Measuring investment contribution to global sustainability remains challenging for asset owners.
The United Nations (UN) published the Sustainable Development Goals (SDGs) in 2015, mapping out 17 of the world’s most urgent systemic issues that need to be addressed by 2030, including poverty, the climate crisis and equal access to education. Between US$5 to US$7 trillion is needed globally on an annual basis to effectively contribute to achieving the SDGs on schedule, according to a World Bank report last year.
The role of global investors in ensuring that capital is directed to – and making an impact in – these areas is crucial.
“The SDGs have been instrumental in changing the perspective of ESG investors, from measuring how external factors affect their investment portfolios to how their portfolios affect the outside world. The SDGs are a vital part of the next stage of responsible investment,” says Kaori Shigiya, Senior Specialist on SDGs for the UN-convened Principles for Responsible Investment (PRI).
But before the SDGs came into effect, impact investors had already developed investment strategies aimed at generating social and environmental benefits ‘on the ground’ while maintaining strong financial returns. It’s suggested that the term ‘impact investment’ was first coined in 2008 by the Rockerfeller Foundation, and the market has since grown to US$715 billon as of 2020, according to The Global Impact Investing Network’s (GIIN) Annual Impact Investor Survey.
Partly due to their breadth, the vast majority of impact investments are already SDG-aligned, points out Diane Damskey, Head of the Secretariat for the Operating Principles for Impact Management. Launched in April 2019, the framework provides signatories with a global standard for managing their impact investments.
“Even if impact investors don’t specifically mention the SDGs, they can still be considered SDG-aligned – it’s just a matter of whether it’s explicit or implied,” Damskey says.
Investors should be thinking of the SDGs as “the world’s business plan”, adds Anastasia Guha, Global Head of Sustainable Investment at investment consultancy Redington.
“The SDGs need to be achieved by 2030. There will likely be policy interventions from governments to try and get capital to move in that direction, so there are definite upsides for investors looking to allocate capital towards addressing aligned environmental and social issues,” Guha tells ESG Investor.
Inventing investable solutions
The SDGs tackle broad themes – some more investable than others. For example, SDG 16 concerns “peace, justice and strong institutions”, which can’t be solved through increased investments alone. What should the investor even be investing in?
“It’s not about asset owners and managers making investments that contribute to all 17 SDGs, but rather about encouraging them to identify areas in which they already have an existing interest that could provide investment opportunities and contribute to the well-being of people and the planet,” says Sarah Gordon, CEO of the Impact Investing Institute. The UK-based independent non-profit, launched in 2019, aims to accelerate the growth of the impact investing market in the UK and internationally, including increasing alignment with the UN’s SDGs.
Asset managers and owners such as Aberdeen Standards Investments (£535 billion AUM) and the Church Commissioners for England (which manages a £9.2 billion investment fund) have developed key investable themes that incorporate the SDGs.
“[The Church Commissioners] arrived at 13 investable impact themes that are aligned with the SDGs. We take stock of our entire portfolio on an annual basis and assess our contributions to each of them. It’s a strong benchmarking tool which allows us to look at the portfolio through a different kind of lens and see where we are contributing to positive solutions and where we could do more,” says Aaron Pinnock, Impact Investment Analyst for the Church Commissioners.
The broad and sometimes intangible nature of the SDGs can also be a headache for data providers looking to quantify and curate decision-useful information for impact investors.
“The SDGs were not built to be used for investors to assess corporates, so the methodologies data providers are having to adopt in this space aren’t straightforward,” says Rodolphe Bocquet, Global Head of Sustainable Investment for analytics and index provider Qontigo.
As a result, assessing corporate contributions to specific SDGs remains quite a manual process, Pinnock says. Considering the fact asset owners may be invested in hundreds – even thousands – of companies at a time, it’s vital that asset owners cultivate a good relationship with their asset managers, “as well as installing a strong internal data system which can process and harvest the relevant data”, Pinnock adds.
As well as offering advice on asset owners’ impact investment objectives and strategies, asset managers offer a variety of SDG-aligned funds, such as the Federated Hermes SDG Engagement Fund and Robeco’s RobecoSAM Global SDG Credits fund. Asset managers need to be providing asset owners with as much evidence as possible that outlines SDG-alignment, as well as their methodologies for measuring this.
While frameworks exist for impact investing, there is no consensus on measuring contribution of investments to specific SDGs, making it hard for asset owners to compare one SDG-aligned fund to another.
Some asset owners are taking a collaborative approach to addressing the data gap.
Cooperative Netherlands-based pension scheme PGGM (€268 billion AUM) has collaborated with APG, AustralianSuper and the British Columbia Investment Management Corporation to build the Sustainable Development Investments (SDI) Asset Owner Platform. Over 8,000 companies have been analysed by SDI on their existing contributions to the SDGs, and the platform has 17 asset owner members.
“We wanted to establish a standard led by asset owners that indicates alignment with the SDGs in a way that’s credible, transparent and carries weight in the market – so we built a taxonomy of investable solutions [using machine-learning technologies], mapping out to what extent revenues generated by companies [through products and services] align with SDGs,” says Piet Klop, PGGM’s Senior Advisor for Responsible Investment.
The benefit of machine-learning is that “it will get better over time” and improve the accuracy of the SDI platform, he points out.
To ensure the reliability of the data, Entis, a data and software technology firm that is a partner behind the platform, combines the AI and machine-learning used to harvest the structured and unstructured data from corporates with “human validation”.
Alignment, outputs and outcomes
Experts say that investors need to measure their impact on SDGs in three ways: How aligned to specific impact goals are their investments? How have corporate outputs changed as a result of their investments? What have been the overall outcomes?
“Investors are currently able to look at where there is alignment to the SDGs in their portfolios, but it becomes exponentially harder to look at your portfolio from an output or outcomes perspective, because that’s when you really need to go into the detail of what a company is doing and how you are affecting them through investment,” says Pinnock.
Investors can report revenue alignment to the SDGs by looking at the holdings in their portfolio. This in itself can be complex and imprecise, especially for investments in companies with diverse business lines. It’s even harder to measure the real-world impacts their investments have.
“A lot of investors still aren’t clear on the difference between process- and activity-based metrics as opposed to outcomes-based metrics. They tend to mix them up,” Shigiya says.
For example, a corporate output may refer to the number of drugs a healthcare company is able to provide to people, following a cash injection from an investor. The outcome therefore refers to how many people have been cured or saved as a direct result of that increase in output.
“At the moment, companies – and therefore the Church Commissioners as an investor – are only really reporting revenue alignment to the SDGs,” Pinnock acknowledges. “This is just stage one, because what we really want is to be able to monitor how our portfolio performs based on the real-world output of companies, and, in turn, outcomes. That’s when we’re going to need more data.”
In the absence of the data needed to progress to the next stage of measuring impact, PGGM’s Klop says that there are several ways for asset owners to “provoke” corporates into providing the information they need through increased engagement.
“Asset owners need to outline their expectations for corporates to report their impact in tangible terms,” he says. “Therefore, it’s important to be able to hold up a certain impact to a company and provoke them into proving you’re right or wrong.”
Standing on shoulders
A number of impact investment frameworks are already available for asset owners to use, and these can be applied to assessing SDG-alignment, too, according to experts.
The Operating Principles for Impact Management, the Impact Investing Institute, the PRI’s five-part framework and the Impact Management Project (IMP) all offer investors guidance in the development of impact investment strategies.
“The SDGs are a very useful guideline for most investors and asset owners to use, but we don’t know if there will be a new set of goals from 2030, so that’s why [the Operating Principles for Impact Management] aren’t specifically tied to the SDGs, although do refer to them as one of the potentially widely accepted impact goals,” Damskey explains. For example, around 85% of disclosure statements from their signatories cite alignment with the SDGs, she adds.
There are, however, emerging frameworks specific to SDG alignment.
The UN’s SDG Impact Standards framework, which provides best practice guidance and self-assessment tools, can be used to align internal processes, practices and decision-making that helps to contribute to the SDGs. Currently these Standards are tailored for investment in private equity funds, bonds and enterprises.
However, the sheer number and variety of different impact investment frameworks and standards “can make it difficult for asset owners to see the wood from the trees”, says PGGM’s Klop, which may be why asset owners are taking it upon themselves to develop in-house solutions in tandem with industry-level frameworks.
Damskey emphasises that the impact market is varied in size and types of investors and therefore requires different frameworks to account for all impact strategies.
“It’s not about standardisation, but, in the longer term, we certainly want to see more consistency in the language used and the indicators for impact measurement used, so that they mean the same thing regardless of the type of investor you are,” she adds.
If the impact of an investment is only realised years later then, regardless of data availability, investors must be willing to exercise a measure of patience.
For example, investing in education by backing infrastructure developments in a developing nation won’t be quantifiable for a long time, until the generation that has benefitted from increased access is contributing to society and effecting the wealth of that region.
“That’s why we call it patient capital,” says Damskey.
Nonetheless, the problem remains that asset owners still don’t have access to metrics and data that will sufficiently capture the true extent of their investment’s impact on corporate alignment with SDGs, as well as outputs and outcomes.
“ESG data quality is a perennial issue and won’t go away anytime soon,” says Klop.
To support the UN’s ambition of US$5 to US$7 trillion invested annually in SDG-aligned targets, asset owners need to feel confident that they will be able to: effectively compare SDG-aligned funds with one another; measure how, and to what extent, their capital is having a direct impact on an investee corporate; and identify where their investments are most needed and most likely to produce the strongest returns.
At the moment, impact investment frameworks give guidance on the formation of impact investing strategies, but the impact measurement hurdle has yet to be overcome.
Efforts are in process and require inputs from multiple stakeholders. Third-party data providers need to innovate and discover new ways to capture impact-related information from corporates, converting it into digestible data that can be used to compare investment performance.
Asset managers, too, need to be engaging with asset owners on how impact strategies should be implemented and managed.
Unless this happens, the continued growth of the impact investment industry – and SDG-alignment by extension – will be stifled, experts warn.
In the interim, asset owners should be pushing for “corporate transparency in lieu of data perfection”, Klop says.