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Innovative development finance

The Monterrey Consensus first called for the exploration of innovative sources of finance, and the Doha Declaration and Addis Agenda welcome progress in developing and mobilizing support for innovative sources and mechanisms of additional financing since Monterrey, and invite more countries to join in implementing innovative mechanisms. The Doha Declaration and Addis Agenda also encourage countries to consider replicating and scaling up existing mechanisms and to explore new mechanisms.  

Innovative development finance

There is no one universally agreed definition of innovative development finance (IDF). The World Economic and Social Survey 2012 (In Search of New Development Finance) defined IDF as mechanisms that are in the realm of international public finance and that have the following characteristics: (i) official sector involvement; (ii) international cooperation and cross-border resource flows to developing countries; (iii) an element of innovation in the nature of resources, their collection or governance structures; and (iv) as a desirable characteristic that resources are additional to traditional ODA. The Leading Group on Innovative Development Finance describes it as ‘comprising mechanisms for raising funds for development that are complementary to official development assistance, predictable and stable, and closely linked to the idea of global public goods’.

A significant number of such mechanisms have been implemented over the last two decades. The international solidarity levy for airline tickets is by far the single largest resource-raising IDF mechanism operational at this point. Introduced in 2006, it is currently levied on airline tickets in 10 countries, and a large share of proceeds are used to fund the UNITAID drug purchase facility. As of 2015, 63 per cent of the cumulative funding of UNITAID (or around USD 1.5 billion) has come from the solidarity tax levied on air-tickets. Yet, overall IDF has so far raised or intermediated only a modest amount of resources. At the same time, some proposed mechanisms (such as issuances of Special Drawing Rights (SDRs), carbon or financial transaction taxes) have the potential to raise large amounts of resources for sustainable development, but remain controversial.

Leading Group on Innovative Financing for Development

The Leading Group is an informal network that currently brings together sixty-six States and international organizations, non-governmental organizations (NGOs), local entities and private foundations to promote innovative development financing mechanisms and to exchange experiences and best practices on innovative solutions to achieve the global development goals. It was created in 2006 under the leadership of France, Chile, Brazil and Spain. Its current President is Mali.

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The Leading Group on Innovative Financing for Development has so far supported and championed three major initiatives: the UNITAID drug purchase facility, the International Financing Facility for Immunisation (IFFIm) and the Advanced Market Commitment (AMC) for pneumococcal vaccines.

In Addis Ababa, the Leading Group also launched a new initiative at the side lines of the Conference named "UNITLIFE".  UNITLIFE is an innovative financing mechanism that seeks to generate new resource flows from extractive industries to address malnutrition in sub-Saharan Africa. By collecting micro levies from extractive industries in participating countries (current champions of the initiative are the Governments of Mali, Niger and the Republic of the Congo), as well as additional contributions from varied partners, a pooled fund will be created to finance efforts to improve maternal and child nutrition in the region. In 2016, steps were taken to set up a UNITLIFE Secretariat in UNICEF.  


Green bonds

Green bonds are an innovative financing instrument that has grown rapidly in use in recent years. They tie the proceeds of a bond issuance to environmental activities, usually by funding projects with positive environmental externalities. While the proceeds are earmarked for project-specific activities, the bonds are backed by the entire balance sheet of issuers, and thus benefit from issuers’ ratings as well. 

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The green bond concept was developed in 2008 by SEB, a Swedish bank, and the World Bank to meet the increasing investor demand for engagement in climate-related opportunities. It has grown rapidly since then. Climate Bonds Initiative (CBI), a non-profit that certifies green credentials of bonds, estimates that in 2016, green bonds totalling US$81 billion were issued, almost doubling 2015 issuances.  While the market was initially dominated by development banks, issuers are much more diversified now, including corporate and commercial bank issuances as well as sovereign bonds. The first sovereign green bond was issued by Poland in December 2016, followed by France in January 2017. Several developing countries are planning to issue green bonds in 2017. The World Bank has issued 125 green bonds in 18 currencies, totalling US$9.1 billion, as of June 2016.

Bonds are labelled green by issuers. To support the integrity of the green bond market and maintain trust by investors, the International Capital Market Association has developed Green Bond Principles, providing voluntary guidelines on the use and management of proceeds, processes for project evaluation, selection and reporting. The guidelines recommend external review – such as verification or certification by independent and qualified third parties. In 2013/14, more than 60 per cent of green bonds had gone through 3rd party reviews.