This recent article was written by Managing Director, Steve Schmida and recently published on Medium.com.
For more than a half-century the least developed countries (LDCs) have been treated as charity cases by wealthy countries in the West. Donor governments, international financial institutions, and NGOs have been dominant actors providing aid, technical assistance, and funding. While the public sector achieved some significant development impacts, particularly in agriculture and health, development institutions and their ways of working have varied little in decades despite massive changes to the global economy. With stagnant budgets and outdated modalities, the public sector-led approach to development has clearly stalled.
Increasingly, however, it is the private sector — companies and investors — that have the potential to have a transformative impact on the world’s poor. Over the last decade, companies and investors have become more engaged in development problems, largely through corporate social responsibility (CSR) and philanthropy initiatives, particularly in the LDCs. As the private sector gains experience on development issues there is now a shift towards development efforts that create both business value and social good, which generate business and economic value while addressing key environmental and social issues — what Michael Porter has termed “Shared Value.”
This trend will only accelerate as the planet’s population in the middle of this century passes 9 billion with nearly 2 billion consumers living in frontier markets of the LDCs. In the coming decades, the private sector -companies and investors- will no longer be partners in global development through corporate sustainability efforts alone, the private sector will shape the global development agenda across a wide range of sectors — food security, health, energy, environment, human rights and governance. This new era of Private Sector-led Development will fundamentally alter the landscape, transforming the roles of donors, development agencies and private companies alike. It has the potential to scale solutions to our greatest development problems — climate change, resource depletion and violent extremism while also creating new markets and investment opportunities.
Two examples from vastly different industries highlight how, in the 21st century, companies that align their business goals with social and environmental considerations in frontier markets will grow and create value. Unilever, one of the world’s largest and most successful fast-moving consumer goods companies, has re-oriented its strategy around sustainability. Under the visionary leadership of CEO Paul Polman, Unilever is tying its own profitability to its ability to address global development problems in health, nutrition, sanitation and agriculture, especially in Africa and Asia. For example, in Ethiopia and Nigeria, the company is engaged in a large, multi-year strategy to enhance hygiene and nutrition for women — aligned with brands such as LifeBuoy and Knorr, creating opportunities for growth in new underserved market segments. In the process, Unilever has become not only one of the world’s most admired companies, but has now successfully fended off a hostile takeover earlier this year by Kraft. Recognizing the value of Polman’s innovative strategy, Kraft — a company notorious for cost-cutting –has now adopted elements of the Unilever approach.
A second example from Southeast Asia demonstrates how companies working in frontier markets are also shifting their strategy to reflect this new reality. Thai Union, the world’s third largest seafood processor and owner of the Chicken of the Sea brand, is grappling with human trafficking and illegal, unreported and unregulated (IUU) fishing in its supply chain. The Thailand-based company is now partnering with donors, conservation groups, labor rights groups, and governments to develop electronic traceability systems, which enable the entire industry to reduce illegal catch and forced labor aboard vessels and in processing facilities. Thai Union is not tackling these vexing issues for CSR or charity reasons, but because these problems represent a fundamental threat to the sustainability of the company’s core business and its ability to sell into vital markets in North America and Europe. According to the company, “Sustainable development is essential to the future of Thai Union’s business and our growth; it is fundamental to being a responsible corporate citizen; and it is how we will achieve our vision of being the world’s most trusted seafood leader.”
In each case, the company did not merely sign up to a donor-led agenda and attend a press conference, these examples reside at the heart of their respective corporate strategies. They represent an evolution from relatively superficial CSR to a much deeper level of engagement with the development agenda. These companies have hired development professionals, invested in systems and aligned corporate objectives with development goals. In Unilever’s case, the company has engaged in an offensive strategy designed to grow new markets and customer segments through increased nutrition and hygiene –highly aligned with the company’s brands. Meanwhile, Thai Union’s strategy is more defensive in nature, focused on ensuring continued market access and de-risking its supply chain. The journeys of these two very different companies illustrate a much broader trend in how the private sector will play a leadership role in addressing global development challenges in the coming decades.
The Shift to Private Sector-led Development
For decades, international development has been the job of the public sector — donor agencies and host governments were very much in charge of the development agenda. By the turn of the century, however, public sector donors, such as the World Bank, USAID and DFID, were no longer the biggest players in developing countries. In 1980, foreign aid comprised roughly 70% of US capital flows to developing countries. Today, US official development assistance (ODA) comprises less than 10% of overall US capital flows to less developed countries (LDCs) — meaning more than 9 out of 10 dollars flowing into these countries from the US are from the private sector — companies, investors, philanthropists, diaspora, etc. While the role of the private sector in development has been increasing for decades, there are three factors going forward, that will accelerate this trend line:
1. Secular Stagnation in Developed Economies: Low-Growth and Low Interest Rates:
The first and, perhaps most significant factor, are the shifts in the global economy. We are living in an era of ‘secular stagnation,’ in which a combination of slack demand, excess liquidity, central bank quantitative easing, aging populations and even technological change are resulting in sluggish or even flat economic growth in many developed countries. During this time of low growth and negative interest rates in many mature economies, the LDCs and emergent economies of Africa and Asia are now seen as frontier markets and prime opportunities for growth. Investments in economies, such as Ethiopia and Myanmar, that might have once been considered too risky or earning too low a return, are starting to look more appealing to investors who are hungry for any opportunity that earns a return and generates predictable cash flow. In the same vein, the world’s poor, once considered only as victims or beneficiaries, are now seen as a distinct market segment of billions at the Base of the Pyramid (BoP) in frontier markets from India to Kenya to the Philippines. With mature economies stagnating, the emergence of this rapidly growing market segment will focus much more centrally on corporate strategy in the coming years.
2. The Paris Climate Agreement
While the Trump Administration’s withdrawal from the Paris Climate Agreement is indeed deeply troubling, it is important to note that the accord will, nonetheless, fundamentally shift the global investment and development landscape for three reasons: 1) it represents a clear signal that climate change is the challenge of the 21st century and will require significant investment- public and private- to both mitigate and adapt to a changing climate; 2) it lays out a global framework for reorganizing the global energy system away from carbon-based fuels; and 3) with public sector budgets under tremendous pressure, governments will most likely shift the global development conversation away from poverty and towards climate change mitigation, adaptation and resiliency in the LDCs. Meanwhile, the broad scientific and political consensus regarding climate change means, whether Trump Administration likes it or not, the private sector will continue to ‘price in’ some form of global climate framework.
Because the private sector is so intimately involved in issues related to climate change — as an emitter, insurer, innovator, etc — its role and relevance as a primary actor will only grow. In frontier markets, companies will see both challenges and new business opportunities in mitigating GHG emissions and in helping society adapt to a changing climate. For example, in Kenya, Jubilee Insurance, one of the country’s largest and most established insurers, faces significant risks due to a changing climate — increased natural disasters and rising sea levels will likely impact Jubilee customers, increasing the likelihood of claims. At the same time, the company is also creating new market opportunities, such as crop insurance for small holder farmers. These opportunities will help drive the growth of the Kenyan company and its global reinsurance partners, such as Swiss Re, in the years to come.
3. SDGs: A Framework for Sustainable Competitive Advantage
The last factor that will drive the move towards private sector-led development is the United Nations (UN) Sustainable Development Goals (SDGs) — a new, universal set of goals, targets and indicators that UN member states will be expected to use to frame their agendas and political policies through 2030. Developed in close collaboration with a wide range of private sector business interests, the SDGs provide a global framework to align and drive the global poverty alleviation. Increasingly, companies and investors alike are aligning their efforts with the SDGs. What’s more, recent analysis by the Business and Sustainable Development Commission indicates that achieving the SDGs could unlock up to $12 trillion in economic value by 2030– a huge opportunity for any company.
What makes the SDGs so powerful in this context is that they create a framework for integrating sustainability into core business operations. Companies can identify the SDGs that most align with their business model and then devise operational strategies, as well as monitoring and reporting processes — tasks companies are well-suited to undertake. Unlike their predecessors — the Millenium Development Goals (MDGs) — the SDGs were developed with the private sector as a full partner at the table, meaning that the goals align with both those of governments as well as companies and investors. For the first time, the global development community, private companies and investors all have a set of measurable goals they co-developed and can work towards together, creating new business opportunities for growth and new pathways for achieving development impacts at scale.
In a recent PWC survey, nearly half of businesses indicated that they intend to integrate the SDGs into corporate strategy within 5 years. The case of Kenya’s leading mobile operator, Safaricom, is a great example. The company has aligned the strategy of several of its businesses to their impacts on the SDGs in areas such as financial inclusion, literacy, and communications. Halfway around the world, Mexico’s CEMEX is working across dozens of its cement plants across the globe to align community engagement and social investment strategies with the SDGs.
These three factors- 1) growing pressures of secular stagnation in developed countries; 2) the Paris Climate Agreement’s reorganization of the global energy and development architecture; and 3) the emergence of the SDGs as an increasingly important element of corporate strategy- are driving companies and investors towards becoming leaders of the global development agenda.
Modalities of Private Sector-led Development
Private Sector-led Development fundamentally differs from the traditional approach to development. It is characterized by four modalities that have emerged in the last decade. Taken independently, these elements are significant in their own right; taken collectively they represent mutually reinforcing trends that when combined will address global development challenges while also unlocking vast new market opportunities.
1. Shared Frameworks and Metrics
As highlighted above, there is a growing interest in aligning core elements of corporate strategy with the SDGs and the 169 agreed-upon targets. Meanwhile, the investment community is also looking for ways that current environmental, social, governance (ESG) investment strategies can evolve to better reflect and report against the SDGs. Here, companies like Unilever and Safaricom are looking at ways they can align their strategy with the SDGs to deliver value to shareholders while addressing the challenges that impact their supply chains and their customers. By aligning frameworks and metrics, these companies are able to leverage the global development community.
2. Blended Finance
The World Economic Forum defines Blended Finance as “the strategic use of development finance and philanthropic funds to mobilize private capital flows to emerging and frontier markets.” This helps to alleviate concerns faced by investors in these markets, mitigating risks and managing returns in line with similar investments in developed markets. By de-risking investments, donors and development finance institutions (DFIs) enable institutional investors to make impactful investments that also deliver strong returns in alignment with their fiduciary responsibilities.
3. Systems Approaches and Collective Impact
While the private sector may increasingly be in the lead, it will not be able to address complex development challenges on its own. As the case of Thai Union demonstrates, companies and investors will need to work as part of complex, multi-stakeholder initiatives with governments, NGOs, advocacy groups and others using systems approaches and the tools of collective impact to generate returns while delivering development outcomes.
4. Not Just for the Multinationals
Perhaps the most intriguing aspect of Private Sector-led Development is that it is not being led only by the large multinationals; instead there are a growing number of national and regional level companies leading the way. According to McKinsey, by 2025, 50% of the world’s largest companies will be based in developing countries. In the era of Private Sector-led Development, it will be innovative corporates and investors from the Global South that are leading the charge.
None of these elements are entirely new. However, when grouped, they offer significant new opportunities for companies, investors and the global development community alike to drive business growth while improving lives and enhancing ecosystems.
For companies and investors, this new era will unlock new growth opportunities in markets that previously have been untapped. Here are several key implications for companies and investors to consider:
First, whether it is new market entry or ‘greening’ global supply chains, companies and investors will have a leadership role in the global development agenda and should be considered global development actors in their own right. To some degree this is happening already as CEOs from companies such as Wal-Mart actively participate in global development gatherings like the UN General Assembly Week. As companies look to frontier markets for growth and integrate the SDGs into their corporate strategies, they are becoming essential actors on the global development stage.
Second, while the opportunities in frontier markets are large, so too are the risks and challenges — most of which are development-related. Frontier markets in Africa and Asia offer the potential for outsized returns in today’s slow-growth global economy, these countries face significant development challenges — governance, economics, natural resource management, workforce education — that companies and investors need to address if they are to be successful in these markets. No company, no matter how large, has the resources and capabilities to tackle these complex issues on its own.
Lastly, to grow in frontier markets, companies and Investors must better understand the Global Development landscape. Foreign assistance budgets total roughly $100bln annually, making global development a substantial part of the global economy. The sector is complex with a myriad of actors, segments and stakeholders. Companies that take the time to understand how this landscape can help build better, more impactful partnerships with the global development community, which in turn will reduce risks along complex supply chains and create new market opportunities.
This new era will require companies and investors to acquire new skills and cultivate new talent to become proficient in global development issues and methodologies. They need to be skilled at engaging with a wide range of stakeholders: governments and civil society as well as suppliers and consumers. Companies who embrace their new role as emergent leaders in global development and who integrate that role into their strategies will reap the greatest returns. Meanwhile, those that treat development issues purely as CSR or philanthropic issues will see their competitors successfully enter new markets and grow, while they continue to tread water in an era of sluggish growth in the developed world.
The Role of Governments, Donors and NGOs
In the era of Private Sector-led Development it might seem like the public sector and civil society have few roles to play. However, this is not the case. Traditional global development actors still have essential roles to play, but adapting to this emerging reality will require fundamental changes in the way these organizations operate and engage. Donors will need to evolve their role from mere funders of programs to catalysts, using their capital strategically to drive private investment and action towards SDGs and Paris goals. In this new era, organizations will move away from funding and implementing development projects and increasingly focus on:
· Catalyzing and Incentivizing
Host governments, multil-lateral institutions, donors and philanthropists have a critical role in catalyzing investments — public and private –to solve global development challenges through thought leadership, advocacy, thoughtful pilots and strategic convening. For example, Humanity United has made numerous strategic philanthropic investments to promote the issue of forced labor in global supply chains, such as funding investigative journalism at the Guardian and other publications. This, in turn, has galvanized the private sector to partner with donor organizations, such as USAID and Australia’s DFAT, to tackle the issue through partnerships. By shining a light on a particular issue, donors, philanthropists and advocacy NGOs incentivize the private sector to play a greater role in solving economic, environmental and social challenges. This watchdog function also reassures host governments and a skeptical public that private companies are not taking advantage or exploiting vulnerable populations or weak institutions.
The public sector has a range of tools it can use to help de-risk and crowd-in private capital, whether it is through the use of Public Private Partnerships for infrastructure investments, credit guarantees, or project preparation grants. For example, USAID is using a credit guarantee to de-risk commercial investors in the Sustainable Oceans Fund — $100 mln fund that will invest in sustainable fisheries and low-impact aquaculture projects in Latin America, Africa and Asia. UN agencies, donors and NGOs can also improve governance and other enabling environment factors that impede investment. In addition, the public sector has a critical role in supporting the monitoring and evaluation needed to ensure results are truly being achieved.
· Supporting and Underpinning Multi-stakeholder Initiatives
In this new era of private sector-led development, NGOs, consulting firms and local organizations will need to evolve from project managers to providing backbone support to multi-stakeholder and collective impact initiatives that pilot and then scale solutions. For example, the University of Rhode Island is playing a critical role in supporting a range of partnerships designed to improve livelihoods in coastal Ghana, enabling companies, government and NGOs to collaborate and scale up effective solutions.
For decades, the work of global development has been stagnant, driven largely by technocrats in Washington, London or Tokyo. Now, global development organizations must evolve from top-down institutions to networked organizations that can collaborate effectively across sectors and geographies, working seamlessly with diverse partners from pension funds to human rights groups to consumer products companies. This evolution will require these organizations and institutions to acquire new skills. No longer will deep, narrow technical expertise or project management skills be sufficient. Rather, development organizations will need more tri-sector specialists who are able to work as conveners and facilitators, able to devise and execute integrated development strategies in a collaborative, adaptive manner.
From Charity Cases to Market-led Solutions
After seven decades of government-driven foreign aid efforts, Private Sector-led Development represents a tectonic shift that will transform the world’s poorest countries from beneficiaries of rich-country generosity to drivers of global economic growth and valued consumers in their own right. This new paradigm creates tremendous opportunities to solve global development challenges through market-led solutions that can scale with private capital and investment. Companies, investors, governments and global development actors who understand the dynamics of Private Sector-led Development will reap substantial rewards in this new era — creating new customers and investment opportunities, while improving lives and the sustainability of economies and ecosystems in frontier markets.
by Steve Schmida, Managing Director