ESG: UN goals strike a chord
The UN Sustainable Development Goals, agreed by world leaders in September 2015, have captured the imagination of many in the European institutional investment community. Susanna Rust asks why
Few would accuse the United Nations of not aiming high. In 2015 it came up with 17 Sustainable Development Goals (SDGs) forming an agenda “to end poverty, protect the planet and ensure prosperity for all”, by 2030.
There are 169 targets linked to the goals, and 230 individual indicators to monitor implementation.
In the 15 months since they were agreed, the SDGs have gained a good deal of attention from the institutional investor community.
This is perhaps best encapsulated by initiatives in the Netherlands and Sweden, as part of which pension funds and other institutional investors with more than €700bn in assets under management have expressed commitments to make investments in line with the goals.
Interest in the SDGs is also reflected in a guide produced by the Principles for Responsible Investment (PRI) on the goals and how financial markets can support them, and a report by the Investment Leaders Group (ILG) at the Cambridge Institute for Sustainability Leadership, which sets out a framework for reporting the impact of responsible investment that uses the SDGs as its starting point.
But the SDGs are not without criticism – some quite sharp.
A contribution for US magazine Foreign Policy in September 2015 by William Easterly, professor of economics at New York University (NYU) and co-director of the NYU Development Research Institute, is headlined: The SDGs Should Stand for Senseless, Dreamy, Garbled.
In the article, Easterly points to other voices critical about the SDGs – in the Economist, from an anthropologist at the London School of Economics, and the Pope – and slams the SDGs as “unactionable, unquantifiable” and, in some cases, “unattainable”.
Unlike their predecessors, the Millennium Development Goals (MDGs) from 2000, the SDGs are not “precise and measurable” but have gone “all vague and utopian”, Easterly argues.
He also criticises what he describes as a foreign aid “no-show” in the SDGs and the reference instead to the target to “mobilise additional financial resources for developing countries from multiple sources”.
Although not asked specifically about this precise attack on the SDGs, the pension funds I spoke to were not oblivious to the woolliness of the SDGs and the challenge this poses.
But they do not appear fazed, or put off by this state of affairs.
Johan Florén, head of communications and ESG at Sweden’s AP7, says the pension fund was “instantly interested” in the SDGs when they were finalised, but then realised that they are “very broad and more or less cover everything”.
He says: “This is good but also a challenge, because it’s very hard to work with everything,” he tells IPE. “So we came to the conclusion that we probably have to start with something – we have to start digging where we stand, sort of.”
He talks of the SDGs as “almost like a language”. Acknowledging their vagueness, he says the buffer fund sees them as “a common starting point around which we can define everything from metrics to models”.
“We can agree on what the goals are, what the sub-goals are and then we can put it into practice,” he says. “But it’s not like we have worked everything out yet. It’s more like this is our intention.”
Fellow Swedish buffer fund AP3 has a similar stance. “We can’t cover all the SDGs,” says Peter Lundkvist, its senior strategist and head of corporate governance. “I don’t think that’s very smart to do – you have to prioritise.”
AP3 has done so, identifying five of the SDGs that are most important for the fund.
Indeed, some of the goals will be more actionable than others, either in general or specifically in terms of what institutional investors can do.
The point is made by a group of large Dutch financial institutions, including pension investors APG and PGGM, in a report on an ‘SDG Investing Agenda’ initiative they launched in December 2016.
In the report, the investors state that although research into the investability of the themes identified by the SDGs is limited, studies show infrastructure and environment-oriented SDGs as “particularly investable SDG investment areas”.
“A common starting point around which we can define everything from metrics to models”
“While it is clear that not all SDGs are as ‘investable’ as others, we assert that a lot more can be done to ‘crowd in’ additional investment across asset classes and across the societal and environmental themes that are incorporated by the Sustainable Development agenda,” the report adds.
To the extent that it is the infrastructure and environment-oriented SDGs that investors are focusing on, the goals can be seen as a way of framing investment strategies and beliefs about the importance of environmental, social and governance (ESG) issues that are already espoused by many European institutional investors.
Echoing a comment from Mark Wilson, group CEO of Aviva, that “it’s just enlightened self-interest” to support the SDGs, the group behind the Dutch SDG investing agenda says “it is not only of societal importance but also in the interest of their investors and business relations to consider the largest social and environmental challenges of our time in their work and investments”.
But the SDGs are not only attracting attention as a way of framing existing practices. Institutional investors are also turning to them as a reference framework for the future.
Lundkvist at AP3 speaks of the SDGs as “a good roadmap for our investment process” and one that can “align companies, investors and society”.
They are a helpful tool for “scaling up” investments, he adds.
But more than anything perhaps, the SDGs feel very much “of their time” in the still young history of responsible investment.
Will Oulton, global head, responsible investment at First State Investments, tells IPE that “the perception of value at risk” from poor management of environmental and social issues has changed since the MDGs.
There have been many “nudges” from regulators and governments since the financial crisis, he adds.
“We didn’t have this kind of environment and broad industry acceptance that these are important issues at the time of the Millennium Development Goals,” he notes.
The SDGs are also of their time in that they tie in with a growing interest in impact investing and in particular the recognition that, as the ILG puts it, “[t]he challenge now is to bring simplicity to the measurement and reporting of impact within a credible, scientifically robust framework”.
The ILG has turned to the SDGs to help it do just that, distilling them – “owing to the large number and diversity” – into six themes relative to investors, “from which metrics, methodologies and test reports are being derived”.
The report continues: “The framework is not a complete solution but a first step towards grappling with an extremely complex reporting challenge.”