In September 2015, 193 countries agreed to seventeen ‘Sustainable Development Goals’ (SDGs) as part of the United Nations 2030 Agenda for Sustainable Development. The goals are wide-ranging, from eliminating poverty and providing clean water, to action on climate change and improving the state of the world’s oceans. Together, they are an ambitious call for action to promote prosperity and inclusion while protecting the planet.
Since then many Socially Responsible Investment (SRI) funds have started to reference the goals to articulate their own aims and help form a framework for their investment process. Although the SDGs were primarily designed for nations and broader society rather than for business or investors, they provide convenient reference points and language to communicate non-financial objectives. Climate action, gender equality, education, and good health are some of the key SDGs that companies and investors can help address.
How can the SDGs apply to investments?
The SDGs are a particularly good fit for thematic investing – building a portfolio around one or more themes. However, in doing so it’s important that principles of the goals are integrated into an investment strategy in a credible way and that some measurement of the contribution towards a certain goal is made to establish ‘materiality’. For example, Zero Hunger (SDG 2) or Decent Work & Economic Growth (SDG 8) could, in theory, be applied to many businesses, making it technically possible to claim adherence to the SDGs by investing in almost any company. Investors also need a holistic view, weighing up good and bad elements of a business rather than picking out the good bits against certain SDGs.
The goals generally provide a framework and don’t always specify targets, so investors may need more defined aims. For instance, goal 13, ‘climate action’, is arguably somewhat nebulous. Therefore, asset managers are likely to set a more specific objective, for example aligning investments in line with the Paris climate agreement, which requires global warming to be kept well within 2°C of pre-industrial levels.
How do funds use the SDGs?
Baillie Gifford Positive Change is a concentrated, global equity fund with dual objectives: to deliver attractive long-term returns and to deliver positive change by contributing toward a more sustainable and inclusive world.
The managers target companies that address global challenges, many of which are highlighted by the SDGs.
The fund’s impact report maps the significant contributions of companies in the portfolio against various SDGs. For instance, Indonesia’s Bank Rakyat supports SDG 10 (reduced inequalities) through its provision of basic financial services to underserved and disadvantaged parts of society. Meanwhile, renewable energy provider Ørsted and electric car firm Tesla are expected to assist towards SDG 13, climate action.
Specialist fund manager WHEB has a similar philosophy. They invest in companies that are enabling and benefitting from the transition to a low carbon and more sustainable economy and has an investment strategy that supports the achievement of the SDGs. WHEB’s mission statement is to advance sustainability and create prosperity through positive impact investments.
WHEB’s fund managers invests in businesses with a positive impact that they categorise as either ‘mitigating’ or ‘breakthrough’. There are nine thematic areas: Cleaner energy, resource efficiency, sustainable transport, environmental services, water management, health, safety, well-being and education. The managers believe these directly support seven of the SDGs through the products and services that they sell. This includes goals 3, 4, 6, 7, 9, 11 and 12.
Additionally, in relation to SDG 13 (climate action), a significant proportion of the WHEB Sustainability Fund’s investment strategy is invested in companies that manufacture and sell products and services that help to reduce greenhouse gas emissions. For 2018 they estimate that the strategy helped avoid the emission of over 218,000 tons of CO2, and claim that, a shift of economic activity towards the companies held in WHEB’s investment strategy would help limit emissions to levels that are consistent with warming of no more than 1.5° Celsius. The manager’s 2018 impact report, published in June 2019, can be found here.
Liontrust’s Sustainable Future team, who run the Liontrust Sustainable Future UK Growth Fund, have also mapped their investment themes to the SDGs. Those where their funds have the largest exposure are: Good health and well-being (SDG 3); Affordable and clean energy (SDG 7); Decent work and economic growth (SDG 8); Industry, innovation and infrastructure (SDG 9); and Responsible consumption and production (SDG 12). More details can be found in the team’s annual review.
What are the limitations of referencing SDGs?
Others are more sceptical about directly referencing SDGs, arguing the breadth and quality of the data that companies provide in reference to environmental and social issues is not consistent or complete, and this can lead to errors and oversights when trying to report against the goals.
Although they can provide a helpful common language and framework for thinking about important global issues and investing sustainably, with no standardised methodology in place providers do have to devise their own models to assess investments against SDGs. That can mean a lack of consistency across the industry when referencing them. Any measurement of impact will tend to rely, to a degree, on assumptions.
SDGs are just the start
The UN SDGs are helpful in underlining the scale of the environmental and social challenges we face, as well as highlighting the opportunity to invest in businesses, technologies and projects that help solve the challenges.
They provide an overarching framework for thinking about important global issues and investing sustainably. However, with few industry-wide standards to measure the environmental and social impact they are largely open to interpretation.
Fund managers, therefore, need to go further than referencing SDGs in order to prove their efforts to shift the way we invest to benefit society and the environment are genuine. Measuring and reporting the real-life impact of investments is one way to do this, as is ‘active ownership’ through engagement with companies and voting on key issues.
Whatever the methods used, fund managers have the opportunity to translate their efforts to a positive emotional connection between investors and their money by demonstrating the impact of their investments in the real world. Bringing socially responsible investing to life in this way can help direct the capital necessary to help to solve the world’s problems.
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What are the UN Sustainable Development Goals and how do they relate to investing?
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