January 31, 2018

Can you use the SDGs as an investment tool?

by Thomson Reuters.

In September 2015, 193 of the world’s governments adopted the UN’s sustainable development goals (SDGs) as a blueprint for changing the face of the planet by 2030. They provide a universal framework for sustainable development through 17 different goals, each targeting a different aspect of a future that ensures prosperity and environmental protection for future generations.

For investors, the SDGs represent both the power that the financial world can have in supporting a transition to the UN’s vision of the future and the ability to find sustainable investment opportunities. Many of the goals – for example, climate change, water quality and availability and gender equality – represent areas in which investors are already making progress towards improved ESG outcomes, through asset allocation, investment decisions and company engagement.

Though their introduction in 2015 has already prompted a lot of investor movement – some 76% of institutions surveyed at the time by the UN say they are “already taking action” on the SDGs – translating them into investible decisions is not altogether straightforward and requires some extra work. With 169 targets included in the 17 goals themselves, there is a clear need to identify priorities and measure the impact of any investments made as a baseline requirement.

Some institutions are setting high-level targets that align with the SDGs. For example, Dutch public sector pension fund ABP announced in 2015 that it was aiming to cut the carbon footprint of its investments by 25% and double its sustainable development investments to be worth 58 billion (£51 billion) by 2020. This required a careful look at the “taxonomy” of each SDG to determine which were investible or which “could be translated into investible cases” said Xander den Uyl, who serves on ABP’s Board of Trustees, when speaking at an SDG Webinar hosted by Thomson Reuters and Responsible Investor.

This approach can work for broad targets like ABP’s, but can require more granular input when examining the impact made through investments. Christopher Greenwald, Executive Director, Sustainable and Impact Investing at UBS Asset Management, recognized the opportunity for expanding ESG investing that they provide but also the challenge posed by the current sustainability data landscape. Most information is provided via companies’ internal performance metrics, he noted, rather than their external impacts.

“Establishing new and innovative metrics to monitor and measure the external impacts of companies is one of the most important foundational tasks required for a solid basis to develop investment strategies around the SDGs”, he added.

Creating such a model is important for using the SDGs to their full investment potential as it allows portfolio decisions to be made based on comprehensive and objective information, with analysis moving from just one company’s disclosures to examining the impact of that same company’s products and services on the world at large. Greenwald spoke at length about the need for consistent data based on objective frameworks, and said that though UBS had worked with its partners to develop their own, a clear leader in the market had yet to emerge.

Data providers are turning their attention to these metrics, however. For example, a recent report that Thomson Reuters produced alongside the UN examined a group of 250 publically traded companies that represented a third of the world’s anthropogenic emissions in an effort to highlight the relationship between decarbonization strategies and long-term financial performance.

Among other recommendations, it set out new strategy-centric metrics to better assess firms as they progress towards decarbonization. These data points could allow investors to better assess companies’ efforts in aligning with SDG number 13 – to take urgent action to combat climate change – and thereby accurately gauge the material impact of steps they were or were not taking.

The potential for the SDGs to transform investors’ attitudes towards sustainability and ESG issues is close to being realized. Given a robust, impact-focused set of metrics, the tools to be able to identify the opportunities offered by the UN’s framework are almost in investors’ hands.

With Thomson Reuters ESG data and solutions, you can more effectively identify systemic ESG risks in your investment portfolio and make the most of the SDGs’ potential. Find out more here.

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