Stockholm (NordSIP) – Given the financial industry’s continued embrace of the UN Sustainable Development Goals (SDGs), the discussion has moved on from questioning their usefulness. Instead, the focus is now on implementation. Nevertheless, understanding how the SDGs can be used to map investments onto sustainable development outcomes is not always a clear cut task.
Given their early adoption of the goals, investment practices in the Nordics, such as the experiences of Nordea Asset Management and Handelsbanken Fonder, are extremely valuable for others still struggling to come to grips with the UN framework.
Focused Vs Holistic
Regarding their attitude to the SDGs, some take a focused approach, while others focus on a more holistic route. Eric Pedersen (pictured left), Head of Responsible Investments at Nordea Asset Management, distinguishes between the general and the product level.“At the highest level, our main focus areas for thematic engagements with investee companies are Climate, Human Rights, Good Corporate Governance and Biodiversity/Water. Especially the Human Rights theme obviously relates to a number of the SDG’s, but even e.g. our climate engagement relates to several SDGs, especially SDG 13 and 7,” Pedersen says.
“At the product level, we have a few focused, thematic products focused on things like climate, social empowerment and diversity. But for our broad ESG STARS funds, we look at all the SDG’s, and actually we assign a weight of 30% to the SDG alignment factor in our internal ESG scoring model, which determines what companies are eliglible for investment. That makes for a more absolute and SDG-aligned scoring system than what most of the vendors offer,” Pedersen adds.
Simon Park (pictured right), Sustainability Analyst at Handelsbanken Fonder, describes a more holistic approach. “We do not focus on a specific sub-set of the SDGs. We believe the complexity of the 2030 Agenda with the many trade-offs and inter-linkages between the specific targets necessitates a holistic approach. With that said, we do see our role and opportunity to drive change as being different for different targets,” Park says. “We do not approach the 2030 Agenda from a “preference perspective”, but rather from a ‘impact perspective’ in the sense of focusing on where we can achieve the most good given our role as asset managers in the sustainability transformation of our economy, ” Park adds.
“We usually talk about the WHAT (products and services the companies produce) and the HOW (the companies are producing these products and services). Our internally developed SDG Solutions Model focus on the WHAT aspect, in identifying to which degree we invest in companies that derive revenue from products and services that directly contribute to the SDGs. Currently we see the potential for doing so in 13 of 17 SDG (SDG 2, SDG 3, SDG 4, SDG 5, SDG 6, SDG 7, SDG 8, SDG 9, SDG 11, SDG 12, SDG 13, SDG 14, SDG 15). This does not entail that we are not focusing on for example equality issues in our engagement efforts as covered in SDG 10. We also evaluate the landscape every year in terms of including new targets and/or SDGs,” Park explains.
SDG Mapping: How?
Both asset managers focus on the connecting revenue streams from their investments to the SDGs, rather than taking an overly top down view of the whole portfolio. “The four themes, Climate, Human Rights, Good Governance and Biodiversity, are part of the long-term Strategy of Nordea Asset Management. As I mentioned, our internal ESG Scoring Model weights SDG alignment directly as part of the score given to an individual company. That has been the case for some years already,” Perdersen explains. “We do not generally map assets against the SDG’s in a summary way, only at the security level as part of the scoring and selection process. For example, in our Climate and Social Empowerment strategies, the investment opportunities are selected on the basis of their alignment to the relevant SDG’s,” Pedersen adds.
“We use annual and sustainability reports in order to map specific revenue streams at the investee company level to specific targets within the SDGs, by assessing whether the product or service produced by the company contribute to any of the 169 targets,” Park explains. “ If yes, we need to establish how much revenue the company is generating from that particular product or service. The analysis was originally conducted manually, today it is facilitated via a machine learning tool we have developed together with a researcher at the Stockholm School of Economics,” Park adds.
“The model is used in different stages of the investment process. It is both used as a screening tool looking for new investment ideas as well as later in the process to further analyse and dissect the company’s different product offerings. For example, the American company Darling Ingredients first came to our intention via an investor conference in which the company’s growing biofuel business was highlighted,” Park continues
“We then analysed the company’s other products and found a strong case for the company being an enabler for target 12.5 which focuses on ‘substantially reducing waste generation through prevention, reduction, recycling, and reuse’. Instead of a company with, at the time, less than 10% revenue exposure to biofuel we saw a company with a core business model that is all about reuse, which positioned the company in a unique situation in terms of its sourcing for the biofuel business as well. Today the company is a core holding in both Hållbar Energi and Amerika Småbolag,” Park says.
SDG Mapping: Challenges and Benefits
Considering the challenges they face, both Nordea and Handelsbanken touched on the difficult issue of data. “I think we have to be frank and say that there is a lot judgement that goes into what is and isn’t aligned to a particular SDG. We have some vendor data that we use for the purpose of determining alignment, but we do have to override that once in a while,” Pedersen says. “Accessing detailed and specific data about the companies’ products and services. Many companies are reporting based on business areas containing products that are not necessarily homogenous in terms of contribution towards a sustainable development. Even for many larger companies, where the amount of sustainability information often is tremendous, there is still a lack of focus on the sustainability impacts of the products and services themselves,” Park adds.
According to Pedersen, one of the main benefits of the SDGs is to provide a benchmark for consistent assessments. “Using the SDG’s gives us a more absolute scoring system than what most of the vendors offer – so that for example a tobacco company would be scored down because of obstruction of SDG 3, Good Health and Well-being , no matter how good they were on other parameters – even if they were the best in their specific industry,” Pedersen says.
Park on the other hand, focuses on the effect that the SDGs have in pushing the sustainability and impact agenda by permeating such discussions. “The main benefit has been having a tangible way of integrating the SDGs in the investment process. The specific score for each company in itself is not the core value, but the discussions and shift in focus towards products and services that actually contribute to a sustainable development are. As a consequence, we have seen an increase in exposure in our actively managed funds to companies providing these products and services,” Park concludes.