Shaping an investment strategy around the SDGs

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    This article is a part of the NordSIP Insights – Handbook – “Investing Along the 17 Shades of SDGs”.

    The last few years have seen surging interest in impact investing, fuelled in particular by the adoption of the UN’s Sustainable Development Goals (SDGs) in 2015. Experience in this area shows that an investment strategy that puts the SDGs at its centre can generate sustainable impact as well as competitive financial returns – as long as investors observe a number of key considerations when choosing their investments.

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    by Christian Regnicoli CAIA, Head Institutional Clients at responsAbility Investments AG

    Just as consumers are becoming more aware of the environmental and social impacts of their consumption choices, investors are paying increasing attention to the environmental and social implications of their investment decisions. More and more of these investors are using the SDGs as a framework for their investment strategies.

    As a universal call to action for a sustainable future, the SDGs are creating potentially enormous investment opportunities. According to the IFC, as much as USD 7 trillion a year in global investments will be needed to achieve the SDGs by 2030 — including up to USD 4.5 trillion in developing countries. The importance of private sector investments to achieve these goals is widely acknowledged.

    What makes investing with the SDGs in mind a compelling opportunity is that investors do not need to compromise on returns to generate impact. Nor are they entering completely unchartered territory. Seasoned impact investors – responsAbility, active in the field for over 15 years, is one of them – have demonstrated that it is possible to consistently deliver high impact as well as attractive returns.

    Defining the mission and measuring impact

    As with all things, to find the adequate SDG-aligned investment solution for a particular portfolio will require investors to analyse their motives and expectations. When decision makers first decide to add SDG investments to their portfolio or shape their entire investment strategy around the SDGs, they will need to decide what they are looking for and invest some time in understanding what they are offered: empower women or rural communities? Mitigate climate change? Ensure food security?

    Objectives vary according to the background an investor may have – and there are a series of different options to fulfil these requirements. Most obviously, climate change is one topic that is raised time and again. As the key to mitigate it will ultimately lie with developments in emerging economies, this is an area where investments in these markets can achieve considerable impact. One of the funds responsAbility manages, founded in 2009, is entirely dedicated to climate change mitigation and we have seen institutional investors like banks or pension funds increase their engagement over the past years.

    On a much broader level, building up adequate infrastructure in emerging economies is proven to contribute to almost all of the SDGs at the same time. By investing in microfinance institutions and SME banks, for instance, investors actively contribute to creating a stable and inclusive financial sector which helps broad sections of the population to create a livelihood and build resilience. Less poverty translates into better health and education, more equality and a safer environment.

    So-called microfinance investments, pioneered by asset managers like responsAbility, have now been around for over 15 years and have long been integrated into institutional portfolios. Stable returns, low correlation with other investment classes and the potential to access to growth markets through tried-and-tested investment solutions make them a compelling choice.

    Agriculture: the super-sector for SDG investments

    For those seeking to maximise development impact, however, experts agree that there is one sector that beats them all: agriculture. Studies show that economic growth in the agricultural sector is at least twice as effective as growth in other sectors in contributing to poverty reduction. Some of the reasons:

       Unsurprisingly, the agricultural sector is the basis for SDG 2, Zero Hunger. Few of us are aware that some 80% of food items are produced by smallholder farmers and family businesses around the world. To meet the increasing demand for food of a growing global population, a financing gap of some USD 150 billion needs to be filled.

    The sector is also crucial as a source of income. In emerging economies it accounts for 31% of economic output and 34% of employment. Rural areas tend to be the most deprived regions, even within low-income economies. Creating employment and ensuring smallholder farms can live off their work is a crucial element in the quest to end poverty.

    Equally, agriculture is where investors can truly create impact when it comes to environmental protection and the safeguarding of healthy ecosystems. The sector accounts for 10% to 12% of total greenhouse gas emissions. Promoting sustainable and more resource-efficient production methods helps to address climate change – through carbon sequestration, the prevention of soil erosion, safeguarding biodiversity as well as better water management.

    Agriculture Private Debt: investments for high impact

    There are different possibilities of investing in agriculture with the SDGs in mind. As with any other investment, investors should explore the available investment opportunities, identifying how they could complement their portfolios while keeping an eye on the actual impact they are likely to generate.

    Initial factors to assess are the same as for any other investment: the investment’s correlation with the other portfolio investments; its risk-return profile; its liquidity, and its diversifying properties. To explain this, let’s take a look at responsAbility-managed private debt funds in the area of sustainable agriculture, which largely benefit agricultural SMEs and smallholder communities associated with them:

    The asset class, Emerging Markets (EM) Private Debt, provides investors with access to an unexploited growth market, new assets, opportunities and returns by providing loans to private companies in developing countries. It also offers attractive long-term risk-adjusted yields. Particularly in the current low-interest environment and thanks to its low correlation with other asset classes, the asset class can serve as a valuable portfolio diversifier. This makes it an interesting investment alternative which has been garnering increasing attention, particularly among institutional investors.

    Looking at responsibility’s Private Debt portfolio in sustainable agriculture, the annualized performance over the last five years (net of fees – TER 1.9%) was 3.91%. This comes with low correlation with traditional, listed EM Debt and lower volatility than that asset class.

    What is ‘high impact’?

    Gauging the likely impact of an investment is a more complex matter, which is compounded by the fact that a flurry of supposedly SDG-aligned investment products has hit the market since SDG investing has become in vogue. Investors who are unlikely to settle for mediocre financial performance also will be reluctant not accept mediocrity when it comes to impact. To avoid “impact-washing” I recommend to seek out investments with a direct impact and be sure that they understand whether and how that impact is measured.

    The good news is that, in the area of sustainable agriculture, quantifying the effect of impact investments is relatively easy. A glimpse at the impact reported by responsAbility-managed Private Debt funds in the area of sustainable agriculture for the year 2017 illustrates this.

    The funds provided loans totalling USD 250 million to 124 borrowers in the agricultural sector with 420 affiliated companies benefiting indirectly from these loans These investments reached 495,650 smallholder farmers and 535 intermediaries in 51 countries. The portfolio companies generated total sales of USD 2.84 billion, 33% of which was certified as sustainable while USD 2.25 billion flowed to smallholder farmers through the purchase of their products. The portfolio companies employed a total of 28,797 workers, 24% of whom were women and invested USD 3.9 million in the education and training of staff as well as the smallholder farmers who act as suppliers. In addition, responsAbility can identify which sustainability standards investees have complied with, and whether they invest in energy efficiency and renewable energies.

    Investing in the SDGs: a worthwhile opportunity

    This is just one example of how to evaluate at an SDG-related investment for its performance when it comes to impact. While there is no universally accepted measurement system, investors can understand what they are offered by asking the right questions –which will come more easily as investors gain experience in the field. In turn, they will be rewarded with access to unique growth markets and investments that create market-based returns at the same time as sustainable impact.

    Investors’ growing interest in the impact of their investments is a huge opportunity to progress the SDGs, and sends a clear signal to the market that investment capital can help solve some of the world’s most pressing challenges. In addition, by adopting an SDG-aligned investment strategy, investors can more clearly communicate how they are considering ESG factors in their investment decisions and how their investments contribute to the broader priorities of global society.


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