Commentary: Both sides of the mouth
SDGs: an opportunity for mis-selling?
My LinkedIn posts generally get 1,000 or fewer views but my recent posting about Sustainable Development Goals (SDGs) received nearly 13,000 views. For those who roll their eyes at yet another acronym, think again. These 17 global goals – covering poverty, hunger, health, education, climate change, gender equality, water, sanitation, energy, urbanisation, environment and social justice – were agreed by the United Nations in 2015 but have received a surge of interest in the financial community over the last year. Unlike the Millennium Development Goals, which they replace, the SDGs apply to all countries, developed and developing alike. And the outsized response to my consultation is a good reminder that SDGs are a hot topic. Investors who have any desire to be client-centric should take this issue seriously.
I have long argued that a focus on one thing – be it traditional corporate governance or climate change – is misguided. We can’t fix our highly dysfunctional investment system that way. So I fully applaud political leaders for adopting this holistic set of goals, which are the first step in envisioning a different kind of future to the one we are on track for. But I’m far from convinced that the best thing that investors can do is to create SDG investment products.
First, it’s very easy to re-badge current corporate social responsibility (CSR) projects as ‘good news’ SDG stories and then use these narratives to justify stock picking. In that respect, SDGs could be manna from heaven for ESG mis-selling, possibly even the next sub-prime. Not only has this little societal value, but it will almost certainly rebound on the industry. As Ralph Thurm, managing director of Reporting 3.0, put it: “As long as we don’t have new business models that challenge our current economic system design incentives – what we call the missing ‘SDG 18’ – and the reporting, accounting and data architecture to ensure this, scalability remains a really big issue.
“Saying ‘we comply with these two to three (cherry-picked) SDGs’ is just white noise in a world where 90% plus of companies don’t even know the SDGs.”
Second, by framing all 17 SDGs as equivalently important, this inevitably reduces the focus on the really critical issues. We need a good debate about what these are. As regular readers will know, I think the ‘meta-SDGs’ are climate change, the greatest systemic risk, income inequality, which is the driver of dysfunctional politics, and corporate political influence – a big reason why governments are so ineffective. The key point for now is that having more than three, or perhaps five, goals means progress on any one of them will be too slow.
For small to medium-sized enterprises (SMEs) – which make up well over 90% of corporations in most countries and which responsible investors should be allocating more capital to – this seems like a one-size-fits-all approach. SMEs – as Lowellyne James, an academic and CSR adviser, highlighted – have limited resources and cannot achieve all 17 SDGs simultaneously. At best, they can focus on those SDGs that are relevant to their business goals.
So is there common ground between my position – about the critical importance of climate, inequality and political capture – and the pragmatic position about what SMEs can do? Yes. First, multinationals that support projects like the UN Global Compact should be expected to shoulder the bulk of the burden on these meta-SDGs. And second, SMEs should ensure their trade associations do nothing to undermine these meta-SDGs.
Third, having SDG products inevitably triggers a race in asset gathering for these niche products. We’ve seen this before, first with ethical/SRI funds, then climate bonds and most recently impact investing. We also know that this will do very little to impact positively in the real world. Rather, genuine progress means creating contexts that cause core business strategies to become SDG-compliant. Changing the people at the top and changing their incentives is key. Investors who claim to be SDG-friendly or who launch SDG products, but who support most directors and most incentive plans, are clearly talking from both sides of their corporate mouth.
SDG-friendly investors should use their stewardship influence to bring about this paradigm shift and that means directing as much energy at identifying the SDG laggards – and either getting them to change or shorting them – as stock picking the SDG leaders. Regulators have a key role to play here, not least with ‘new’ systemic risks like climate change.
The bottom line is that SDGs were formulated by the UN system to fix a macro political/economic problem. In an age of austerity, reduced taxation and drop in public support for international solidarity – agendas that have been promoted by powerful corporate and financial interests – one hope is that SDGs will result in the private sector contributing to essential budgets. This is totally understandable if you are a UN official worried about how your part of the ecosystem will keep doing what is urgently needed. But trying to fill the gap in budgets by looking to corporates and the financial sector is the wrong way to frame the SDG challenge – the issue is much more important.
So what is the answer? We need the hugely powerful global corporate and financial community to take up the SDGs – and especially the meta-SDGs – as central to the core of their work, or all their assets. One of my colleagues put it bluntly using the example of SDG 1, reducing poverty. “For asset managers to say they contribute to this SDG through SDG products whilst they continue with their outsized and indefensible big pay packages is paradoxical.” And that is being rather understated.
What does this understanding of the SDGs mean for impact investors who assert that they have a ‘unique role’ in taking forward the SDG agenda? I have no doubt that good impact investors could be a significant part of the solution, helping innovation and scaling up. But until the advocates of impact investing also take up the campaign to transform the 90%-plus of assets that their clients and in some cases, other parts of their very own firm are responsible for, impact investing will continue to be seen as, at best, a distraction activity.
Raj Thamotheram is founder and chair of responsible investment think-tank Preventable Surprises