Pension scheme trustees have to be resilient. With the world seemingly buying into the idea that their savings should be used to protect the planet, end corruption and promote equality, the guardians of their retirement pots have had to consider one new strategy after another.
First there was socially responsible investing. Then there was corporate social responsibility, which was followed by environmental, social and governance (ESG). Just as trustees were getting to grips with what that means and how to include these factors into their investment decisions, along came the Sustainable Development Goals (SDGs).
In 2015 the United Nations (UN) introduced SDGs to improve the quality of life for every citizen around the world by 2030. To achieve this they set 169 targets organised into 17 categories, or goals (see page 31). Access to clean water, eradicating hunger, promoting gender equality and social justice as well as reducing global warming are just a few of the goals that 198 governments have signed a commitment to in the past four years.
The significance of this challenge should not be ignored. Success is not just about feeding starving children in Africa or providing affordable energy in the developing world; the ramifications run much deeper. Not achieving these goals could have “dire consequences” for pension schemes, read the conclusion of Dutch pension funds have yet to embrace SDGs, a report sponsored by Robeco, an asset manager.
The thinking behind this warning is simple. A pension scheme could regularly beat its return targets and enjoy the luxury of a surplus, but in 20 years’ time if it is paying pensions into a world that is unliveable then the trustees have failed in their fiduciary and stewardship duties.
So it is not just the responsibility of governments to improve the quality of life, private capital has an interest, too.
MEANS, MOTIVE AND OPPORTUNITY
Victoria Barron, a responsible investment analyst at Newton Investment Management, says that the goals are a catalyst to encourage global participation in ensuing that there is a future for all beneficiaries to retire into. “This is about something more than just profit,” she adds. “It is about viewing profit in a more holistic sense where everyone is profiting from what pension schemes are doing.”
The point is that to achieve all 17 goals in 15 years is a huge challenge, and an expensive challenge at that. Indeed, the UN Commission on Trade and Development estimates that meeting the SDGs will cost US$5trn to US$7trn a year between 2015 and 2030.
Governments, many of which could be navigating economic turbulence in the coming years, cannot be expected to foot the entire bill for fixing the world. So, private capital does have a role to play.
There is, however, a problem. Thanks to the trillions of dollars under trustees’ management, the means to fund change is there. Pressure from shake-holders on those responsible for their capital to build sustainable portfolios means that the will is there. But the opportunity isn’t.
The targets within each goal were devised for governments to tackle and not to meet the needs of those managing private capital.
The sub-targets under each SDG not being easily investable is a problem that is all too real to Lottie Meggitt, a responsible investment analyst at Newton Investment Management. “A lot of them are quite obscure and there are things that are quite difficult for companies to measure, even if they have every intention of adhering to them. “In the investment world that just doesn’t work,” she adds. “People want to be able to quantify things. Until the UN makes them more investable it is difficult for investors to measure them.”
NOT GREEN ENOUGH
This is a big problem. Mette Charles, senior investment research consultant at Aon, recalls a conversation she had with a manager who told her that only 50 of the 169 sub-goals are “possibly investable”.
This difficulty was highlighted in research by PwC late in 2018 that found only 28% of companies globally mention SDGs as part of their business strategy.
Green bonds are a perfect example of the problems investors face when wanting to support these goals.
On the surface, it might appear that lending money to a company that intends to build a solar power plant would help achieve SDG 13, which is climate action. Not so. That particular goal includes spreading national awareness of the issue, and that is not easy to invest against.
“It is difficult to have a targeted investment within the SDGs because they were not devised for that purpose,” Charles says. David Czupryna, senior client portfolio manager at Candriam Investors, picks up the thread that not every company can easily align itself to an SDG. “Take a telecom company. Is it reducing poverty? No. Is it reducing hunger? No.
“A local telecom provider operating in Suffolk has no clear path aside from having an advanced gender equality policy,” he adds. “Not everyone can make a huge impact.” Indeed, having an impact on peace and justice is harder than generating cleaner energy or reducing water usage.
One argument as to why more companies have not included SDGs in their strategy is because the goals are less than four years old and senior managers are still trying to get to grips with them.
Investors are facing the same problem in that many are struggling to know how to implement SDGs into their portfolio, says Masja Zandbergen, Robeco’s head of ESG integration and who is responsible for co-ordinating ESG integration.
“What does no poverty mean? How do you translate biodiversity into an investment opportunity?” she asks. “So it has taken some time for people to get their hands across this topic and to get research in place.”
Newton’s Victoria Barron says: “The SDGs have been described as a gift to investors in that they are bringing together some of the world’s biggest challenges into a framework. Yet because this is not an investment framework it is hard to bed down into an investment approach.”
Manuel adds that the SDGs are a great framework, but that “the devil is in the detail”.
There are individuals, organisations and groups trying to build investable mandates off the SGDs.
“Everyone is chipping in but no one approach is standing out,” Manuel says. “Some ideas are emerging, but what is not there is any form of common practice or common acceptance of building SDGs into the way that investment portfolios and investment strategies are run.”
SDG funds is not a subject that is raised by Aon’s clients in conversation. “It tends not to be what starts the discussion,” Manuel says. “It might lead onto the SDGs, but is not what triggers the interest.”
It is a similar experience at Newton, although any questions put to its managers on implementing such a strategy usually comes from the firm’s Nordic clients or those who already have sustainable exposures.
So investors and companies already having an interest in sustainability are usually the ones taking the lead on SDGs. Indeed, in December climate impact disclosure specialist CDP announced it was opening the order book on its first fund, CPR Invest – Climate Action.
The aim is to build a portfolio of mainly larger companies that are working to keep global temperature rises below 2 degrees Celsius (see page 27). In the sales publicity for the fund, CDP stated that the investment objective will be in line with SDG 13, which is related to climate change. So there is an interest, albeit by niche specialists, but they are still being used in investment circles.
To help investors navigate the problem of allocating funds to these goals, MSCI launched the Sustainable Impact index a few years ago, which is the basis of iShares MSCI Global Impact ETF.
“It is a concentrated universe,” says Meggin Eastman, head of impact and screening research at MSCI ESG Research. The index is made up of companies focused on products and services that are aligned to helping solve the goals, such as generating cleaner sources of energy or treating diseases.
MSCI is talking to several institutional investors about developing this index and is working with the Organisation for Economic Co-operation and Development on exploring the possibility of creating an index that would take a more holistic view of how companies could contribute to achieving the goals.
Designing an index that would contribute to achieving each of the goals appears to be a near impossible task. But, as Eastman points out, just because a goal cannot be achieved through a company’s business model does not mean that it cannot contribute through its behaviour.
For the goal on peace, justice and strong institutions, for example, companies can play a role by keeping their operations, and those in their supply chain, free of corruption. Not engaging in money laundering and paying their fair share of taxes would also help. “It is not contributing to the problem as well as trying to solve it,” Eastman says.
“There are different ways that companies can contribute to these goals,” she adds. “Some are more business opportunities and some are about basic conduct.”
A HOLISTIC VIEW
Despite the difficulty in finding an investable angle for many of the goals, their introduction has made a positive impact.
“It is not perfect, but from an investor’s standpoint we welcome them,” Czupryna says. “It has provided a lot of clarity. It has allowed us to provide a form of reporting to investors that could be consistent across the portfolio.”
He adds that the goals have a “common language”, which is something missing from ESG strategies. “SDGs are a way to provide a common denominator along globally agreed and visible objectives.”
For Manuel there is a lot of work to do in finding out how trustees can invest in these goals, but they have “made an impact”, also pointing to the framework and terminology that they provide, which enables people from different parts of the system to understand each other.
This common language is needed to help the industry solve problems rather than just manage risks.
Another benefit is that the goals have a wider remit than ESG-led investing when it comes to making a difference. It also takes an expanded view of a company’s offering. “SDG investing shifts the focus from the operations to the product and both should be good for a company to be included in a SDG fund,” Zandbergen says.
When it comes to trying to meet the goals, trustees should take a holistic view of a company they are assessing, says Helena Viñes Fiestas, deputy head of sustainability and head of research and policy at BNP Paribas AM.
She adds that if you invest in a solar power company investors should also screen their social practices. “We need to always remember the importance of due diligence.”
For example, a pharmaceutical company may have distributed 100 doses of a medicine for free in the developing world. This might help an investor to contribute to SDG 3, which focuses on good health, but a look at the wider company shows that it blocked generic competition in those countries.
“While they have a programme that provides a medicine for free, it is generic competition that will lower prices. So how do you account for that?” Viñes Fiestas says.
“You have to look at everything a company does before you invest,” she adds. “At its core, SDGs are about the overall footprint of the company.”
More importantly, she says, SDGs provide a different portfolio outcome. “Whereas traditional ESG investing is more about selecting the best companies in each sector, SDG investing builds a portfolio of sector biases.”
This means that there will be exposure to fewer energy companies, for obvious reasons, as well as food companies, due to un-nutritious food not contributing to eradicating hunger or providing good health and wellbeing. “So there is a difference between sustainable investing and SDG investing,” Zandbergen adds.
HERE TO STAY?
Different can only mean better when investors crack the code as to how to invest against more of these objectives. Newton’s Victoria Barron believes that investors need help in this area.
She calls for the UN and governments to give investors better information, greater descriptions and more clarity on how this could all work.
“At the moment we are floundering and coming up with our own ideas and our own metrics and everyone is trying to take the glory for the best idea or unique selling point.
“The best way to make meaningful progress is through policy initiatives and providing greater information which may enable quicker investment which can actually achieve the SDGs by 2030,” she adds.
Although the SDGs need to be more investor friendly and have so far been slow to become part of company strategies, Candriam’s Czupryna believes that they are “not a fad” as they could be an effective risk management tool.
“If you see a clear mismatch between an investment and the SDGs, then you are carrying some risk in your portfolio, be it climate risk or governance risk,” Czupryna adds.
Barron returns to the theme that these goals are still largely new, when she concludes by saying: “Having said all of this, we are at the beginning of this journey. It is not perfect, but exciting progress is being made.”
It appears trustees have a long way to go before they can satisfy some of their members that they are contributing to the goals. They are probably hoping that this will be the last sustainability strategy that they will have to figure out how to play for a while.