Jennifer Coulson, Senior Managing Director, ESG at Canadian pension fund BCI, explains how an asset owner-led platform is making SDGs more investable.
Last month UN Secretary General António Guterres issued a stark warning: “As the world faces cascading and interlinked global crises and conflicts, the aspirations set out in the 2030 Agenda for Sustainable Development are in jeopardy.”
In the Sustainable Development Goals Report 2022, Guterres says a disastrous combination of the Covid-19 pandemic entering its third year, Russia’s invasion of Ukraine with its associated impacts on the food, energy, humanitarian and refugee crises, and a “fully-fledged climate emergency” mean “we need an urgent rescue effort for the [17 Sustainable Development Goals (SDGs)] ”.
“Greater investment in data infrastructure is needed to efficiently target investments now, anticipate future demands, avoid crises from descending into full-blown conflict and plan the urgent steps needed to achieve the 2030 Agenda,” Guterres concludes.
Aligning with SDGs
Part of the solution might be found in the Sustainable Development Investments Asset Owner Platform (SDI AOP), developed by a community of institutional investors looking to make it easier to align investments with the UN SDGs.
Created by institutional investment behemoths APG, AustralianSuper, British Columbia Investment Management Corporation (BCI) and PGGM, SDI AOP offers a standard framework – built using artificial intelligence based on its own taxonomy – which directs investors to solutions that contribute to the SDGs and develops rules for SDIs.
The platform is already proving popular with the investment community. This April the world’s largest asset manager, BlackRock, announced it would use SDI AOP’s dataset to “advise clients on ESG portfolio construction, research, reporting, product creation and evolution”.
Jennifer Coulson, Senior Managing Director, ESG at BCI, says: “We have got a bit of momentum behind us and more of a track record. People are really interested in the idea of standardisation because there are so many different [sustainable investment] frameworks.”
She adds: “The community is really interested in getting behind a credible framework and the SDI AOP fills that gap. Being driven by asset owners is the key to the whole initiative and provides a lot of credibility.”
According to Coulson, the involvement of the two Dutch asset owners, APG and PGGM, has been critical in transitioning the SDGs from a government-focused initiative to ones that investors can support, due to the work on formulating the SDI AOP’s taxonomy.
“When the UN first announced the SDGs there was a period where investors were asking how to translate the goals into an investment framework, because they were initially more about government and policymaking. There was a lot of work by a lot of different players to really map how to translate the SDGs into something that is investable.”
She continues: “We all have to respect our fiduciary mandates, so we needed that translation to happen. I must give APG and PGGM a lot of credit for that because they’re the ones that developed the taxonomy in the first place.”
The taxonomy is a reference point for asset owners, who can select portfolio components depending on their mandates, policies, and the asset classes in their portfolio.
The SDI classification focuses on companies’ product and service-related contributions to the SDGs, and is based on financial metrics, most often revenues.
For some sectors, alternative metrics will be used where appropriate such as volumes of products or lending activity, in the case of financial institutions.
The SDI classification is based on current financial data, but future SDI AOP products will focus on forward looking metrics such as patents, capex and/or R&D expenditures.
This August the SDI AOP added negative contributions to the taxonomy to “provide a more comprehensive picture”. If a company negatively contributes more than 10% to an SDG it cannot be considered sustainable.
The current classifications identify almost 2,000 equity and bond issuers from a universe of 8,700 as either majority SDI – where more than 50% of revenue comes from products and services aligned with SDGs or – decisive SDI where 10-50% of revenues are aligned.
This taxonomy, Coulson says, enhances asset owners’ engagement with investee companies.
“Anyone who has looked at companies’ sustainability reports can see how much they are genuinely positioning themselves on the SDGs. What they say they are doing could be a little bit of a stretch in terms of their actual business. If the heart of their business does not necessarily align with the SDGs, then that’s a perfect lever to engage and say ‘according to our data, the revenues and the actual business lines you have, do not necessarily support your assertions’. It becomes a good dialogue tool to get into more detail about how companies say they contribute to the SDGs.”
Informing investment strategy
The SDI AOP is increasingly informing how BCI’s sustainable investment strategy, graduating from being a reporting tool to one used by the investment team.
Coulson says: “It always takes a while to change processes and introduce new things. The Dutch funds are much further along, having been involved from the very beginning. Slowly, we’ve been bringing it into more of our active management strategies. My team, who are responsible for the ESG analysis and working with the investment teams, have been building the dataset into the investment process to showcase companies that are further along in advancing the SDGs.”
BCI, which recently published its 2021 ESG annual report, uses dashboards to identify which organisations are aligned with individual SDGs.
“It’s another data point and a new lens to look at an investment through. Obviously, it’s not the only lens but it brings another perspective into the conversation.”
While the platform is more relevant to active managers since they are not bound to an index like their passive counterparts, Coulson says ADI AOP is suitable for the entire investment community.
“This is not just for a concentrated active portfolio. There are many use cases, and we can design all kinds of passive products for those who are really interested. BlackRock uses the dataset, and they’ve worked quite closely with APG to design a suite of [SDI] indices which has the potential to influence a lot of capital. Passive managers have so much in AUM at this point that, if we can really start to shift some of that capital, then there is a lot of upside for the SDGs.” Coulson says.
European regulation is also driving asset owners to the platform, specifically the Sustainable Finance Disclosure Regulation (SFDR).
This March NN Investment Partners subscribed to the SDI AOP saying it will use the data to “feed into their proprietary frameworks and models to identify companies that are considered sustainable investments in the context of the SFDR”.
In the future, the asset manager plans to expand on its existing client reporting capabilities using the data to “optimise reporting on SDG exposures on its strategies”.
Coulson says a combination of the SFDR and the US Securities and Exchange Commission’s May announcement that it would enhance funds’ ESG disclosures are important for the platform.
“There’s no question that regulation has been a big driver and not only in Europe; we see it driving activity further around the globe. Funds need to have a credible way to back up their ESG integration more broadly, and their claims around SDG specifically. This data set can play a role there.”
Despite the increasing signs of progress, Coulson would like to see more movement from asset owners towards SDG alignment.
She says: “The world doesn’t turn on a dime, but as some of the more tangible impacts of climate change become more apparent, the capital markets may shift more quickly. As the saying goes; things move pretty slow until they don’t.”