 – EDFIs in the global EU financial architecture for development

As EDFIs are expected to channel more funds for development, there is now an imperative for them to more clearly demonstrate these operations are impactful and sustainable. In doing so, they can benefit from the expertise of other European development stakeholders. All these are important steps for the EU to collectively demonstrate leadership ahead of its SDG review in 2023 and for the SDG stocktaking summit the same year.

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Sources

[1] https://international-partnerships.ec.europa.eu/funding/funding-instruments/european-fund-sustainable-development-plus-efsd_en

^[2] https://www.edfi.eu/policy/

^[3] Attridge, Samantha and Gouett, Matthew , “Development finance institutions: the need for bold action to invest better”, https://cdn.odi.org/media/documents/DPF_Blended_finance_report_tuMbRjW.pdf

^[4] https://edfi-website-v1.s3.fr-par.scw.cloud/uploads/2017/09/EDFI-Responsible-Financing-SDG_Principles_final_190515-1.pdf

[5] https://www.edfi.eu/news/edfi-adopts-harmonised-paris-alignment-approach/

[6] https://www.edfi.eu/news/leading-impact-investors-make-progress-toward-harmonised-impact-measurement-with-release-of-joint-indicators/

^[7] https://www.edfi.eu/about-dfis/impact/ 

^[8] on the absence of links with country development plans when they exist, see https://www.stockholmsustainablefinance.com/wp-content/uploads/2022/05/sei-report-development-finance-three-countries-03032022_Final-V3.pdf

[9] See Bilal & al, “Enhancing coordination​ ​between European donors,​ ​development agencies​ ​and DFIs/PDBs​ – ​Insights and recommendations”, ETTG, September 2022; Keijzer & al, The rise of the Team Europe approach in EU development cooperation: Assessing a moving target, IDOS, 2021.

About the author

Elise Dufief is a researcher at IDDRI in the Sustainable Development Governance Programme. Her work focuses on financing sustainable development issues. She has previous experience working on EU development policy, the role of development finance institutions, and aid impact and monitoring.

The published essay represent the views of the authors alone, and do not reflect the opinions of either the EDFI Association or its member institutions.