From ESG to SDG?
by Tom Lord — Senior Sustainability Analyst at World Wide Generation
“The global coronavirus pandemic, which has already caused unimaginable devastation and hardship, has brought our way of life to an almost complete halt. The outbreak will have profound and lasting economic and social consequences in every corner of the globe,” says United Nations Environment Programme (UNEP) Executive Director Inger Andersen.
The pandemic has exposed the current frailties of our economy and threatened to reverse any gains that have previously been made in addressing poverty, good health and well-being. Global environmental issues, such as climate change and biodiversity loss, still pose significant threats to humanity’s ability to survive. Now more than ever is the time to use the Sustainable Development Goals (SDGs) as the basis of a recovery plan. Several governments have been quick to recognise this and are emphasising the SDGs should be used to “build back better”. With regard to investors, they should also acknowledge the significance of the current issue we are in and make the SDGs the cornerstone of their investment strategies. The rest of this article will discuss the importance of the SDGs and how investors can transition from ESG investing to more impactful SDG investing.
Current ESG-investing picture
The Financial Times Lexicon defines ESG as “a generic term used in capital markets and used by investors to evaluate corporate behavior and to determine the future financial performance of companies.” ESG-investing has continued to grow in recent years and has developed as one class of investment that makes up the umbrella term Responsible Investment. As demand has grown from stakeholders, for companies and investors to be more accountable for their actions in society, as has ESG. Morningstar reported that European investors placed a record €120 billion into sustainable investment options in 2019. [1] More than a third of that investment came in the final three months as sustainability was brought to the forefront of society’s mind. European funds now hold €668 billion of assets in sustainable investments which is an increase of 58% from 2018. This progress has further come to fruition during the current pandemic where it has been shown by Credit Suisse, among others, that funds observing ESG factors are largely outperforming their benchmark. [2] However, it is now time for investors to build on the success of ESG investing and imbed the SDGs into their ESG frameworks. Achieving the SDGs will require an estimated $5–7 trillion per year until 2030 and they can help ESG investors move from a “cause no harm” investment approach to one that is based on creating long-term value and measuring impact.
Figure 1: Annual European Sustainable Fund Flows, 2010–2019 (Morningstar Direct)
ESG to SDG
“Where once ‘do no harm’ was a common approach for the business community, today we are arriving at a new landscape of elevated expectations and responsibilities.” With reference to what U.N. Secretary-General Anttónio Guterres said at the United Nations Global Compact Leaders Summit this week, it is important to take ESG to the next level, with the SDGs being the ready-made tool to do so. [3] ESG investing has previously mainly focused on creating processes and policies, accompanied by basic reporting. Although the current approaches to ESG integration may begin to align to the SDGs, there has been less focus on how investments impact the environment or society as a whole. ESG investors do set targets, but these are based around activity level, such as % investment in renewable energy, not measuring outcomes or impacts, such as the number of girls educated in developing countries, which would be more SDG-investing.
Figure 2: Different terms under the umbrella of Responsible Investment and the direction needed to develop SDG-investing (Tauw)
Existing ESG frameworks can lack direction for investors whereas the SDGs provide guidance and intentionality. The SDGs provide a standardised language, with the global targets and indicators providing opportunities for investors to monitor and compare the progress of investments. Although we must not fail to acknowledge the success of ESG in creating public acceptance and demand for impact-driven investments, SDG-aligned investment provides opportunities for greater financial return as well as measuring impact.
A major complication in moving from ESG to SDG-investing is that the SDGs were never designed as an investment framework but instead as a set of goals defined by governments to achieve social and environmental equality. Yet, as shown in the figure below, it is simple to see the links of certain goals to Environment, Social and Governance pillars. If investors are to meet the SDGs and link their investments to them, they must identify the positive and negative implications of their investments and then attempt to ensure the impacts align with the SDGs. To enable this to happen we come to the age-old problem of lack of reliable sustainability-related data. There will not be an instant solution to this problem. However, if companies identify and focus on their most material sustainability issues, and report on them holistically, identifying synergies and links to other issues, investors can obtain a better idea of how that company is impacting society and then measure its investment impacts.
Figure 3: Aligning the SDGs with the three pillars of ESG. (Berenberg)
Embedding the SDGs into investment strategies should be the primary manner that investors transition from ESG to SDG-investing but investors should also have a major influence on how public policy can benefit the SDGs. Public policy significantly affects the sustainability of financial markets as well as economic, environmental and social systems. Hence, public policy engagement with regulators, governments and policymakers should be a key responsibility for investors looking to gravitate their investments towards having an SDG impact.
We have now reached the “Decade of Action” and the clock is ticking on the SDGs. Even with this current pandemic, we need to translate ESG-shaped investing, and interest in SDG-investing, into actual actions and transactions.
At World Wide Generation we have developed Company Tracker that helps companies report their sustainability-related data in a standardised and holistic manner. This data is then mapped to the SDGs which provides the company with insight into how their business and supply chains are contributing to the SDGs. Company Tracker also allows for investors to use this information on companies to then inform their investment decisions in how to make the greatest impact and move from ESG investing to SDG investing.
