How the UN Sustainable Development Goals support investment aims
The UN Sustainable Development Goals, or SDGs, are fast becoming a key tool when it comes to measuring and monitoring investments. In this article we take a closer look at why and how they are being used.
At the UN Summit in New York in September 2015, world leaders adopted 17 Sustainable Development Goals (SDGs), an integral part of the 2030 Agenda for Sustainable Development. The SDGs, which officially launched in 2016, aim to tackle big environmental, economic and societal issues, and are intentionally interconnected. Their overarching ambition is to ensure that no-one is left behind in the move to create a more sustainable world.
The SDGs and how they work
Each SDG has a number of targets and indicators that are used to focus action and monitor performance. For example, Goal 12, ‘Ensure sustainable consumption and production patterns, has 11 targets, including:
- By 2030, achieve the sustainable management and efficient use of natural resources
- By 2030, substantially reduce waste generation through prevention, reduction, recycling and reuse.
The SDGs were originally intended as a tool for government and policymakers. Data is collected at different levels of government, which is reported to the UN who forms a comprehensive picture of national and global progress on each SDG.
By combining ESG integration of risks and opportunities with an SDG framework, a more holistic responsible investing approach can be achieved.
SDGs and investors
The clarity and holistic nature of the SDGs has led to them being adopted by an increasing number of businesses, organisations and investors as part of their environmental, social and governance strategies, helping them develop solutions and align decision making. The SDGs focus on real world outcomes for society, with a forward-looking approach that promotes action and provides meaningful measurement.
The Principles for Responsible Investment (PRI) is a global body to support investors’ ‘incorporation of ESG issues into investment practice’. The launch of the SDGs highlighted the key role of the private sector in tackling these global issues. As part of that, the PRI aims to help investors align their responsible investment practices with the SDGs.
To encourage the participation of the investment community, the PRI has distilled the investment case for the SDGs into five points of opportunity identification as well as risk mitigation:
- The SDGs are the globally agreed sustainability framework – supporting investors to understand sustainability trends and their relevance to investment activity and their fiduciary duties.
- Macro risks – the SDGs are an unavoidable consideration for ‘universal owners’ (those who own a slice of the global market). Good outcomes for such owners are contingent upon good global economic health. Encouraging sustainable economies and markets could improve their long-term financial performance.
- Macro opportunities – the SDGs will drive global economic growth; the SDGs aim for a future where economic growth – a key driver of financial returns – goes hand in hand with a sustainable environment and fairer society.
- Micro risks – the SDGs as a risk framework. Using an SDG lens can help identify financially material risk across industries, companies, regions and countries and thus strengthen investors’ ESG risk frameworks.
- Micro opportunities – the SDGs as a capital allocation guide. They can be used to help define and shape investment strategies to identify investment opportunities in solutions to sustainability challenges. 1
Building on this, the PRI has also suggested a high-level framework to support investors to shape real world outcomes that are in line with the SDGs. The framework is designed to help investors identify risk and opportunity, understand the changing regulatory landscape, and overall ‘minimise the negative outcomes and increase the positive outcomes of investment’. 2
Investing in companies with better ESG credentials that contribute positively towards the SDGs helps align purpose with action, and can ultimately affect real world outcomes.
Real world outcomes in real world practice
Some Investment managers, pension providers, and asset owners are integrating SDGs into their investment strategies. They can be used in different ways. For example, some are using them to create their own frameworks to help evaluate companies against the goals. This provides data which they can then use to assist asset allocation, or stock selection, for example.
Frameworks that draw on the SDGs also create an ability to increase investments in companies that have a positive impact on SDGs and more closely link to real-world outcomes. This can also help manage risks and opportunities. For example, tilting away from companies with a negative impact on SDGs or lower ESG credentials in order to reduce risk, and tilting towards companies with better ESG credentials and those transitioning their businesses to a low carbon economy, which could potentially deliver growth opportunities.
The SDGs can also be used to direct stewardship activity, by identifying system-level themes and supporting those companies that are contributing to the global achievement of the SDGs.
By combining ESG integration of risks and opportunities with an SDG framework, a more holistic responsible investing approach can be achieved. Creating investment portfolios that tilt towards companies with better ESG credentials and that are making a positive contribution towards the SDGs helps align purpose with action, delivering investments that can affect real world outcomes.
References
1 ‘The SDG Investment Case’, Principles for Responsible Investment, 12 October 2017, The SDG investment case | Thought leadership | PRI
2 ‘Investing with SDGs: a five-point framework’, Principles for Responsible Investment, 15 June 2020, Investing with SDG outcomes: a five-part framework | Thought leadership | PRI
