- The United Nations’ Sustainable Development Goals are increasingly being viewed as an opportunity to usher in a new and refined age of affirmative action through responsible investing.
- A broader level mapping of investor’s existing ESG considerations employing SDGs as a practical framework would help in mainstreaming the former’s granular acceptance and also anchor responsible corporate behaviour.
- SDGs though being more thematic than corporate centric, can help in aligning sector and company specific ESG factors with broader societal and environmental goals.
While the UN Sustainable Development Goals (SDGs), adopted as part of the 2030 Agenda for Sustainable Development, require no highbrow introduction, their successful fruition unarguably demands a systematic assessment of strategies appropriated by investors and corporates alike.
SDGs did not enter the global lexicon until 2015, nevertheless, in past decades, investors are known to have directed their focus and concerted efforts towards ‘Socially Responsible Investments’, essentially designed on an early premise of ‘social screening’ that had enabled them to weed-out companies with detrimental business models and/or obvious exacting impact on the environment and the connected communities. Further, post the embodiment of ESG (environmental, social, and governance) issues under the UN Principles of Responsible Investment in 2006, investors better aligned their interests and strategies with the broader objectives of society, and set the tone for mainstreaming of ESG investing. Not surprisingly, today, the global initiative has over 1,600 signatories representing over USD 70 trillion in assets under management, a remarkable growth on a global scale.
Yet, despite this exhilarating market response, often corporate participation and actions are found to fall short on both commitment and output, which is invariably linked to their inability to integrate sustainable business practices into their corporate strategy. Both investors and the corporates are argued to face roadblocks in thought and direction to further their capital utilization for impactful societal and environmental changes. So, while ESG investing did pave the way for accelerated market transformations and for the better, a tangible gap has been consistently noted between the potential investment opportunities and their realization.
Providentially, in 2015 the global investment scenario underwent a pragmatic shift with the advent of the 17 Sustainable Development Goals by the United Nations. Their inherent granularity rendered the requisite flexibility and universality that could enable investors and the private sector players to understand and address the pressing sustainability challenges pertaining to their business models while meeting their fiduciary duties.
Notwithstanding their global acceptance and undeniable relevance, many stakeholders are still seeking answers to the questions on what is the investment case of SDGs? If and how they can impact the investment strategies, corporate responses, policy action, and more importantly, how the existing frameworks of ESG investing can be scaled to meet the new global targets of sustainable development? Let’s delve!
SDGs Business Case and ESG Facilitation
SDGs outline the pivotal areas of impact and offer a practical framework to complement and support the ESG considerations, which are part of investors’ existing fundamental research methodology. In other words, SDGs help in mainstreaming the granular acceptance of ESG based investment decisions while anchoring their wider reach in corporate circles. Let’s look at the overarching linkages between the investment case for SDGs and ESG driven investment decisions, and how they can lead to tangible consequences for both the investors and the corporates.
- Universal Acceptance and Scalability
SDGs were formulated to bring a global consensus on pressing and pervasive social and environmental challenges, which thereby rendered them universality in application and scalability in context, to gauge the impact of ESG investment strategies.
Henceforth, investors have shown overwhelming endorsement of investible SDGs by augmenting the purview of their responsible investment portfolio and seeking intersections with the goals and their corresponding targets. Through mapping of SDGs to their existing ESG considerations, directing capital flow toward positive and measurable impact, and driving accountable and responsible business behavior from investee companies, investors are endeavoring to give a broader context to their current business engagements. For instance, the Dutch pension funds managers PGGM and APG Asset Management have tenaciously formulated taxonomies identifying the demonstrated areas that can be considered as Sustainable Development Investments (SDIs) and can help to create a market standard for such investments across 13 of the 17 UN SDGs. Thus, setting out investment routes to their achievement. Further, 18 Dutch financial institutions with signatories such as ABN-AMRO, Achmea Investment Management, Aegon PGGM, Rabobank, Robeco and more, have launched a SDG Investing Initiative (SDI) to facilitate action in four broad areas – accelerating SDG thematic investments through systematic deployment of blended finance instruments; mainstreaming SDG centric investments amongst Dutch retail investors; supporting integration and uptake of sustainability standards and indicators; and identifying and addressing regulatory barriers and incentives to SDG investment. Meanwhile, the Swedish International Development Cooperation Agency (SIDA), a government agency has formed a partnership of 18 institutional investors, pension funds, and investment companies, called the Swedish Investors for Sustainable Development (SISD) to explore investment opportunities, associated hurdles, and serve as a global learning platform related to SDGs.
Nevertheless, it’s only the large pension funds that have been able to realign their investment strategies to the SDGs, and they too along with the smaller players struggle to abridge the wide gap in capacity and expertise in mainstreaming the direct impact of their investment decisions. This reluctance and inability can be attributed to the lack of clarity on financial consequences and the measurability of progress in the face of limited information on a concrete investment criterion linked to the SDGs. However, a well-managed and well-understood ESG engagement at the corporate-side can help investors align their investment decisions toward broader SDG-aims and channel their finances to areas with SDG relevance, instead of grappling with the enigma to mirror their business commitments and fiduciary duties in a sacrosanct manner.
- Macro and Micro Relevance
SDGs are unavoidable universal considerations that stand to impact all countries and sectors, at least at macro financial level. Investors with highly diversified and long-term portfolio have high risk exposure to the widespread risks, as articulated under each development goal, which are essentially concentrated in corporates and other business entities. Therefore, investors play an indelible role in indirectly rooting for formation of sustainable businesses, markets, and economies.
It is in this respect, the ESG considerations can proffer a new strategic lense to view and assess the business decisions under SDG-led scenario. At macro level, linking of SDGs to existing ESG considerations will serve as a common communication medium to shape and articulate business decision-making process and investment strategies. The UN SDGs and their underlying targets can be a reference point to address the uncertainty in time and extent of risk internalization and opportunity realization, a persistent dilemma faced by investors across the globe. Further, they have the potential to strengthen the existing ESG frameworks while enabling a reflection of financially material regulatory, operational, and ethical risks into investees’ business accounts, of course in a foreseeable future.
At micro level, the UN PRI signatories believe that their investments in corporates and other business entities hold long term profitability potential only when the latter is driven to contribute in development of equitable and sustainable financial systems and societies. There is increasing stipulation from stakeholders across markets, asset holders, and managers to assume a broader long-term interest and approach into account while evaluating any and all business decisions. And, while SDGs are more thematic than corporate centric in nature, they do help align sector and company specific ESG considerations with broader societal and environmental goals. An SDG and ESG amalgamated business approach will move companies to direct their attention toward financial and non-financial factors such as corporate governance, direct and indirect environmental footprint, human rights issues and more, that can help them maintain a social license to operate, and also facilitate a transition toward a rather active stance on adoption of new business models through disruptive or realignment strategies. Essentially, it will be an opportunity for businesses to localize their efforts to meet their own financial objectives while enabling the achievement of SDGs.
A successful achievement of SDGs necessitates a systemic response anchoring transformative changes in knowledge, skill, and institutional arrangements catering to all sections of the society. And, this is essentially a highly data intensive process, both at the macro (global) and micro (company/sector) level. Often lack of data and insufficient transparency on ESG performance of investee companies is cited as a key barrier to progressive and impactful investment decisions. Since companies provide deficient information on their ESG performance to the investors, the latter is constrained to ask targeted questions that are designed to highlight inherent risks and opportunities within the investee’s business, which can potentially help them achieve sustainable business performance. This is often referred to as the Catch-22 of Sustainable Investing. Further, many of SDGs such as SDG2: Zero Hunger; SDG3: Good Health & Well-being have an inherent qualitative character, which is often difficult to capture and connect with a company’s performance vis-à-vis the positive or negative effects it has on achieving SDGs targets. These two challenges in isolation can undermine the effectiveness of respective strategies to assess and report; however, a connection of ESG to SDGs is expected to – first, facilitate companies in gathering and sharing the presumably copious amount of data (once their ESG considerations are in sync with SDGs’ targets) with investors especially on those goals which are deemed as the right fit with their businesses; and second, herald a trend of public reporting on their initiatives and progress around the selected SDGs on standardized indices, thereby addressing the concerns around quantifying the otherwise qualitative targets.
Prima facie the mentioned causality might seem a farfetched idea, nevertheless, a broader level mapping of ESG considerations to individual SDGs and their respective targets will be a good starting point. So, let’s discuss how these ESG considerations within the investable universe can be attributed to individual SDGs.
The Direct Connect
ESG based investment decisions are directed toward long-term value creation for the business and the society. Consequently, it draws a direct connection with the SDGs’ concept of creating ‘shared value’ that represents a constructive intersection of market potential, societal demands, and policy action for a sustainable and inclusive approach to economic growth and well-being.
At the corporate side, ESG considerations can be broadly mapped to SDGs, as illustrated in the graph below, which is a general representation that can be relevant to most sectors and sub-sectors. While companies find it comparatively easy to identify and align Environmental and Social considerations (as they invariably assume a directly mapped context to SDGs); association via their Governance function is rather indirect, and many a times found to be linked to their existing environmental and social functions. Nevertheless, ranging from tangible to intangible associations, all of the 17 goals can be attributed to individual elements of ESG considerations.