Written by Jan Anton van Zanten, SDG strategist at Robeco
The Sustainable Development Goals (SDGs) are taking sustainable investing to the next level. Since their adoption by all United Nations member states in 2015, the 17 SDGs, with their 169 targets and 232 measurable indicators, crystallised an understanding of sustainable development. This provides a blueprint for sustainable investors, who seek to harvest alpha from investing in activities that contribute to societal well-being and environmental sustainability.
The United Nations brands the next 10 years as a ‘Decade of Action’ to ensure that the SDGs are achieved by 2030, calling on governments, but also the private sector and investors, to accelerate their impacts. So, how can investors invest in those firms that make the best contributions to the SDGs – thereby advancing both wealth and well-being?
Why investors should care about the SDGs
The SDGs present a massive business opportunity in investing in the sustainable future of people and the planet. These range from investing in infrastructure, housing, food and medicines, to increasing use of renewable energy, providing finance and insurance to those that need it, and as a means of cutting waste. One oft-cited estimate suggests that the goals could mean as much as $12trn (£9.2trn) of market opportunities per year. In the words of former Unilever CEO Paul
Polman: “The SDGs provide the world’s long-term business plan by putting peo- ple and the planet first. It’s the growth story of our time.”
At the same time, the SDGs also facilitate identifying and then mitigating risks. Not understanding the trend of the transition to a lower-carbon economy, for example, may pose a real risk of having a business rendered unviable by changing consumer demand or regulation.
The role of investors in accelerating progress
At Robeco, we believe that investors can make a difference. One way is to allocate capital to companies that can help achieve the goals. This can mean buying the equities or bonds of companies that contribute to the SDGs, and avoiding financing the companies that undermine progress. A second way in which investors can make a difference is through active ownership. By using our position as asset owners, we can use voting and engagement to effect changes. Robeco’s engagement with energy company Enel, for example, led to the appointment of a wind power expert as a climate-competent director.
Robeco’s approach to assessing companies’ impacts on the SDGs
Understanding how different companies positively and negatively impact the SDGs is a requirement for investors to embed these goals into their investment strategies. Yet assessing the extent of these impacts for each of the companies in the universe is challenging.
That is why we at Robeco created a propri- etary methodology for analyzing to what extent a company positively or negatively impacts the SDGs. This method uses a three-step process:
Step 1: What does the company produce? Using an extensive set of sector-specific KPIs and thresholds, analysts determine how much a company’s goods or services positively or negatively impact SDGs.
Step 2: How does the company produce these goods and services? Here, analysts look at the companies’ operations, paying particular attention to topics like govern- ance, gender equality and environmental pollution.
Step 3: Is the company involved in controversies? Checks are made to see whether the company has been involved in any scandals, such as environmental pollution or corruption and bribery.
Each company then receives a score to assess its impact on the SDGs. These scores range from +3 (highly positive) to -3 (highly negative). With these scores, we can integrate companies into our SDG Credits and SDG Equities strategies. Moreover, the scores give us valuable insights into how companies impact soci- ety and the environment. This helps us in our active ownership as well as in our research more broadly.
Towards achieving the SDGs
The ‘Decade of Action’ for the SDGs also is a call to action on us in the investment community. Amidst the Covid-19 pandemic – with its devastating social and economic consequences – the objective of achieving the SDGs became only more relevant. Covid-19 underscores why we need the SDGs in the first place. The United Nations posits that the SDGs are “vital for a [Covid-19] recovery that leads to greener, more inclusive economies, and stronger, more resilient societies”. Sustainable investing can play a critical role in making this transition. We have a lot of financial weight in our sector, so let’s use it. We have a choice: we can invest in companies that help meet the SDGs and simultaneously harvest alpha.