Commentary

Investors Can do More to Align With SDGs

Measuring impact performance will help investors to identify strategies in pursuit of SDG goals, explains Sarah Wang, Manager of Impact Products, Morningstar Sustainalytics.

2023 marks the halfway point to the deadline for achieving the United Nations’ 2030 Sustainable Development Goals (SDGs). Yet only 15% of the overall objectives are currently on track. World leaders will convene in New York on September 18-19 to reflect on progress so far, identify challenges, and develop more effective strategies for the future. Not only is there an expectation for investors to drive SDG improvement, but they should want to.

All investor actions shape positive and negative outcomes in the world. With increased recognition of the interconnectedness of financial outcomes with environmental and societal sustainability, more investors are looking at how their portfolios align with the SDGs. At first glance, the granularity of the SDGs that is beneficial for policymakers needs to be more user-friendly for investors. Morningstar Sustainalytics’ proprietary Impact Framework below covers the direct and indirect potential environmental and social impacts of investee companies with broader groupings of SDGs under specific impact themes.

Exhibit 1: Morningstar Sustainalytics’ Impact Framework – SDG Mapping

Source: Morningstar Sustainalytics

These aggregated themes help inventory of recent activity within the global sustainable funds space, highlighting how investors target SDG-aligned themes in today’s shifting economic and geopolitical climate.

Climate leads the sustainability-themed landscape

There are 1,310 open-ended funds and exchange-traded funds globally that, by prospectus or other regulatory filings, which claim to target social and environmental themes as central to their investment strategy.

Some examples of how investment funds approach environmental and social considerations can include identifying companies:

  • Which lead on a particular thematic area like gender equality, by looking at workforce and board diversity metrics, diversity policies, and excluding those in violation of global standards and norms.
  • That can attribute business activities and revenues that support positive environmental outcomes such as low carbon energy or environmental infrastructure or social outcomes such as building high-quality, affordable housing for underserved populations.

Among funds that centre on one sustainability theme, climate action dominates the market regarding the number of funds available to investors. This is not surprising, given the urgency of the climate crisis, the growing awareness among investors about the impact of their portfolios on the environment, and the maturity of decision-useful climate data. It is helpful for investors to have choices focused on human development with 181 funds available in the market. Additionally, among the 1,310 funds, 33% aim to achieve more than one sustainability theme.

Exhibit 2: Number of Global Sustainability-Themed Funds

Source: Morningstar

As of June 2023, assets in sustainability-themed funds stood at around US$392 billion. Climate action funds account for more than 40% of the total assets of Morningstar Sustainalytics’ thematic categories. Human development (i.e., gender equality, good health, and technological breakthroughs) funds follow in second with US$35.9 billion in total assets. While it’s promising to see investors prioritising the planet’s well-being and the welfare of people, there is still a significant gap in asset size compared to climate action funds.

Exhibit 3: Global Sustainability-Themed Fund Assets (US$ Billion)

Source: Morningstar

A challenging year

Driven by factors such as global macroeconomic pressure, 2023 has been a challenging year for launching or repurposing sustainable funds across all theme categories. Halfway into the year, we see a sharp decline in new sustainability-themed funds for clients to choose from, whether new launches or repurposed mandates. For example, 40 climate action funds were launched or repurposed this year, which is less than one-third of the 142 funds investors gained in 2022.

Exhibit 4: Number of Newly Launched or Repurposed Global Sustainable Funds

Source: Morningstar

More impact data can help track progress

Looking at the UN Progress assessment for the 17 SDGs, it is clear that we have made some strides in achieving SDG goals such as Goal 7, which calls for more affordable and clean energy. Still, accelerated progress is needed in other areas, such as Goal 8, which aims to promote sustained economic growth and decent work for all, despite the strong commitment by the investment community.

For the financial community, the lag in progress in certain SDGs may be due to insufficient investment or inadequate capital allocation caused by a lack of data available to investors, which can result in suboptimal allocation of resources and hinder the progress towards achieving certain SDG goals. Work continues on research and data enhancements to bring new insights into the positive and negative impacts of a company’s operations. The transition of measuring impact performance alongside the risk of returns will help empower investors to adopt diverse strategies in their pursuit of SDG goals through their portfolios. These insights include considering both positive and negative impact areas and evaluating a company’s future impact based on its existing, credible commitments.

As more comprehensive ESG data becomes available, investors can develop more holistic and diverse sustainable investment strategies by integrating the long-term impact of investment decisions on the environment and society—leading to a more sustainable and SDG-aligned future.

The author recognizes the contributions of Shannon Fellows, Commercialization Manager, Irina Asaftei, Senior Product Manager, ESG Products, and Matt Herbert, Senior Marketing Manager, who support Morningstar Sustainalytics’ Impact Solutions, with additional data insights from Alyssa Stankiewicz, Associate Director of Sustainability Research, and Maggie Stafford, Senior Product Manager of Morningstar.

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