Over the past years, several investors have developed strategies based on the SDGs. In the working paper that the Platform for Sustainable Value Creation publicised, Annebeth Roor examines the SDG investment strategies of an equity fund and a credits fund. The research shows that where ESG ratings and information predominantly focuses on the business conduct of companies, the SDGs focus attention on the current challenges in the world and possible solutions. When focused on the actual impact of a company, the SDGs can support the assessment of a company’s contribution to challenges and the preparedness for the world of tomorrow.
SDG investing in practice
Investing on the basis of the SDGs, where one person mostly fears ‘SDG-washing’, others emphasize the strength of a common language for the societal and environmental challenges the world is faced with. Several asset managers have by now developed investment products in which the SDGs are integrated into investment decisions. In the working paper that the Platform for Sustainable Value Creation publishes today two SDG investment strategies are researched. Annebeth Roor, graduate of the master ‘Global Business & Sustainability’ and currently working at EY Climate Change and Sustainability Solutions, examines the SDG investment strategies of an equity fund and a credits fund. The research shows that, given the limited attention that investors have in making decisions, the SDGs can influence the focus and language in the fundamental analysis of a firm. The setup of a SDG investment strategy in structures and processes plays a large role in this. In both methods the asset managers focuses on its own proprietary assessment of the SDG impact and not of that of the companies themselves. Where ESG ratings and information predominantly focuses on the business conduct of companies, the SDGs focus attention on the current challenges in the world and possible solutions. This other perspective helps investor to focus attention on the societal and environmental impact of a company. In the end this leads to an increased effort to indicate and measure the impact of a company, either via a proprietary assessment or via engagement with the firm.
Saudi Aramco’s contribution to the SDGs
To illustrate this I would like to look at the long expected IPO of Saudi Aramco. At first it was expected to become the world’s largest listed company, but soon several environmental, social and governance concerns began to have a large impact on the valuation of the firm. Several Dutch institutional investors announced to not invest in Aramco, but for investors with a passive strategy the IPO still is a dilemma. Saudi Aramco itself writes on its website:
‘Quite simply, sustainability makes good business sense. From continuously improving operational efficiency and the environmental performance of our facilities, to pursuing low carbon energy solutions, and strategically investing for growth, we view sustainable practices as the best way to ensure our business remains viable for the long-term.’
Although this, together with a worked out CSR policy, could lead to a reasonable score on certain ESG ratings. And for disclosing, Aramco might even claim a contribution to SDG 8 and 9 based on energy efficiency and innovative production methods. But does this actually tell us something on the value creating potential of Aramco and its ability to contribute to certain challenges? The perspective of the SDGs helps investors to find an answer to these questions. When focused on the actual impact of a company, the SDGs can indeed support the assessment of a company’s contribution to challenges and the preparedness for the world of tomorrow.