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Investors: why SDGs are the new black

This blog has been co-authored with George MARGESSON, MPA programme at Sciences Po Paris

 

The Sustainable Development Goals (SDGs) are turning the investment world upside down. According to an analyst “For me, the SDGs really correspond to a paradigm shift in responsible finance right now, turning to impact actually”. To understand how this shift is happening, we analysed the products currently offered by leading investment managers, and the published requirements of investment funds. We carried out an initial search of institutions to identify those with the most developed requirements. We also interviewed five key players from the investment industry to understand why and how the move from a focus on environmental, social and governance (ESG) risk to SDG impact was taking place.

The move away from ESG into the SDG world is characterized by the fact that:

1/ Investors are now looking for impact (“So it's really different, it's not pure reporting, it's really reporting on impact”). It is not about managing risk anymore, but it is about the actual sustainability target.

2/ The SDG lens complements the former ESDG lens for the investors’ analysis (“So it's complementary [ESG and SDGs], what must be done is not necessarily only one of two, we must do both, it also requires a responsible policy. But it's beyond CSR. It really is a supplement of soul, there is really a concrete addition to the methodologies that existed in the past.”). Consequently, some companies that were considered favourably with just one lens have been readjusted in portfolios due to their lack of contributions to the SDGs.

3/ The topline (the products and services), and the business model, is what investors look at to identify contributions to the SDGs.

However, our interviews also warned about the SDGs not being “the next reporting”: “It’s all about the definition of the company's directions on the choices they have to make from a strategic point of view saying: what should be my business model tomorrow if I want my products and services to meet the SDGs?”. Some investors are beginning to recognise the importance of corporate sustainability as a means of safeguarding long-term value in the face of global challenges such as climate change. This builds on the current discussion by the European Commission of incorporating sustainability factors within investment managers’ fiduciary duty.

For example BlackRock, the largest investment manager in the world, has recently emphasised the importance of environmental, social, and governance (ESG) factors in investment decisions. In January 2018, the chief executive of the firm wrote to listed companies stating that “a company’s ability to manage environmental, social, and governance matters demonstrates the leadership and good governance that is so essential to sustainable growth, which is why we are increasingly integrating these issues into our investment process” (https://www.blackrock.com/corporate/investor-relations/larry-fink-ceo-letter). The letter requested that companies explain their long-term strategy and understand their wider impact on society. The firm argues that investing with a sustainability focus helps to reduce ESG risks within the investment portfolio, and may provide better financial returns in the long term. BlackRock already offers one product that is explicitly linked to the Sustainable Development Goals, the ‘iShares MSCI Global Impact’ exchange traded fund (ETF), known as MPCT. This fund tracks the ACWI Sustainable Impact Index focused on the SDGs created by MSCI, an index provider. The index intends to “identify listed companies whose core business addresses at least one of the world’s social and environmental challenges”. The MPCT ETF is currently fairly small, with $35.3m under management as of 1 June 2018, holding 122 companies.

Table 1: Summary of institutions with significant SDG approaches

Institution

SDG-specific approach?

Investment selection criteria on SDGs

SDG reporting

Black Rock

Impact index fund - iShares MSCI Global Impact ETF

All companies with >50% revenue from SDG products; no ESG controversies

SDG revenue shares by category

Aberdeen Standard

Impact managed fund - Global Equity Impact Fund

Among high-return companies, those with high positive sustainability impact

Outputs linked to SDG indicators

BNP Paribas

Planned index fund based on Solactive SDGs World Index

High returns from among a pool with low ESG risk and significant products contributing to SDGs

No requirements published to date

Mirova

Impact managed funds – Sustainable Equity Funds and Sustainable Bond Funds

Criteria not published; based on size of ‘stake’ in sustainability issues

Suggests framework developed by Investment Leadership Group

PGGM

Targets positive impact against SDGs

Products contribute to SDGs

Suggests using framework developed with De Nederlandsche Bank

Government Pension Fund of Norway - Global

Uses SDGs to understand risks but not to drive investments

No

No requirements published to date

 

Aberdeen Standard Investments offers a managed Global Equity Impact Fund that invests in 35-60 companies, aiming for a positive social and environmental impact and above-market returns. The firm identifies companies with the potential for a strong financial return, before then assessing the level of sustainability impact. Activity is assessed against eight pillars which are designed to align with the SDGsThe firm assesses companies that present an investment opportunity to understand their level of ‘impact maturity’ – the extent to which delivering impact against the SDGs is an established and significant part of the target’s business strategy and operations.

BNP is intending to introduce investment products based on the Solactive Sustainable Development Goals World Index, which it has licenced. This is an index of 50 companies with a positive impact on SDG outcomes, as measured by Vigeo Eiris, an ESG data provider. Mirova is a French sustainable investment manager and all of its products are built using SDG criteria. This includes both equity and bond funds. The funds aim to provide both financial return and a positive impact in terms of sustainability. To achieve this, the firm prioritises “players offering sustainable solutions with positive implications for the SDGs” (http://www.mirova.com/Content/Documents/Mirova/publications/va/Reports/ResponsibleInvestorReport2016.pdf), and also companies that it believes will provide innovative solutions in the future.

The institutional investor PGGM, one of the largest Dutch pension funds, published in 2016 a statement committing to invest in assets that produce positive social or environmental impact. The statement states that “one initially may have to use proxies for impact, such as revenues from specific solutions, [but] we will push for being able to capture more tangible impact over time” (https://www.pggm.nl/english/what-we-do/Documents/Annual-Responsible-Investment-report_2017.pdf). The fund is currently assessing the extent to which its current portfolio provides positive impact. PGGM measures whether its investments meet its criteria for ‘sustainable development investments’, which it defines as “meet[ing] our financial risk and return requirements and support[ing] the generation of positive social and/or environmental impact through their products and services, and sometimes via recognised transformational leadership”. This impact is determined by assessing whether a company produces products or services contributing to a range of categories that PGGM has identified, together with APG, in the form of a taxonomy aligned with the SDGs. For impact reporting, PGGM has formed part of an SDG Impact Measurement Working Group organised by De Nederlandsche Bank. This working group has proposed an extensive framework of measurements linked to the SDGs, focusing primarily on positive impact produced by companies’ products. In situations where product impacts are less relevant, operational process impact measurements have been identified as well.

Finally, Norway’s sovereign wealth fund aims to take a responsible and long-term approach to its investments, and to ensure that it manages the challenges from global trends and risks. The fund states that the SDGs “provide companies and investors with a framework for better understanding these challenges” (https://www.nbim.no/contentassets/67c692a171fa450ca6e3e1e3a7793311/responsible-investment-2017---government-pension-fund-global.pdf). However, the fund’s investment strategy does not explicitly target SDG impacts.

To conclude, although investors with explicit sustainable development goal-linked products remain a minority, it seems that both sustainable and mainstream investors increasingly see sustainability issues as significant, and the SDGs as an appropriate framework of analysis. It is clear that no common approach has yet emerged among investors on SDG-related activity in their portfolios. Among those that have adopted SDG approaches, there is a range of methods for selecting investments and for reporting impact. The first one, and probably the most popular, appears to be the use of the proportion of a company’s revenues attributable to products and services contributing to the SDGs. More detailed reporting is currently required by a smaller set of investors, for impact reporting purposes. Few investors are currently using detailed SDG impact criteria as part of their investment strategy, and this seems likely to persist given the complexity and wide range of potential impacts. The next step for companies and investors is to work on a harmonized and transparent way of linking SDGs to product and services, while developing impact measurement for companies to report on.

 
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Birmingham Business School

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