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Impact investors could find sustainable development goals are a damp squib

sustainable development goals

Ahead of Good Money Week, new ways to approach sustainable investing are on many people’s radars

The Sustainable Development Goals, unveiled by the United Nations in 2015, have become the de facto benchmark for measuring the sustainability and societal impact of investment portfolios.

The 17 Global Goals, which aim to transform our world by 2030, cover many areas such as ending poverty, reducing inequalities, improving education and acting on climate change. While the SDGs are not legally binding, measuring impact and outcomes through the lens of the goals is a fiduciary duty for investors, according to the UN-supported Principles for Responsible Investment.

This has led many investment-reporting providers to offer tools designed to map portfolio exposures to SDGs.

We have previously warned the industry is facing an increasing risk of “greenwashing” – a term to describe when asset managers purport to be green through marketing, rather than fully integrating ESG and sustainability into investment processes. This has become particularly acute in the past couple of years with the launch of a wave of new strategies marketed as “sustainable” or “impact” by houses not associated with this form of investment – often framing their goals within the SDGs.

Passive ESG: Growing and evolving

With a three-decade track record of responsible investing, we are acutely aware of the complex requirements of investing through an ESG lens. Our early analysis suggests that framing impact solely through the SDGs could fail to adequately account for the impact of investment portfolios.

Difficult to translate
The 17 SDGs incorporate many of the themes sustainable investors such as ourselves have considered for years. However, the goals were not designed for the corporate sphere, but were largely centred around the country and other governmental organisations or global agencies. A number of the goals simply cannot be translated to the world of business. For example, one of the stated goals is “Peace, Justice and Strong Institutions”. In its literature, the UN outlines the focus of this goal as eliminating bribery and corruption within certain organisations such as the judiciary and police.

While we clearly support this goal on an ethical level, there is little the private sector can practically do to aid its promotion, other than reinforcing freedom of information and doubling down on existing anti-corruption efforts.

The limitations of the goals become apparent when utilised as a framework for measuring the impact of portfolios. The overlay tools hurried to market so far seek to apply simple metrics to complex business models in a bid to provide a comparative, quantitative impact ratings methodology.

Barriers to quantitative impact measurement
While this approach seems straightforward at first glance, our deeper analysis shows several weaknesses embedded in these methods. Not least, the data available from companies on operational impact is limited. With no legal requirement to release this data, it is unlikely to become widely available. Quantitative ratings providers will therefore be forced to use flawed or estimated data. This issue is glaringly obvious when witnessing the vast differences in model outcomes.

The most successful implementation of SDG impact measurement has come from thematic investors. It is simpler for investors to measure a singular impact within corporates, such as access to clean water and sanitation, than the full 17 goals. However, while this simple approach works for a certain range of SDGs and sectors, it fails to meaningfully measure the impact of broader portfolios too.

Adviser guide to social impact investing launched after industry-led review

Viewing impact through the lens of the SDGs also narrows the definition of impact – resulting in the exclusion of many businesses, or even entire sectors. For example, a company such as ITV does little to forward or hinder any of the individual SDGs. However, it is still important to understand the company’s wider impact on society – either beneficial or detrimental.

Processes must move beyond SDGs
By solely focusing on the SDGs, investors risk overlooking the subtleties of impact investing. For some providers, whole sectors – such as pharmaceuticals – have been classified as impact stocks due to aiding a specific SDG in some degree. However, we note many examples of companies wrongly classified as impact stocks in our view, because of unethical business practices even when offering a societally beneficial product or service.

The notion of impact is constantly evolving, as new societal and business challenges emerge. As a result, investors must regularly adapt the metrics used to measure impact.

In this context, applying a quantitative approach drawn from limited data and grounded in the SDGs may not offer the nuance required to understand a portfolio’s impact fully.

Neville White is head of SRI policy and research at EdenTree Investment Management

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  1. They rather are (damp squibs). SDG investing is fine as long as it performs at least as well as non SDG. It seems that we are entering a regime where the SDG tail may be wagging the investment dog.

    If we take the most renowned SDG firms – just taking three of the leaders as an example – in the year to 19th Sept Aviva LOST 6.5%, Siemens LOST 5.6% and Nokia LOST 10.5%. I found it amusing that in the line up of the best SDG firms BMW and Dassault were listed. Rather makes a farce of it with diesel engines and military hardware respectively.

    On the other hand if you do want military hardware (and are not too concerned about SDG) then Raytheon and Northrup Grumman are good examples. PLUS 11.9% and PLUS 12.13% respectively over the same period.

    Got a social conscience? Then make money and give a proportion to a charity of choice.

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