Investors are being urged to take a more targeted approach to supporting the UN Sustainable Development Goals.
Back in 2015 the United Nations laid out a visionary plan to try and end poverty and hunger by 2030.
The ambition was one of 17 Sustainable Development Goals (SDGs), also incorporating the protection of human rights, promoting gender equality, good health and climate action.
As we edge closer to 2030, there are increasing concerns that the targets are already out of reach.
The UN has always made it clear that the private sector has a critical role in funding and realising the SDGs. Asset owners and managers are being urged to do more in terms of outcome-focused financing, reducing greenwashing and platitudes and working closer together with public sector institutions and NGOs to make a real-life impact.
Alignment between SDGs and ESG
Asset owners have increasingly used the SDG framework to articulate their sustainable investment priorities and asset managers have responded by launching funds which target one of more SDGs. But mapping investment outcomes to SDGs is not a precise science and claims of impact are open to interpretation, with many firms supplementing guidelines from the UN and other bodies with proprietary methods and metrics.
As a result, it can require close scrutiny by asset owners and their advisors to assess the extent to which their intentions are having the desired effect on SDGs.
Last week sustainable investment data provider Util released a report – ‘How SDG aligned is ESG: Putting the US fund universe to the test’ – which compared the respective holdings of US sustainable funds against all US-domiciled funds in terms of their positive and negative contributions to SDGs.
It found that without “regulation dictating what constitutes ESG investing, nor how it should be integrated and addressed, funds marketed as ‘sustainable; are commonly exposed to the same constituents as their vanilla counterparts”.
The report concluded that nearly three-quarters – US$25 trillion – of the total US$35 trillion invested sustainably “isn’t doing much”.
While 77 of the sustainable fund names contain the terms ‘green’, ‘clean’, ‘climate’, or ‘sustainable’, only four had a positive impact on the environmental SDGs.
Both fund groups in the study had a positive impact on the four ‘prosperity’ goals, a slight positive impact on the eight ‘people’ goals and a negative impact on the five ‘planet’ goals.
“A great many funds that claim to being sustainable and tracking towards the SDGs goals are actually not that different from vanilla funds,” said chief executive Patrick Wood Uribe. “There are some small gains in terms of performance against the SDGs but mainly because they are not doing as badly as the rest of the investment universe.”
Mind the funding gap
Earlier this month, a stark warning was issued by the Force for Good Initiative, an NGO focused on mobilising capital toward sustainable investment, highlighting how far the world is from meeting SDGs goals.
Its ‘Capital as a Force for Good’ report said leading financial institutions have significantly increased funding, committing US$9.5 trillion until 2030 and deploying a record US$2.1 trillion in 2020. US$88 trillion in managed or owned assets are now committed to net zero, while 20% of total assets or US$33 trillion now actively incorporate ESG into investment decision-making.
Despite this Force for Good said the UN SDGs face a financing gap of UA$100 trillion. It found that 44% of the total current spending is focused on climate change, which constitutes roughly 20% of the funding requirement across all the SDGs and 32% is focused on human, economic, and social SDGs, which represent almost half of the funding need.
“All institutions have to boost their commitments significantly if the goals are to be met,” the report warned.
“The financial sector is playing a rapidly expanding role in financing the SDGs and the transition to a sustainable digital future. Sustainability has become a mega-trend. However, with less than ten years to go, there is a pressing need to explore even bigger and more radical solutions than those being deployed today. Closing the funding gap needs to become a compelling business opportunity,” says Ketan Patel, Chairman of Force for Good.
Patel argues that SDGs-focused funds are pioneering and making a difference in areas such as the ocean and extreme hunger. “It’s just that we need a different volume of magnitude,” he adds, calling for a scaling up in the multi-stakeholder effort to meet the SDG targets.
“For asset managers, we need more to move from just having ESG filters to a positive bias approach. They should also consider not launching more funds across all SDGs but specialising in particular SDGs that are linked to their client base’s interests such as hunger, water, or food. Asset managers should have this dialogue and find the opportunities.”
Charlotte O’Leary, chief executive of Pensions for Purpose, an impact-focused advisor to pension funds, says her firm uses SDGs as a framework for discussion with clients on their sustainable investment beliefs and priorities.
“We ask trustees to consider which three SDGs they think will have the biggest investment impact on their investments either from a risk or an opportunity perspective. Once they have agreed their priorities, they then need to decide where on the spectrum of capital they will be most aligned,” she explains.
“For example, gender diversity may mean focusing on good stewardship, voting against boards without a good gender mix, engaging with management to demand gender pay gaps to be published. By keeping the SDGs front and centre of the discussion, trustees make effective and informed decisions about their investment strategy.”
Although O’Leary argues that asset owners need to increase their commitment to SDGs, she says they need support from asset managers, in terms of developing new impact funds which result in intentional, additional capital being invested to achieve a financial return and a positive impact on society or the environment.
“They then need to report on that impact in a clear and effective manner, showing how the impact is improving over time, not just a snapshot at the quarter end,” she said. “They need to be sensitive to the fiduciary challenges facing investors and to make it clear how their impact fund will help address those challenges.”
Big job for big data
Util’s Wood-Uribe says the methodologies of many ESG and impact funds to date have been too “basic”.
“They take a healthcare company and think it will be good for the health and well-being SDG but go little further than that. But SDGs are a highly inter-linked set of goals such as climate and pollution and therefore needs a much deeper methodology,” he stated.
“Investment strategies are not nuanced enough to capture the real-world needs. They must measure these using data, allocate capital accordingly and create products. The demand is there on the client side. The data is the missing link to providing properly differentiated, outperforming products.”
Util uses machine learning to analyse how 45,000 listed companies are affecting the 17 SDGs in the real world. The firm’s algorithms run over 120 million peer-reviewed journals, factoring in multiple issues, such as the impact of social media giant Facebook on mental health.
Moody’s SDG Alignment Screening tool is another option for asset managers and owners to better align products with SDGs. According to Moody’s it has been developed to help investors identify the extent to which companies are contributing to the individual SDGs.
Contributions are identified through two different lenses for each goal. The first lens assesses the products and services that companies develop, while the second assesses companies’ business conduct, such as policies, processes, and exposure to ESG controversies.
“Market participants can leverage the data to understand the extent to which their investment funds or portfolios are contributing to the goals today, and then go further to make investment decisions that favour companies that are better aligned to the SDGs,” said Keeran Gwilliam-Beeharee, Executive Director at V.E., part of Moody’s ESG Solutions.
“Transparent, defined and standardised ESG data – through our SDG Alignment and Global Compact Alignment screening – will enable markets to identify risks and opportunities and allocate greater capital towards companies that are better aligned with international norms and standards.”
There are of course multiple channels across diverse asset classes for private investment to support SDGs. Gwilliam-Beeharee added that sustainable bonds are increasingly popular as a means of supporting sovereigns and companies in financing projects that are better aligned to the SDGs. In the last 12 months, Moody’s ESG Solutions has provided Second Party Opinions on SDG Bond frameworks for Mexico and Benin alongside a broad mix of corporates and financial institutions.
In its joint input for the G20 Sustainable Finance Working Group the UN and the International Platform on Sustainable Finance made their own innovative recommendations including expanding taxonomies to include social aspects of sustainability, investment managers having to disclose how they intend to achieve their sustainability goals and investors, scientists and civil servants coming together to identify common KPIs for impact measurement.
For Patel it can be boiled down to a simple equation.
“On one side we have all the money in the world and on the other all the knowledge of all the problems in the NGOs. We just need it to all come together,” he said.