Stockholm (NordSIP) – On September 25, 2015, the United Nations General Assembly adopted the Sustainable Development Goals. These 17 goals succesfully rejuvenated the previously esablished 8 Millenium Development Goals and have since become a staple of global economic policy and a set of reference points for sustainable investors.
To mark their fifth anniversary, we decided to reach out to asset managers and hear their assessment of the SDGs, how far along in the journey we have come along, the challenges we still face and how the goals have interacted with the COVID-19 epidemic.
The SDGs as an Engaging Common Language
Discussing the journey over the last five years, most asset managers recognise the framework’s ability to create a common language for sustainable investors to engage with the challenges facing our planet across all levels of society, business and politics.
“Today, the SDGs have become a common language for many investors focused on sustainable investing,” says Louise Kooy-Henckel, Investment Director, Wellington Management. “We welcome the increased visibility and sense of urgency for impact they have catalysed, even if we do not use them explicitly in our investment approach.”
Florian Cisana, Head UBS Passive & ETF Specialist Sales Strategic Markets EMEA at UBS echoes this sentiment, noting that at UBS, the “concept of sustainability is guided by the [SDGs], which bring together the enormous societal and environmental challenges the world faces. We recognize that it is important to understand these challenges as well as the opportunities arising from them.”
At Union Bancaire Privée (UBP), Victoria Leggett, Head of Impact Investing and Eli Koen, Portfolio Manager Emerging Equities, also agree. “Arguably the most useful aspect of the SDGs, is that they’ve achieved widespread buy-in across industries and sectors. It is a huge achievement that the goals have become familiar to schoolchildren and CEOs […] the first step towards change.”
Leggett and Koen further point to the SDGs’ ability to focus political and business minds as another source of success. “Even in emerging markets where corporate disclosure standards and ESG practices have lagged behind some of the more developed markets, we see many companies publishing detailed sustainability reports which map their activities to different SDGs,” they add.
Eoin Murray, Head of Investment, at the international business of Federated Hermes, also highlights the benefits of having the SDGs as a tool with which to engage companies. “The SDGs are increasingly being used as a framework through which market participants can articulate, measure and report efforts to improve their impact. They have served as a catalyst in mobilising the investment industry to work alongside governments and institutions to solve some of the world’s most urgent environmental and social problems.”
“As a common framework and language, the SDGs continue to prove invaluable to our efforts to engage companies on what more they can – or should – be doing to play a part in this shared endeavour,” Murray adds. “Engaging with companies on the SDGs provides investors with valuable insights into their current levels of sustainability and longer-term commercial risks and opportunities. We have seen a profound shift in the fixed income market, with bondholders engaging with issuers on SDG objectives and corporates linking their coupons to sustainable targets.”
However, the success of the last five years was not preordained. Robert Rubinstein, Founder and Chairman of TBLI Group, for one, did not expect the goals to be so warmly embraced. “I am surprised how the SDG’s have become the flavour of the month so quickly. With all the issues fund managers and corporates had on their plate, the SDG’s growth in popularity was quite surprising,” he explains noting their ability to “capture corporate attention”.
For Nick Tapp, Chairman of Craigmore, a sustainable farm and forestry investor in New Zealand, the benefits of the SDGs are clear in his field of work. “The SDGs have proved valuable on two fronts, both in engagement with those investors, who need to have a basis on which to make decisions and at the operational asset level, where on-farm and in-forest decision-making can have a meaningful impact. Engagement with the SDGs has highlighted those areas of activity, where we already have a strong sustainability presence, but do not talk about it, as it is accepted good practice, and has identified those areas, where there are improvements to be made. Agriculture and forestry are complex sectors which cut across many of the SDGs, and where individual decisions can make improvements in more than one area.”
Pitfalls: Slow Pace, SDG-Washing, Disclosures and Contradictions
The road is paved with good intentions but much still needs to be done to overcome several bumps. “Like with the PRI, many embraced [the SDGs] for ribbon-cutting ceremonies or press releases but didn’t allocate resources to actually achieve them or report on them,” warns Rubinstein.
“Our focus has continued to be on investability as this is consistent with a key message that accompanied the launch of the SDGs – the recognition of a major investment gap (with estimates ranging from USD 2 trillion to as high as USD 7 trillion annually) that will need to be closed if the world was to achieve the Goals by 2030,” Cisana adds, noting the importance of walking the walk.
“A lack of focus is a cause for concern when goals are not integrated into business plans and not supported by the setting of measurable target outcomes,” says Andrew Parry Head of Sustainable Investing at Newton Investment Management, part of BNY Mellon. “This lack of detail and commitment also puts into context the limitations of the mapping to SDGs in public equity or credit portfolios when the reporting and intention are so limited at the investee company level.”
“Using SDGs as a simple mapping exercise could render them to no more than a simple relabelling tool to replace existing index sector classifications. Many of the approaches use index construction methodologies, which makes the baseline for risk, not people and the planet, but market capitalisation-weighted indices. Eliminating poverty cannot be normalised for the convenience of public market investors,” Parry continues.
Koen dives into details, discussing what can be done to manage the risk of SDG-washing. “There’s a danger [the SDGs] are misused and this is the flip side to their accessibility. Companies are in some cases stating that they are contributing to certain SDGs, but there is no evidential requirement or audit regarding these claims.”
With her colleague, Leggett seems to suggest that the problem with SDG-washing is just another symptom created by the difficulty to develop common measurement and data disclosure standards enforced by regulatory agencies globally. “Regarding carbon emissions, we still do not have an internationally agreed measurement, monitoring and disclosure standard that would force companies to disclose Scope 1,2,3 emissions as well as emissions avoided. The EU taxonomy is a big step in the right direction to fill this gap but more needs to be done both within the EU and outside of it.”
“Finally, we need to be cognisant of the potential conflict among some of the SDGs, particularly in developing countries. In some cases, poverty cannot be alleviated without (a short team at least) an environmental cost. The reverse is also true, where the transition to more climate supporting systems may require strong state and industry support to ensure workers can be retrained and redeployed,” Legget and Koen warn.
“Although the take-up and use of the SDGs have been strong, it has not been uniform. Too many asset managers mistakenly cite their relevance only to nation-states rather than to corporate,” Murray says. “We observe – when reading the UN SDG progress report – that the world still has a long way to go in solving these intractable problems. We recognise that it takes time,” adds Kooy-Henckel.
SDGs and COVID-19: Interconnectedness and Recovery
Sadly, COVID-19 casts a shadow over what would otherwise be a joyful occasion as we reach this 5-year milestone. “The pandemic has reinforced our contention that companies have a responsibility to their employees that goes beyond paying them for their labour,” Murray says.
“Some argue that the pandemic has been a great leveller – people across the globe have been forced to self-isolate, regardless of their income or status. However, we believe it has been quite the opposite,” Murray warns. “It is clear that economic, employment and health inequalities will be exacerbated by this crisis. While this is unavoidable, we must work to mitigate the downsides as best we can.”
Nevertheless, some of the asset managers expressed hope that the similarities between the ongoing crisis and the concerns posed by longer-term sustainability risks will help fuel support for the SDGs.
“As COVID-19 has swept across the world, it has revealed how truly interconnected we all are,” Kooy-Henckel argues. “It has underscored acutely the need for and challenge of – coordinated social and economic actions. The world is changing fast and the pandemic underlines the need for all market participants to mobilise capital for impact purposes in effective, measurable ways, urgently.”
Koen notes the similarities between the interconnectedness at the heart of COVID-19 and the global nature of pollution. “A problem that arises in a remote part of the world has the power to change everyone’s life” the duo explain. “This is not only true for pandemics but also for issues like pollution and climate change. Many issues targeted by SDGs like access to healthcare, education, climate change, pollution, gender equality, poverty, biodiversity cannot be dealt with locally. They are global problems that have to be dealt with through a coordinated response. COVID-19 has made this clear to all of us.”
“The COVID-19 pandemic underlines the need for all market participants to mobilise capital for impact purposes in effective, measurable ways, urgently,” Kooy-Henckel agrees. “The rapid spread and devastating toll of COVID-19 has revealed systemic deficiencies and structural challenges that threaten public safety, community cohesion, and the global economy.”
“In many ways, I believe the crisis will accelerate several of the sustainability trends already underway globally,” Kooy-Henckel adds. “For example, the need to provide access to affordable, high-quality healthcare, especially to underserved communities, and to stem climate change, which is contributing to the frequency of viruses globally. In my view, technology and innovation, which forms the basis of many of our Impact companies, will play an important part and is being employed, both to seek solutions to the pandemic and to mitigate its effects.”
On a similar note, Parry argues that in the present contractionary economic environment, the SDGs also offer a template for growth after the crisis has passed. “SDGs make enormous economic sense, as the UN estimate that their delivery could add $12 trillion to the global economy and create 380 million new jobs [source]. In a world beset by the challenge of recovering from the Covid-19 crisis, that represents a much welcome growth opportunity. The COVID-19 crisis has underscored the urgent need for greater action towards SDGs.”
“Also, recovery packages across the globe are embedding ‘green jobs/recovery’ into their spending plans, so hopefully, this should support the UN’s climate agenda,” Leggett says, echoing Parry. “Consumers have shown an increased awareness for their environment during the COVID months – with renewable energy, energy-saving solutions and electric vehicles proving very resilient in an otherwise challenging market. Climate has, for understandable reasons, dominated the conversation in recent years, but there are signs that COVID-19 has increased awareness about social challenges.
“Perhaps, optimistically, this crisis could even be seen as the point where social and environmental issues are better understood to be co-dependent and the interlinked nature of the SDGs agenda will be a strong reference point,” Leggett concludes.
Picture credits: United Nations / @paolo_cristaldi on Twenty20 / NordSIP