Before the COVID-19 pandemic, the funding gap for achieving the Sustainable Development Goals in developing countries and emerging markets reached USD 2.5 trillion annually. As funding needs for emergency and response measures increased while resources available for investments declined during the pandemic, the funding gap has widened to USD 4.2 trillion (OECD, 2020). While the funding gap is large, it represents only 1.1% of the USD 379 trillion of financial assets owned and managed by global financial institutions in 2020.

In the wake of the COVID-19 pandemic, credit institutions, asset managers and institutional investors increasingly recognize that non-financial environmental, social, and governance (ESG) risks can have a material impact on risk-adjusted returns and thus the long-term value of their assets under management. According to ADB’s Asian Development Outlook 2021, shifts in stakeholders’ preference towards SDGs, the need to mitigate and hedge sustainability risks, as well as the demand for investments in greater resilience in the face of increasing uncertainty are jointly driving the need for of sustainable finance.

Nonetheless, the development of sustainable finance market is constrained by a considerable asymmetry of information, under-regulation, the lack of consistency and transparency in reporting requirements and ESG rating methodologies, and the absence of common definitions, standards and metrics on impact measurements. Such challenges have resulted in selective reporting and increased risk of overstatement of environmental and social outcomes. As investors seek to sustain and increase value, improved metrics and data on sustainability to make better-informed investment decisions are gaining importance.

A joint study by the OECD and UNDP concluded that greater alignment of financial assets with sustainable development goals would require efforts by regulators, investors and businesses to enhance market integrity and market efficiency through improved coherence, transparency and accountability.