4 Investments in sustainable development: A new framework for development policy
With the current level of economic development, the World Bank estimates that around 600 million people will be living in extreme poverty by 2030. Climate change has happened faster than expected and has led to changes in precipitation patterns and more extreme weather, which, in combination with loss of nature, can destabilise countries and regions and undermine progress on a number of the SDGs. Seen together, this represents a complex set of challenges that need to be addressed simultaneously.
In the future, climate change will generate a constant stream of overlapping crises that will impact poor countries the hardest, but also wealthy countries, either directly or indirectly. Norway has a significant stake in contributing to the prevention of global instability and crises. The Coalition for Epidemic Preparedness Innovation (CEPI) points out that climate change will increase the likelihood of pandemics in the future. Norway’s vested interest in the prevention of international crises is not just about foreign policy and security policy considerations: Through the Government Pension Fund Global (GPFG), Norway has become a universal investor which cannot (fully) diversify away from systemic risk arising from climate change, political unrest, global economic crises and pandemics.113
To help meet these challenges in the most effective way, we present in this and the next chapter a new development policy framework for investments in sustainable development. The framework is organised around a number of key principles and the specific operationalisation of these principles, which can more effectively tackle current and future challenges in a more effective way.
In this chapter, we will
- introduce a set of principles for a more comprehensive development policy, ‘investments in sustainable development’, and show how these principles broaden and challenge traditional thinking in development policy
- discuss which steps must be taken in order to use this framework effectively, both in Norway and in international development cooperation
- highlight the importance of having a consistent focus on effectiveness, adaptation and long-term results
4.1 Sustainable investments
The terms ‘sustainability’ and ‘sustainable development’ can be interpreted in different ways. A broad interpretation is that sustainable development encompasses all 17 SDGs. The Brundtland Commission’s interpretation from 1987 includes two central principles: the fair distribution of resources between and within generations, and development that ‘that meets the needs of the present without compromising the ability of future generations to meet their own needs’.
Another approach has been to divide sustainable development into three pillars, as the SDGs can also be grouped: an economic pillar, a social pillar and an environmental pillar. In addition to political sustainability, these three pillars have formed the basis of the expert group’s discussions on how to ensure sustainability over time:
- Environmental: development must take place within nature’s tolerance limits (for example, greenhouse gas emissions and local pollution must be limited) and be based on the preservation of natural capital (for example, soils and natural habitats).
- Economic: development must entail societal value creation that lays the foundation for income increases and poverty reduction, while also ensuring the profitability of individual actors (smallholders and businesses, for example).
- Social: the value creation must occur – and be distributed – in a way that is regarded as fair and legitimate and ensures popular support and ownership.
- Political: development strategies and policies must be grounded in political consensus, a ‘development bargain’ between influential groups and institutions. This applies within countries, between countries, and within donor countries, to ensure that priorities remain stable over time.
4.2 Three key investment principles
The discussion in Chapter 3 showed how the international system for assuring the quality of aid does not function well enough: The ODA rules have been diluted and neither ODA nor TOSSD function as adequate assurances of what constitutes good and effective aid. This is part of the reasoning behind formulating an investment framework for aid that sets up principles and guidelines to ensure that aid is used as effectively as possible. Our framework is based on a distinction between goals and criteria for effective interventions on the one hand, and the reporting system, such as ODA and TOSSD, on the other. The former should form the basis for assessments on how to best pursue and follow up political goals.
The problem can be illustrated by the way in which different development policy goals are put into practice. For example, Norway has a political ambition of contributing to both gender equality and climate adaptation. In addition to direct interventions to achieve such goals, these ambitions can also be included in other projects and interventions as ‘cross-cutting considerations.’ Thus, they are included in addition to goals such as poverty reduction or good governance. One of several examples of this in Norwegian aid administration is the Government’s goal that at least 50 % of all bilateral aid should have a gender equality focus.114 Women’s rights and gender equality has been and remains important to Norwegian development policy, and there are a number of examples of highly effective aid programmes to this end. However, the 50 % gender equality target does not provide any guidance on how to design the content and approach of these measures. This is operationalized by relying on what is known as ‘policy markers’ in ODA statistics. The policy marker for gender equality is used to highlight aid initiatives in which gender equality is an important goal across sectors and alongside other goals. This implies that one and the same intervention may aim to achieve many different goals. It may of course be the case that an intervention can achieve different goals, but within the current system, concerns related to the reporting system or budget lines often take precedence over thorough assessments of whether an initiative is effective.
Another example is the operationalisation of the political goal of tripling funding for climate adaptation in developing countries. The allocation letter to Norad for 2023 states that:
- Norad will contribute to the Government’s goal of doubling climate finance and, within this, at least tripling climate adaptation by 2026 at the latest. All budgetary items will be assessed for this purpose. To ensure good statistics on climate finance, it should be remembered that all relevant climate measures are to be registered using the Rio markers for climate change adaptation and climate change mitigation in the MFA’s case-processing system.115
The tripling of funding to climate change adaptation is thus here achieved by adding a goal of adaptation to already existing budgetary items for private sector development, agriculture, renewable energy, civil society, oceans and other items. Political ambitions for funding targets in different areas are thus not necessarily accompanied by actual increased funding. One of the consequences of this may be that the assessment of climate initiatives is done on the basis of the synergies to various budgetary goals rather than being a comparison of which measures are most effective. If there are too many such cross-cutting considerations or if they become too complex, there is a risk of introducing ill-designed earmarking that is difficult to implement, in turn hindering the achievement of an initiative’s primary goal. There is also a risk that individual interventions with multiple goals can be cited as having supported multiple political ambitions or goals at the same time. Thus, in some cases the same funding is counted more than once depending on which goal is considered opportune to highlight for reporting purposes.
Norway’s development policy objectives could have been managed more effectively if the assessment of different initiatives and goals was based on effective goal attainment, rather than how well they fit predetermined budget lines with already defined objectives. As seen in Chapter 3, existing research offers guidance on what kind of interventions are most effective. The challenge is to set up a framework in which such insights and assessments can take precedence over reporting routines. Our investment framework is an attempt to do just that.
What do we mean by investments in sustainability? What does it change? Firstly, an investment approach signals a change in the relationship between ‘donors’ and ‘recipients’. Establishing a more equitable partnership is a goal in itself. It also entails a greater openness about expectations and mutual needs (win-win). This can strengthen both long-term thinking and the realism of development policy. Secondly, an investment approach signals a stronger and more natural ownership of the processes one looks to support, as investments are not seen as charitable, nor one-sided solidarity. Thirdly, investment thinking signals a clear expectation of the greatest possible return for people and planet (positive societal impact). An investment approach therefore entails close monitoring of performance and results and a focus on cost-effectiveness, as it is in one’s own interest to monitor investments, costs and returns. An investment approach requires more systematic investigations and assessments prior to the decision to invest. Three principles are of particular importance in our context: (i) effectiveness and clear objectives, (ii) long-term and patient investments, (iii) active management.
Effectiveness and unambiguous project objectives
In order to be effective, investments in sustainability must yield the highest possible return on investment. This understanding of effectiveness combines ‘effectiveness in achieving objectives’ – that what is done is effective and relevant according to predefined goals – and ‘cost-effectiveness’, meaning that the use of time and resources are as low they can be to achieve the goals. In other words, emphasis is on doing the right things and doing those things right. Three basic criteria for achieving effectiveness are (1) a defined set of unambiguous objectives or goals; (2) choosing the most effective channel(s), initiatives and partner(s); and (3) the fewest possible costly intermediaries between the disbursement of funds and their intended target. Clear goals make it possible to optimise investments and evaluate which initiatives are most effective. For example, a better distinction should be made between investments with the primary goal of reducing greenhouse gas emissions and investments with the primary goal of poverty reduction.
Choosing the best partner(s) increases the effectiveness in achieving objectives. By reducing the number of agreements and unnecessary intermediaries the greatest possible proportion of the funds can be used to achieve the goal of the initiative. The ambition to reduce intermediaries must be weighed against the risks and capacity challenges this entails for Norwegian systems, and where this may come at the expense of the development cooperation’s ability to scale up projects by pooling resources.
Note that this approach builds on established principles of aid effectiveness. For decades, both in Norway and internationally, there has been a discussion about the need for more effective and less fragmented aid, but although ambitions related to ‘concentration’ and ‘harmonisation’ have been a recurring theme – also in Norwegian aid – Norway has not been able to concentrate aid.116 Moreover, work on the principles of aid effectiveness has been weakened in recent years.117 The view of the expert group is that an investment approach must be built on the principles of aid effectiveness and prioritised goals with high likelihood of societal impact. This is important because Norway’s overall international contribution to a sustainable future is limited and should be used as effectively as possible.
The commitment to place more emphasis on results has led to a far more nuanced and fine-grained approach to measuring performance, including impact evaluations and increased use of controlled studies at the intervention/implementation level. The International Initiative for Impact Evaluation (3ie) was founded in the wake of the OECD’s High-Level Forum in Accra in 2008 and compiles research and learning based on the fundamental question: ‘what works, for whom, how, why and at what cost?’ Insights from such methods must be used more systematically in evaluating which alternatives should be prioritised.
Long term approach – patient investment
In line with an investment approach, the most significant factor is the long-term societal impact. We do not want an increased focus on results to lead to simpler interventions with shorter cause-and-effect chains favouring the short and medium-term. The question we have to ask ourselves is what significant social, environmental or economic changes can realistically be envisaged at an aggregated level.118 As far as possible, development investments should break out of short-term funding patterns and focus on long-term solutions and prevention. Not all long-term effects can be accurately documented and measured, but they must be shown to be plausible.
A focus on long-term investments also serves as a counterweight to the political shifts and associated volatility that characterise parts of Norwegian and international aid. The goal should be to have a certain number of large-scale initiatives and prioritise following up these investments, rather than spreading limited resources too thinly. This could help reduce the complexity and fragmentation of international development cooperation, which has only increased in recent years.
Active management
The investment approach places emphasis on results and upgrades the importance of assessing how to manage projects and resources to achieve them. This means, inter alia, focusing on synergies between different initiatives (such as national resource mobilisation and private investment), scaling interventions that function well, and emphasizing flexibility, adaptation and active risk management in line with changing conditions and new knowledge.
In practice, this will entail more frequent adjustments to investments and interventions. This will require continuous, evidence-based monitoring and subsequent feedback. Active steps must be taken to put knowledge that is adapted to local contexts into practice, for example by creating links between authorities in the country where the aid funds are to be used, donors, and research institutions. Follow-up research should be used more actively than it is today to ensure more independent evaluations as well as proposals for adjustments.
The investment approach outlined here builds on and clarifies established principles on the importance of local ownership in the development process. As an investment, aid is viewed as a contribution that will yield a benefit, and in order to be successful all partners must be committed to the same goal. This means, for example, that donors must adapt their priorities to the respective countries’ own priorities and development plans. This includes using the recipient country’s own national systems and budgetary processes, as well as avoiding the use of aid to procure from the donor countries’ business and industry (such as ‘tied aid’ in the form of food aid from the donor country’s agricultural industry).
Such an approach will also entail a greater openness to experimentation, increased risk tolerance and a pragmatic consideration of predetermined plans. Increased transparency is another side to it. It should be made easier for citizens and elected representatives in donor countries and ODA countries to keep an overview and hold those responsible for different projects accountable. Transparency also ensures exchange of experience and learning across national borders. The International Aid Transparency Initiative (IATI), which has developed standards for transparency, publishes its findings on a regular basis. This will be a useful resource in this work.
4.3 Investments in sustainability in practice
The overarching principles for ‘investments in sustainable development’ are naturally generic and, if they are to serve as a tool for identifying priorities and initiatives that deliver results, they need to be clarified and put into practice. An important step will therefore be to develop a tool for due diligence, in the form of an ‘investment instruction’ or check list consisting of a set of questions that should be answered before major investment decisions are made. The Instructions for Official Studies and Reports, which applies to the Norwegian public administration, have elements of such a methodology, where a series of questions must be answered before deciding which measure or intervention is most suitable.119
As a follow-up to the expert group’s report, more detailed investment instructions should be prepared based on the overarching principles proposed here. A good starting point for making a comprehensive assessment of the aid portfolio is to carry out such a due diligence prior to decisions being made at different levels of the system. Such assessments are already being made, but our proposal is to systematise these processes and align them with a set of overarching criteria in order to ensure effectiveness, long-term focus and active management.
It is worth noting that such instructions are not about assessing whether, for example, support for health is more effective than support for education, as thematic choices will largely be the subject of a political decision. Our proposal is to assess what kind of support or interventions are best within politically defined themes and priorities – known as a ‘best in class’ approach to effectiveness. It is also important to point out that the assessments of which priorities and initiatives are effective are carried out at different levels. Specifically, this means that once the budgetary aid framework for the following year has been set, recommendations to political leaders on the allocation of available funds should be prepared following the investment principles proposed above. The first step is to set unambiguous goals. This is a political responsibility and must therefore be followed up and implemented at civil service and administrative level. The recommendations for allocation within the budget framework should be prepared through cooperation between relevant ministries and then across the Ministry of Foreign Affairs on the basis of professional input and knowledge of effectiveness and results. The principles and investment instructions should form the basis for the management of allocated aid funds in the Ministry of Foreign Affairs, the Ministry of Climate and Environment, and at the foreign service missions and underlying agencies.
Boks 4.1 Example of investment instructions
Assessment of scale and importance of the problem: The starting point should be to focus on the biggest and most urgent problems and bottlenecks that require a solution, and where the outcome will maximise societal benefits.
Evaluation of potential and feasibility:The next thing to consider is the probability of success/return vs. the risk of failure. Evidence and systematic evaluations of effects and results (estimates of the societal benefits) should be available. If not, the initiative should be re-evaluated and piloted with a follow-up evaluation.
Assessment of alternative solutions: What are the most cost-effective interventions, and what gives the most sustainable development outcomes relative to the money invested? From research and impact evaluations, we know that there is a great deal of variation in the different initiatives’ effectiveness in achieving objectives and cost-effectiveness. It is therefore important to conduct a broad evaluation of alternatives and their impacts. Alternative solutions and their effects should be thoroughly assessed.
Ownership and demand: If an investment is made directly in a country, is there a ‘development bargain’ (World Bank 2017; Dercon 2021) that provides a supportive political environment, in the form of a consensus to development? To ensure demand-driven rather than supply-driven priorities, it is similarly important to ask: Which local and national groups are the best partners? Does the proposed investment align with what national authorities themselves want to prioritise? Can we support and contribute to governments adopting and implementing good policies?
Capacity, partnership and complementarities: Do we have administrative capacity and access to relevant expertise? What is our comparative advantage and what do other countries and multilateral organisations do better? Answering these questions can help identify areas that others neglect, and where even smaller investments can be catalytic.
Assessment of our time horizon: The analysis should also assess the long-term impact of the investment. Relevant questions are: What should the time horizon be? What will happen if this is postponed? How important is it that this is resolved now?
Intermediaries and transaction costs: How many intermediate levels are there between the disbursement of funds and implementation? How much of the funding ends up ‘on the ground’ and how much is lost in transaction costs on the way? Is it possible to distinguish between necessary (i.e., intermediaries that increase effectiveness, add value and reduce risk) and unnecessary intermediaries, thereby allowing us to streamline the process of achieving the goal?
Monitoring, follow-up and learning: Which systems are in place with partners or in our own organization to map, measure, ensure quality and evaluate the investment? How do we ensure that data and information are collated? How do we ensure transparency and learning?
A more detailed study should be carried out of which specific elements should be included in an investment instruction and, not least, what kind of knowledge should be applied in these assessments. Given that Norwegian aid is largely channelled through multilateral organisations, it will be important to use a wide array of data and knowledge about these organisations. The Multilateral Organisation Performance Assessment Network (MOPAN) and the aid effectiveness principles that have been developed over a number of years within international development cooperation are important in this respect. MOPAN’s assessments are in line with the expert group’s principles of effective and sustainable investment.120 The aid effectiveness principles are equally important criteria that, if followed, could increase the effectiveness of development cooperation and the long-term support of partner countries.121
4.4 Conclusion
The purpose of an investment framework is primarily to emphasise the importance of effective goal attainment, while budgetary items and reporting systems are secondary objectives. In our view, the investment approach will also reflect a more equal relationship between ‘donors’ and ‘recipients’ of aid, as these will be grounded in common/shared interests and commitment to follow-up. The elements of the investment instruction discussed here are intended to outline the types of questions and issues that should be addressed and resolved as part of the assessment of different alternatives to achieve different policy goals. However, there is a significant difference between bilateral and multilateral aid. The former involves a significantly greater degree of control and flexibility, while the latter will require cooperation with and work through multilateral channels to ensure similar follow-up.