(127) At the same time, investors—including those with long-term liabilities, such as pension funds, life insurers, and SWFs— have been hesitant to invest in long-term sustainable development projects across a wide range of policy and regulatory regimes.68One impediment is that many investors do not have the capacity to do the necessary due diligence to invest directly in infrastructure and other long-term assets. Instead, when they do make these investments, they do so through financial intermediaries, whose liabilities and incentive structures tend to be shorterterm. (See Figure 5 for a breakdown of long-term and shorter-term investors.)69 If long-term investors were to bypass intermediaries and invest directly, they could adopt a longer-term horizon in their investment decisions. However, it is often not cost effective for diversified investors to build this expertise in-house. There is thus a need for new instruments in this area. For example, investor groups could build joint platforms, e.g. for sustainable infrastructure investments. This is already beginning to happen (e.g. South African pension funds setting up a jointly owned infrastructure fund). Public actors, such as multilateral and bilateral DFIs, can also help set up investment platforms, as discussed in Section VI.E on pooled financing. (128) In addition, policies can be designed to lengthen investment horizons, such as through a reduction of the use of mark-to-market accounting for long-term investments (in which portfolio valuations are adjusted daily, thus incorporating short-term volatility into portfolios) and changes to performance measurement and compensation (to change incentives, and potentially incorporate sustainability criteria), among others. Manage volatility of risk associated with short-term cross-border capital flows (129) While private capital flows to developing countries have risen during the past decade, some types of flows remain highly volatile. Conventional approaches to managing volatile cross-border capital flows have focused on macroeconomic policies to enhance an economy’s capacity to absorb inflows. However, these policies are often not sufficiently targeted to stabilize financial flows and may have undesired side effects. Policymakers should thus consider a toolkit of instruments to manage capital inflows, including macroprudential and capital market regulations, as well as direct capital account management.70 (130) In addition, international coordination of monetary policies of the major economies and management of global liquidity can reduce global risks. Similarly, stronger regional cooperation and dialogue, and regional economic and financial monitoring mechanisms can help stabilize private capital flows at a regional level.
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ibid While large fund managers manage more liquid portfolios in-house, most investors use external managers for such investments. See UNTT 2013, Background Paper 3 70 Stiglitz, et al, Stability with Growth, Oxford University Press, 2006. 69
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