1 Delivering the SDGs through business action

2 Mobilizing private finance for the SDGs

3 Engaging the private sector in SDG planning and coordination

Introduction

The 2030 Agenda for Sustainable Development acknowledges the role of the diverse private sector, ranging from micro-enterprises to cooperatives to multinationals, in the implementation of the Sustainable Development Goals (SDGs). It commits Member States to take the necessary actions to encourage and promote effective public-private partnerships (PPPs). It also calls on all businesses to apply their creativity and innovation to solving sustainable development challenges.

The ESCWA Annual SDG Review 2023, the second in the series, explores the contributions of the private sector to the realization of the 2030 Agenda and the SDGs in the Arab region. Building on limited available data on the subject, the report offers an indicative reading of existing trends and gaps in the region. The analysis is guided not only by the Agenda’s goals and targets, but also by the whole-of-society and rights-based approaches and the principles of universality, leaving no one behind, combating inequality and promoting gender equality and the empowerment of women.

Although the private sector has the potential to be a key development partner in the Arab region, this is yet to fully materialize. Available evidence indicates that businesses are a major driver of productivity gains, job creation and economic growth. In some Arab countries, private enterprises also contribute to the provision of some social services, such as education and health care, and spearhead innovation and technological change. Moreover, the private sector, in synergy with Governments, donors and other partners, can play a key role in bridging the financing gap to achieve the SDGs by 2030, which has been estimated in 12 Arab countries to exceed $660 billion per year.^[1]

Businesses face a plethora of challenges in the region, including instability, lack of effective enforcement of competition law, low investment in human capital and technology, insufficient access to finance and limited opportunities for women and young people. Arab States and other stakeholders are deploying broad efforts to support the development of the private sector and its alignment with the SDGs. Governments are also increasingly engaging the private sector in institutional mechanisms dedicated to planning, coordination and review of the 2030 Agenda.

The next chapters of this report review the contributions of the private sector to sustainable development in the Arab region from three lenses:

Each chapter assesses evidence for private sector engagement in the delivery of the SDGs in the region and provides guidance on actions needed to address current gaps.

A. Every business can contribute

Businesses and other private sector entities can contribute directly to the SDGs by producing the goods and services required to realize a sustainable society. Beyond that, regardless of the sector they operate in, all businesses can contribute to the SDGs by adopting better business models and aligning their internal policies and standards to the principles of the 2030 Agenda.

The present chapter provides an overview of the sustainability performance of the private sector in the Arab region and sheds light on pathways to better alignment of business with the SDGs.

Given the scarcity of studies on this subject in the region and the lack of disaggregated information by enterprise type, size and sector of operation, only a general assessment can be made. Findings were arrived at through a synthesis of information from various sources, including:

• Macro-level data on the environmental and social performance of Arab economies, mainly SDG indicators obtained from the ESCWA Arab SDG Monitor.
• Published firm-level datasets covering representative samples of companies and collected through surveys.
• United Nations reports on labour and human rights issues.
• Reporting by the United Nations Global Compact concerning the performance of its members.

Analysis is informed by an environmental, social and governance (ESG) framework (table 1), which offers broad and widely used criteria for analysing the impact that a business has on the natural environment, the relationships it has with people and communities, and how it governs itself. ESG covers elements that are core to the SDGs, making ESG performance a good proxy for SDG alignment.

B. The region’s private sector is underperforming on the environmental, social and governance fronts

While little information exists to fully assess the ESG performance of businesses in the Arab region across all the above criteria, available data point to generally poor performance. This is true for both home-grown companies and foreign direct investment (FDI) into the region. While a growing number of companies are adopting sustainability policies and commitments, there has been limited progress in moving from policy to measurable action.

It should be noted that the analysis below refers to both private sector and State-owned enterprises due to the lack of disaggregated data.

1. Environmental performance

Despite some progress on the environmental front, such as the reduction in carbon dioxide emissions relative to manufacturing gross domestic product (GDP) over the past two decades, Arab economies remain environmentally inefficient.

Carbon: Industries in the Arab region continue to emit a high level of carbon dioxide per unit of manufacturing value added. Averaging 1 kg per $ in 2019, the regional average was more than double the world average of 0.4 kg per $, driven by the Gulf Cooperation Council (GCC) subregion, which recorded the highest rate globally (1.3 kg per $, the same as Central and South Asia, while Europe was the best global performer in 2019 with an emission rate of 0.2 kg per $) (figure 1).

Figure 1. Carbon dioxide emissions per unit of manufacturing value added, 2000 and 2019 (Kilogram per $)

Energy: The EBRD-EIB-WB Enterprise Surveys (2018–2019)^[2] showed that 1 in 5 firms in the region had adopted energy efficiency measures; a similar proportion of companies set energy consumption targets, whereas 1 in 3 firms monitored energy consumption.^[3] Across Arab economies, larger companies performed better than small and medium-sized enterprises (SMEs),^[4] implying that commitments by large corporations are yet to reverberate across businesses in their value chains.

Water: The Arab region is still far from achieving a decoupling of economic growth from water use. In 2019, water use efficiency across agriculture, industry and services in the region was about half the world average, with a ratio of $10.1 value added for each cubic metre of water withdrawal, compared to a global value of $19/m³.^[5] There are notable subregional differences, with GCC countries typically making better economic use of water due to the relatively smaller size of their agricultural sectors.

The above enterprise survey^[6] found that only 1 in 6 firms in the region monitored their water usage, and even fewer (11 per cent) had adopted water management measures.^[7]

2. Social performance

Social engagement constitutes a weak point for the private sector in the region. In the absence of strong regulatory environments and just labour systems governed by human rights, risks of abuse by the private sector can be high. Groups that tend to pay the price include women, children and migrant workers. These groups deserve particular government attention to protect them.

Despite global efforts, the uptake of corporate respect for human rights has been slow across world regions, and particularly so in the Arab region.^[8] Since the unanimous adoption by the United Nations Human Rights Council of the Guiding Principles on Business and Human Rights in 2011, and more than ten years later, no Arab country has elaborated a national action plan on business and human rights, although Morocco and Jordan have declared their intention to do so.^[9]

Employment of women: The gender gap in employment in the Arab region is massive. The female labour force participation rate in the region stood at around 20 per cent in 2021 – less than half the global average of 46 and the lowest among world regions – compared to 70 per cent for men.^[10] Unemployment among women is increasing, reflecting that the region is not creating enough jobs to absorb even the small number of female entrants to the labour force.

Only 14 per cent of firms in the Arab world had female participation in ownership in 2020 – less than half the global average of 33 per cent.^[11] Just 5 per cent of firms in the region were managed by women, compared to 18 per cent globally.^[12]

Migrant workers: Discrimination against migrant workers in Arab countries is multi-faceted. One aspect relates to wages, where in some Arab countries,^[13] a minimum wage applies only to nationals (e.g. in Oman) or only to public sector employees (e.g. in Bahrain, where calls have been mounting to offer migrant workers in the private sector the minimum wage set by General Federation of Bahrain Trade Unions)^[14] Double standards may be applied, such as in Jordan where a higher minimum wage applies to national workers than to migrant workers. Even where wage laws do not discriminate between nationals and non-nationals, such as in Lebanon, migrant workers tend to earn below the minimum wage.

The COVID-19 crisis has further highlighted the vulnerability of migrant workers in the private sector, who are often excluded from social protection and health insurance systems. In the GCC, COVID-19 transmission rates were higher among migrant workers, who often live in overcrowded accommodations. Moreover, due to the economic downturn resulting from the pandemic, foreign workers were the first to be dismissed by businesses, and many had their pay cut.^[15]

Child labour: The number of children aged 5–17 in the Arab region who work doubled from 1.2 million in 2016 to 2.4 million in 2020. Three quarters of working children are boys who perform hazardous work.^[16] There are significant subregional differences, with child labour being mostly prevalent in Arab least developed countries (LDCs), such as Comoros (24.4 per cent), the Sudan (12.6 per cent) and Mauritania (9.4 per cent),^[17] where children work mostly in agriculture.

3. Governance performance

Every company is governed by an internal system of rules and procedures – whether explicit or implicit. Governance has implications on environmental, social and economic performance.

Corruption: Corruption is considered by businesses in the region to be among the top barriers facing their development.^[18] As measured by SDG indicator 16.5.2, 20.5 per cent of firms in the region paid at least one bribe to a public official or were asked for a bribe in 2020, compared to around 3.2 per cent in the European Union and 16.4 per cent globally (figure 2).^[19]

Figure 2. Incidence of bribery, 2020 (Percentage)

Transparency: Very few companies in the Arab region publish sustainability reports according to SDG indicator 12.6.1, with most reporting companies being from GCC countries.^[20]

According to the KPMG Survey of Sustainability Reporting 2020,^[21] 96 per cent of the top 250 corporations in the world (measured by revenue) currently report on sustainability. Sustainability reporting rates among the top 100 companies headquartered in Saudi Arabia and the United Arab Emirates are 36 per cent and 51 per cent respectively, which are among the lowest rates in the sample of 52 countries included in the survey (the average of the global sample was 88 per cent). Growth in reporting is low across the board, with no significant differences noted across sectors of operation.

Support for civil rights: Businesses in the region are yet to shoulder their share of the responsibility to support civil rights. Customer privacy is one right that is not often respected. For example, only 20 per cent of mobile operators in the region have publicly published their privacy policies. Moreover, some mobile operators are failing to stand up against repressive practices, reportedly contributing to government initiatives aiming to limit freedom of expression and the freedom of access to information.^[22]

Political connection: The private sector in Arab countries is characterized by large enterprises that are politically connected. Alliances between the business and the political spheres constitute a barrier to development in some countries such as Lebanon and Mauritania.^[24] Politically connected firms tend to have an unfair competitive edge, therefore deterring other companies from entering the market and hurting job creation.

Innovation: The extent to which a business innovates is reflective of corporate culture and values and is therefore tightly linked to internal governance practices. A company’s innovation capabilities directly impact its environmental, social and economic performance and cannot therefore be dissociated from the ESG framework (table 1).

Innovation rates in the region are significantly lower than the global average. According to the EBRD-EIB-WB Enterprise Surveys (2018–2019), 1 in 5 enterprises in the surveyed Arab countries introduced new or improved products, services or processes or invested in research and development (R&D) activities. This is almost half the rate in the global sample. Participation in global trade is an important determining factor, implying that engagement in foreign markets can incentivize but also facilitate innovation in businesses in the region through access to knowledge and technology.^[25] Importantly, digital technology – a prerequisite for innovation in today’s economies – has particularly low adoption among small enterprises in the region.

While limited up-to-date data on R&D expenditure by the private sector prevent an adequate regional analysis, existing figures show that in some GCC countries, the private sector contributes a significant share of total R&D funding, reaching in the case of the United Arab Emirates a staggering 74 per cent of gross domestic expenditure on R&D.^[26] Despite this bleak backdrop, a number of start-ups, microenterprises and SMEs in the Arab region are championing business models that combine environmental, societal and financial sustainability, such as BIOwayste and L’Atelier du Miel in Lebanon (boxes 8 and 9).^[27]

Box 8. Testimonial: BIOwayste – Transforming organic waste into biogas and biofertilizer

BIOwayste is a start-up from Lebanon that provides businesses, farmers and municipalities with innovations that turn organic waste into cooking gas and biofertilizer, saving money and protecting the environment. We have developed a system that contributes to achieving four SDGs:

• Affordable and clean energy (SDG 7): BIOwayste promotes the use of clean renewable energy in the form of biogas for cooking.
• Sustainable cities and communities (SDG 11): BIOwayste can be jointly operated with municipalities to divert urban waste from landfills.
• Responsible consumption and production (SDG 12): BIOwayste decreases food waste by up to 80 per cent, and reduces greenhouse gas emissions by up to 40 per cent annually. It can also help in spreading awareness around waste reduction and recovery.
• Climate action (SDG 13): BIOwayste provides significant research potential for a closed-loop renewable energy system. Every BIOwayste system saves over six tons of carbon dioxide emissions per year.

The technology can be tricky, as multiple parameters can affect the biodegradation reaction leading to the generation of biogas. In addition, our technology needs a lot of investment in R&D, which is a challenge for microenterprises and SMEs. However, with the right knowledge and expertise, we have won many competitions and awards from local and international organizations.

Despite the difficult circumstances faced by Lebanon in recent years, our design is finalized and is now being tested and installed in private companies, civil society organizations and universities. Moving forward, we plan to expand as much as possible to help the environment and reduce greenhouse gas emissions.

Note: box was produced by Reine Metlej and Yasmine Jabali, founders of BIOwayste.

Box 9. Testimonial: L’Atelier du Miel – Enhanced transparency, reduced food miles and higher producer income in the honey sector

L’Atelier du Miel’s objective is to pioneer a more sustainable food supply model with greater value to the consumer, the producer and the land. Our star offering is the installation of beehives in customer’s gardens to enable them to produce homegrown honey, from garden to table. Currently serving 200 customers, we aim to reach 1,000 homegrowers in the next three years.

The programme reduces food miles, enhances transparency regarding product quality and creates opportunities for local beekeepers to sell their produce at a premium. Our services contribute to making the SDGs a reality, with a focus on food security, improved nutrition and sustainable agriculture (SDG 2) and responsible consumption and production (SDG 12).

In 2013, when L’Atelier du Miel was founded, artisanal beekeeping was on decline in Lebanon. The lack of trust in artisanal honey due to deceptive practices, poor regulation and insufficient product differentiation resulted in customers replacing local honey from their diets with imported honey or other products.

By promoting region-based varieties and creating new ways to engage with customers (dedicated stores, ecommerce and giving honey as a gift), L’Atelier du Miel has been able to introduce honey to new market segments.

This has encouraged a local supply of quality products, promoted artisanal practices that help maintain ecosystems and created income for underserved communities of producers in more than 15 regions in Lebanon.

Although the model has proven resilient in a precarious and unstable business environment, we continue to face challenges, including the decay of public infrastructure and the loss of the financial services previously provided by banks.

In this context, companies like L’Atelier du Miel could benefit the most from support in opening new markets and investments in digital and physical infrastructure.

Note: This box was produced by Marc-Antoine Bou Nassif, founder and CEO, L’Atelier du Miel.

C. The private sector’s approach to SDG actions remains largely conventional; a shift is yet to take place towards shared value creation

Reported SDG actions by private sector enterprises in the region reflect largely conventional CSR approaches or models of action, notably:

• Philanthropic actions that are add-ons to a business’ core operations, such as private sector support to charities and vulnerable groups, schools, health facilities, etc. Support by the private sector to communities affected by COVID-19 was also seen in several Arab countries during the pandemic.
• Actions to integrate environmental and social considerations into core business operations, such as energy and water use efficiencies, recycling of materials and improvements to working conditions. This is a widely adopted model, driven by greater awareness, but also by cost savings, compliance with stricter regulations and reputational considerations.

Both approaches have the potential to be transformative, although philanthropy often does not address the unsustainable business practices of companies and tends to not go to scale. Yet, there is growing criticism of conventional CSR as a box-ticking action meant to make businesses look good, and given the realization that CSR does little to address the risks to businesses and societies resulting from social or environmental problems.

Globally, there has been a shift towards a more ambitious and holistic ‘shared value’ approach that can bring longer-term and cumulative gains to both businesses and societies. Shared value entails a change in the business model to one where a firm seeks profit and competitive advantage by improving the conditions of the community in which it operates.^[28] Shared value can be created in different ways, as described below, with associated costs and efforts borne differently depending on who reaps the fruits. While the shared value approach is yet to be mainstreamed in the Arab region, some companies are taking transformative steps to strengthen the contribution of their regional operations to the SDGs, including Fine Hygienic Holding (Jordan) (box 10) and SAP (Germany) (box 11).^[29]

Box 10. Testimonial: Fine Hygienic Holding – Promoting sustainable value chains, enhancing water-use efficiency and empowering stakeholders

At Fine Hygienic Holding (FHH), we realize that we are in the Decade of Action, and we are working on accelerating sustainable solutions by making changes to our operations and aligning ourselves with the SDGs. Our multiple projects aim to protect the environment and fight climate change. We are aligning ourselves with SDG 15, where, for every tree we use, we have made a deal with our suppliers to plant an average of five trees. We have also ensured that all our products are made from 100 per cent virgin pulp and sourced from certified suppliers. We are also supporting SDG 6 by leading the industry in terms of minimizing water usage. In Jordan, we were the first private sector company to take the initiative and recycle wastewater. Our contributions are numerous, as FHH runs a variety of other sustainable projects and is committed to protecting the environment.

At FHH, we also go the extra mile to help the surrounding community. In 2021, we launched Fine Academy, our group’s CSR programme, offering diploma students more than 60 years of expertise to equip them with the knowledge required to enter the job market efficiently. Another CSR we are proud of is Khair Al Koura. The initiative was designed to promote sustainable development in underdeveloped communities by empowering women and lifting them out of poverty by establishing income-generating projects. In 2020, the entire project was handed over to its beneficiaries, making the project 100 per cent independent and self-sufficient.

Note: This box was produced by James Michael Lafferty, Chief Executive Officer, Fine Hygienic Holding.

Box 11. Testimonial: SAP – Building skills for a sustainable and digital future

In line with our purpose to improve the world and people’s lives, SAP has embraced the SDGs since their launch in 2015. While we are committed to using our extensive resources to reach across 25 industries and contribute to nearly all of the 17 SDGs, through our CSR initiatives and global university programmes we have focused on SDG 4 (quality education).

From a CSR perspective, our programming is strategically designed to power equitable access to economic opportunity, education and employment in the digital and green economies. Within our novel programme Digital Skills for Today, we have impacted over 120,000 lives in the MENA region alone. We have also established nearly 800 design and skills labs in communities of highest need.

Through the SAP University Alliances programme, we have partnered with more than 100 schools and universities in the MENA region to enable young people to access decent work in the digital economy by implementing various digital skills initiatives. These initiatives prepare young people to manage an intelligent enterprise, shape their own future, and have a meaningful impact on the world. SAP skills allow young talent to kick-start their tech career within the vast ecosystem of SAP customers and partners.

For example, in 2022, SAP teamed up with Global Scouting and GEMS Education to hold a Learn to Code workshop at the SAP House at Expo 2020 Dubai, as part of the World Scouting Camp activities codenamed JOTA-JOTI, the largest internet-based event followed by more than 3 million people. The event addressed over 150 scouts from the United Arab Emirates and more than 1,000 young thinkers from around the world. Such initiatives demonstrate how multisectoral partnerships can contribute the 2030 Agenda and provide various opportunities to ensure inclusive and quality education for all and promote lifelong learning.

Note: This box was produced by Wissam Kadi, Global Initiatives Director, SAP Next-Gen and SAP University Alliances, SAP.

Box 12. Is social entrepreneurship a viable model in the Arab region?

A social enterprise is a “mission-driven organization whose activities are focused on social value creation through sustainable business models”.a While social enterprises may have different legal forms and ways of operating, they can be thought of as NGOs that undertake profit-generating market activities. Another important characteristic of social enterprises is having a participatory governance structure. Social enterprises have the potential to contribute to decent employment (especially for women and young people) and decentralized public service delivery in underprivileged areas, therefore reinforcing social cohesion, and the resilience of local communities over the longer term.b

Social enterprises can be found in several Arab countries, notably in Egypt, Morocco and Tunisia. However, they are mostly small-scale enterprises that are far from constituting an organized sector, so their voice is often not heard. Although they receive support from a growing number and variety of national and international organizations, the support is generally piecemeal, and so they continue to face financing and technical challenges at all stages of maturity. National policy frameworks for social entrepreneurship are starting to emerge in some Arab countries. In Tunisia, for example, a law on the social and solidarity economy was adopted in 2020 that provides financial and tax advantages for social enterprises.c In Djibouti, a similar law was adopted in 2019 to define social enterprises and promote their development through the establishment of dedicated structures and instruments including microfinance.^d

a World Bank (2017). Social Entrepreneurship in Tunisia: Achievements and Way Forward.
b Ibid.
c Government of Tunisia (2021). Rapport national volontaire sur la mise en œuvre des Objectifs de développement durable en Tunisie.
d ILO (2019). The Republic of Djibouti passes a law on the social and solidarity economy.

D. A web of pressures from nature, consumers and Governments has turned alignment with the SDGs into a strategic choice

Government regulations (so-called “hard” measures) are commonly the main driver behind the alignment of business operations with the public good. However, this is not always the case. Presently, a web of “soft” pressures by nature and consumers are pushing businesses to pursue such alignment as a strategic choice.

The business case for action is clear. A company that does not align with the SDGs faces at least three types of risks:^[30]

Evidence from the literature abounds. For example:

• A survey of the private sector in Lebanon revealed that climate change is perceived as a risk to companies, with 2 in every 3 companies surveyed identifying the scarcity and increased cost of raw materials due to climate change to be impacting their business.^[31] Perceptions of climate change risk has prompted 3 of every 4 companies surveyed to switch to more sustainable materials across the value chain.
• A study found that increasing water stress in Egypt and Morocco could compel Governments to tighten regulations on water use in agriculture, which could in turn raise the cost of producing staple crops, such as cereals and pulses, by 20 to 40 per cent by 2030.^[32] Against this risk, it is in the best interest of producers to seek solutions to reduce their use of irrigation water.
• A recent survey of consumers in Saudi Arabia, the United Arab Emirates and Egypt^[33] found that some 7 out of 10 shoppers prefer to buy products from companies that respect the environment. This proportion is greater than the global average, and has risen from earlier surveys, signalling that the COVID-19 pandemic may have impacted consumer behaviour in favour of eco-friendly products. Surprisingly, older consumers (older than 45 years) seem to be more socially conscious than younger consumers. One possible explanation is that older groups may have higher incomes that allow them to make this choice.
• A growing number of Arab countries are making varying degrees of sustainability commitments, which could come at a cost to companies as they seek to comply. For example, the United Arab Emirates committed to getting to net zero by 2050, while Bahrain and Saudi Arabia committed to doing so by 2060,^[34] which would pressure companies operating in these countries to take aggressive actions to cut their emissions. As another example, Egypt, Jordan, Morocco and Tunisia have adhered to the Declaration on International Investment and Multinational Enterprises of the Organisation for Economic Co-operation and Development (OECD), thus committing to actively promote the “responsible business conduct” of multinationals operating in or from their territories, in line with agreed guidelines.^[35]

On the flip side of risk lies opportunity!

ESG performance can contribute to financial performance. While the evidence is not solid across the board, an analysis of financial performance of companies listed in stock exchanges in Egypt and Jordan suggests that socially and environmentally responsible companies tend to have a better return on assets.^[36] ESG performance boosts company resilience, drives innovation and gives a competitive advantage to companies in the region for integrating into global supply chain networks. This is especially true in Arab countries that have entered association agreements with the European Union.^[37]

This is over and above business opportunities in green sectors such as those created in a circular economy (box 13).

E. Actions needed to fill the gap

There is a generally poor business environment in the region that prevents the growth of companies – whether such growth is SDG aligned or not. General challenges include instability, unfair competition (including from informal businesses and State-owned enterprises), low investment in human capital and technology and difficulties in accessing finance. The latter issue is addressed in detail in the following section.

Arab countries and other stakeholders are deploying broad efforts to enable the development of the private sector, as reported in voluntary national reviews (VNRs) and other reports. They are also making efforts to engage the private sector in institutional mechanisms dedicated to planning, follow-up and review of the 2030 Agenda. To accelerate the alignment of the private sector with the SDGs in a just way for all, Governments, businesses (and their associations), civil society organizations and other stakeholders must work together to build a culture of trust and achieve the following:

The financing for development outlook in the Arab region remains turbulent. Fiscal stress from high and increasing debt is draining a large share of many countries’ revenues to cover debt servicing, instead of financing the SDGs and climate action.^[38] Conflict and protracted economic crises add further layers of complexity to the challenges faced by some countries. Moreover, the Russian war in Ukraine has set in motion a triple global crisis (food, energy and finance) that is compounding the already devastating impacts of climate change and the COVID-19 pandemic. In this context, private finance is ever more vital for delivering the SDGs in synergy with Governments, donors and other development partners. The following sections explore the role of the private sector in bridging the SDG financing gap through investments in the real economy and capital markets in the Arab region. Trends in domestic private investment and FDI reveal that private capital is falling short of its transformative potential in Arab countries. Not only do private investments account for a small share of GDP compared to other developing regions, but they are also concentrated in a few sectors and are declining rapidly. Innovative approaches to mobilize private finance for the SDGs include PPPs, blended finance, bankable project portfolios, sustainable bonds and sustainability-themed funds. Governments need to put in place regulations and institutions that create an enabling environment for sustainable private finance and promote synergies with other sources of finance for development.

Disentangling what constitutes private sector investment in the SDGs is a difficult task. In broad terms, all investments that create employment, raise tax revenue and spur economic growth contribute to the achievement of the SDGs. However, not all investments are sustainable from the economic, social and environmental perspectives. For example, some private sector initiatives may contribute to global warming or harm the health of communities. Thus, a distinction is needed between overall private investments and those that are socially inclusive, environmentally sustainable and reflective of the principles of the 2030 Agenda. In the absence of an exact classification, analysts often define SDG-related investments as those that focus on particular sectors. For example, UNCTAD considers SDG-related investments as those targeting agriculture and forestry, education, health, power transmission and distribution, renewable energy, telecommunications, transportation, waste management and recycling, and water and sanitation.^[39]

The diverse nature of the private sector implies that the ability of businesses to mobilize financing for the SDGs varies significantly. In particular, micro, small and medium-sized enterprises (MSMEs) face constraints in accessing credit and financial services. Unmet finance needs by formal MSMEs in nine Arab countries were estimated at $207 billion in 2018–2019, or 24 per cent of their combined GDP. The financial inclusion of MSMEs has the potential to generate jobs, reduce poverty and advance sustainable development. This is reflected in the 2030 Agenda, which calls for the formalization and growth of MSMEs, including through access to financial services (SDG target 8.3).

A. Bridging the SDG financing gap

Prior to the COVID-19 pandemic and the Russian war in Ukraine, total investment needs in developing countries in SDG-related sectors were projected at $3.3 trillion to $4.5 trillion per year between 2015 and 2030. ^[40]

Considering that investment in these sectors was estimated at $1.4 trillion at the time, developing countries faced an average annual funding shortfall of $2.5 trillion

Cascading crises (climate change, COVID-19 and the Russian war in Ukraine) have increased investment needs and reduced resource availability, widening the estimated SDG financing gap in developing countries to $4.3 trillion a year.^[41]

Given the methodological limitations and data gaps associated with their calculations, SDG costing and financing gap projections should be approached with caution.

Prior to the COVID-19 pandemic and the Russian war in Ukraine, ESCWA had estimated a financing gap of $545 billion per year to achieve nationally determined priority targets in 12 middle- and high-income Arab countries.^[42]

Following these crises, the estimate has been revised to $660  billion per year.^[43]

Although SDG financing gaps are colossal, private capital is abundant. For example, transnational corporations and pension funds domiciled in developed countries had combined holdings of over $25 trillion.^[44]

In the Arab region, the 15 largest companies held $2.4 trillion in assets,^[45] and ultra-high-net-worth individuals held over $950 billion in 2020.^[46]

Only a small share of this capital is channelled to investments in SDG-related sectors. The challenge resides in effectively mobilizing private capital to help close the SDG financing gap in the Arab region.

B. Private investment for the SDGs

The private sector in the Arab region has been less effective in mobilizing investment than in other developing regions and falls short of its potential. Domestic private investment and FDI witnessed a notable retraction in the aftermath of the 2008 global financial crisis and continued to fall following the adoption of the 2030 Agenda. This downward trend is in stark contrast with SDG target 17.3, which calls for the mobilization of additional resources from multiple sources, including the private sector. Moreover, private investment in the region is highly concentrated on SDGs associated with the provision of economic infrastructure, as opposed to those related to providing social infrastructure and services, fighting inequality or promoting peace and justice.

1. Domestic private investment

Domestic private investment in the Arab region is low compared to peer regions. In the six Arab countries for which data are available,^[47] average gross fixed capital formation in the private sector in 2015–2018 was equal to 12 per cent of GDP, half as high as in South Asia (24 per cent) or nearly one third as high as in developing East Asia and the Pacific (34 per cent) (figure 3). Notably, the six Arab countries also underperformed when compared to LDCs (21 per cent). Among the 75 economies for which data are available, the Syrian Arab Republic and Egypt had the second and fifth lowest values, at 4 per cent and 7 per cent of GDP, respectively.

Figure 3. Domestic private investment, 2011–2015 and 2015–2018 (Percentage of GDP)

Compared to 2011–2014, domestic private investment as a percentage of GDP declined in five of the six Arab countries. Retraction was substantial in the four Mashreq countries, and less pronounced in the United Arab Emirates. Only in Bahrain did domestic private investment increase relative to GDP. Shortages of foreign exchange, high borrowing costs, political turmoil and protracted conflict have contributed to the decline in domestic private investment in many Arab countries. Despite this bleak picture, domestic corporations are actively engaged in SDG-related infrastructure projects in many Arab countries, often through PPPs and as part of consortiums with foreign investors. For example, in Egypt, 12 domestic corporations have sponsored $3.3 billion in projects in the energy, transportation and water and sanitation sectors. This corresponds to 26 per cent of total private investment (domestic and foreign) in active infrastructure projects in the country. Two of the top three private investors in infrastructure projects in Egypt are domestic corporations: Orascom Construction PLC, with $1.3 billion invested in the New Cairo wastewater treatment plant, the Ras Ghareb wind farm and the Cairo monorail transit system, and Arab Contractors, with $868 million invested in the Gabal El Asfar water treatment plant and Cairo’s monorail transit system, which it cosponsors with Orascom and Bombardier (Canada). These projects are expected to improve the lives of millions of Egyptians and decrease greenhouse gas emissions.

2. Foreign direct investment

Net FDI flows to the Arab region fell from a record $60 billion in 2009 to $15 billion in 2014, and remained negative or close to zero between 2015 and 2021 (figure 4A), pushed by large FDI outflows from the GCC countries. As a share of GDP, net FDI fell from an average of 1.4 per cent in 2008–2014 to –0.2 per cent in 2015–2021. Notably, the Arab region is the only developing region where average net FDI was negative during the first seven years of the implementation period of the 2030 Agenda (figure 4B). Moreover, it was also the region with the most sizeable decline relative to 2008–2014 (1.6 per cent of GDP, compared to 0.3 per cent of GDP or less in the other regions). Regional averages mask substantial intraregional variance. While the high-income countries of the GCC became net direct investors in 2015–2021, Arab LDCs and middle-income countries (MICs)^[48] remained net FDI recipients (figure 4C). However, the downward trend in net FDI among Arab MICs raises questions about the extent to which they can continue to rely on such flows. Moreover, inward FDI did not go to where the need is greatest within the Arab region. Indeed, underfunded LDCs received only 5 per cent of total inward FDI in the Arab region in 2015–2021, while cash-rich GCC countries received 67 per cent and MICs 28 per cent. This deviates significantly from SDG target 10.b, which calls for increased financial flows, including FDI, to countries with the greatest needs. This unequal distribution of FDI is often replicated within country borders, as a small number of municipalities or governorates tend to concentrate most inflows. For example, in Egypt, five governorates account for 90 per cent of investments, while the remaining 22 governorates share the other 10 per cent.^[49]

Figure 4. FDI flows, Arab region and other developing regions, 2008–2021

Inward FDI in the Arab region has been traditionally concentrated in sectors that create few jobs and fall short of having the transformative impact called for by the 2030 Agenda (box 15). Most international corporate finance deals targeting the region in 2011–2021 were concentrated in non-SDG sectors (56 per cent), most notably fossil fuels and petrochemicals (33 per cent) (figure 5A). However, deals announced in recent years suggest that inward FDI in the region is moving towards increased sustainability. Deals in SDG-related sectors reached an all-time high of $105 billion in 2021 (figure 5B), or 61 per cent of the total value of the deals announced that year (figure 5C).

Figure 5. International project finance deals targeting the Arab region, 2011–2021

C. Innovative approaches to mobilize private capital for sustainable development

Given the relatively low levels of private investment in the Arab region, a scale-up of private capital is needed to bridge the SDG financing gap. A number of innovative approaches to mobilize private capital for sustainable development have been proposed, including sustainable bonds, sustainability-themed funds, blended finance, PPPs and bankable project portfolios.

1. Sustainable bonds

To meet longer-term SDG financing needs, Arab countries must work towards developing sustainable domestic capital markets, particularly long-term bond and insurance markets. Global issuance of sustainable bonds increased 16-fold since the adoption of the 2030 Agenda and the Paris Agreement, from $66 billion in 2015 to $1.1 trillion in 2021. The private sector is a key player in sustainable bond markets, both as an issuer and a buyer. Sustainable use-of-proceeds (UOP) bonds are debt instruments from which net proceeds are used to finance projects with positive environmental or social impacts, including green, social and mixed sustainability bonds. Global issuance of sustainable UOP bonds reached $1 trillion in 2021 (figure 6A), accounting for 91 per cent of the sustainable bond market. Cumulative global issuance between 2015 and June 2022 reached $3 trillion, split between green bonds (62 per cent), social bonds (17 per cent) and mixed sustainability bonds (21 per cent) (figure 6B).

Green bonds raise funds for projects with environmental benefits, most notably in infrastructure. Nearly 90 per cent of the net proceeds raised through green bonds between 2015 and June 2022 were invested in the energy, buildings, transportation and water and sanitation sectors. Social bonds finance projects with positive social outcomes, such as employment generation and access to healthcare, while mixed sustainability bonds combine social and environmental benefits. SDG bonds are a special type of mixed sustainability bond that channel net proceeds into eligible SDG projects.^[50]

Figure 6. Global sustainable UOP bond issuance, 2015–2022*

Globally, the private sector is the leading issuer of sustainable UOP bonds, accounting for 39 per cent of the issued value in 2015–2022 (figure 6C). Other issuers include government-backed entities (22 per cent), development banks (17 per cent), national Governments (9 per cent) and local governments (6 per cent). Institutional investors, including banks, mutual funds, hedge funds and insurance companies, are the main buyers of sustainable bonds, often guided by ESG mandates. Other purchasers include Governments, corporate investors and – to a lesser extent – retail investors.

The Arab region raised $14.4 billion in proceeds from sustainable UOP bonds between 2015 and June 2022, or 0.5 per cent of the global total, behind every developing region except for sub-Saharan Africa. Average annual issuance rose from $250 million in 2015–2018 to $5.3 billion in 2019–2020, and subsequently fell to $1.4 billion in 2021 (figure 7A). Green bonds represented 84 per cent of the total of the cumulative issuance value between 2015 and June 2022 (figure 7B). Three GCC countries – the United Arab Emirates, Saudi Arabia and Qatar – concentrated 91 per cent of total UOP bond issuance in the region, with Egypt, Morocco and Lebanon making up the remainder (figure 7C). Most of these bonds were issued by corporations or government-backed entities. As of October 2021, Egypt was the only Arab country to have issued a sovereign green bond, the proceeds of which were used to fund budgetary expenditures in the transportation and water and sanitation sectors.

SDG-related projects in the Arab region have also benefited from the proceeds of sustainable bonds issued by supranational entities and purchased by a mix of investors,including private investors. For example, the Islamic Development Bank committed $110 million from its first sustainable sukuk (i.e. sharia-compliant sustainable bond) to a photovoltaic solar power plant in the United Arab Emirates, and $35 million to an integrated agricultural development project in Tunisia.^[51] In addition, the World Bank allocated proceeds from its sustainable development bonds to SDG-related projects in the Arab region, including $1 billion for financial inclusion and private sector development in Egypt, $674 million for water supply in Lebanon and $200 million for disaster risk management in Morocco.^[52]

Figure 7. Sustainable UOP bond issuance in the Arab region, 2015–2022*

2. Sustainability-themed funds

Globally, assets under management (AUM) of sustainability-themed funds reached a record of $2.7 billion in 2021, a 53 per cent increase from the previous year (figure 8A).^[53] Nonetheless, the vast majority (97 per cent) of sustainable funds are domiciled in developed countries (figure 8B), where most of their assets are also targeted. The Arab region has not yet tapped into this rapidly growing market, even less than the sustainable bond market. The first impact investing fund in the Middle East was launched in Egypt in March 2022 by Catalyst Private Equity, the investment arm of Catalyst Partners Holding, a merchant bank with a focus on SMEs and family businesses. The Catalyst Capital Egypt Fund, with a first closing of 450 million Egyptian pounds, aims to invest in SMEs. Through a partnership with UNDP, the fund developed an impact measurement and management tool based on the global SDG Impact Standards.^[54] Some sustainable funds domiciled outside the Arab region cover assets or products from Arab countries. One example is the Amundi Planet Emerging Green One, a fixed income fund managed by Amundi (France) that invests in green bonds in emerging markets, including €101 million in bonds issued by the Qatar National Bank and the First Abu Dhabi Bank (United Arab Emirates), which fund projects in the green buildings, energy efficiency, renewable energy and water management sectors in these two GCC countries.^[55] Fund providers use the label SDG fund for some of their sustainable funds. However, the lack of rules on what should count as an SDG fund makes it difficult to assess SDG alignment. A study by UNCTAD on more than 800 sustainability-themed equity mutual funds found that only 26 per cent of their total AUM were in SDG sectors (figure 8C), 90 per cent of which were concentrated in three sectors – health, climate change mitigation, and food and agriculture.^[56]

Figure 8.Global sustainable funds and assets under management*

3. Blended finance

Blended finance uses concessional capital from public or philanthropic sources to mobilize private investment for sustainable development projects that are otherwise unable to proceed on strictly commercial terms. Rather than an investment instrument, it is a structuring approach that addresses two common impediments to private investment: high risks and below-market returns. It can be structured as debt, equity, risk-sharing, guarantee or insurance products that mitigate investments risks and rebalance risk-reward profiles for private investors. In its most common form, public or philanthropic investors provide funds at below-market rates to lower the cost of capital and lock-in additional private capital.

Global blended finance transactions totalled $7 billion in 2021, down from $19 billion in 2015 (figure 9A). Blended climate finance accounted for 60 per cent of overall blended finance between 2019 and 2021 (figure 9B). As blended finance is used to promote projects in high-risk countries,^[57] it is heavily concentrated in developing countries. Nonetheless, the Middle East and North Africa trail behind all developing regions, accounting for 6 per cent of blended climate finance in 2019–2021 (figure 9C).

One example of blended finance targeted at the Arab region is the Green for Growth Fund III, a debt fund initiated by the European Investment Bank and the KfW Development Bank (Germany), which leverages risk capital from European public institutions with additional private capital to promote investment in energy efficiency and renewable energy in six Arab countries (Egypt, Jordan, Lebanon, Morocco, the State of Palestine and Tunisia). The fund provides private debt to financial intermediaries that lend to end-borrowers (SMEs and households), and invests directly in renewable energy projects, companies and municipal entities.^[58]

Figure 9. Global blended finance

Another example is the $75 million financing package announced by the International Finance Corporation (IFC) to help a food conglomerate in Yemen boost food production and distribution amid the ongoing humanitarian crisis. The package includes a loan of up to $55 million directly from IFC funds, and a syndicated loan of up to $20 million from FMO (Netherlands), a bank with 51 per cent of its shares held by the Dutch State and 49 per cent by commercial banks and other private sector institutions.^[59]

4. Public-private partnerships

PPPs are a mechanism that helps Governments procure and implement infrastructure and services using private sector resources and expertise. The public sector must put in place dedicated legal and institutional frameworks to support such partnerships and ensure that risks and responsibilities are balanced and that long-term development objectives are prioritized. PPPs may involve multiple partners in addition to the companies in charge of implementing the project, including private institutional investors, donor agencies and international financial institutions.

The public sector can also contribute to the mobilization of private capital for SDG-related projects by identifying projects to be carried out through these partnerships and promoting capacity-building on the design and implementation of PPP projects. Several Arab countries have enacted PPP-specific legislation to promote this type of partnership, while others conduct dealings with the private sector under general commercial and administrative laws. In addition, many Arab countries have established PPP units within government entities, including the PPP Central Unit in the Ministry of Finance in Egypt, the PPP Directorate in the Prime Minister’s Office in Jordan, the National PPP Commission in Morocco and the National Center for Privatization and PPP in Saudi Arabia.

Announcements of PPP infrastructure projects in low- and middle-income countries in the Arab region totalled $20 billion between 2015 and 2021. These investments were highly concentrated: 85 per cent were targeted at three countries (Egypt, Jordan and Morocco) and 95 per cent at two sectors (energy and transportation) (figure 10).

Figure 10. Infrastructure PPPs in low- and middle-income countries in the Arab region

5. Bankable projects

The shortage of bankable projects and transparent project pipelines remains a primary bottleneck to private sector participation. Investment currently falls short of what is needed not because of a lack of capital, but because there are not enough identifiable, investment-ready and bankable projects.^[60] Action to identify bankable projects and build robust pipelines is underway in the Arab region. For example, 30 bankable projects were presented by member States at the Arab Regional Forum on Climate Finance, hosted by ESCWA in 2022, most of which targeted climate adaptation and co-benefits in the water, energy and food sectors.^[61] Another example is the UNDP SDG Investor Platform, which contains SDG investor maps for Djibouti and Jordan (box 16). However, despite these and other initiatives, the supply of bankable projects remains minimal compared to the region’s SDG investment needs.

D. Actions needed to fill the gaps

What actions are needed to address current impediments to private investment in sustainable development in the Arab region? The table below identifies key gaps and actions to address them based on guidance from the Addis Ababa Action Agenda and good practices at the regional and global levels.

A. Who represents the private sector

Of the 21 Arab countries covered in the survey and desk research by ESCWA,^[62] the large majority (90 per cent) have engaged the private sector in institutional structures for the 2030 Agenda and its follow-up and review processes. Chambers of commerce and industry are the most common type of private sector representatives, cited by 71 per cent of countries, followed by business associations covering specific sectors (43 per cent) and individual companies (29 per cent) (figure 11). Chambers of commerce and business associations were generally selected to participate in SDG processes on the basis of being the most representative of the private sector. Their members are diverse in terms of sector and geographic coverage (for more on chambers and the SDGs, see box 17). Examples pointing to good practices in the Arab region include the involvement of the professional association of banks in Morocco.

B. How the private sector is engaged

Different approaches have been used to select representatives, including: (1) selecting companies based on existing partnerships with the Government, (2) considering companies that are part of a governmental database, (3) allowing companies to express interest via an open call, and (4) getting support from United Nations Global Compact local networks to identify companies within their participant bases. In some cases, individual companies were proactive and approached the Government during events to express their interest in contributing to the 2030 Agenda.

Examples of good practices include the establishment of an authority for development in Libya, which facilitates collaboration between the private sector and the Government, and the formation of the Private Sector Advisory Council in the United Arab Emirates, where members from private companies collaborate with the governmental National Committee on the SDGs. The Private Sector Advisory Council in the United Arab Emirates contributed to the production of the country’s VNR and published reports on the private sector and the SDGs.^[63]

The means of engaging the private sector in the SDG process varied across countries in the region. Governments either consulted with the private sector, facilitated its contribution to decision-making or merely kept it informed of developments. Considering the follow-up and review of SDGs, out of 16 countries that responded to the survey, 93 per cent consulted with the private sector in preparing their VNRs. This is followed by 73 per cent in which the private sector provided input to the VNR report. In less than a third of countries was the private sector engaged in decision-making in the VNR process (figure 12). It is worth noting that these means of engagement are not mutually exclusive. In more than two thirds of countries, the private sector was engaged through two or more means.

Figure 11. Private sector representation in national SDG institutional structures, by type of entity (Percentage of surveyed Arab countries)

Source: ESCWA.

Figure 12. Private sector engagement in VNR processes, by role played (Percentage of surveyed Arab countries)

Figure 13. Sources of information on the private sector for VNRs (Percentage of surveyed Arab countries)

Source: ESCWA.

Figure 14. Governments publishing national reports on private sector contributions to the SDGs (Percentage of surveyed Arab countries)

Private sector representatives that participate in VNR processes are often invited to attend coordination meetings, report on contributions and present recommendations. In some countries, such as Lebanon, they are asked to draft written contributions that are incorporated directly into the VNR report. The latest VNR report of the United Arab Emirates included a contribution from the United Nations Global Compact local network in the section on private sector engagement.

Regardless of membership status, the private sector is engaged in VNR processes through public consultations, workshops, reflection groups and meetings. These events facilitate the collection of information from the private sector and reflect their viewpoints in the VNR. Information on the private sector was mostly obtained during workshops and from published reports (in 64 and 57 per cent of countries, respectively). Interviews and surveys were also used but to a lesser extent, in 36 per cent and 7 per cent of countries, respectively (figure 13). In only a third of countries do governments publish reports on the private sector contribution to the SDGs (figure 14).^[64]

Member States have adopted tools to facilitate engagement with the private sector and other stakeholders, such as the Partnerships for Development platform in Egypt, which was designed to capture stakeholder initiatives interlinkages with different SDGs, outcomes and challenges. Other platforms were established, such as a national forum for sustainable development in Libya that engaged companies, young entrepreneurs and businesswomen. In addition, some countries utilized reports that United Nations Global Compact participants are required to publish on an annual basis. These reports, known as communications on progress, showcase progress towards alignment with the United Nations Global Compact and the SDGs.

In most countries (56 per cent), the number of private sector representatives engaged in the VNR process was less than 10 (figure 15). Interestingly, most countries (93 per cent) have engaged women business associations in their SDG processes, although less so during the VNR. The participation of MSMEs in the SDG process is lacking in more than a third of countries (figure 16).

Figure 15. Number of private sector representatives involved in VNR processes in the Arab region (Percentage of surveyed countries

Figure 16. Involvement of women business associations and MSMEs in SDG processes in the Arab region (Percentage of surveyed countries with positive response)

C. The post-VNR phase

Most countries’ VNR reports (85 per cent) include recommendations for improving the private sector’s engagement in SDG achievement, stressing the role of the sector as a development partner. Most recommendations focus on the role of the private sector in providing employment opportunities and helping diversify the economy, with limited reference to transformative actions or innovative roles. Some recommendations focus on improving legislation for PPPs and public procurement. Others address the mobilization of private sector resources for the implementation of national development plans and the enhancement of investments on specific sectors, such as education, health, industry and food. Partnerships with the private sector are also seen as means for data collection. For example, a report on public-private data sharing by the Private Sector Advisory Council of the United Arab Emirates proposes a framework for collaboration based on four pillars: effective data-sharing governance; a unified public-private vision for sustainability; ensuring trust and transparency are built into data partnerships; and building partnerships with strong mutual benefits.^[65] The report also provides examples of how companies in the United Arab Emirates shared data during COVID-19.

Despite these recommendations, communication with the private sector post-VNR remains a challenge in some countries, with 25 per cent indicating that communication is not maintained post-VNR (figure 17).

Figure 17. Post-VNR communication with the private sector in the Arab region (Percentage of surveyed countries)

D. Actions needed to fill the gaps