Sustainable Development Goals show their worth for investors
The UN’s Sustainable Development Goals (SDGs) were not specifically designed for finance, something that perhaps helps to explain their popularity among responsible investors, institutions and borrowers. But this does not mean that factoring them into investing decisions is easy, reports Jasper Cox.
It took less than 90 seconds for the eight-storey Rana Plaza complex to collapse in 2013, causing more than 1,000 people to die.
The building, near Dhaka in Bangladesh, housed garment factories used by global brands. Before the accident, cracks had been found in its concrete pillars, but workers still flooded in on the day of the disaster.
The catastrophe sharpened minds on the link between large Western firms and working conditions in poor countries.
When socially responsible investors decide how to spend money wisely, it can be difficult to sift through the myriad risks and pitfalls. Factory collapses are further down the list of priorities than topics like climate change prevention.
But the United Nations’ Sustainable Development Goals (SDG) offer a broad framework, identifying priorities across the entire world. One of the targets within SDG 11 (see list of SDGs) is to “support least developed countries, including through financial and technical assistance, in building sustainable and resilient buildings utilising local materials,” something clearly relevant to the Bangladesh disaster.
“The Rana Plaza collapse caused a lot of reputational damage for companies who had garments being produced by those garment workers,” says Carly Greenberg, senior ESG analyst at Walden Asset Management in Boston. “That this is explicitly recognised within the SDGs should be a signal to investors: this is something that matters for any of our companies who have supply chains in developing and the least developed countries.”
The SDGs came into force in 2016 with a 15 year timespan, after being adopted at a UN summit.
“This is the first ever statement from global governments that this is where we want to be and this is where we want businesses to be along with us by 2030,” says Greenberg. “That’s never existed before, where you have such a clear statement from every country in the world.”
And this gives them some weight among investors.
“They feel like they’ve got this universal relevance and applicability,” says Catherine Howarth, chief executive of ShareAction, a charity promoting sustainable investing, in London. “That very universal quality gives them a kind of credibility.”
Those working in the responsible investment sector found the SDGs’ predecessors, the Millennium Development Goals, more focused on the public sector and the developing world. The SDGs bring corporate and financial players more firmly into the picture.
Of course, timing has also played a part in their take-up: the SDGs emerged as responsible investing was moving into the mainstream.
Compared with other frameworks, the SDGs have also gained traction because they capture impact as well as risk: rather than investors simply treating environmental, social and governance problems as detrimental to returns, the goals ask how much good a portfolio is doing.
“It changes the focus from integration of environmental, social and governance factors to the outcomes and the impact on society at large of our asset allocation, active management, engagement and advocacy activities,” says Alison Schneider, director of responsible investment at Alberta Investment Management Corporation (AIMCo) in Edmonton.
But for all their worth, the SDGs are still rarely the primary tool used in the responsible investing sector.
How to invest in the SDGs
It uses the SDGs as a complement to its work: evaluating whether ESG factors could harm a firm’s stock performance, and wielding its shareholder power to prod companies to up their game.
And while ShareAction has connected its recent workforce disclosure initiative — aiming to make companies more transparent about how they manage and look after their staff — to SDG 8, it would stand on its own merit.
But doing an SDG audit can help investment firms work out where they are not paying enough attention.
In 2016 Walden mapped its shareholder engagement activities to the SDGs. It found that some of its efforts did not particularly relate to them, as the goals do not focus much on the governance pillar of ESG. But it was able to match its work to 11 of the 17 goals.
“It was also a good opportunity for us to do a critical thinking exercise to evaluate which goals are most important to our clients and whether we were doing enough to address these goals,” says Greenberg.
Where it found gaps, it assessed whether it could do more and is now working on developing an engagement strategy for them. Meanwhile, there are other considerations to make when investing with the SDGs.
One is how extensive horizons should be when examining assets. Walden aims to take a holistic view of firms through the goals, looking at their operational exposure, supply chains and lobbying activities, an approach Greenberg says is not adopted by everyone.
And for large investors, using the goals as a lens through which to view their overall exposure rather than focusing on specific holdings may be the best approach.
AIMCo manages Alberta’s sovereign wealth fund as well as most public pension plans for the province, and it invests in thousands of companies. Schneider says the firm looks at the SDGs from an “overarching perspective across the portfolio rather than a company-by-company perspective” to work out, for example, the percentage of alternative energy exposure in its portfolio.
Some have considered the SDGs as only relevant for certain investors with a more direct approach, like private equity firms or thematic funds. But Greenberg dislikes this attitude. “It’s a cop out, it’s a way for investors to escape even looking at the goals,” she says. “Because the SDGs are so ambitious, it is very important for investors to support them in whatever way they can.”
This includes those in fixed income.
“The SDGs are a framework that is relevant across asset classes, and I hope we’ll see more emphasis over time on bonds in particular,” says Howarth.
But the SDGs have flaws for investors too.
A good enough fit?
While some goals are likely to remain relevant, others may not, and new challenges will emerge.
Howarth disagrees that the timeline is a concern: she says the 15 year shelf-life is “long enough that the world can make some serious meaningful progress on those goals in that timeframe but short enough that in the history of human civilisation we can evolve them”.
As the SDGs are not specifically tailored to business, they do not provide an exact guide to corporate responsibility. For example, one source of public anger towards certain companies relates to aggressive tax practices. “Ultimately an awful lot of people feel that the number one thing companies ought to do to be responsible is pay their fair share of tax,” says Howarth.
But this is not prominent in the SDGs. And it is not clear how one would hold assets which relate to SDGs 16 and 17, although Schneider says core responsible investment activities such as engaging with policymakers and collaborating with peers can work towards advancing these goals. Schneider, like Greenberg and Howarth, is a member of the SDG advisory committee for the UN Principles for Responsible Investment (PRI).
Yet paradoxically, the cause of the incomplete synchronisation between the UN’s SDG agenda and the financial sector is also why the goals have become so useful for investors and companies.
They help investors look to broader horizons when allocating capital. This is trickier than sticking to more familiar areas of ESG, but if asset holders really are dedicated to making the world a better place, this type of exercise is entirely necessary.
|Issuers are increasingly seeing value in the SDGs too, and are incorporating them within green and social bond frameworks.
“When we structure the frameworks we work on and when we design investor presentations, there’s a clear need for alignment to the SDGs,” says Vlad Mitroi, vice president, sustainable markets at ING in Amsterdam.
Mitroi has noticed some issuers using the SDGs as more of a complement to the green, social and sustainability bond principles and guidelines of the International Capital Market Association (ICMA). But others use the SDGs more centrally. For example, HSBC’s SDG bond framework links use of proceeds to seven of the goals.
BBVA recently published a bond framework linked to the SDGs and issued the first one from it earlier this year. Ángel Tejada, director in the Spanish bank’s DCM-green sustainable bond group in Madrid, says this was because the goals are “clearly emerging as the dominant framework” for organising investment for impact.
Meanwhile, Caja Rural de Navarra says its decision to link a bond framework to the SDGs was mainly due to investor demand.
“We think that investors are willing to get a more harmonized classification of positive environmental and social impacts and SDGs provide such a common and broadly accepted taxonomy,” says Miguel García de Eulate, the Iberian lender’s head of treasury and capital markets in Pamplona.
Tejada also points to an ICMA mapping exercise as a reason his bank had chosen the SDGs. The body recently detailed how the SDGs could align to its principles and guidelines.
“It’s something that issuers really find useful because it allows them to think about their own investments at the company level,” says Mitroi.