The United Nations’ Sustainable Development Goals offer an excellent path to value creation for society and shareholders. We can invest in a better world and achieve a healthy financial return.
The United Nations’ Sustainable Development Goals (SDGs) are a set of ambitious targets for making the world a better place. They have generated a lot of investment discussions, but investment action so far has been limited. Why should one invest in the SDGs? What does it mean for financial returns? And how can one invest in the SDGs and make them visible at the portfolio level?
The 17 UN Sustainable Development Goals
Source: United Nations
Why invest in the SDGs? Value creation and the societal role of finance
There are several potential reasons to invest in the SDGs. First, by investing in the SDGs, investors can make the world a better place. With the ascent of exchange-traded funds (ETFs) and quantitative investing, one easily forgets that listed companies are more than a few financial metrics. In fact, finance and the financial sector have an important societal function, that of steering funds towards the most productive investments, including societal costs and benefits.
It’s very inspiring to construct a portfolio withcompanies that commit themselves to improving theworld by aligning with the UN SDGs,” says Huub vander Riet, Lead Portfolio Manager Impact Investing atNN Investment Partners. “We focus on those thatoffer innovative solutions and attractive financial andsocietal returns.
Second, investing in the SDGs can be a way for asset owners to meet the wishes of their participants. For example, a pension fund in the healthcare sector might prefer to invest for Goal 3, which strives for health and well-being. Eventually, this sort of alignment could become part of an asset manager’s fiduciary duty.
Third, assessment of the SDGs gives active managers an opportunity to show added value over passive investments, in the form of active ownership and conscious capital allocation. To seize that opportunity, they will have to explore the white space beyond ratings and the frontiers of standardized data.
Finally, investing in the SDGs might yield great financial value for shareholders, too. It entails, after all, investing in firms that provide solutions for and contributions to the SDGs, which tend to be better prepared for the future, for example, with lower chances of costly disruption.
We are convinced that we can invest in a betterworld and achieve a healthy financial return,” Vander Riet says. “If the SDGs are going to be achieved,you’d better be exposed in a positive way.
What are the SDGs?
The Sustainable Development Goals (SDGs) are a set of 17 aspirational goals set by the UN to achieve a more sustainable planet by 2030. They include objectives such as battling poverty (Goal 1) and providing clean, affordable energy (Goal 7). The goals, which make up a plan of action officially known as ”Transforming our world: the 2030 Agenda for Sustainable Development”, have 169 targets among them. The goal-setting process was led by the UN, through a deliberative process involving its member states and global civil society, including leading corporations. The goals were adopted by the UN General Assembly in September 2015.
These goals are very much interconnected. Poverty reduction contributes to good health; good health contributes to education participation, etc. Of course, for these goals to be achieved, implementation at the country level is critical. Fortunately, many countries have already tailored their own policies and plans to the SDGs.
The SDGs are commendable for several reasons. They set ambitious targets for making the world a better place and they provide a common language for talking about development and impact investing. They are also a huge business opportunity 3 and a call to action for corporations, some of which will win, some of which will lose. Smart corporates make sure to be well-prepared – and can make for great investments.
Sustainable development: adaptability & opportunity
It is worthwhile to elaborate a bit on the meaning of the concept of sustainable development. As Crawford Holling (2001) puts it:
Sustainability is the capacity to create, test, andmaintain adaptive capability. Development is theprocess of creating, testing, and maintainingopportunity. The phrase that combines the two,“sustainable development,” thus refers to the goal offostering adaptive capabilities and creatingopportunities.
It is about systems change and holistic thinking, not just box-ticking. Especially the last part of the quote, on fostering adaptive capabilities and creating opportunities, suggests a role for corporate strategy.
The role of corporations in achieving the goals is critical, so be prepared
The goals were set up mainly for governments by government-oriented people. Still, they are highly relevant for corporations, whose contribution is very much needed in achieving the goals. This is especially so in the areas where corporations are the main actors, such as innovation (Goal 9), affordable and clean energy (Goal 7), and responsible consumption and production (Goal 12). But in most other areas too, corporations have the potential to make a significant contribution. Sometimes this depends on their exposures – food and pharma companies are obviously more exposed to health & well-being (Goal 3) than are, say, software companies. But other goals, such as gender equality (Goal 5), are not specific to an industry, geography or market. In those cases, a company’s contribution depends even more on its own initiative and creativity.
Second, the SDGs can be useful and inspiring (or threatening) for corporates, as they lay out a path for future policies that may affect corporations. These can be very material to businesses’ value creation. For example, consider taxation or regulation on sugar, carbon or water. They pose risks to some and opportunities for others that provide solutions. Smart companies make sure to be well-positioned by adapting their business models and technologies accordingly. In fact, Ortiz-de-Mandojana and Bansal (2015) found that firms that adopt responsible social and environmental practices have lower financial volatility, higher sales growth, and higher chances of survival over a 15-year period. Moreover, the researchers did not find a cost in the sense of a difference in short-term profits.
Third, the SDGs are also important from a communication perspective. They provide a framework and common language for making an impact. Companies will increasingly report on their contributions to the goals. This reporting is now in its infancy, as very few report on them yet, but at least companies have started mentioning the SDGs in their reporting. In our engagements we find that many companies are now trying to figure out how to report on them and are asking us for support and suggestions.
Willem Schramade – Senior Portfolio Manager Impact Investing, NN Investment Partners