The 17 Sustainable Development Goals (SDGs) that were ratified by the United Nations (UN) in 2015 with the central aims of ending poverty, protecting our planet and ensuring prosperity for all have become the foundation for one of today’s most innovative forms of asset management – impact investing. This type of strategy aims to achieve positive environmental and social impacts as well as financial returns and the SDGs provide the framework by which to align these goals. However, as the 2030 deadline set to fulfil the SDGs grinds closer, are there shortfalls emerging in investment allocations?
The UN estimated that between USD 5 trillion and USD 7 trillion of annual investment will be required to achieve the goals by the deadline. Accurate figures are hard to source but the world is woefully short of these levels. Progress has been most noticeable in relation to SDGs with economy-related targets, such as Decent Work & Economic Growth (#8); Industry, Innovation and Infrastructure (#9); and Responsible Consumption and Production (#12). However, serious shortfalls have been registered by the Intergovernmental Panel on Climate Change (IPCC) on Climate Action (#13); Quality Education (#4); and Sustainable Cities and Communities (#11). The IPCC report provides new estimates of the likelihood of exceeding global warming by more than 1.5 degrees Celsius in the next decades and finds that unless there are immediate and large-scale reductions in greenhouse gas emissions, limiting warming to 1.5-2 degrees Celsius will be beyond reach. NN Investment Partners (NN IP) believes that the most imperative of all the SDGs are clearly becoming those relating to climate solutions, which also includes Affordable & Clean Energy (#7), and investments aligned with them must be accelerated if the world is to avert disaster.
Huub van der Riet, Lead Portfolio Manager, Impact Equities, NN Investment Partners, commented: “The most pressing issue for humanity over the next few years is going to be tackling climate change. The climate crisis continues to worsen: many countries have seen another year of record temperatures and intensifying natural disasters, underlining how important it is that the world does more to combat rising temperatures.”
At present, NN IP identifies 750 listed stocks globally that meet the twin aims of achieving positive impacts and financial returns. Some SDGs are clearly more investible than others. For example, it is much harder to find listed equities that make positive impacts in relation to Gender Equality (#5), Life Below Water (#14); and Life on Land (#15). From the pool of 750, the investment themes offering the most stock options include: Affordable Healthcare (200 stocks); Resilient Infrastructure (130 stocks); Energy Transition (100 stocks); and Enhanced Productivity (100-plus). The themes with the least stock options include Food Sufficiency (20 stocks), Water Management (20); Financial Inclusion (25); and Circular Economy (40 stocks).
At an SDG level, NN IP’s Impact Equity portfolio currently has 8.6% exposure to Affordable and Clean Energy and 1.6% to Climate Action.
Huub van der Riet added: “We recognize the urgency of this crisis and we look for companies that are actively combating climate change through solutions relating to the clean energy transition. However, we expect to increase our focus on investments offering solar, wind, and energy-efficiency solutions, as more companies in this space will improve their profitability due to technological developments and increasing scale. We also expect impact investing portfolios globally will increasingly adopt higher weightings to energy transition companies as they rise in number and the climate crisis intensifies nearer to 2030 and beyond.
“If, or when, externalities from fossil fuel companies are priced in, it may trigger a further switch completely to renewables and companies will reduce, rather than create, their CO2 emissions. This would mark a major turning point in the climate and environment arena.”
NN IP’s Impact Equity strategies use the SDG framework as a yardstick to assess companies and the contributions they make to solving three global challenges into which they can be divided. These challenges include:
- Ensuring human health and well-being
- Protecting the climate and environment
- Increasing the inclusivity of economic growth
NN IP has three strategies focusing on serving each of these challenges and a fourth that covers all three. These strategies use 12 investment themes, or ‘solutions’, that can be used to generate positive impacts as defined by the SDG criteria. These solutions have been identified based on the most pressing global issues and on the strength of the long-term investment growth opportunities they provide. For example, under Affordable Healthcare, NN IP invests in companies that make healthcare systems cheaper and more accessible but at the same time these companies also benefit from strong trends such as ageing populations and the rising need for quality care.